Sempra Energy 10-K 12/31/2007


 

UNITED STATES
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, 2007

 

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from

 

to

 

 

 

 

 

Commission file number

1-14201


SEMPRA ENERGY

(Exact name of registrant as specified in its charter)
 

 

California

 

33-0732627

 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)


101 Ash Street, San Diego, California 92101

(Address of principal executive offices)
(Zip Code)


(619) 696-2034

(Registrant's telephone number, including area code)
 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

Title of each class

 

Name of each exchange on which registered

 

Common stock, without par value

 

New York

 

 

 

 

 

 

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes

X

 

No

 


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes

 

 

No

X

 



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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 (or for such shorter period that the registrant was required to file such reports), 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

[ X ]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

 

 

No

X


Exhibit Index on page 42. Glossary on page 48.

 

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007 was $15.5 billion.

 

Registrant's common stock outstanding as of January 31, 2008, was 261,306,080 shares.

 

 

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the 2007 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV.

 

 

 

 

Portions of the Proxy Statement prepared for the May 2008 annual meeting of shareholders are incorporated by reference into Parts II and III.

 

 



2




 

 

TABLE OF CONTENTS

Page

PART I

 

 

Item 1.

Business and Risk Factors

5

Item 2.

Properties

28

Item 3.

Legal Proceedings

29

Item 4.

Submission of Matters to a Vote of Security Holders

29

 

 

 

PART II

 

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


29

Item 6.

Selected Financial Data

31

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


32

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 8.

Financial Statements and Supplementary Data

32

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures


32

Item 9A.

Controls and Procedures

32

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

33

Item 11.

Executive Compensation

33

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


34

Item 13.

Certain Relationships and Related Transactions, and Director Independence


34

Item 14.

Principal Accountant Fees and Services

34

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

35

 

 

 

Consent of Independent Registered Public Accounting Firm and Report on Schedule

36

 

 

 

Schedule I - Condensed Financial Information of Parent

37

 

 

 

Signatures

 

41

 

 

 

Exhibit Index

42

 

 

 

Glossary

 

48

 

 

 





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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, the Federal Energy Regulatory Commission, the Federal Reserve Board, the U.K. Financial Services Authority 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 electric power, natural gas and liquefied natural gas; weather conditions and conservation efforts; war and terrorist attacks; business, regulatory , environmental and legal decisions and requirements; the status of deregulation of retail natural gas and electricity delivery; the timing and success of business development efforts; the resolution of litigation; and other uncertainties, all of which are difficult to predict and many of which are beyond 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 AND RISK FACTORS


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 2007 Annual Report to Shareholders (Annual Report), which is incorporated by reference. The company has five separately managed reportable segments consisting of Southern California Gas Company (SoCalGas), San Diego Gas & Electric Company (SDG&E), Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage. SoCalGas and SDG&E are collectively referred to as "the Sempra Utilities." In July 2007, the company entered into an agreement with The Royal Bank of Scotland plc (RBS) to form a partnership to purchase and operate the company's commodity-marketing businesses, which generally comprise the Sempra Commodities segment. This agreement is discussed in "Sempra Global – Joint Venture Partnership with RBS" herein.


Company Website


The company's website address is http://www.sempra.com. 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 company's 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.



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Risk Factors


The following risk factors and all other information contained in this report should be considered carefully when evaluating the company. These risk factors could affect the actual results of the company and cause such results to differ materially from those expressed in any forward-looking statements made by or on behalf of the company. Other risks and uncertainties, in addition to those that are described below, may also impair its business operations. If any of the following risks occurs, the company'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 the company 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 2007 Annual Report to Shareholders, which is incorporated by reference in this report.


Risks Related to the Sempra Utilities


The Sempra 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 Sempra Utilities' rates (except electric transmission rates, which are regulated by the Federal Energy Regulatory Commission (FERC)) and conditions of service, sales of securities, capital structure, rates of return, rates of depreciation, the uniform systems of accounts and long-term resource procurement. The CPUC conducts various reviews of utility performance (which may include reasonableness and prudency reviews of capital expenditures, natural gas and electricity procurement, and other costs, and reviews and audits of the company's records) 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 C PUC and relating to the Sempra Utilities' rates, costs, incentive mechanisms and performance-based regulation are discussed in Notes 14 and 15 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations."


The Sempra Utilities may expend funds prior to receiving regulatory approval to proceed with a major capital project. If the project does not receive regulatory approval or management decides not to proceed with the project, the company may not be able to recover the amount expended for that project.


Periodically, the Sempra Utilities' rates are approved by the CPUC based on authorized capital expenditures and operating costs. If the Sempra Utilities' actual capital expenditures and operating costs were to exceed the amount approved by the CPUC, it could adversely affect earnings and cash flows.


To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC applies Performance-Based Regulation (PBR) to the Sempra Utilities. Under PBR, regulators require future income potential to be tied to achieving or exceeding specific performance and operating income goals, rather than relying solely on expanding utility plant to increase earnings. The areas that are eligible for PBR rewards are: operational incentives based on measurements of safety, reliability and customer service; energy efficiency rewards based on the effectiveness of the programs; and natural gas procurement rewards. Although the Sempra Utilities have received PBR rewards in the past, there can be no assurance that they will receive rewards in the future,



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or that they would be of comparable amounts. Additionally, if the Sempra Utilities fail to achieve certain minimum performance levels established under the PBR mechanisms, they may be assessed financial disallowances or penalties which could negatively affect earnings and cash flows.


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


The Sempra Utilities may be adversely affected 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 Sempra Utilities operate, could affect their ability to recover various costs through rates or adjustment mechanisms, or could require the Sempra Utilities to incur additional expenses.


The construction and expansion of the Sempra Utilities' natural gas pipelines and storage facilities and electric transmission and distribution facilities require numerous permits and approvals from federal, state and local governmental agencies. If there are delays in obtaining required approvals, or if the company fails to obtain or maintain required approvals or to comply with applicable laws or regulations, its business, cash flows, results of operations and financial condition could be materially adversely affected.


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


SDG&E has a 20-percent ownership interest in the San Onofre Nuclear Generating Station (SONGS), a 2,150-megawatt (MW) 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 Sempra Utilities' future results of operations, financial condition and cash flows may be materially adversely affected by the outcome of pending litigation against them.

Sempra Energy and the Sempra Utilities are defendants in numerous lawsuits. They have expended and continue to expend substantial amounts defending these lawsuits and in connection with related investigations and regulatory proceedings and have established reserves that they believe to be appropriate for their ultimate resolution. However, uncertainties inherent in complex legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of resolving legal matters. Accordingly, costs ultimately incurred may differ materially from estimated costs and could materially adversely affect Sempra Energy's and the Sempra Utilities' business, cash flows, results of operations and financial condition.


These proceedings are discussed in Note 16 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations."



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Risks Related to Sempra Energy's Electric Generation, Liquefied Natural Gas (LNG), Commodities Trading, 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 Generation generates electricity that it sells under long-term contracts and into the spot market or other competitive markets. It purchases natural gas to fuel its power plants and may also purchase electricity in the open market to satisfy its contractual obligations. As part of Sempra Generation's risk management strategy, it may hedge a substantial portion of its electricity sales and natural gas purchases to manage its portfolio.


