SEMPRA ENERGY - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
--------------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
- ------ -------
SEMPRA ENERGY
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(Exact name of registrant as specified in its charter)

CALIFORNIA 1-14201 33-0732627
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(State of incorporation (Commission (I.R.S. Employer
or organization) File Number) Identification No.)

101 ASH STREET, SAN DIEGO, CALIFORNIA 92101
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (619)696-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Common stock, without par value New York and Pacific
Mandatorily redeemable trust preferred securities New York
Equity units, due 2007 New York

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]

Exhibit Index on page 49. Glossary on page 58.

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2005 was $8.7 billion.

Registrant's common stock outstanding as of January 31, 2005 was 235,610,601
shares.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 2004 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV.

Portions of the Proxy Statement prepared for the April 2005 annual meeting of
shareholders are incorporated by reference into Part III.

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TABLE OF CONTENTS

PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . 31
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 33
Item 4. Submission of Matters to a Vote of Security Holders . 33

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . 33
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 35
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . 35
Item 8. Financial Statements and Supplementary Data . . . . . 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . 36
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . 36
Item 9B. Other Information . . . . . . . . . . . . . . . . . . 37

PART III
Item 10. Directors and Executive Officers of the Registrant. . 39
Item 11. Executive Compensation. . . . . . . . . . . . . . . . 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters . . 40
Item 13. Certain Relationships and Related Transactions. . . . 40
Item 14. Principal Accountant Fees and Services. . . . . . . . 40

PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . 41

Consent of Independent Registered Public Accounting Firm and
Report on Schedules. . . . . . . . . . . . . . . . . . . . 43

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . 49

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements that are not historical fact and
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "estimates,"
"believes," "expects," "anticipates," "plans," "intends," "may,"
"could," "would" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking
statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, 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, and the Federal Energy Regulatory
Commission and other regulatory bodies in the United States and other
countries; capital markets conditions, inflation rates, interest rates
and exchange rates; energy and trading markets, including the timing and
extent of changes in commodity prices; the availability of 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; and other uncertainties, all of which are difficult to predict
and many of which are beyond the control of the company. Readers are
cautioned not to rely unduly on any forward-looking statements and are
urged to review and consider carefully the risks, uncertainties and
other factors which affect the company's business described in this
report and other reports filed by the company from time to time with the
Securities and Exchange Commission.

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PART I

ITEM 1. BUSINESS

Description of Business

A description of Sempra Energy and its subsidiaries (the company) is
given in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the 2004 Annual Report to Shareholders,
which is incorporated by reference. The company has four separately
managed reportable segments comprised of Southern California Gas
Company (SoCalGas), San Diego Gas & Electric (SDG&E), Sempra
Commodities and Sempra Generation. SoCalGas and SDG&E are collectively
referred to as "the California Utilities."

Company Website

The company's website address is http://www.sempra.com/investor.htm.
The company makes available free of charge through its website its
annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports as soon as
reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission. The charters of
the audit, compensation and corporate governance committees of the
company's board of directors' (the board), the board's corporate
governance guidelines, and the code of business conduct and ethics for
directors and officers are posted on the company's website. Printed
copies may be obtained by writing to the company's Corporate Secretary
at Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017.

RISK FACTORS

The following risk factors and all other information contained in this
report should be considered carefully when evaluating Sempra Energy and
its subsidiaries. These risk factors could affect the actual results of
Sempra Energy and its subsidiaries and cause such results to differ
materially from those expressed in any forward-looking statements of,
or made by or on behalf of, Sempra Energy or its subsidiaries. Other
risks and uncertainties, in addition to those that are described below,
may also impair their business operations. If any of the following
risks occurs, Sempra Energy's business, cash flows, results of
operations and financial condition could be seriously harmed. In
addition, the trading price of its securities could decline due to the
occurrence of any of these risks. These risk factors should be read in
conjunction with the other detailed information concerning Sempra
Energy and its subsidiaries set forth in the notes to Consolidated
Financial Statements and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the 2004
Annual Report to Shareholders, which is incorporated by reference in
this report.

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Risks Related to the California Utilities

The California Utilities are subject to extensive regulation by state,
federal and local legislation and regulatory authorities, which may
adversely affect the operations, performance and growth of their
businesses.

The California Public Utilities Commission (CPUC), which consists of
five commissioners appointed by the Governor of California for
staggered six-year terms, regulates the California Utilities' rates
(except electric transmission rates, which are regulated by the Federal
Energy Regulatory Commission (FERC)) and conditions of service, sales
of securities, rates of return, rates of depreciation, uniform systems
of accounts, examination of records and long-term resource procurement.
The CPUC conducts various reviews of utility performance (including
reasonableness and prudency reviews) and affiliate relationships and
conducts audits and investigations into various matters which may, from
time to time, result in disallowances and penalties adversely affecting
earnings and cash flows. Various proceedings involving the CPUC and
relating to the California Utilities' rates, costs, incentive
mechanisms, performance-based regulation and compliance with affiliate
and holding company rules are discussed in the notes to Consolidated
Financial Statements and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Periodically, the California Utilities' rates are approved by the CPUC
based on forecasts of capital and operating costs. If the California
Utilities' actual capital and operating costs were to exceed the amount
included in its base rates approved by the CPUC, it would adversely
affect earnings and cash flows.

To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC adopted
Performance-Based Regulation (PBR) for the California Utilities. Under
PBR, regulators require future income potential to be tied to achieving
or exceeding specific performance and productivity goals, rather than
relying solely on expanding utility plant to increase earnings. The
three areas that are eligible for PBR rewards are: operational
incentives based on measurements of safety, reliability and customer
satisfaction; energy efficiency rewards based on the effectiveness of
the programs; and natural gas procurement rewards. Although the
California Utilities have received significant PBR rewards in the past,
there can be no assurance that the California Utilities will receive
rewards at similar levels in the future, or at all. Additionally, if
the California Utilities fail to achieve certain minimum performance
levels established under the PBR mechanisms, they may be assessed
financial disallowances or penalties which could adversely affect their
earnings and cash flows.

The FERC regulates electric transmission rates, the transmission and
wholesale sales of electricity in interstate commerce, transmission
access and other similar matters involving SDG&E.

The California Utilities may be impacted by new regulations, decisions,
orders or interpretations of the CPUC, FERC or other regulatory bodies.
New legislation, regulations, decisions, orders or interpretations
could change how the California Utilities operate, could affect their

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ability to recover their various costs through rates or adjustment
mechanisms, or could require the California Utilities to incur
additional expenses.

SDG&E may incur substantial costs and liabilities as a result of its
ownership of nuclear facilities.

SDG&E owns a 20% interest in the San Onofre Nuclear Generating Station
(SONGS), a 2,150 megawatt nuclear generating facility near San
Clemente, California. The Nuclear Regulatory Commission (NRC) has broad
authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities.
SDG&E's ownership interest in SONGS subjects it to the risks of nuclear
generation, which include:

* the potential harmful effects on the environment and human
health resulting from the operation of nuclear facilities
and the storage, handling and disposal of radioactive
materials;
* limitations on the amounts and types of insurance
commercially available to cover losses that might arise in
connection with nuclear operations; and
* uncertainties with respect to the technological and
financial aspects of decommissioning nuclear plants at the
end of their licensed lives.

The California Utilities' future results of operations and financial
condition may be materially adversely affected by the outcome of pending
litigation against them.

The California energy crisis of 2000 and 2001 has generated numerous
lawsuits, governmental investigations and regulatory proceedings
involving many energy companies, including Sempra Energy and the
California Utilities. They are the remaining defendants in class action
and individual antitrust and unfair competition lawsuits scheduled for a
jury trial to begin in September 2005 in which the plaintiffs have
asserted that they are entitled to recover $24 billion in damages.
Additional lawsuits have been filed by the Attorney General of Nevada and
by others. They are also responding to an ongoing investigation being
conducted by the California Attorney General and an ongoing CPUC
proceeding related to the increase in natural gas prices at the
California-Arizona border in 2000-2001. The California Utilities have
expended and continue to expend substantial amounts defending these
lawsuits and in connection with related investigations and regulatory
proceedings. If these matters are ultimately resolved unfavorably to the
California Utilities, their results of operations and financial condition
and those of Sempra Energy may be materially adversely affected.

These proceedings are discussed in the notes to Consolidated Financial
Statements and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

7

Risks Related to Sempra Energy's Electric Generation, Commodities
Trading, Liquefied Natural Gas (LNG), Pipelines & Storage and Other
Businesses

Sempra Energy's businesses are exposed to market risk, and its financial
condition, results of operations, cash flows and liquidity may be
adversely affected by fluctuations in commodity market prices that are
beyond its control.

Sempra Commodities is a full-service trading company that markets and
trades physical and financial commodity products. Its trading portfolios
consist of physical and financial commodity contracts, including
contracts for natural gas, electricity, petroleum products, base metals
and other commodities that are settled by the delivery of the commodity
or cash. Although Sempra Commodities generally seeks to structure its
trading contracts so that a substantial majority of its trading revenues
are realizable within 24 months and strives to maintain appropriate
hedging mechanisms for its trading book, Sempra Commodities may have
substantial unhedged trading positions in the market, resulting from the
management of its trading portfolios or from its inability to hedge, in
whole or in part, particular risks.

Sempra Generation generates electricity that it sells under long-term
contracts and into the spot market or other competitive markets. It
purchases fuel for its power plants, consisting of natural gas and coal,
and may also purchase electricity in the open market to satisfy its
contractual obligations.

Sempra Energy's sales and results of operations could be adversely
affected if the prevailing market prices for electricity, natural gas,
coal or other commodities, whether procured for power plants or to
satisfy contractual obligations with trading counterparties or customers,
in regional markets and other competitive markets in which the company
competes, change in a direction or manner that it has not anticipated and
for which it has not provided through purchase or sale commitments or
other hedging transactions.

Unanticipated changes in market prices for energy-related and other
commodities result from multiple factors, including: weather conditions;
seasonality; changes in demand; transmission or transportation
constraints or inefficiencies; availability of competitively priced
alternative energy sources; commodity production levels; actions by the
Organization of the Petroleum Exporting Countries with respect to the
supply of crude oil; federal, state and foreign energy and environmental
regulation and legislation; natural disasters, wars, embargoes and other
catastrophic events; and expropriation of assets by foreign countries.