Sempra Energy's revenues and results of operations could be adversely affected if the prevailing market prices for electricity, natural gas, LNG or other commodities, whether procured for power plants or LNG regasification terminals 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.


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. However, it may at any time 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.


Unanticipated changes in market prices for energy-related and other commodities result from multiple factors, including: weather conditions; seasonality; changes in supply and 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 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, 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



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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 strategies 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 in place risk management systems and control systems 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 based on 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 assurance that Sempra Energy's risk management procedures will prevent losses that would negatively affect its business, results of operations, cash flows and financial condition.


Sempra Energy's businesses depend on counterparties, business partners, 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, business partners, 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.


Sempra LNG's obligations and those of its suppliers for LNG supplies are contractually subject to suspension or termination for "force majeure" events beyond the control of the parties and to substantial limitations of remedies for other failures to perform, including limitations on damages to amounts that could be substantially less than those necessary to provide full recovery for breach of the agreements.


If California's 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 MW to the state. The validity of the power sales agreement with the DWR continues to be the subject of extensive litigation between the parties before the FERC, in the courts and in arbitration proceedings. 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." As described in Note 16 of



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the Notes to Consolidated Financial Statements, the company unilaterally reduced its price to the DWR in connection with the agreement to settle other litigation.


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 may 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 expiring in 2011, Sempra Energy's sales may be subject to increased price volatility, and it may be unable to sell the power generated by Sempra Generation's facilities or operate those facilities profitably.


Sempra LNG intends to utilize its regasification terminals by entering into long-term firm capacity service agreements whereby customers would pay Sempra LNG fees to use Sempra LNG's facilities to regasify the customer's LNG or by entering into long-term supply agreements for the purchase of LNG to be regasified at its terminals for sale to other parties. In the case of long-term supply agreements, these contracts are expected to substantially reduce its exposure to changes in natural gas prices through corresponding natural gas sales agreements or by tying supply prices to prevailing natural gas price market indices. However, if Sempra LNG is unable to obtain such long-term agreements or 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 material adverse effect on Sempra Energy's business, results of operations, cash flows and financial condition. In addition, reduced availability of LNG due to inadequate supplies, delays in the development of new liquefaction capacity and increased demand are affecting the timing of development of new LNG facilities and expansion of existing facilities, and are likely to delay near-term attainment of full-capacity utilization when facilities under construction become operational. The company's potential LNG suppliers also may be subject to international political and economic pressures and risks which may also affect the supply of LNG.


Sempra Pipelines & Storage's natural gas pipeline operations will be dependent on supplies of natural gas from their transportation customers, which may include Sempra LNG facilities.


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 LNG receiving terminals, natural gas pipelines and storage facilities, and other energy infrastructure projects 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, negotiation of supply and natural gas sales agreements or firm capacity service agreements, receipt of required governmental permits and timely implementation and satisfactory completion of construction. Successful completion of a particular project may be adversely affected by unforeseen engineering problems, construction delays and contractor performance shortfalls, work stoppages, equipment supply, 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.



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The operation of existing and future 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 facilities 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.


Sempra Energy's subsidiaries rely on transportation assets and services 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 to their electric generation facilities, and to provide retail energy services to customers. Sempra Pipelines & Storage also depends on natural gas pipelines to interconnect with their ultimate source or customers of the commodities they are transporting. Sempra LNG also will rely on specialized LNG ships to transport LNG to its 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 LNG receiving terminals, natural gas pipelines and storage facilities, and electric generation 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. If there is a delay in obtaining any required regulatory approvals or if the company fails to obtain or maintain 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.


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 effect 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 other operations are subject to affiliate rules relating to transactions with the Sempra Utilities and with each other. 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 Sempra Utilities and with each other. Affiliate transaction rules also could require these



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businesses to obtain the prior approval of the CPUC before entering into any such transactions with the Sempra Utilities. Any such restrictions or approval requirements could adversely affect the LNG receiving terminals, natural gas pipelines, electric generation facilities 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 Note 16 of the Notes to Consolidated Financial Statements.


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 have interests in electricity generation, natural gas distribution and transmission, and LNG terminal projects in Mexico, and also have trading, marketing and risk management operations in Canada, Europe and Asia. Sempra Pipelines & Storage 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, legal and financial risks which vary by country, including:


·

changes in foreign laws and regulations, including tax and environmental laws and regulations, and U.S. 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, challenges to permits, difficulty in enforcing contractual rights, and unsettled property rights and titles in Mexico and other 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 subsidiaries. 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.




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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 and 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 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.


Under the terms of the agreement for the pending joint venture transaction with RBS, RBS will provide all credit support for the commodities-marketing business, and that business will no longer be dependent on Sempra Energy’s credit ratings. Additional information is provided in "Sempra Global -- Joint Venture Agreement with RBS."


Other Risks Related to the Company


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, including, in particular, global warming and greenhouse gas (GHG) emissions. 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, mitigation costs 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, 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 operati ons.


The scope and effect of new environmental laws and regulations, including their effects on current operations and future expansions, are difficult to predict. Increasing international, national, regional and state-level concerns as well as new or proposed legislation and regulation may have substantial effects on operations, operating costs, and the scope and economics of proposed expansion. In particular, state-level laws and regulations as well as proposed national and international legislation and regulation relating to GHG emissions (including carbon dioxide, methane, nitrogen oxide, hydrofluorocarbon, perfluorocarbon and sulfur hexafluoride) may limit or otherwise adversely affect the operations of Sempra Energy and its subsidiaries. The implementation of recent California legislation and proposed federal legislation may adversely affect Sempra Energy's unregulated businesses by imposing additional costs associated with emission limits and the poss ible requirement of carbon taxes or the purchase of emission credits. Similarly, the Sempra Utilities may be affected if costs are not recoverable in rates and because the effects



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of significantly tougher standards may cause rates to increase to levels that substantially reduce customer demand and growth. In addition, SDG&E may be subject to penalties if certain mandated renewable energy goals are not met. Further discussion of these matters is provided in Notes 14 and 16 of the Notes to Consolidated Financial Statements.


In addition, existing and future laws and regulation on mercury, nitrogen and sulfur oxides, particulates or other emissions could result in requirements for additional pollution control equipment or emission fees and taxes that could adversely affect Sempra Energy's subsidiaries. Moreover, existing rules and regulations may be interpreted or revised in ways that may adversely affect the company and its facilities and operations. Additional information on these matters is provided in Note 14 of the Notes to the Consolidated Financial Statements. 


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 facilities, electric transmission and distribution facilities, LNG receipt 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 the company's financial condition, 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 the company and its subsidiaries. Insurance coverage may become unavailable for certain of these ris ks and the insurance proceeds received for any loss of or damage to any of its facilities, or for any 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.


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


The company's ability to pay dividends and meet its debt obligations is dependent on cash flows from its subsidiaries and, in the short term, its ability to raise capital from external sources. Cash flows from the subsidiaries are dependent, in the long term, on the ability of the subsidiaries to generate operating cash flows in excess of their own capital expenditures and long-term debt obligations. In addition, 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.


GOVERNMENT REGULATION


The most significant government regulation affecting Sempra Energy is the regulation of 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, rates of return, capital structure, rates of depreciation, uniform systems of accounts and long-term resource procurement, except as described below under "United States Utility Regulation." The CPUC also has



14



jurisdiction over the proposed construction of major new electric transmission, electric distribution and natural gas transmission and distribution facilities. The CPUC conducts various reviews of utility performance, conducts audits for compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies. The CPUC also regulates the interactions and transactions of the Sempra Utilities with Sempra Energy and its affiliates. Further discussion is provided in Note 15 of the Notes to Consolidated Financial Statements.


The California Energy Commission (CEC) establishes 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 statewide 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.


California Assembly Bill 32, the California Global Warming Solutions Act of 2006, makes the California Air Resources Board (CARB) responsible for monitoring and reducing GHG emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions including, among other things, a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a part of the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government.


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, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale.


The NRC oversees the licensing, construction and operation of nuclear facilities in the United States. 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 reanalyze 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 241 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 public places. Some franchises, such as that for the city of Los Angeles, which expires in 2012, have fixed expiration dates ranging from 2008 to 2048. Most of the franchises have indefinite lives with no expiration date.


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 public places. Most of the franchises have indefinite lives, except for the



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electric and natural gas franchises with the cities of (with expiration dates as indicated) Encinitas (2012), Chula Vista (2015), San Diego (2020) and Coronado (2028) and the natural gas franchises with the county of San Diego (2029) and the city of Escondido (2035).


Sempra Generation, Sempra LNG and Sempra Pipelines & Storage have operations in Nevada, Arizona, California and Louisiana. These entities are subject to state and local laws and regulations in the states in which they operate.


Other Regulation


Sempra Commodities' operations are subject to regulation by the New York Mercantile Exchange, the London Metal Exchange, the Commodity Futures Trading Commission, the FERC and the National Futures Association. It also has trading locations in Canada, Europe and Asia that are subject to regulation as to operations and financial position by bodies such as the U.K. Financial Services Authority (FSA) and Liffe, the international derivatives business of NYSE Euronext. Upon completion of the joint venture transaction with RBS, the joint venture partnership will also be subject to regulation by the Federal Reserve Board.


Sempra Generation and Sempra LNG have operations in the United States that are subject to regulation by the FERC.


Sempra Pipelines & Storage's Mexican utilities build and operate natural gas distribution systems in Mexicali, Chihuahua and the La Laguna-Durango zone in north-central Mexico, and its pipelines transport gas from the U.S. border to Baja California, Mexico. Sempra Generation operates a natural gas-fired power plant in Baja California, Mexico. Sempra LNG’s Energía Costa Azul receipt terminal is currently being developed in Baja California, Mexico. These operations are subject to regulation by the Comisión Reguladora de Energía and by the labor and environmental agencies of city, state and federal governments in Mexico.


Licenses and Permits


The Sempra 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 other subsidiaries 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, and in connection with wholesale distribution of electricity. Sempra Pipelines & Storage’s Mexican subsidiaries obtain construction permits for their natural gas distribution and transmission systems from the local governments where the service is provided. Sempra Pipelines & Storage obtains licenses and permits for natural gas storage facilities and pipelines. Sempra LNG obtains licenses and permits for the construction and operation of LNG facilities.


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




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CALIFORNIA NATURAL GAS UTILITY OPERATIONS


The company is engaged in the purchase, sale, distribution, storage and transportation of natural gas through the Sempra Utilities. The company's resource planning, natural gas 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 classified as either core or 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 Sempra Utilities. While customers are permitted to aggregate their natural gas requirement and purchase directly from brokers or producers, the Sempra Utilities continue to be obligated to provide reliable supplies of natural gas to serve the requirements of core customers.


Natural Gas Procurement and Transportation


Most of the natural gas purchased and delivered by the Sempra Utilities is produced outside of California, primarily in the southwestern U.S., U.S. Rockies and Canada. The Sempra Utilities purchase natural gas under short-term and long-term contracts, which 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 its 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 on a short-term basis. Interstate pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company and Kern River Gas Transmission, provide transportation services into SoCalGas' intrastate transmission system for supplies purchased by SoCalGas or its transportation customers from outside of California. The rates that interstate pipeline companies may charge for natural gas and transportation services are regulated by the FERC.


SDG&E has natural gas transportation contracts with various interstate pipelines that expire on various dates between 2008 and 2023. SDG&E currently purchases natural gas on a spot basis from Canada, the U.S. Rockies and the southwestern U.S. to fill its long-term pipeline capacity and purchases additional spot-market supplies delivered directly to California for its remaining requirements. All of SDG&E's natural gas is delivered through SoCalGas' pipelines under a long-term transportation agreement. In addition, under separate agreements expiring in March 2008, SoCalGas provides SDG&E up to nine billion cubic feet (Bcf) of storage capacity. A December 2007 CPUC decision directs that, effective April 1, 2008, natural gas procurement for both SDG&E’s and SoCalGas’ natural gas core customers be combined into a single supply portfolio to be administered by SoCalGas. All SDG&E assets associated with it s core customer natural gas supply portfolio will be transferred or assigned to SoCalGas.




17



Natural Gas Storage


SoCalGas provides natural gas storage services for use by core, noncore and off-system customers. Sempra Utilities’ customers are allocated a portion of SoCalGas' storage capacity. Other customers can bid and negotiate the desired amount of storage on a contract basis. The storage service program provides opportunities for these customers to purchase and store natural gas when natural gas costs are low, 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 better manage their fuel procurement and transportation needs.


Demand for Natural Gas


The Sempra Utilities face competition in the residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the non-core industrial market, some customers are capable of using alternate fuels which can affect the demand for natural gas. The company's ability to maintain its industrial market share is largely dependent on the relative spread between energy prices. 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 U.S. and Canada. In addition, natural gas use is impacted by the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas faciliti es 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 extended heat waves. Over the long-term, natural gas used to generate electricity will be influenced by additional factors such as the location of new power plant construction and the development of renewable energy resources. Recently, more generation capacity has been constructed outside Southern California than within the Sempra Utilities' service area. This new generation will displace the output of older, less-efficient local generation, reducing the use of natural gas for local electric generation. Over the next few years, however, construction and planned construction of smaller natural gas-fired peaking and other electric generation facilities within the Sempra Utilities’ service area are expected to result in a slight overall increase in the demand for local natural gas for electric generation.


Effective March 31, 1998, electric industry restructuring provided out-of-state producers the option to provide power to California utility customers. As a result, natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the company's 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, development of renewable energy resources, development of new natural gas supply sources and general economic conditions can result in significant shifts in demand and market price. The Sempra Utilities added 62,000 and 85,000 new customer meters in 2007 and 2006, respectively, representing growth rates of 1.0 percent and 1.3 percent, respectively. The Sempra Utilities expect that their growth rate for 2008 will approximate that of 2007.