In 2001 the FERC, which has jurisdiction over wholesale power and
transmission rates, independent system operators and other entities that
control transmission facilities or that administer wholesale power sales
in some of the markets in which the company operates, imposed price
limitations which resulted in unexpected moves in electricity prices. The
FERC may impose additional price limitations, bidding rules and other
mechanisms or terminate existing price limitations from time to time in
the future. Any such action by the FERC may result in prices for
electricity changing in an unanticipated direction or manner, and may

8

have an adverse effect on Sempra Energy's sales and results of
operations.

Sempra Energy and its subsidiaries cannot and do not attempt to fully
hedge their assets or positions against changes in commodity prices, and
their hedging procedures may not work as planned.

To reduce financial exposure related to commodity price fluctuations,
Sempra Energy's subsidiaries routinely enter into contracts to hedge a
substantial portion of their purchase and sale commitments and
inventories of electricity, natural gas, coal, crude oil and refined
petroleum products, base metals and other commodities. As part of this
strategy, they routinely utilize fixed-price, forward, physical purchase
and sales contracts, futures, financial swaps and option contracts traded
in the over-the-counter markets or on exchanges. However, the company
does not cover the entire exposure of its assets or its positions to
market price volatility and the coverage will vary over time. To the
extent Sempra Energy's subsidiaries have unhedged positions, or if their
hedging positions do not work as planned, fluctuating commodity prices
could have a material adverse effect on Sempra Energy's business, results
of operations, cash flows and financial condition.

Risk management procedures may not prevent losses.

Although Sempra Energy and its subsidiaries have risk management systems
and control systems in place that use advanced methodologies to quantify
and manage risk, these systems may not always prevent material losses.
Risk management procedures may not always be followed or may not always
work as planned. In addition, daily value-at-risk and loss limits are
derived from historic price movements. If prices significantly or
persistently deviate from historic prices, the limits may not protect the
company from significant losses. As a result of these and other factors,
there can be no assurances that Sempra Energy's risk management
procedures will prevent losses that would negatively affect its business,
results of operations, cash flows and financial condition.

A downgrade in Sempra Energy's credit ratings could negatively affect its
commodities trading and other non-utility businesses.

If Sempra Energy's credit ratings were to be downgraded, the business
prospects of its commodities trading and other non-utility businesses,
which generally rely on the credit-worthiness of Sempra Energy, would be
adversely affected. Sempra Commodities would be required to comply with
various margin or other credit enhancement obligations under its trading
and marketing contracts, substantially all of which are guaranteed by
Sempra Energy, and it may be unable to continue to trade or able to do so
only on less-favorable terms. To meet liquidity requirements, Sempra
Energy and its subsidiaries maintain substantial unused committed lines
of credit for which borrowings are available without regard to credit
ratings. However, a ratings downgrade could require Sempra Energy to
divert to Sempra Commodities all or a portion of the liquidity that these
lines would otherwise provide for the expansion of Sempra Energy's other
non-utility businesses. In addition, if these lines were to become
unavailable or to be inadequate to meet margin or other credit
enhancement requirements, Sempra Commodities' trading partners could
exercise other remedies such as liquidating and netting their exposures
to Sempra Commodities, making it more difficult or impossible for Sempra

9

Commodities to manage effectively its remaining trading positions or to
continue its trading business, and Sempra Energy and its subsidiaries may
not have sufficient liquidity to meet their obligations.

Sempra Energy's businesses depend on counterparties, customers and
suppliers performing in accordance with their agreements, and any failure
by them to perform could require the company to incur substantial
expenses and expose it to commodity price risk and volatility, which
could adversely affect Sempra Energy's liquidity, cash flows and results
of operations.

Sempra Energy's subsidiaries are exposed to the risk that counterparties,
customers and suppliers that owe money or commodities as a result of
market transactions or other long-term agreements will not perform their
obligations under such agreements. Should they fail to perform, the
company may be required to acquire alternative hedging arrangements or to
honor the underlying commitment at then-current market prices. In such
event, Sempra Energy's subsidiaries may incur additional losses to the
extent of amounts already paid to such counterparties or suppliers. In
addition, the subsidiaries often extend credit to counterparties and
customers. While the company performs significant credit analyses prior
to extending credit, Sempra Energy and its subsidiaries are exposed to
the risk that they may not be able to collect amounts owed to them.

If the Department of Water Resources (DWR) were to succeed in setting
aside, or were to fail to perform its obligations under its long-term
power contract with Sempra Generation, Sempra Energy's business, results
of operations and cash flows will be materially adversely affected.

In 2001, Sempra Generation entered into a 10-year power sales agreement
with the DWR, to supply up to 1,900 megawatts to the state. Sempra Energy
expects the contract with the DWR will be a source of significant revenue
over the 10-year period. The validity of the power sales agreement with
the DWR has been the subject of extensive litigation between the parties
before the FERC and in California courts. Sempra Generation has prevailed
in all of these challenges to date, but the plaintiffs have appealed
several of these rulings. If the DWR were to succeed in setting aside its
obligations under the contract, or if the DWR fails or is unable to meet
its contractual obligations on a timely basis, it could have a material
adverse effect on Sempra Energy's business, results of operations, cash
flows and financial condition. These proceedings are described in the
notes to Consolidated Financial Statements and in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."

In the future, Sempra Energy's subsidiaries may elect not to or may not
be able to enter into long-term supply and sales agreements or long-term
firm capacity agreements for their projects, which would subject their
sales to increased volatility and its businesses to increased
competition.

The electric generation and wholesale power sales industries have become
highly competitive. As more plants are built and competitive pressures
increase, wholesale electricity prices become more volatile. Without the
benefit of long-term power sales agreements, such as the 10-year power
sales agreement between Sempra Generation and the DWR, Sempra Energy's
sales will be subject to increased price volatility, and it may be unable

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to sell the power generated by Sempra Generation's facilities or operate
those facilities profitably.

Sempra LNG does not intend to commence significant construction of its
proposed LNG terminals without first obtaining long-term LNG supply
agreements that substantially reduce its exposure to changes in natural
gas prices (through corresponding natural gas sales agreements or supply
prices tied to prevailing natural gas prices or long-term firm capacity
agreements) for a substantial portion of the processing capacity of these
facilities. However, if these plans were to change and the company were
to construct its terminals without the benefit of such arrangements, its
sales would be subject to increased price volatility, and it may be
unable to sell the services of its LNG facilities or to operate the
facilities profitably. If the counterparties, customers or suppliers to
one or more of the key agreements for the LNG facilities were to fail or
become unable to meet their contractual obligations on a timely basis, it
could have a significant negative impact on Sempra Energy's business,
results of operations, cash flows and financial condition.

Business development activities may not be successful and projects under
construction may not commence operation as scheduled, which could
increase Sempra Energy's costs and impair its ability to recover its
investments.

The acquisition, development and construction of electric generating
facilities, LNG receiving terminals, and natural gas pipelines and
storage facilities involve numerous risks. Sempra Energy and its
subsidiaries may be required to expend significant sums for preliminary
engineering, permitting, fuel supply, resource exploration, legal and
other expenses before it can be established whether a project is
feasible, economically attractive or capable of being built. Sempra
Energy's success in developing a particular project is contingent upon,
among other things, negotiation of satisfactory engineering, procurement
and construction agreements, fuel supply and power sales contracts (for
generating facilities), supply and natural gas sales agreements or firm
capacity service agreements (for LNG receiving terminals and natural gas
pipelines and storage facilities), receipt of required governmental
permits and timely implementation and satisfactory completion of
construction and, successful completion of a particular project may be
adversely affected by unforeseen engineering problems, construction
delays and contractor performance shortfalls, work stoppages, adverse
weather conditions, environmental and geological conditions, and other
factors. If the company is unable to complete the development of a
facility, it typically will not be able to recover its investment in the
project.

The operation of these facilities also involves many risks, including the
breakdown or failure of generation or regasification and storage
facilities or other equipment or processes, labor disputes, fuel
interruption and operating performance below expected levels. In
addition, weather-related incidents and other natural disasters can
disrupt generation, regasification, storage and transmission systems. The
occurrence of any of these events could lead to operating power plants
below expected capacity levels, which may result in lost revenues or
increased expenses, including higher maintenance costs and penalties, and
could adversely affect Sempra Energy's business, cash flows and results
of operations.

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Competition among developers and operators of LNG terminals is rapidly
increasing, which may adversely affect the profitability of Sempra LNG's
proposed LNG terminals.

Although there are only a limited number of LNG terminal facilities
operating in North America today, many companies have announced plans to
develop LNG facilities to serve the North American market. Some of these
competitors have more operating experience, more development experience,
larger staffs and greater financial resources than the company. Industry
analysts have predicted that, if all of the proposed LNG facilities in
North America that have been announced by developers are actually built,
there will likely be substantial excess capacity for such terminals in
the near future. Excess capacity is likely to lead to decreased prices
for such services. Although its proposed LNG facilities in Mexico and
Louisiana are more advanced in the siting, permitting and regulatory
approval processes than the proposed projects of many of its competitors,
there can be no assurance that Sempra Energy will be able to maintain
that advantage.

Sempra Energy's subsidiaries rely on transportation assets that they do
not own or control to deliver electricity and natural gas.

Sempra Energy's subsidiaries depend on electric transmission lines,
natural gas pipelines and other transportation facilities owned and
operated by third parties to deliver the electricity and natural gas they
sell to wholesale markets, to supply natural gas and coal to their
electric generation facilities, and to provide retail energy services to
customers. Sempra LNG also will rely on specialized LNG ships to
transport LNG to its proposed LNG facilities and on natural gas pipelines
to transport natural gas for customers of the facilities. If
transportation is disrupted, or if capacity is inadequate, the ability of
Sempra Energy's subsidiaries to sell and deliver their products and
services may be hindered. As a result, they may be responsible for
damages incurred by their customers, such as the additional cost of
acquiring alternative supply at then-current spot market rates.

Sempra Energy's businesses require numerous permits and other
governmental approvals from various federal, state, local and foreign
governmental agencies, and any failure to obtain or maintain required
permits or approvals could cause Sempra Energy's sales to decline and/or
its costs to increase.