The natural gas distribution business is seasonal in nature and revenues generally are greater during the winter months. As is prevalent in the industry, the company injects natural gas into storage during the



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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, 2007, SDG&E had 1.4 million customer meters consisting of 1,210,600 residential, 146,300 commercial, 500 industrial, 2,000 street and highway lighting and 5,400 direct access. The company's service area covers 4,100 square miles. The company added 10,000 new electric customer meters in 2007 and 17,000 in 2006, representing growth rates of 0.7 percent and 1.3 percent, respectively. The company expects that its growth rate for 2008 will approximate that of 2007.


Resource Planning and Power Procurement


SDG&E's resource planning, power procurement and related regulatory matters are discussed 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.


Electric Resources


Based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its Palomar and Miramar generating facilities and its 20-percent ownership interest in SONGS, the supply of electric power available to SDG&E as of December 31, 2007, is as follows:



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Supplier

 

Source

 

Expiration date

 

MW

PURCHASED-POWER CONTRACTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

DWR-allocated contracts:

 

 

 

 

 

 

 

Bear Energy LP

 

Natural gas

 

2008 to 2010

 

700

*

 

Sunrise Power Co. LLC

 

Natural gas

 

2012

 

575

 

 

Other (5 contracts)

 

Natural gas/Wind

 

2011 to 2013

 

264

 

 

Total

 

 

 

 

 

1,539

 

Other contracts with Qualifying Facilities (QFs):

 

 

 

 

 

 

 

Applied Energy Inc.

 

Cogeneration

 

2019

 

107

 

 

Yuma Cogeneration

 

Cogeneration

 

2024

 

53

 

 

Goal Line Limited Partnership

 

Cogeneration

 

2025

 

50

 

 

Other (17 contracts)

 

Cogeneration

 

2009 and thereafter

 

56

 

 

Total

 

 

 

 

 

266

 

Other contracts with renewable sources:

 

 

 

 

 

 

 

Oasis Power Partners

 

Wind

 

2019

 

60

 

 

Kumeyaay

 

Wind

 

2025

 

50

 

 

Covanta Delano

 

Bio-mass

 

2017

 

49

 

 

PPM Energy

 

Wind

 

2018

 

25

 

 

WTE/FPL

 

Wind

 

2019

 

17

 

 

Other (8 contracts)

 

Bio-gas/Hydro

 

2012 to 2022

 

31

 

 

Total

 

 

 

 

 

232

 

Other long-term and tolling contracts:

 

 

 

 

 

 

 

 

Cabrillo Power I, LLC

 

Natural Gas

 

2009

 

964

 

 

LSP South Bay, LLC

 

Natural Gas

 

2009

 

704

 

 

Portland General Electric (PGE)

 

Coal

 

2013

 

89

 

 

Enernoc

 

Demand Response/Dist. Generation

 

2016

 

25

 

 

Total

 

 

 

 

 

1,782

 

Total contracted

 

 

 

 

 

3,819

 

 

 

 

 

 

 

 

 

GENERATION:

 

 

 

 

 

 

 

 

Palomar

 

Natural Gas

 

 

 

550

 

 

SONGS

 

Nuclear

 

 

 

430

 

 

Miramar

 

Natural Gas

 

 

 

45

 

Total generation

 

 

 

 

 

1,025

 

TOTAL CONTRACTED AND GENERATION

 

 

 

4,844

 

*

Effective January 1, 2008, the quantity will decrease to 325 MW.


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 most of 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, or are tolls based on available capacity. The prices under these contracts are at the market value at the time the contracts were negotiated.




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Natural Gas Supply


SDG&E buys natural gas under short-term contracts for its Palomar and Miramar generating facilities and for the Cabrillo Power I, LLC and LSP South Bay, LLC tolling contracts. Purchases are from various southwestern U.S. suppliers and are primarily based on monthly and spot-market prices. All of SDG&E's natural gas is delivered through SoCalGas' pipelines under a two-year transportation agreement which expires on March 31, 2008.


SDG&E also buys natural gas as the DWR’s limited agent for the DWR-allocated contracts. Most of the natural gas deliveries for the DWR-allocated contracts are transported through the Kern River Gas Transmission under a long-term transportation agreement. The DWR is financially responsible for the costs of gas and transportation.


SONGS


SDG&E has a 20-percent ownership interest in SONGS, which is located south of San Clemente, California. SONGS consists of two operating nuclear generating units and one that is permanently shut down and is being decommissioned. The city of Riverside owns 1.79 percent of Units 2 and 3, and Southern California Edison (Edison), the operator of SONGS, owns the remaining interests.


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.


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 in an independent spent fuel storage installation (ISFSI) licensed by the NRC.


SDG&E has fully recovered its SONGS capital investment through December 31, 2003 and earns a return only on subsequent capital additions, including the company's share of costs associated with planned steam generator replacements.


Additional information concerning the SONGS units and nuclear decommissioning is provided below, in "Environmental Matters" herein, 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 supply cycle includes materials and services (uranium oxide, conversion of uranium oxide to uranium hexafluoride, uranium enrichment services, and fabrication of fuel assemblies) performed by others under various contracts which extend through 2012. The availability and the cost of the various components of the nuclear fuel cycle for SDG&E's 20-percent ownership interest in SONGS in subsequent years cannot be estimated at this time.


Spent fuel from SONGS is being stored on site in both the ISFSI and spent fuel pools. Upon completion of the current phase of Unit 1 decommissioning, the site will have adequate space to build ISFSI storage capacity through 2022, the expiration date of the units' 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 from SONGS. SDG&E pays the DOE a disposal fee of $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 2017 at the earliest.



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


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 300 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 preapproved by the FERC.


Transmission Arrangements


SDG&E's 500-kV 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 1,163 MW, although it can be less under certain system conditions.


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


SDG&E is in the approval phase for the Sunrise Powerlink, a new 500-kV transmission line between the existing Imperial Valley Substation and a new central substation to be located within the SDG&E system. The proposed rating of the Sunrise Powerlink is 1,000 MW. The project is subject to CPUC approval. Further discussion is provided in Note 14 of the Notes to Consolidated Financial Statements.


Transmission Access


The National Energy Policy Act governs procedures for others' requests for transmission service. The FERC approved the California investor-owned utilities' (IOUs) transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998. Additional information regarding FERC, ISO and transmission issues is provided in Note 14 of the Notes to Consolidated Financial Statements.


RATES AND REGULATION -- SEMPRA UTILITIES


Information concerning rates and regulation applicable to the Sempra 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.


SEMPRA GLOBAL


Sempra Global consists of most of the businesses of Sempra Energy other than the Sempra Utilities, and serves a broad range of customers' energy and other needs. Sempra Global includes Sempra Commodities, Sempra Generation, Sempra LNG and Sempra Pipelines & Storage. Descriptions of these business units and information concerning their operations are provided under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 3, 4, 5, 16 and 17 of the Notes to Consolidated Financial Statements.