The acquisition, ownership and operation of electric generation
facilities, LNG receiving terminals, and natural gas pipelines and
storage facilities require numerous permits, approvals and certificates
from federal, state, local and foreign governmental agencies. All of the
existing and planned development projects of Sempra Energy's subsidiaries
require multiple permits. They may not be able to obtain or maintain all
required regulatory approvals. If there is a delay in obtaining any
required regulatory approvals or if the company fails to obtain any
required approvals or to comply with any applicable laws or regulations,
it may not be able to operate its facilities, or it may be forced to
incur additional costs.

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Sempra Energy's businesses are subject to complex government regulations
and may be adversely affected by changes in these regulations or in their
interpretation or implementation.

In recent years, the regulatory environment applicable to the electric
power and natural gas industries has undergone significant changes, on
both federal and state levels, which have affected the nature of these
industries and the manner in which their participants conduct their
businesses. These changes are ongoing, and Sempra Energy cannot predict
the future course of changes in this regulatory environment or the
ultimate affect that this changing regulatory environment will have on
its businesses. Moreover, existing regulations may be revised or
reinterpreted, and new laws and regulations may be adopted or become
applicable to the company and its facilities. Future changes in laws and
regulations may have a detrimental effect on Sempra Energy's business,
cash flows, financial condition and results of operations.

Sempra Energy's energy and commodity trading operations are subject to
affiliate rules relating to transactions with the California Utilities.
These businesses could be adversely affected by changes in these rules or
by additional CPUC or FERC rules' further restricting their ability to
sell electricity or natural gas or to trade with the California
Utilities. Affiliate transaction rules also could require these
businesses to obtain the prior approval of the CPUC before entering into
any such transactions with the California Utilities. Any such
restrictions or approval requirements could adversely affect the electric
generation plants, natural gas pipelines, LNG receiving terminals, or
trading operations of the company's subsidiaries.

Various proceedings, inquiries and investigations relating to the
business activities of Sempra Generation and Sempra Commodities are
currently pending before the FERC. A description of such proceedings,
inquiries and investigations is provided in the notes to Consolidated
Financial Statements and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Sempra Energy's businesses have significant environmental compliance
costs, and future environmental compliance costs could adversely affect
Sempra Energy's profitability.

Sempra Energy's subsidiaries are subject to extensive federal, state,
local and foreign statutes, rules and regulations relating to
environmental protection. They are required to obtain numerous
governmental permits, licenses and other approvals to construct and
operate their businesses. Additionally, to comply with these legal
requirements, they must spend significant sums on environmental
monitoring, pollution control equipment and emissions fees. The company
also is generally responsible for all on-site liabilities associated with
the environmental condition of its electric generation facilities and
other energy projects which it has acquired or developed, regardless of
when the liabilities arose and whether they are known or unknown. If
Sempra Energy's subsidiaries fail to comply with applicable environmental
laws, they may be subject to penalties, fines and/or curtailments of
their operations.

The scope and effect of any new environmental laws and regulations,
including their affects on operations, are difficult to predict. However,

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increasing national and international concerns regarding global warming
and proposed regulations regarding mercury, nitrogen oxide and sulfur
dioxide emissions could result in requirements for additional pollution
control equipment or significant emissions fees or taxes, particularly
with respect to coal-fired generation facilities, that could adversely
affect Sempra Generation. In addition, existing environmental regulations
could be revised or reinterpreted and other new laws and regulations
could be adopted or become applicable to the company and its facilities.

Sempra Energy's international businesses are exposed to different local,
regulatory and business risks and challenges, which could have a material
adverse effect on Sempra Energy's financial condition, cash flows and
results of operations.

Sempra Energy subsidiaries currently have interests in electricity
generation, natural gas transmission and LNG terminal projects in Mexico,
and also have trading, marketing and risk management operations in
Canada, Europe and Asia. Sempra Pipelines & Storage also has ownership
interests in electricity and natural gas distribution businesses in
Argentina, Chile and Peru. Developing infrastructure projects, owning
energy assets and operating businesses in foreign jurisdictions subject
the company to significant political and financial risks which vary by
country, including:

* changes in foreign laws and regulations, including tax and
environmental laws and regulations;
* changes in U.S. laws and regulations, including tax and
environmental laws and regulations, related to foreign
operations;
* high rates of inflation;
* changes in government policies or personnel;
* trade restrictions;
* limitations on U.S. company ownership in foreign countries;
* permitting and regulatory compliance;
* changes in labor supply and labor relations in operations
outside the U.S.;
* adverse rulings by foreign courts or tribunals and difficulty
in enforcing contractual rights in foreign jurisdictions; and
* general political, economic and business conditions.

Sempra Energy's international businesses also are subject to foreign
currency risks. These risks arise from both volatility in foreign
currency exchange rates and devaluations of foreign currencies. In such
cases, an appreciation of the U.S. dollar against a local currency could
reduce the amount of cash and income received from those foreign

14

subsidiaries. For example, the devaluation of the Argentine peso against
the U.S. dollar in recent years (as well as the Argentine government's
unilateral, retroactive abrogation of utility agreements in early 2002)
has had a material adverse effect on Sempra Pipelines & Storage's two
unconsolidated subsidiaries in Argentina. On September 6, 2002, Sempra
Pipelines & Storage initiated arbitration proceedings under the 1994
Bilateral Investment Treaty between the U.S. and Argentina for recovery
of the diminution of the value of its investments that has resulted from
Argentine governmental actions. Sempra Pipelines & Storage has claimed
damages of at least $258 million in these proceedings, which are
continuing. A description of legal proceedings relating to Sempra
Pipelines & Storage's business operations in Argentina is provided in the
notes to Consolidated Financial Statements. While Sempra Pipelines &
Storage believes that it has contracts and other measures in place to
mitigate its most significant foreign currency exchange risks, it has
some exposure that is not fully mitigated.

Other Risks Related to the Company

Sempra Energy's cash flows, ability to pay dividends and ability to meet
its debt obligations largely depend on the performance of its
subsidiaries.

Sempra Energy is a holding company and conducts its operations entirely
through its subsidiaries. Sempra Energy's California Utilities are its
major source of liquidity. Funding of other business units' capital
expenditures is largely dependent on the California Utilities' paying
sufficient dividends to Sempra Energy, which depends on the sufficiency
of utility earnings and cash flows in excess of utility needs. In
addition, Sempra Energy's cash flows, ability to meet its obligations to
creditors and its ability to pay dividends on its common stock are
largely dependent upon the earnings of the subsidiaries and the
distribution of such earnings to Sempra Energy in the form of dividends.
The subsidiaries are separate and distinct legal entities and could be
precluded from making such distributions under certain circumstances,
including as a result of legislation or regulation or in times of
financial distress.

Natural disasters, catastrophic accidents or acts of terrorism could
materially adversely affect Sempra Energy's business, earnings and cash
flows.

Like other major industrial facilities, Sempra Energy's generation plants
(including SONGS), electric transmission facilities, LNG receiving
terminals and storage facilities, chartered oil and LNG tankers and
natural gas pipelines and storage facilities may be damaged by natural
disasters, catastrophic accidents or acts of terrorism. Any such
incidents could result in severe business disruptions, significant
decreases in revenues or significant additional costs to the company,
which could have a material adverse effect on Sempra Energy's earnings
and cash flows. Given the nature and location of these facilities, any
such incidents also could cause fires, leaks, explosions, spills or other
significant damage to natural resources or property belonging to third
parties, or personal injuries, which could lead to significant claims
against Sempra Energy and its subsidiaries. Insurance coverage may become
unavailable for certain of these risks and the insurance proceeds
received for any loss of or damage to any of its facilities, or for any

15

loss of or damage to natural resources or property or personal injuries
caused by its operations, may be insufficient to cover the company's
losses or liabilities without materially adversely affecting the
company's financial condition, earnings and cash flows.

GOVERNMENT REGULATION

The most significant government regulation affecting Sempra Energy is
that affecting its utility subsidiaries.

California Utility Regulation

The CPUC, which consists of five commissioners appointed by the Governor
of California for staggered six-year terms, regulates SDG&E's and
SoCalGas' rates and conditions of service, sales of securities, rate of
return, rates of depreciation, uniform systems of accounts, examination
of records, and long-term resource procurement. The CPUC conducts various
reviews of utility performance and conducts investigations into various
matters, such as deregulation, competition and the environment, to
determine its future policies. The CPUC also regulates the relationship
of utilities with their holding companies and is currently conducting an
investigation into this relationship. This investigation is further
discussed in Note 15 of the notes to Consolidated Financial Statements.

The California Energy Commission (CEC) has discretion over electric
demand forecasts for the state and for specific service territories.
Based upon these forecasts, the CEC determines the need for additional
energy sources and for conservation programs. The CEC sponsors
alternative-energy research and development projects, promotes energy
conservation programs and maintains a state-wide plan of action in case
of energy shortages. In addition, the CEC certifies power-plant sites and
related facilities within California.

The CEC conducts a 20-year forecast of supply availability and prices for
every market sector consuming natural gas in California. This forecast
includes resource evaluation, pipeline capacity needs, natural gas demand
and wellhead prices, and costs of transportation and distribution. This
analysis is used to support long-term investment decisions.

United States Utility Regulation

The FERC regulates the interstate sale and transportation of natural gas,
the transmission and wholesale sales of electricity in interstate
commerce, transmission access, the uniform systems of accounts, rates of
depreciation and electric rates involving sales for resale. Both the FERC
and the CPUC are currently investigating prices charged to the California
investor-owned utilities (IOUs) by various suppliers of natural gas and
electricity. Further discussion is provided in Notes 14 and 15 of the
notes to Consolidated Financial Statements.

The NRC oversees the licensing, construction and operation of nuclear
facilities. NRC regulations require extensive review of the safety,
radiological and environmental aspects of these facilities. Periodically,
the NRC requires that newly developed data and techniques be used to re-
analyze the design of a nuclear power plant and, as a result, requires
plant modifications as a condition of continued operation in some cases.

Local Regulation

SoCalGas has natural gas franchises with the 240 legal jurisdictions in
its service territory. These franchises allow SoCalGas to locate, operate
and maintain facilities for the transmission and distribution of natural
gas in streets and other public places. Some franchises have fixed terms,
such as that for the city of Los Angeles, which expires in 2012. The
range of expiration dates for the franchises with definite terms is 2005
to 2048. Most of the franchises do not have fixed terms and continue
indefinitely.

SDG&E has electric franchises with the two counties and the 26 cities in
its electric service territory, and natural gas franchises with the one
county and the 18 cities in its natural gas service territory. These
franchises allow SDG&E to locate, operate and maintain facilities for the
transmission and distribution of electricity and/or natural gas in
streets and other public places. The franchises do not have fixed terms,
except for the electric and natural gas franchises with the cities of
Encinitas (2012), San Diego (2021), Coronado (2028) and Chula Vista
(2014), and the natural gas franchises with the city of Escondido (2036)
and the county of San Diego (2030).

Sempra Pipelines & Storage's Mexican subsidiaries, Distribuidora de Gas
Natural (DGN) de Mexicali, DGN de Chihuahua and DGN de La Laguna Durango,
build and operate natural gas distribution systems in Mexicali, Chihuahua
and the La Laguna-Durango zone in north-central Mexico, respectively.
These companies are regulated by city and state government labor and
environmental agencies. They are also regulated by the Mexican energy
regulatory commission.

Other Regulation

Sempra Commodities has trading locations in North America, Europe and
Asia that are subject to regulation as to operations and financial
position. Among other things, its operations are subject to the New York
Mercantile Exchange, the London Metals Exchange, the Commodity Futures
Trading Commission, the FERC and the National Futures Association.

Sempra LNG has operations in the United States that are subject to
regulation by the FERC and operations in Mexico that are subject to
regulation by the Mexican energy regulatory commission.

Sempra Pipelines & Storage's affiliates have international operations in
Argentina, Chile, Mexico and Peru that are subject to federal, local and
other regulations of the countries and/or political subdivisions in which
they are located. These regulatory bodies include but are not limited to
Mexico's Comision Reguladora de Energia, Argentina's Ente Naal Regulador
de Gas, Chile's Comision Nacional de Energia and Peru's Consejo Nacional
de Energia.

Other subsidiaries are also subject to varying amounts of regulation by
various governments, including various states in the United States.

17

Licenses and Permits

The California Utilities obtain numerous permits, authorizations and
licenses in connection with the transmission and distribution of natural
gas and electricity. They require periodic renewal, which results in
continuing regulation by the granting agency.

The company's unregulated affiliates are also required to obtain numerous
permits, authorizations and licenses in the normal course of business.
Some of these permits, authorizations and licenses require periodic
renewal. Sempra Generation and its subsidiaries obtain a number of
permits, authorizations and licenses in connection with the construction
and operation of power generation facilities. In addition, Sempra
Generation obtains permits in connection with wholesale distribution of
electricity. Sempra Pipelines & Storage's Mexican subsidiaries obtain
construction permits for their distribution systems from the local
governments where the service is provided. Sempra Pipelines & Storage and
Sempra Commodities obtain licenses and permits for natural gas storage
facilities. Sempra LNG obtains licenses and permits for construction and
operations of LNG facilities.

Other regulatory matters are described in Notes 14 and 15 of the notes to
Consolidated Financial Statements.

SOURCES OF REVENUE

Industry segment information is contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Note 17
of the notes to Consolidated Financial Statements. Various information
concerning revenue and revenue recognition is provided in Note 1 of the
notes to Consolidated Financial Statements.

NATURAL GAS UTILITY OPERATIONS

Resource Planning and Natural Gas Procurement and Transportation

The company is engaged in the purchase, sale, distribution, storage and
transportation of natural gas through the California Utilities. The
company's resource planning, power procurement, contractual commitments
and related regulatory matters are discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and in Notes 15 and 16 of the notes to Consolidated Financial Statements.

Customers

For regulatory purposes, customers are separated into core and noncore
customers. Core customers are primarily residential and small commercial
and industrial customers, without alternative fuel capability. Noncore
customers consist primarily of electric generation, wholesale, large
commercial, industrial and enhanced oil recovery customers.

Most core customers purchase natural gas directly from the California
Utilities. Core customers are permitted to aggregate their natural gas
requirement and purchase directly from brokers or producers. The
California Utilities continue to be obligated to purchase reliable
supplies of natural gas to serve the requirements of the core customers.

18

Natural Gas Procurement and Transportation

Most of the natural gas purchased and delivered by the California
Utilities is produced outside of California, primarily in the
southwestern U.S. and Canada. The California Utilities purchase natural
gas under short-term and long-term contracts. Short-term purchases are
primarily based on monthly spot-market prices.

To ensure the delivery of the natural gas supplies to the distribution
system and to meet the seasonal and annual needs of customers, SoCalGas
is committed to firm pipeline capacity contracts that require the payment
of fixed reservation charges to reserve firm transportation entitlements.
SoCalGas sells excess capacity, if any, on a short-term basis. Interstate
pipeline companies, primarily El Paso Natural Gas Company and
Transwestern Pipeline Company, provide transportation services into
SoCalGas' intrastate transmission system for supplies purchased by
SoCalGas or its transportation customers from outside of California. All
of these contracts will have expired by 2007. The rates that interstate
pipeline companies may charge for natural gas and transportation services
are regulated by the FERC.

SDG&E has long-term natural gas transportation contracts with various
interstate pipelines that expire on various dates between 2005 and 2023.
SDG&E currently purchases natural gas on a spot basis to fill its long-
term pipeline capacity and purchases additional spot market supplies
delivered directly to California for its remaining requirements. SDG&E
continues its ongoing assessment of its pipeline capacity portfolio,
including the release of a portion of this capacity to third parties. In
accordance with regulatory directives, SDG&E will reconfigure its
pipeline capacity portfolio by November 2005 to secure firm
transportation rights from a diverse mix of U.S. and Canadian supply
sources for its projected core customer natural gas requirements. All of
SDG&E's natural gas is delivered through SoCalGas' pipelines under a
short-term transportation agreement. In addition, under a separate
agreement expiring in March 2006, SoCalGas provides SDG&E eight billion
cubic feet of storage capacity.

According to "Btu's Daily Gas Wire", the annual average spot price of
natural gas at the California/Arizona border was $5.53 per million
British thermal unit (mmbtu) in 2004 ($6.35 per mmbtu in December 2004),
compared with $5.10 per mmbtu in 2003 and $3.14 per mmbtu in 2002. Prices
for natural gas increased toward the end of 2002, 2003 and in 2004. The
California Utilities' weighted average cost (including transportation
charges) per mmbtu of natural gas was $5.94 in 2004, $5.06 in 2003 and
$3.12 in 2002.

With improved delivery capacity to California, the company expects
adequate resources to be available at prices that generally will follow
national natural gas pricing trends and volatility.

Natural Gas Storage

SoCalGas provides natural gas storage services for use by the core,
noncore and off-system customers. Core customers are allocated a portion
of SoCalGas storage capacity. Remaining customers, including SDG&E, can
bid and negotiate the desired amount of storage on a contract basis. The

19

storage service program provides opportunities for customers to store
natural gas, usually during the summer, to reduce winter purchases when
natural gas costs are generally higher. This allows customers to select
the level of service they desire to assist them in managing their fuel
procurement and transportation needs.

Demand for Natural Gas

The California Utilities face competition in the residential and
commercial customer markets based on the customers' preferences for
natural gas compared with other energy products. The demand for natural
gas by electric generators is influenced by a number of factors. In the
short-term, natural gas use by electric generators is impacted by the
availability of alternative sources of generation. The availability of
hydroelectricity is highly dependent on precipitation in the western
United States. In addition, natural gas use is impacted by the
performance of other generation sources in the western United States,
including nuclear and coal, and other natural gas facilities outside the
service area. Natural gas use is also impacted by changes in end-use
electricity demand. For example, natural gas use generally increases
during summer heat waves. Over the long-term, natural gas use will be
greatly influenced by additional factors such as the location of new
power plant construction. More generation capacity currently is being
constructed outside Southern California than within the California
Utilities' service area. This new generation will likely displace the
output of older, less efficient local generation, reducing use of natural
gas for local electric generation.

Effective March 31, 1998, electric industry restructuring provided out-
of-state producers the option to purchase energy for California utility
customers. As a result, natural gas demand for electric generation within
Southern California competes with electric power generated throughout the
western United States. Although electric industry restructuring has no
direct impact on the California Utilities' natural gas operations, future
volumes of natural gas transported for electric generating plant
customers may be significantly affected to the extent that regulatory
changes divert electric generation from the California Utilities' service
area.

Growth in the natural gas markets is largely dependent upon the health
and expansion of the Southern California economy and prices of other
energy products. External factors such as weather, the price of
electricity, electric deregulation, the use of hydroelectric power,
competing pipelines and general economic conditions can result in
significant shifts in demand and market price. The California Utilities
added 86,000 and 83,000 new natural gas customer meters in 2004 and 2003,
respectively, representing growth rates of 1.4 percent in both cases. The
California Utilities expect that their growth rate for 2005 will
approximate that for 2004.

In the interruptible industrial market, customers are capable of burning
a fuel other than natural gas. Fuel oil is the most significant competing
energy alternative. The company's ability to maintain its industrial
market share is largely dependent on price. The relationship between
natural gas supply and demand has the greatest impact on the price of the
company's product. With the reduction of natural gas production from
domestic sources, the cost of natural gas from non-domestic sources may

20

play a greater role in the company's competitive position in the future.
The price of oil depends upon a number of factors, including the
relationship between world-wide supply and demand, and the policies of
foreign and domestic governments.

The natural gas distribution business is seasonal in nature as variations
in weather conditions generally result in greater revenues during the
winter months when temperatures are colder. As is prevalent in the
industry, the company injects natural gas into storage during the summer
months (usually April through October) for withdrawal from storage during
the winter months (usually November through March) when customer demand
is higher.

ELECTRIC UTILITY OPERATIONS

Customers

At December 31, 2004, SDG&E had 1.3 million meters consisting of
1,170,000 residential, 139,000 commercial, 460 industrial, 1,940 street
and highway lighting, and 7,700 direct access. The company's service area
covers 4,100 square miles. The company added 22,000 new electric customer
meters in 2004 and 18,000 in 2003, representing growth rates of 1.7% and
1.4% respectively.

Resource Planning and Power Procurement

SDG&E's resource planning, power procurement and related regulatory
matters are discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and in Notes 14, 15 and
16 of the notes to Consolidated Financial Statements.