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Joint Venture Partnership with RBS


In July 2007, the company and RBS entered into an agreement to form a partnership, RBS Sempra Commodities LLP (RBS Sempra Commodities), to purchase and operate the company's commodity-marketing businesses, which generally comprise the company’s Sempra Commodities segment. RBS Sempra Commodities has been formed as a United Kingdom limited liability partnership. Due to increased regulatory capital requirements for the partnership, Sempra Energy's expected equity investment in the partnership has increased from $1.3 billion - $1.5 billion to $1.6 billion - $1.7 billion. The partnership concurrently will purchase Sempra Energy’s commodity-marketing subsidiaries at a price (after deducting certain expenses to be paid by Sempra Energy in terminating pre-existing contractual arrangements) equal to their book value computed on the basis of International Financial Reporting Standards (IFRS) as adopted by the European Union. The company expects t he transaction to close in April 2008, and to receive proceeds of approximately $1 billion in cash, net of its investment in the partnership, upon closing.


RBS will provide any additional funding required for the ongoing operating expenses of the partnership’s businesses. RBS will also provide all growth capital, credit and liquidity for the partnership, replacing the trading guarantees and credit support currently maintained for these businesses by the company. RBS will terminate or replace Sempra Energy’s credit support arrangements for the commodity-marketing businesses acquired by RBS Sempra Commodities that are reasonably capable of being terminated or replaced. To the extent that Sempra Energy’s credit support arrangements have not been terminated or replaced, RBS will indemnify Sempra Energy for any claims or losses arising in connection with those arrangements.


Sempra Energy and RBS intend that RBS Sempra Commodities will distribute all of its net income on an annual basis, although the distributions are within the discretion of the board of directors of the partnership. Subject to certain limited exceptions, partnership pretax income, calculated in accordance with IFRS, will be allocated as follows:


·

Sempra Energy will receive a preferred 15-percent return on its adjusted equity capital;

·

RBS will receive a preferred 15-percent return on any capital in excess of capital attributable to Sempra Energy that is required by the FSA to be maintained by RBS in respect of the operations of the partnership;

·

Sempra Energy will receive 70 percent of the next $500 million in pretax income, with RBS receiving the remaining 30 percent; and

·

Sempra Energy will receive 30 percent, and RBS 70 percent, of any remaining pretax income.


Any losses of the partnership would be shared equally between Sempra Energy and RBS.


RBS Sempra Commodities will initially be governed by a board of seven directors, three appointed by Sempra Energy and four by RBS. The consent of Sempra Energy will be required before the partnership may take certain significant actions, including materially changing the scope of the partnership’s businesses, issuing credit support outside the ordinary course, incurring certain types of indebtedness and entering into agreements of significant size or duration. Sempra Energy will indemnify the partnership for liabilities in respect of certain litigation and taxes relating to the businesses to be purchased by the partnership.


The company will not be required to invest additional capital in the partnership beyond its initial capital investment although, in limited cases, earnings allocable to the company may be retained by the partnership to replenish capital depleted through losses.



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For a period of four years, RBS and the company are each subject to certain limitations on their ability to compete with the partnership. RBS will not compete with certain core business activities of the partnership (defined to include trading, processing and tolling of, and derivatives and certain other transactions in, oil and oil byproducts, electricity, natural gas, LNG, base metals, coal, liquefied petroleum gas, biofuels, carbon credits and emissions credits) or acquire an equity interest in any entity whose principal business involves activities that are competitive with the partnership’s core business activities. If RBS were to acquire an equity interest in excess of agreed upon thresholds in entities whose activities include, but are not principally comprised of, those that are competitive with the partnership’s core business activities, RBS and Sempra Energy will engage in good faith negotiations to combine the activities of such com petitor with those of the partnership, and if RBS and Sempra Energy are unable to agree on terms within six months, RBS will be required to offer the partnership an opportunity to act as the counterparty with respect to certain significant commodities hedging, supply and offtake opportunities generated by RBS’s other business activities in the areas of project finance and structured finance.


The company will be subject to limitations, mirroring those to which RBS is subject, on its ability to acquire equity interests in entities competing with the core business activities of RBS Sempra Commodities. Certain Sempra Energy non-utility businesses will be required, subject to risk concentration policies, to offer the partnership an opportunity to act as the counterparty to the company in certain transactions that are competitive with the core business activities of the partnership.


For a period of four years, neither RBS nor the company is permitted to sell or assign its interest in the partnership. Following this four-year period, if the company were to desire to sell its interest, it is required to so notify RBS and, unless RBS notifies the company that it is not interested in purchasing such interest, negotiate with RBS to determine a price at which the interest would be sold to RBS. If the company and RBS were unable to agree upon a price at which the interest would be sold to RBS, either party is permitted to request that the price be submitted for binding arbitration. If the other party assents to that request, the interest will be sold to RBS at a price determined by arbitration subject to a maximum price of $3.5 billion in the fourth year following the creation of the partnership and increasing by 2.5% per year to a maximum of $4 billion. If RBS declines to arbitrate, the company may sell its interest to a third party upon terms no more favorable than those at which the interest was offered to RBS. If the third party purchaser is a bank or broker-dealer, a majority owned or controlled affiliate of a bank or broker-dealer or a hedge fund controlled by such an entity or has a credit rating lower than the company’s, the third party purchaser must also be reasonably acceptable to RBS.


If RBS were to desire to sell its interest in RBS Sempra Commodities after such four-year period, it is required to provide the company with the opportunity to make the first offer to acquire the interest and is prohibited from subsequently selling the interest to a third party upon terms less favorable than those offered by the company. The company also will have the right to "tag-along" in connection with any sale of RBS’s interest in the partnership to a third party.


In addition, if RBS were to fail to fund RBS Sempra Commodities consistent with its commitments and intentions and did not cure that failure within a specified period following notice from the company, the company would have the right to purchase RBS’s interest in the partnership at book value.


After closing the transaction, the company will account for its investment in the partnership under the equity method, and the company's share of partnership earnings will be reported in the Sempra Commodities segment.




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Competition


Sempra Energy’s non-utility businesses are among many others in the energy industry providing similar products and services. Most activities in which the company is engaged are very competitive and require significant capital investments and highly skilled and experienced personnel to compete. Many of Sempra Global’s competitors may have significantly greater financial, personnel and other resources than the company.


Sempra Commodities


All aspects of Sempra Commodities’ business are intensely competitive and are expected to remain so. Sempra Commodities’ competitors are other brokers and dealers, investment banking firms, energy companies and other companies that offer similar products and services in the U.S. and globally. Sempra Commodities’ competition is based on a number of factors, including transaction execution, products and services, innovation, reputation and price.


Sempra Commodities also faces intense competition in attracting and retaining qualified employees. Sempra Commodities’ ability to compete effectively will depend upon the ability to attract new employees and retain and motivate existing employees.


Sempra Commodities' competitors include Goldman Sachs, JP Morgan and Morgan Stanley.


Sempra Generation


For sales of non-contracted power, Sempra Generation is subject to intense competition from energy marketers, utilities, industrial companies and other independent power producers. For a number of years, natural gas has been the fuel of choice for new power generation facilities for economic, operational and environmental reasons. While natural gas-fired facilities will continue to be an important part of the nation’s generation portfolio, some regulated utilities are now constructing units powered by renewable resources, often with subsidies or under legislative mandate. These utilities generally have a lower cost of capital than most independent power producers and often are able to recover fixed costs through rate base mechanisms, allowing them to build, buy and upgrade generation without relying exclusively on market clearing prices to recover their investments.


When Sempra Generation sells power not subject to long-term contract commitments, it is exposed to market fluctuations in prices based on a number of factors, including the amount of capacity available to meet demand, the price and availability of fuel and the presence of transmission constraints. Some of Sempra Generation’s competitors, such as electric utilities and distribution companies, have their own generation capacity, including nuclear generation. These companies, generally larger than Sempra Generation, have a lower cost of capital and may have competitive advantages as a result of their scale and location of their generation facilities.


Sempra Generation’s competitors include Edison Mission Energy and FPL Energy LLC.


Sempra LNG


New supplies to meet North America’s natural gas demand may be developed from a combination of the following sources:


·

existing producing basins in the United States, Canada, and Mexico;

·

frontier basins in Alaska, northern Canada and offshore deepwater;



25



·

areas currently restricted from exploration and development due to public policies, such as areas in the Rocky Mountains and offshore Atlantic, Pacific and Gulf of Mexico coasts; and

·

imported LNG.


In addition, demand for energy currently met by natural gas could alternatively be met by other energy forms such as coal, hydroelectric, oil, wind, solar and nuclear energy. Sempra LNG will face competition from each of these energy sources.


Sempra LNG competes with other companies to be among the first to construct LNG receiving terminals in economically desirable locations. According to the FERC, as of October 31, 2007, there were five existing LNG terminals in North America, as well as 39 new LNG receiving terminals or expansions approved or proposed to be constructed in the U.S., including six under construction. In addition, as of December 31, 2007, there were 60 LNG receiving terminals in 18 countries and other proposed LNG receiving terminals worldwide with which Sempra LNG will compete to be the most economical delivery point for LNG production of both long-term contracted and spot volumes.


Sempra LNG’s U.S. competitors include Cheniere Energy, Dominion Resources, El Paso Corporation, Southern Union, Exxon Mobil, Occidental Energy Ventures, Chevron Texaco and Hess LNG.


Sempra Pipelines & Storage


Within its market area, Sempra Pipelines & Storage’s natural gas storage facilities and pipelines compete with other storage facilities and pipelines (both regulated and unregulated systems) primarily on the basis of price (in terms of storage and transportation fees), available capacity and connections to downstream markets.


Sempra Pipelines & Storage’s competitors include Cheniere Energy, Exxon Mobil, Kinder Morgan, Spectra Energy and Enterprise Product Partners LP.


ENVIRONMENTAL MATTERS


Discussions about environmental issues affecting the company are included in Notes 14 and 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 mechanism, allowing California's IOUs to recover certain hazardous waste cleanup costs, including those related to Superfund sites or similar sites requiring cleanup. Rate 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.


At December 31, 2007, the company had accrued its estimated remaining investigation and remediation liability related to hazardous waste sites, including numerous locations that had been manufactured-gas plants, of $48.4 million, of which 90 percent is authorized to be recovered through the Hazardous Waste Collaborative mechanism. This estimated cost excludes remediation costs of $6 million 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.



26




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.


Air and Water Quality


The transmission and distribution of natural gas require the operation of compressor stations, which are subject to increasingly stringent air-quality standards, such as those established by the CARB as discussed under "Government Regulation – California Utility Regulation" herein. Costs to comply with these standards are generally recovered in rates.


In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached an agreement with the California Coastal Commission to mitigate the environmental damage to the marine environment attributed to the cooling-water discharge from SONGS Units 2 and 3. SDG&E's share of the cost is estimated to be $36 million, of which $25 million had been incurred at December 31, 2007, and $11 million is accrued for the remaining costs through 2050. In May 2006, the CPUC adopted a decision in Edison's 2006 General Rate Case, in which decision SDG&E is no longer subject to a 50-percent disallowance of cost recovery going forward.


OTHER MATTERS


Employees of Registrant


As of December 31, 2007, the company had 14,314 employees, compared to 14,061 at December 31, 2006.


Labor Relations


Field, technical and most clerical employees at SoCalGas are represented by the Utility Workers Union of America or the International Chemical Workers Union Council. The collective bargaining agreement for these employees covering wages, hours, working conditions, and medical and other benefit plans is in effect through September 30, 2008.


Field, technical and some clerical employees at SDG&E are represented by Local 465 International Brotherhood of Electrical Workers. The collective bargaining agreement for these employees covering wages, hours and working conditions is in effect through August 31, 2008. For these same employees, the agreements covering health and welfare benefits and pension benefits are in effect through December 31, 2010 and December 4, 2009, respectively.




27



ITEM 2. PROPERTIES


Electric Properties - SDG&E


SDG&E owns two natural gas-fired power plants: a 550-MW electric generation facility (the Palomar generation facility) located in Escondido, California, and a 45-MW electric generation facility (the Miramar generation facility) located in San Diego, California. SDG&E's interest in SONGS is described in "Electric Resources" herein.


At December 31, 2007, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. These electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona, and consist of 1,886 miles of transmission lines and 22,056 miles of distribution lines. Periodically, various areas of the service territory require expansion to accommodate customer growth.


Natural Gas Properties - Sempra Utilities


At December 31, 2007, the Sempra Utilities' natural gas facilities included 3,053 miles of transmission and storage pipeline, 61,701 miles of distribution pipeline and 53,368 miles of service pipelines. They also included 13 transmission compressor stations and 4 underground natural gas storage reservoirs with a combined working capacity of 131 Bcf.


Energy Properties – Sempra Global


At December 31, 2007, Sempra Generation operates power plants in California, Arizona, Nevada and Mexico with total capacity of 2,630 MW. Additional information is provided in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 3 and 4 of the Notes to Consolidated Financial Statements.


At December 31, 2007, Sempra Pipelines & Storage's operations in Mexico included 1,806 miles of distribution pipeline, 165 miles of transmission pipeline and two compressor stations.


Other Properties


Sempra LNG is constructing an LNG receipt terminal on land it owns in Baja California, Mexico. Sempra LNG has a land lease where it is developing its Cameron LNG receipt terminal in Hackberry, Louisiana, and owns land in Jefferson County, Texas, to be used for a proposed Port Arthur LNG receipt terminal.


Sempra Pipelines & Storage leases land in Calcasieu Parish, Louisiana, where its Liberty Gas Storage natural gas storage facility is under construction. In 2006, Sempra Pipelines & Storage and Proliance Transportation and Storage, LLC acquired three existing salt caverns representing 10 Bcf to 12 Bcf of potential natural gas storage capacity and more than 150 acres of property in Cameron Parish, Louisiana, that is currently being developed into a natural gas storage facility.