21

Electric Resources

Based on CPUC-approved purchased-power contracts currently in place with
SDG&E's various suppliers and SDG&E's 20-percent share of a generating
plant, as of December 31, 2004, the supply of electric power available to
SDG&E is as follows:

22

Under the contract with PGE, SDG&E pays a capacity charge plus a charge
based on the amount of energy received and/or PGE's non-fuel costs. Costs
under the contracts with QFs are based on SDG&E's avoided cost. Charges
under the remaining contracts are for firm and as-available energy and
are based on the amount of energy received. The prices under these
contracts are at the market value at the time the contracts were
negotiated.

SONGS

SDG&E owns 20 percent of the three nuclear units at SONGS (located south
of San Clemente, California). The cities of Riverside and Anaheim own a
total of 5 percent of Units 2 and 3. Southern California Edison (Edison)
owns the remaining interests and operates the units.

Unit 1 was removed from service in November 1992 when the CPUC issued a
decision to permanently shut it down. Decommissioning of Unit 1 is now in
progress and its spent nuclear fuel is being stored on site.

Units 2 and 3 began commercial operation in August 1983 and April 1984,
respectively. SDG&E's share of the capacity is 214 MW of Unit 2 and 216
MW of Unit 3.

SDG&E had fully recovered its SONGS capital investment through December
31, 2003.

Additional information concerning the SONGS units and nuclear
decommissioning is provided below and in "Environmental Matters" herein,
and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Notes 7, 14 and 16 of the notes to
Consolidated Financial Statements.

Nuclear Fuel Supply

The nuclear-fuel cycle includes services performed by others under
various contracts through 2008, including mining and milling of uranium
concentrate, conversion of uranium concentrate to uranium hexafluoride,
enrichment services, and fabrication of fuel assemblies.

Spent fuel from SONGS is being stored on site, where storage capacity is
expected to be adequate at least through 2022, the expiration date of the
NRC operating license. Pursuant to the Nuclear Waste Policy Act of 1982,
SDG&E entered into a contract with the U.S. Department of Energy (DOE)
for spent-fuel disposal. Under the agreement, the DOE is responsible for
the ultimate disposal of spent fuel. SDG&E pays a disposal fee of
approximately $1.00 per megawatt-hour of net nuclear generation, or $3
million per year. The DOE projects that it will not begin accepting spent
fuel until 2010 at the earliest.

To the extent not currently provided by the contracts, the availability
and the cost of the various components of the nuclear-fuel cycle for
SDG&E's nuclear facilities cannot be estimated at this time.

Additional information concerning nuclear-fuel costs and the storage and
movement of spent fuel is provided in Notes 16 and 14, respectively, of
the notes to Consolidated Financial Statements.

23

Power Pools

SDG&E is a participant in the Western Systems Power Pool, which includes
an electric-power and transmission-rate agreement with utilities and
power agencies located throughout the United States and Canada. More than
280 investor-owned and municipal utilities, state and federal power
agencies, energy brokers, and power marketers share power and information
in order to increase efficiency and competition in the bulk power market.
Participants are able to make power transactions on standardized terms
that have been pre-approved by FERC.

Transmission Arrangements

The Pacific Intertie, consisting of AC and DC transmission lines,
connects the Northwest with SDG&E, Pacific Gas & Electric, Edison and
others under an agreement that expires in July 2007. SDG&E's share of the
Pacific Intertie is 266 MW.

SDG&E's 500-kilovolt Southwest Powerlink transmission line, which is
shared with Arizona Public Service Company and Imperial Irrigation
District, extends from Palo Verde, Arizona to San Diego. SDG&E's share of
the line is 970 MW, although it can be less, depending on specific system
conditions.

Mexico's Baja California Norte system is connected to SDG&E's system via
two 230-kilovolt interconnections with firm capability of 408 MW in the
north to south direction and 800 MW in the south to north direction.

Due to electric-industry restructuring, discussed in "Transmission
Access" below, the operating rights of SDG&E on these lines have been
transferred to the Independent System Operator (ISO).

Transmission Access

The FERC has established rules to implement the transmission-access
provisions of the National Energy Policy Act of 1992. These rules specify
procedures for others' requests for transmission service. The FERC
approved the California IOUs' transfer of operation and control of their
transmission facilities to the ISO in 1998. Additional information
regarding the FERC, ISO and transmission issues are provided in Note 15
of the notes to Consolidated Financial Statements.

SEMPRA GLOBAL

Sempra Global consists of most of the businesses of Sempra Energy other
than the California Utilities, and serves a broad range of customers'
energy and other needs. Sempra Global includes Sempra Commodities, Sempra
Generation, Sempra LNG, Sempra Pipelines & Storage and several smaller
business units. A discussion of each of these business units is provided
below.

Additional information concerning these and other aspects of the
operations of Sempra Global and also of Sempra Financial is provided
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Notes 2, 3 and 17 of the notes to
Consolidated Financial Statements.

24

Sempra Commodities

Sempra Commodities is a wholesale and retail trader of physical and
financial products, including natural gas, power, crude oil and other
commodities, a trader and wholesaler of metals and an owner of synthetic
fuel facilities that generate Section 29 income tax credits. Sempra
Commodities combines trading, risk-management and physical commodity
expertise to provide innovative solutions to its customers worldwide.

Sempra Commodities owns the rights to develop Bluewater Gas Storage, LLC,
a natural gas storage facility in Michigan, and to utilize its capacity
to store natural gas for customers who buy, sell or transport natural gas
in Michigan. The Bluewater Gas Storage facility commenced commercial
operations in May 2004.

During 2002, Sempra Commodities completed acquisitions that added base
metals trading and warehousing to its trading business. In February 2002,
Sempra Commodities completed the acquisition of London-based Sempra
Metals Limited, a leading metals trader on the London Metals Exchange. In
April 2002, Sempra Commodities completed the acquisitions of the assets
of New York-based Sempra Metals & Concentrates Corp., a leading global
trader of copper, lead and zinc concentrates; and of Henry Bath & Sons
Limited, which provides warehousing services for non-ferrous metals in
Europe and Asia; and the assets of the U.S. warehousing business of Henry
Bath, Inc.

Sempra Generation

Sempra Generation primarily acquires, develops and operates power plants
for the competitive market. It also provides energy services and
facilities management, and owns mineral rights in properties that produce
petroleum and natural gas.

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
may, but is not obligated to, deliver this electricity from its portfolio
of natural gas-fired plants in the western United States and Baja
California, Mexico. If and when Sempra Generation uses these plants to
supply the entire 1,900 MW, those sales would comprise more than two-
thirds of the plants' capacity. Subsequent to the state's signing of
this contract and electricity-supply contracts with other vendors,
various state officials have contended that the rates called for by the
contracts are too high. Based on current natural gas prices, the price of
power under the long-term contracts exceeds the current spot market price
for electricity. Although the contract is subject to ongoing litigation
and regulatory proceedings, both Sempra Generation and the State of
California are performing under this contract. Information concerning
litigation regarding this contract, the FERC's orders upholding this
contract and the pending appeal is provided in Note 16 of the notes to
Consolidated Financial Statements.

In July 2004, Topaz Power Partners (Topaz), a 50/50 joint venture between
Sempra Energy Partners and Carlyle/Riverstone, acquired ten Texas power
plants from American Electric Power (AEP), including the 632-MW coal-
fired Coleto Creek Power Station. The transaction included the
acquisition of six operating power plants with generating capacity of

25

1,950 MW and four inactive power plants capable of generating 1,863 MW.
Topaz has entered into several power sales agreements for 572 MW of
Coleto Creek Power Station's capacity. This is discussed further in Note
3 of the notes to Consolidated Financial Statements.

In August 2003, Sempra Generation obtained approvals by the California
Energy Commission for the company's 550 MW Palomar power plant in
Escondido, California. In June 2004, SDG&E received CPUC approval of its
plans to purchase the Palomar plant from Sempra Generation after
construction is completed in 2006. Construction of the project began in
July 2004.

The 1,250 MW Mesquite Power plant, located near Phoenix, Arizona,
provides electricity to wholesale energy markets in the Southwest. The
first phase of commercial operations (50 percent of the plant's total
capacity) began in June 2003 and the second phase of commercial
operations (the remaining 50 percent) began in December 2003. Further
discussion of this is provided under "New Accounting Standards" in Note 1
of the notes to Consolidated Financial Statements.

During 2003, construction was completed on Termoelectrica de Mexicali
(TDM), a 625 MW power plant near Mexicali, and the Elk Hills Power
Project (Elk Hills), both of which commenced commercial operations in
July 2003. TDM and Elk Hills are discussed further in Note 2 and Note 3,
respectively, of the notes to Consolidated Financial Statements.

In October 2002, Sempra Generation purchased the 305 MW, coal-fired Twin
Oaks power plant for $120 million. Sempra Generation sells substantially
all of the output of the plant under a five-year contract expiring on
October 1, 2007. In connection with the acquisition, Sempra Generation
also assumed a contract that includes annual commitments to purchase
lignite coal for the plant until an aggregate minimum volume has been
achieved or through 2025.

Sempra LNG

Sempra LNG is developing receipt terminals for LNG and supplies natural
gas to Mexico's state-owned electric utility.

In January 2005, Sempra LNG was awarded a 15-year natural gas supply
contract by Mexico's state-owned electric utility, Comision Federal de
Electricidad (CFE). The contract is estimated at $1.4 billion over its
life and supports the CFE's future energy needs in northern Baja
California, including the Presidente Juarez power plant in Rosarito, and
it is anticipated that it will use natural gas processed at Energia Costa
Azul. Starting in 2008 and running through 2022, the agreement provides
the CFE with an average of about 130 million cubic feet per day of
natural gas.

In October 2004, Sempra LNG signed a sale and purchase agreement with
British Petroleum for the supply of 500 million cubic feet of gas a day
from Indonesia's Tangguh liquefaction facility to Sempra LNG's Energia
Costa Azul regasification terminal. The terminal is expected to cost
between $900 million and $1 billion, including related pipeline costs.
The 20-year agreement provides for pricing tied to the Southern
California border index for natural gas and will supply half the capacity
of Energia Costa Azul.

26

Also in October 2004, Sempra LNG entered into an agreement with Shell
International Gas Limited (Shell) by which Shell has contracted to
purchase half of the initial capacity of Energia Costa Azul for an
initial period of 20 years. In December 2004, Sempra LNG entered into two
additional contracts: one for the construction of the terminal and one
for the construction of the project's breakwater.