The 21-story corporate headquarters building at 101 Ash Street, San Diego, California, is occupied pursuant to an operating 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 operating lease has six five-year renewal options.




28



SDG&E occupies an office complex in San Diego pursuant to two separate operating leases, both ending in December 2017. One lease has four five-year renewal options and the other lease has three five-year renewal options.


Sempra Global leases office facilities at various locations in the U.S., Mexico and Europe with the leases ending from 2008 to 2035.


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


ITEM 3. LEGAL PROCEEDINGS


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


On July 13, 2007, SDG&E, one of its employees, and an SDG&E contractor were convicted in a federal jury trial on criminal charges of environmental violations in connection with the 2000 - 2001 dismantlement of a natural gas storage facility. SDG&E was also convicted of a related charge of making a false statement to a government agency. SDG&E is subject to a maximum fine of $2 million. On December 7, 2007, the trial court set aside all of the convictions and granted all of the defendants a new trial on all counts. The government has filed a notice of appeal.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


None.



PART II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Sempra Energy common stock is traded on the New York Stock Exchange. At January 31, 2008, there were 48,000 record holders of the company's common stock. The quarterly common stock information required by Item 5 is included in the schedule of Quarterly Common Stock Data provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations."


The information required by Item 5 concerning dividend declarations is included in the "Statements of Consolidated Comprehensive Income and Changes in Shareholders' Equity" set forth in Item 8 of the 2007 Annual Report to Shareholders.


Dividend Restrictions


The payment and amount of future dividends are within the discretion of the company's board of directors. The CPUC's regulation of the Sempra Utilities' capital structure limits the amounts that are available for loans and dividends to the company from the Sempra Utilities. Additional information regarding these restrictions is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Capital Resources and Liquidity – Dividends."



29




Performance Graph -- Comparative Total Shareholder Returns


The performance graph required by Item 5 is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations."


Equity Compensation Plans


The equity compensation plan information required by Item 5 is incorporated by reference from "Proposals To Be Voted On - Proposal 3: Approval of 2008 Long Term Incentive Plan" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders.


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


Unregistered Sales of Equity Securities and Use of Proceeds


Purchases of Equity Securities:


On April 6, 2005, the board of directors authorized the expenditure of up to $250 million for the purchase of shares of common stock, substantially all of which has been utilized for the repurchase of 5,232,630 shares through September 2007.


On September 11, 2007, the board of directors authorized the repurchase of additional shares of the company's common stock provided that the amounts expended for such purposes do not exceed the greater of $2 billion or amounts expended to purchase no more than 40 million shares. Purchases may include open market and negotiated transactions, structured purchase arrangements and tender offers. After the completion of the joint venture transaction with RBS, the company intends to begin a $1 billion purchase program of the company's common stock. Following the expected completion of this purchase program in 2008, the company intends to continue purchasing common shares in 2009, up to a total of $1.5 billion to $2 billion in purchases.


In addition to the programs discussed above, the company may, from time to time, repurchase shares of its common stock from restricted stock program participants who elect to sell enough shares to meet minimum statutory tax withholding requirements.


On December 31, 2007, the company purchased 374,820 shares, at a price of $62.12 per share, from restricted stock program participants.



 



30



ITEM 6. SELECTED FINANCIAL DATA


 

 

 

 

 

At December 31, or for the years then ended

(Dollars in millions, except per share amounts)

 

2007

 

 

 

2006

 

 

 

2005

 

 

 

2004

 

 

 

2003

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

11,438

 

 

$

11,761

 

 

$

11,512

 

 

$

9,234

 

 

$

7,697

 

 

Operating income

 

$

1,679

 

 

$

1,785

 

 

$

1,089

 

 

$

1,272

 

 

$

1,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of changes in accounting principles

 

$

1,125

 

 

$

1,091

 

 

$

913

 

 

$

915

 

 

$

745

 

 

Net income

 

$

1,099

 

 

$

1,406

 

 

$

920

 

 

$

895

 

 

$

649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

30,091

 

 

$

28,949

 

 

$

29,246

 

 

$

23,847

 

 

$

22,053

 

 

Long-term debt

 

$

4,553

 

 

$

4,525

 

 

$

4,815

 

 

$

4,182

 

 

$

3,828

 

 

Short-term debt*

 

$

1,071

 

 

$

933

 

 

$

1,141

 

 

$

783

 

 

$

1,429

 

 

Trust preferred securities

 

$

--

 

 

$

--

 

 

$

--

 

 

$

200

**

 

$

200

 

 

Shareholders’ equity

 

$

8,339

 

 

$

7,511

 

 

$

6,160

 

 

$

4,865

 

 

$

3,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of changes in accounting principles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.34

 

 

$

4.25

 

 

$

3.71

 

 

$

4.01

 

 

$

3.53

 

 

Diluted

 

$

4.26

 

 

$

4.17

 

 

$

3.62

 

 

$

3.92

 

 

$

3.48

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.24

 

 

$

5.48

 

 

$

3.74

 

 

$

3.92

 

 

$

3.07

 

 

Diluted

 

$

4.16

 

 

$

5.38

 

 

$

3.65

 

 

$

3.83

 

 

$

3.03

 

 

Dividends declared

 

$

1.24

 

 

$

1.20

 

 

$

1.16

 

 

$

1.00

 

 

$

1.00

 

 

Book value

 

$

31.93

 

 

$

28.67

 

 

$

23.95

 

 

$

20.77

 

 

$

17.17

 

*

 Includes long-term debt due within one year.

**

 The company redeemed these securities in February 2005.


This data should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. See Note 5 of the Notes to Consolidated Financial Statements for additional information concerning discontinued operations.



31



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 43 of the 2007 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 28 through 31 of the 2007 Annual Report to Shareholders.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The information required by Item 8 is incorporated by reference from pages 44 through 126 of the 2007 Annual Report to Shareholders. Item 15(a)1 includes a listing of financial statements included in the 2007 Annual Report to Shareholders.


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


None.


ITEM 9A. CONTROLS AND PROCEDURES


Company management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). The company has designed and maintains disclosure controls and procedures to ensure that information required to be disclosed in the company's reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to the company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 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-bene fit relationship of other possible controls and procedures. In addition, the company has investments in unconsolidated entities accounted for using the equity method and consolidates a variable interest entity as defined in Financial Accounting Standards Board Interpretation (FIN) No. 46(R) that it does not control or manage and consequently, its disclosure controls and procedures with respect to these entities are necessarily limited to oversight or monitoring controls that the company has implemented to provide reasonable assurance that the objectives of the company's disclosure controls and procedures as described above are met.


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


The company evaluates 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. Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the company evaluated the effectiveness of the design and operation of the company's disclosure controls and



32



procedures as of December 31, 2007, the end of the period covered by this report. Based on that evaluation, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level.


Management's Report on Internal Control Over Financial Reporting is included in Item 8, which information, as noted above, is incorporated by reference from the 2007 Annual Report to Shareholders.


PART III


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


The information required by Item 10 is incorporated by reference from "Corporate Governance" and "Share Ownership" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders. The information required on the company's executive officers is provided below.