In April 2004, Sempra LNG announced plans to develop and construct a new
$600 million LNG receiving terminal near Port Arthur, Texas. The terminal
would be capable of processing 1.5 billion cubic feet (bcf) of natural
gas per day and could be expanded to 3 bcf per day. The company is
currently in the process of obtaining FERC approval for the construction
of the terminal. The project is expected to begin construction in 2006,
with start-up slated for 2009.

In April 2003, Sempra LNG completed its acquisition of the proposed
Cameron LNG project in Hackberry, Louisiana from a subsidiary of Dynegy,
Inc. The total cost of the project is expected to be $700 million. The
terminal is currently designed to supply 1.5 bcf of natural gas per day.
The FERC approved the construction and operation of the project in
September 2003. Construction is expected to begin in 2005 and commercial
operations are expected to begin in 2008.

Additional discussion concerning these projects is provided in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Notes 2 and 16 of the notes to Consolidated
Financial Statements.

Sempra Pipelines & Storage

Sempra Pipelines & Storage engages in energy-infrastructure projects in
North and South America. It holds interests in companies that provide
natural gas or electricity services to over 2.8 million customers in
Argentina, Chile, Mexico and Peru; develops natural gas storage
facilities; and owns two small natural gas distribution utilities in the
eastern United States.

In July 2004, the company acquired the rights to develop a salt-cavern
natural gas storage facility located in Calcasieu Parish, Louisiana. This
facility, operating as Liberty Gas Storage (Liberty) is expected to have
capacity of 17 bcf. Liberty is estimated to cost $150 million and to
begin operation in 2006.

In April 2004, the company acquired land and associated rights for the
development of a salt-cavern natural gas storage facility in Evangeline
Parish, Louisiana. This facility, operating as the Pine Prairie Energy
Center, will consist of three salt caverns with a total capacity of 24
bcf of natural gas and is expected to cost $175 million and to begin
operations in 2006. The company is negotiating contracts to sell the
capacity of this facility. FERC has issued a certificate of public
convenience and necessity for the project and authorized Pine Prairie to
charge market-based rates.

Also in April 2004, Sempra Pipelines & Storage and PSEG sold a portion of
their interests in Luz del Sur S.A.A. (Luz Del Sur), a Peruvian electric
utility. Each party had a 44-percent interest in Luz del Sur prior to the

27

sale and a 38-percent interest after the sale was completed. Sempra
Pipelines & Storage recognized an after-tax gain of $5 million as a
result of the sale.

During the third quarter of 2003, Sempra Pipelines & Storage recorded a
$77 million before-tax write-down of the carrying value of the assets of
Frontier Energy, a small North Carolina utility subsidiary, as a result
of reductions in actual and previously anticipated sales of natural gas
by the utility.

Sempra Pipelines & Storage's Mexican subsidiaries build and operate
natural gas distribution systems in Mexicali, Chihuahua and the La
Laguna-Durango zone in north-central Mexico. In February 2003, Sempra
Pipelines & Storage purchased the remaining minority interests in its
Mexican subsidiaries.

In 2002, Sempra Pipelines & Storage completed construction of the 140-
mile Gasoducto Bajanorte Pipeline that connects the Rosarito Pipeline
south of Tijuana, Mexico with a TransCanada pipeline that connects to
Arizona. Sempra Pipelines & Storage continues to incur costs for the
development of a spur line connecting the Energia Costa Azul terminal to
Gasoducto Bajanorte and for the expansion of the pipeline.

Additional discussion concerning these projects is provided in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Notes 2, 3 and 16 of the notes to Consolidated
Financial Statements.

Sempra Financial

Sempra Financial invests as a limited partner in affordable-housing
properties. Its portfolio includes 1,300 properties throughout the U.S.
that are expected to provide income tax benefits (primarily from income
tax credits) over 10-year periods.

In July 2004, Sempra Financial sold its investment in an enterprise that
earns Section 29 income tax credits. That investment comprised one-third
of Sempra Energy's Section 29 participation, the rest being held by
Sempra Commodities, and was sold because the company's alternative
minimum tax position defers utilization of the credits in the
determination of income taxes currently payable. The transaction has been
accounted for under the cost-recovery method, whereby future proceeds in
excess of the carrying value of the investment will be recorded as income
when they are received. As a result of this sale, Sempra Financial will
not be receiving Section 29 income tax credits in the future.

RATES AND REGULATION -- CALIFORNIA UTILITIES

Information concerning rates and regulations applicable to the California
Utilities is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Notes 1, 14 and 15
of the notes to Consolidated Financial Statements.

28

ENVIRONMENTAL MATTERS

Discussions about environmental issues affecting the company are included
in Note 16 of the notes to Consolidated Financial Statements. The
following additional information should be read in conjunction with those
discussions.

Hazardous Substances

In 1994, the CPUC approved the Hazardous Waste Collaborative Memorandum
account, allowing California's IOUs to recover their hazardous waste
cleanup costs, including those related to Superfund sites or similar
sites requiring cleanup. Cleanup costs at sites related to electric
generation were specifically excluded from the collaborative by the CPUC.
Recovery of 90 percent of hazardous waste cleanup costs and related
third-party litigation costs, and 70 percent of the related insurance-
litigation expenses is permitted. In addition, the company has the
opportunity to retain a percentage of any insurance recoveries to offset
the 10 percent of costs not recovered in rates.

During the early 1900s, the California Utilities and their predecessors
manufactured gas from coal or oil. The manufactured-gas plants (MGPs)
often have become contaminated with the hazardous residual by-products of
the process. SoCalGas has identified 42 such sites at which it (together
with other users as to 21 of these sites) may have cleanup obligations.
At a minimum, preliminary investigations have been completed on 41 of the
sites. As of December 31, 2004, 27 of these sites have been remediated,
of which 22 have received certification from the California Environmental
Protection Agency. At December 31, 2004, SoCalGas' estimated remaining
investigation and remediation liability for the MGPs is $40.5 million.
SDG&E identified three former MGPs, two of which were remediated in 1998
and 2000, with closure letters being received. The estimated remaining
remediation liability on the third site is $1.8 million.

SDG&E sold its fossil-fuel generating facilities in 1999. As a part of
its due diligence for the sale, SDG&E conducted a thorough environmental
assessment of the facilities. Pursuant to the sale agreements for such
facilities, SDG&E and the buyers have apportioned responsibility for such
environmental conditions generally based on contamination existing at the
time of transfer and the cleanup level necessary for the continued use of
the sites as industrial sites. While the sites are relatively clean, the
assessments identified some instances of significant contamination,
principally resulting from hydrocarbon releases, for which SDG&E has a
cleanup obligation under the agreement. Estimated costs to perform the
necessary remediation are $11 million. These costs were offset against
the sales price for the facilities, together with other appropriate
costs, and the remaining net proceeds were included in the calculation of
customer rates. Remediation of the plants commenced in early 2001. During
2002, cleanup was completed at several minor sites at a cost of $0.4
million. In late 2002, additional assessments were started at the primary
sites, where cleanup commenced in 2003 and is expected to be completed
during 2005. In 2003, cleanup was completed at the Encina power plant
site at a cost of $0.8 million. In 2004, cleanup was completed at two
combustion turbine sites at a cost of $0.7 million.

The California Utilities lawfully dispose of wastes at permitted
facilities owned and operated by other entities. Operations at these

29

facilities may result in actual or threatened risks to the environment or
public health. Under California law, businesses that arrange for legal
disposal of wastes at a permitted facility from which wastes are later
released, or threaten to be released, can be held financially responsible
for corrective actions at the facility.

The company and certain subsidiaries are named as potentially responsible
parties (PRPs) for one landfill site and two industrial waste disposal
sites, from which releases have occurred.

Remedial actions and negotiations with other PRPs and the United States
Environmental Protection Agency have been in progress since 1993 for the
Casmalia landfill site. The company's share of costs to remediate this
site is estimated to be $1.3 million, of which $0.9 million has been
spent.

In December 1999, SoCalGas was notified that it is a PRP at a waste
treatment facility in Bakersfield, California. SoCalGas is working with
other PRPs in order to remove from the site certain liquid wastes that
threaten to be released. SoCalGas' share of total site cleanup costs is
estimated at $0.7 million, of which $0.2 million has been spent.

The company and 10 other entities have been named PRPs by the Department
of Toxic Substance Control (DTSC) as liable for any required corrective
action regarding contamination at an industrial waste disposal site in
Pico Rivera, California. DTSC has taken this action because SDG&E and
others sold used transformers to the site's owner. SDG&E and the other
PRPs have entered into a cost-sharing agreement to provide funding for
the implementation of a consent order between DTSC and the site owner for
the development of a cleanup plan. SDG&E's interim share under the
agreement is 10 percent, subject to adjustment based on allocations of
responsibility. The total estimate for all PRPs is $1 million for the
development of the cleanup plan and $2 million to $8 million for the
actual cleanup. Since inception, SDG&E's share of the cleanup expenses
and plan development was $0.2 million. Cleanup is expected to commence in
2005.

At December 31, 2004, the company's estimated remaining investigation and
remediation liability related to hazardous waste sites, including the
MGPs, was $44.6 million, of which 90 percent is authorized to be
recovered through the Hazardous Waste Collaborative mechanism. This
estimated cost excludes remediation costs associated with SDG&E's former
fossil-fuel power plants. The company believes that any costs not
ultimately recovered through rates, insurance or other means will not
have a material adverse effect on the company's consolidated results of
operations or financial position.

Estimated liabilities for environmental remediation are recorded when
amounts are probable and estimable. Amounts authorized to be recovered in
rates under the Hazardous Waste Collaborative mechanism are recorded as a
regulatory asset.

Electric and Magnetic Fields (EMFs)

Although scientists continue to research the possibility that exposure to
EMFs causes adverse health effects, science has not demonstrated a cause-
and-effect relationship between exposure to the type of EMFs emitted by

30

power lines and other electrical facilities and adverse health effects.
Some laboratory studies suggest that such exposure creates biological
effects, but those effects have not been shown to be harmful. The studies
that have most concerned the public are epidemiological studies, some of
which have reported a weak correlation between the proximity of homes to
certain power lines and equipment and childhood leukemia. Other
epidemiological studies found no correlation between estimated exposure
and any disease. Scientists cannot explain why some studies using
estimates of past exposure report correlations between estimated EMF
levels and disease, while others do not.

To respond to public concerns, the CPUC has directed California IOUs to
adopt a low-cost EMF-reduction policy that requires reasonable design
changes to achieve noticeable reduction of EMF levels that are
anticipated from new projects. However, consistent with the major
scientific reviews of the available research literature, the CPUC has
indicated that no health risk has been identified. During 2004, the CPUC
instituted a rulemaking to re-examine its policies related to EMFs and
determine whether the current mitigation policies and utility directives
should be updated in light of science that has developed over the last
decade.

Air and Water Quality

California's air quality standards are more restrictive than federal
standards. However, as a result of the sale of the company's fossil-fuel
generating facilities, the company's primary air-quality issue,
compliance with these standards now has had less significance to the
company's operation. That is changing as Sempra Generation operates more
generating facilities.

The transmission and distribution of natural gas require the operation of
compressor stations, which are subject to increasingly stringent air-
quality standards. Costs to comply with these standards are recovered in
rates.

In connection with the issuance of operating permits, SDG&E and the other
owners of SONGS previously reached agreement with the California Coastal
Commission to mitigate the environmental damage to the marine environment
attributed to the cooling-water discharge from SONGS Units 2 and 3. This
mitigation program includes an enhanced fish-protection system, a 150-
acre artificial kelp reef and restoration of 150 acres of coastal
wetlands. In addition, the owners must deposit $3.6 million with the
state for the enhancement of fish hatchery programs and pay for
monitoring and oversight of the mitigation projects. SDG&E's share of the
cost is estimated to be $34 million. These mitigation projects are
expected to be completed in 2008. Through December 31, 2003, SONGS
mitigation costs were recovered through the Incremental Cost Incentive
Pricing mechanism. SONGS mitigation costs incurred after December 31,
2003, are being capitalized and recovered from ratepayers over the
remaining life of the SONGS units, subject to CPUC approval in the Edison
rate case. Additional information on SONGS cost recovery is provided in
Note 14 of the notes to Consolidated Financial Statements.

31

OTHER MATTERS

Research, Development and Demonstration (RD&D)

The SoCalGas RD&D portfolio is focused in five major areas: operations,
utilization systems, power generation, public interest and
transportation. Each of these activities provides benefits to customers
and society by providing more cost-effective, efficient natural gas
equipment with lower emissions, increased safety and reduced operating
costs. The CPUC has authorized SoCalGas to recover its operating costs
associated with RD&D. SoCalGas' annual RD&D costs have averaged $8.2
million over the past three years.

For 2004, the CPUC authorized SDG&E to fund $1.2 million and $5.7 million
for its natural gas and electric RD&D programs, respectively, including
$5.7 million to the CEC for its PIER (Public Interest Energy Research)
Program. SDG&E's annual RD&D costs have averaged $6.5 million over the
past three years.

Employees of Registrant

As of December 31, 2004, the company had 13,381 employees, compared to
12,807 at December 31, 2003.

Labor Relations

Field, technical and most clerical employees at SoCalGas are represented
by the Utility Workers' Union of America (UWUA) or the International
Chemical Workers' Union Council (ICWUC). The collective bargaining
agreement for field, technical and most clerical employees at SoCalGas
covering wages, hours, working conditions, medical and various benefit
plans was in effect through December 31, 2004. SoCalGas has signed with
UWUA and ICWUC a new collective bargaining agreement that will be in
effect from January 1, 2005 through September 30, 2008.

Certain employees at SDG&E are represented by the Local 465 International
Brotherhood of Electrical Workers. The current contract is in effect
through August 31, 2008.

At some of its field job sites, Sempra Generation employs mechanics who
are represented by the International Union of Operating Engineers, Local
501. One collective bargaining agreement is through November 1, 2006, and
the other through July 7, 2007.

ITEM 2. PROPERTIES

Electric Properties - SDG&E

SDG&E's interest in SONGS is described in "Electric Resources" herein. At
December 31, 2004, SDG&E's electric transmission and distribution
facilities included substations, and overhead and underground lines. The
electric facilities are located in San Diego, Imperial and Orange
counties and in Arizona, and consist of 1,814 miles of transmission lines
and 21,433 miles of distribution lines. Periodically, various areas of
the service territory require expansion to accommodate customer growth.

32

Natural Gas Properties - California Utilities

At December 31, 2004, the California Utilities' natural gas facilities
included 2,996 miles of transmission and storage pipeline, 55,276 miles
of distribution pipeline and 52,109 miles of service piping. They also
included 13 transmission compressor stations and 4 underground storage
reservoirs, with a combined working capacity of 122 bcf.

Energy Properties - Other

At December 31, 2004, Sempra Generation operated power plants in
California, Arizona, Texas, Nevada and Mexico with total capacity of
3,670 MW. Additional information is provided in Notes 2 and 3 of the
notes to Consolidated Financial Statements.

At December 31, 2004, Sempra Pipelines & Storage's operations in Mexico
included 1,704 miles of distribution pipeline, 165 miles of transmission
pipeline and one compressor station.

At December 31, 2004, the company's two small natural gas utilities,
Frontier Energy and Bangor Gas, located in North Carolina and Maine,
respectively, owned 147 miles of transmission lines and 230 miles of
distribution lines.

Other Properties

The 21-story corporate headquarters building at 101 Ash Street, San Diego
is occupied pursuant to a capital lease that expires in 2015. The lease
has two separate five-year renewal options.

SoCalGas leases approximately half of a 52-story office building in
downtown Los Angeles through 2011. The lease has six separate five-year
renewal options.

SDG&E occupies an office complex in San Diego pursuant to an operating
lease ending in 2007. The lease can be renewed for two five-year periods.

Sempra Global leases office facilities at various locations in the U.S.,
Mexico and Europe with the leases ending from 2005 to 2027. Sempra LNG
owns land to develop an LNG receiving terminal in Baja California,
Mexico. Sempra LNG also has a land lease to develop an LNG receiving
terminal in Hackberry, Louisiana. In December 2004, Sempra LNG renewed
the land lease for another five-year period. In April 2004, the company
acquired land and associated rights to develop a natural gas storage
facility in Evangeline Parish, Louisiana that is part of Sempra Pipelines
& Storage. In addition, Sempra Commodities owns the rights to develop a
natural gas storage facility in St. Clair, Michigan.

The company owns or leases other offices, operating and maintenance
centers, shops, service facilities and equipment necessary in the conduct
of its business.

33

ITEM 3. LEGAL PROCEEDINGS

SDG&E and the County of San Diego are continuing to negotiate the
remaining terms of a settlement relating to alleged environmental law
violations by SDG&E and its contractors in connection with the abatement
of asbestos-containing materials during the demolition of a natural gas
storage facility in 2001. SDG&E expects that any settlement with the
County would involve payments by SDG&E of less than $750,000. In January
2005, Sempra Energy and SDG&E received a grand jury subpoena from the
United States Attorney's Office in San Diego seeking documents related to
this matter. The companies are fully cooperating with the investigation.

Except for the matters described above, in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Notes
14, 15 and 16 of the notes to Consolidated Financial Statements, neither
the company nor its subsidiaries are party to, nor is their property the
subject of, any material pending legal proceedings other than routine
litigation incidental to their businesses.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Sempra Energy common stock is traded on the New York and Pacific stock
exchanges. In addition to the shares held by intermediaries, there were
57,000 holders of record of the company's common stock at January 31,
2005. The quarterly common stock information required by Item 5 is
included in the schedule of Quarterly Financial Data of the 2004 Annual
Report to Shareholders.

EQUITY COMPENSATION PLANS

The company's 1998 Long Term Incentive Plan and Employee Stock Incentive
Plan permit the compensation committee of the board of directors to grant
to officers and key employees a wide variety of equity and equity-based
incentive awards relating to common stock. At December 31, 2004,
outstanding awards consisted of stock options and restricted stock held
by 344 employees.

The company's Non-employee Directors Stock Plan also provides for annual
automatic grants to non-employee directors of options to purchase common
stock.

34

The following table sets forth information regarding these plans at
December 31, 2004.

Equity Compensation Plan Information

Number of Weighted- Number of
shares to average additional
be issued upon exercise shares
exercise of price of remaining
outstanding outstanding available for
options (A) options future issuance
- -----------------------------------------------------------------------
Equity compensation
plans approved by
shareholders:
- --------------------

1998 Long Term
Incentive Plan 11,998,342 $ 23.92 5,321,240
(B)(C)(D)
Non-employee Directors
Stock Plan 570,000 $ 25.54 876,360

Equity compensation
plans not approved by
shareholders:
- --------------------

Employee Stock
Incentive Plan 506,375 $ 24.38 8,161,030
(B)(C)

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

(A) Consists solely of options to purchase common stock, all of which
were granted at an exercise price of 100% of the grant date fair
market value of the shares subject to the option.
(B) Excludes shares subject to outstanding stock options and those
subject to other outstanding awards, consisting of unvested
shares of restricted stock which total 2,051,800 shares for the
1998 Long Term Incentive Plan and 767,900 shares for the Employee
Stock Incentive Plan.
(C) The number of shares available for future issuance is increased
by the number of shares received in payment of the exercise price
or withheld to satisfy related tax withholding obligations
relating to awards and by the number of shares subject to awards
that lapse, expire or are otherwise terminated or settled other
than by the issuance of shares.
(D) The number of shares available for future issuance also is
increased at the beginning of each year by 1.5% of the total
number of shares of common stock then outstanding.

35

ITEM 6. SELECTED FINANCIAL DATA

This data should be read in conjunction with the Consolidated Financial
Statements and the notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information required by Item 7 is incorporated by reference from
pages 1 through 32 of the 2004 Annual Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A is incorporated by reference from
pages 24 through 27 of the 2004 Annual Report to Shareholders.

36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is incorporated by reference from
pages 37 through 112 of the 2004 Annual Report to Shareholders. Item
15(a)1 includes a listing of financial statements included in the 2004
Annual Report to Shareholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures - Management has
established disclosure controls and procedures to ensure that material
information relating to the company and its consolidated subsidiaries
is made known to the officers who certify the company's financial
reports and to other members of senior management and the Board of
Directors. In designing and evaluating these controls and procedures,
management recognizes that any system of controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired objectives and necessarily applies
judgment in evaluating the cost-benefit relationship of other possible
controls and procedures.

Based on their evaluation as of December 31, 2004, the principal
executive officer and principal financial officer of the company have
concluded that the company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) are effective, at the reasonable assurance level, to
ensure that the information required to be disclosed by the company in
the reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time
periods specified by SEC rules and forms.

Management's Report on Internal Control Over Financial Reporting -
Company management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in
Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of company management, including the principal executive
officer and principal financial officer, the company conducted an
evaluation of the effectiveness of its internal control over financial
reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the company's evaluation under the
framework in Internal Control - Integrated Framework, management
concluded that the company's internal control over financial reporting
was effective as of December 31, 2004. Management's assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2004 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in its report,
which is included herein.

37

ITEM 9B. OTHER INFORMATION

In February 2005, Sempra Energy entered into a severance pay agreement
with each of its executive officers (other than Stephen L. Baum, Donald
E. Felsinger and Neal E. Schmale whose continuing employment and
employment-related agreements have been previously filed with the
Securities and Exchange Commission) to replace the previously reported
agreements. The agreements are for an initial term of three years and
are subject to automatic one year extensions on each anniversary of the
effective date (commencing with the second anniversary) unless Sempra
Energy or the executive elects not to extend the term.

The agreements provide severance benefits to the executive in the event
that Sempra Energy or its subsidiaries terminates the executive's
employment (other than for cause, death or disability) or the executive
does so for good reason.

Severance benefits under the agreements vary with the executive's
position and include (i) a lump sum cash severance payment varying from
50% to 100% of the sum of the executive's annual base salary plus the
greater of the executive's average annual bonus or average annual
target bonus for the two years prior to termination; (ii) continuation
of health insurance benefits for a period varying from six months to
one year; and (iii) financial planning and outplacement services for a
period varying from 18 months to two years. If the termination were to
occur within two years after a change in control of the company, (i)
the lump sum cash severance payment would be multiplied by two; (ii) an
additional lump sum payment would be paid equal to the pro rata portion
for the year of termination of the target amount payable under any
annual incentive compensation award for that year or, if greater, the
average of the three highest gross annual bonus awards paid to the
executive in the five years preceding the year of termination; (iii)
all equity-based incentive compensation awards would immediately vest
and become exercisable or payable and any restrictions on the awards
would automatically lapse; (iv) a lump sum cash payment would be made
equal to the present value of the executive's benefits under
supplemental executive retirement plans calculated on the basis of the
greater of actual years of service or years of service that would have
been completed upon attaining age 62 and applying certain early
retirement factors; (v) life, disability, accident and health insurance
benefits would be continued for a period varying from one year to two
years; and (vi) financial planning and outplacement services would be
provided for a period varying from two years to three years.

The agreements also provide that if the terminated executive agrees to
provide consulting services for two years and abide by certain
covenants regarding non-solicitation of employees and information
confidentiality, the executive would receive (i) an additional lump sum
payment equal to the executive's annual base salary and the greater of
the executive's target bonus for the year of termination or the average
of the two or three highest gross annual bonus awards paid to the
executive in the five years prior to termination and (ii) health
insurance benefits would be continued for an additional one year.

38

The agreements also provide for a gross-up payment to offset the
effects of any excise tax imposed on the executive under Section 4999
of the Internal Revenue Code.

Good reason is defined in the agreements to include the assignment to
the executive of duties materially inconsistent with those appropriate
to a senior executive of Sempra Energy and its subsidiaries; a material
reduction in the executive's overall standing and responsibilities
within Sempra Energy and its subsidiaries; and a material reduction in
the executive's annualized compensation and benefit opportunities other
than across-the-board reductions affecting all similarly situated
executives of comparable rank. Following a change in control, good
reason is defined to include an adverse change in the executive's
title, authority, duties, responsibilities or reporting lines;
reduction in the executive's annualized compensation opportunities
other than across-the-board reductions of less than 10% similarly
affecting all similarly situated executives of comparable rank;
relocation of the executive's principal place of employment by more
than 30 miles; and a substantial increase in business travel
obligations. A change in control is defined to include the acquisition
by one person or group of 20% or more of the voting power of Sempra
Energy's shares; the election of a new majority of the board of Sempra
Energy comprised of individuals who are not recommended for election by
two-thirds of the current directors or successors to the current
directors who were so recommended for election; certain mergers,
consolidations or sales of assets that result in the shareholders of
Sempra Energy owning less than 60% of the voting power of Sempra Energy
or of the surviving entity or its parent; and approval by shareholders
of the liquidation or dissolution of the company.

39

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required on Identification of Directors is incorporated
by reference from "Election of Directors" in the Proxy Statement
prepared for the April 2005 annual meeting of shareholders. The
information required on the company's executive officers is provided
below.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age* Position
- ---------------------------------------------------------------------
Stephen L. Baum 63 Chairman and Chief Executive Officer

Donald E. Felsinger 57 President and Chief Operating Officer

Edwin A. Guiles 55 Group President, Sempra Energy
Utilities

Mark A. Snell 48 Group President, Sempra Global
Enterprises

M. Javade Chaudhri 52 Executive Vice President and General
Counsel

Neal E. Schmale 58 Executive Vice President and Chief
Financial Officer

Frank H. Ault 60 Senior Vice President and Controller

G. Joyce Rowland 50 Senior Vice President, Human Resources

* As of December 31, 2004.

Each Executive Officer has been an officer of the company or one of its
subsidiaries for more than five years, with the exception of Mr.
Chaudhri. Prior to joining the company in 2003, Mr. Chaudhri was Senior
Vice President and General Counsel of Gateway, Inc.

In June 2004, the company announced a succession plan whereby Donald E.
Felsinger became president and chief operating officer, effective June 9,
2004, and will become chairman and chief executive officer in January
2006, when Steven L. Baum retires. At that time, Neal E. Schmale,
currently the company's chief financial officer, will become president
and chief operating officer.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from
"Election of Directors" and "Executive Compensation" in the Proxy
Statement prepared for the April 2005 annual meeting of shareholders.

40

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under equity
compensation plans is set forth in Item 5 herein.

Additional discussion of stock-based compensation is provided in Note 10
of the notes to Consolidated Financial Statements.

Security Ownership of Certain Beneficial Owners

The security ownership information required by Item 12 is incorporated by
reference from "Share Ownership" in the Proxy Statement prepared for the
April 2005 annual meeting of shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services as required
by Item 14 is incorporated by reference from "Proposal 3: Ratification of
Independent Auditors" in the Proxy Statement prepared for the April 2005
annual meeting of shareholders.

41

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial statements
Page in
Annual Report*

Management's Responsibility for Financial Statements . . . 33

Management's Report on Internal Control Over
Financial Reporting . . . . . . . . . . . . . . . . . . 33

Reports of Independent Registered Public Accounting Firm . 34

Statements of Consolidated Income for the years
ended December 31, 2004, 2003 and 2002 . . . . . . . . . 37

Consolidated Balance Sheets at December 31,
2004 and 2003. . . . . . . . . . . . . . . . . . . . . . 38

Statements of Consolidated Cash Flows for the
years ended December 31, 2004, 2003 and 2002 . . . . . . 40

Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . 42

Notes to Consolidated Financial Statements . . . . . . . . 43

*Incorporated by reference from the indicated pages of the 2004
Annual Report to Shareholders.

2. Financial statement schedules

The following document may be found in this report at the indicated page
number.

Schedule I--Condensed Financial Information of Parent. . . 44

Any other schedules for which provision is made in Regulation S-X are not
required under the instructions contained therein or are inapplicable.

42

3. Exhibits

See Exhibit Index on page 49 of this report.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed after September 30, 2004:

Current Report on Form 8-K filed October 27, 2004, discussing the
current status of the California Utilities' Cost of Service Proceedings
and the Border Price Investigation.

Current Report on Form 8-K filed November 4, 2004, filing as an exhibit
Sempra Energy's press release of November 4, 2004, giving the financial
results for the quarter ended September 30, 2004.

Current Report on Form 8-K filed November 5, 2004, discussing the
current status of the California Utilities' Cost of Service
Proceedings, including a proposed decision and an alternate proposed
decision issued by CPUC commissioners on November 4, 2004.

Current Report on Form 8-K filed November 17, 2004, discussing the
current status of the Border Price Investigation, including the
proposed decision issued by the CPUC Administrative Law Judge on
November 16, 2004.

Current Report on Form 8-K filed December 3, 2004, discussing the
current status of the California Utilities' Cost of Service
Proceedings, including the CPUC decision issued on December 2, 2004.

Current Report on Form 8-K filed December 7, 2004, discussing and
filing as an exhibit the 2005 Deferred Compensation Plan and announcing
the impending retirement of directors Hyla H. Bertea and Herbert L.
Carter.

Current Report on Form 8-K filed December 17, 2004, discussing the
Sempra Energy/Sempra Energy LNG $1.25 billion five-year credit
agreement and discussing the current status of the Border Price
Investigation.

Current Report on Form 8-K filed January 11, 2005, discussing the
current status of energy crisis litigation.

Current Report on Form 8-K filed January 18, 2005, discussing the
current status of energy crisis litigation.

Current Report on Form 8-K filed February 8, 2005, announcing that
Sempra Energy had raised its earnings-per-share estimate for 2004 to
approximately $3.80, from its previous guidance of $3.15 to $3.25,
filing as an exhibit Sempra Energy's press release of February 8, 2005.

Current Report on Form 8-K filed February 23, 2005, filing as an
exhibit Sempra Energy's press release of February 23, 2005, giving the
financial results for the three months ended December 31, 2004.

43

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON
SCHEDULES

To the Board of Directors and Shareholders of Sempra Energy:

We consent to the incorporation by reference in Registration Statement
Numbers 333-51309, 333-52192, 333-70640 and 333-103588 on Form S-3 and
Registration Statement Numbers 333-56161, 333-50806, 333-49732 and 333-
121073 on Form S-8 of Sempra Energy of our reports dated February 22,
2005 (which reports express an unqualified opinion and include an
explanatory paragraph relating to the Company's adoption of Statement
of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, effective January 1, 2003, and Financial
Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities an Interpretation of ARB No. 51, effective
December 31, 2003) relating to the financial statements of Sempra
Energy and management's report on the effectiveness of internal control
over financial reporting, incorporated by reference in this Annual
Report on Form 10-K of Sempra Energy for the year ended December 31,
2004.
Our audits of the financial statements referred to in our
aforementioned report also included the financial statement schedule of
Sempra Energy, listed in Item 15. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects, the information set forth therein.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 22, 2005

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