EXECUTIVE OFFICERS OF THE REGISTRANT


Name

Age*

Position*

Donald E. Felsinger

60

Chairman and Chief Executive Officer

Neal E. Schmale

61

President and Chief Operating Officer

Javade Chaudhri

55

Executive Vice President and General Counsel

Edwin A. Guiles

58

Executive Vice President - Corporate Development

Jessie J. Knight, Jr.

57

Executive Vice President - External Affairs

Mark A. Snell

51

Executive Vice President and Chief Financial Officer

Joseph A. Householder

52

Senior Vice President, Controller and Chief Accounting Officer

Charles A. McMonagle

58

Senior Vice President and Treasurer

G. Joyce Rowland

53

Senior Vice President - Human Resources

* As of February 26, 2008.


Each Executive Officer has been an officer of the company or one of its subsidiaries for more than five years, except for Mr. Chaudhri and Mr. Knight. Prior to joining the company in 2003, Mr. Chaudhri was Senior Vice President and General Counsel of Gateway, Inc. since 2001. Prior to joining the company in 2006, Mr. Knight served as President and CEO of the San Diego Regional Chamber of Commerce since 1999.


ITEM 11. EXECUTIVE COMPENSATION


The information required by Item 11 is incorporated by reference from "Corporate Governance," and "Executive Compensation," including "Compensation Discussion and Analysis," and "Compensation Committee Report" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders.




33



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 as required by Item 12 is incorporated by reference from "Proposals To Be Voted On - Proposal 3: Approval of 2008 Long Term Incentive Plan" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders.


Additional discussion of stock-based compensation is provided in Note 10 of the Notes to Consolidated Financial Statements of the 2007 Annual Report to Shareholders.


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 May 2008 annual meeting of shareholders.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


The information required by Item 13 is incorporated by reference from "Corporate Governance" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


Information regarding principal accountant fees and services as required by Item 14 is incorporated by reference from "Proposals To Be Voted On - Proposal 2: Ratification of Independent Registered Public Accounting Firm" in the Proxy Statement prepared for the May 2008 annual meeting of shareholders.






34



PART IV


ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


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


1. Financial statements

 

Page in

 

Annual Report*

 

 

Management's Responsibility for Financial Statements

44

 

 

Management's Report On Internal Control Over Financial Reporting

44

 

 

Reports of Independent Registered Public Accounting Firm

45

 

 

Statements of Consolidated Income for the years ended December 31, 2007, 2006 and 2005

48

 

 

Consolidated Balance Sheets at December 31, 2007 and 2006

49

 

 

Statements of Consolidated Cash Flows for the years ended December 31, 2007, 2006 and 2005

51

 

 

Statements of Consolidated Comprehensive Income and Changes in Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005

53

 

 

Notes to Consolidated Financial Statements

54

 

 

*

Incorporated by reference from the indicated pages of the 2007 Annual Report to Shareholders, filed as Exhibit 13.01.



2. Financial statement schedules


Schedule I--Condensed Financial Information of Parent may be found on page 37.


Any other schedule for which provision is made in Regulation S-X is not required under the instructions contained therein, is inapplicable or the information is included in the Consolidated Financial Statements and notes thereto.


3. Exhibits


See Exhibit Index on page 42 of this report.






35



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON SCHEDULE


To the Board of Directors and Shareholders of Sempra Energy:

We consent to the incorporation by reference in Registration Statements No. 333-51309, 333-52192, 333-70640 and 333-103588 on Form S-3 and 333-56161, 333-50806, 333-49732, 333-121073 and 333-128441 on Form S-8 of our reports dated February 25, 2008, relating to the consolidated financial statements of Sempra Energy and subsidiaries ("the Company") (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's adoption of Financial Accounting Standards Board ("FASB") Statement No. 157, Fair Value Measurements, effective January 1, 2007, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, effective January 1, 2007, and FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective December 31, 2006) and the effectiveness of the Company’s internal control ove r financial reporting, incorporated by reference in this Annual Report on Form 10-K of Sempra Energy for the year ended December 31, 2007.


Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of the Company, 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, presents fairly, in all material respects, the information set forth therein.


/S/ DELOITTE & TOUCHE LLP


San Diego, California
February 25, 2008



36





Schedule I -- Condensed Financial Information of Parent


SEMPRA ENERGY

CONDENSED STATEMENTS OF INCOME


 

 

 

 

 

 

 

Years ended December 31,

(Dollars in millions, except per share amounts)

 2007

 

 2006

 

 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

166

 

 

$

188

 

 

$

186

 

Interest expense

 

 

(178

)

 

 

(202

)

 

 

(197

)

Litigation expense

 

 

--

 

 

 

(2

)

 

 

(316

)

Operating expenses and other

 

 

(47

)

 

 

(97

)

 

 

(41

)

Income tax benefits

 

 

38

 

 

 

61

 

 

 

195

 

 

Loss before equity in earnings of subsidiaries

 

(21

)

 

 

(52

)

 

 

(173

)

Equity in earnings of subsidiaries

 

1,120

 

 

 

1,458

 

 

 

1,093

 

 

Net income

 

$

1,099

 

 

$

1,406

 

 

$

920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4.24

 

 

$

5.48

 

 

$

3.74

 

 

Weighted-average number of shares outstanding (thousands)

 

259,269

 

 

 

256,477

 

 

 

245,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4.16

 

 

$

5.38

 

 

$

3.65

 

 

Weighted-average number of shares outstanding (thousands)

264,004

 

 

 

261,368

 

 

 

252,088

 

See Notes to Condensed Financial Information of Parent.




37




SEMPRA ENERGY


CONDENSED BALANCE SHEETS



 

 

 

 

 

December 31,

 

December 31,

(Dollars in millions)

2007

 

2006

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6

 

 

$

427

 

Due from affiliates

 

 

103

 

 

 

17

 

Other current assets

 

 

31

 

 

 

65

 

 

Total current assets

 

140

 

 

 

509

 

 

 

 

 

 

 

 

 

Investments in subsidiaries

 

8,766

 

 

 

7,824

 

Due from affiliates

 

2,298

 

 

 

2,845

 

Other assets

 

784

 

 

 

699

 

 

 Total assets

$

11,988

 

 

$

11,877

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

Current portion of long-term debt

$

--

 

 

$

600

 

Income taxes payable

 

663

 

 

 

453

 

Due to affiliates

 

835

 

 

 

891

 

Other current liabilities

 

344

 

 

 

313

 

 

Total current liabilities

 

1,842

 

 

 

2,257

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,290

 

 

 

1,590

 

Other long-term liabilities

 

517

 

 

 

519

 

Shareholders' equity

 

8,339

 

 

 

7,511

 

 

 Total liabilities and shareholders' equity

$

11,988

 

 

$

11,877

 

See Notes to Condensed Financial Information of Parent.






38



SEMPRA ENERGY


CONDENSED STATEMENTS OF CASH FLOWS


 

 

 

 

 

 

 

Years ended December 31,

(Dollars in millions)

 

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

240

 

 

$

322

 

 

$

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends received from subsidiaries

 

 

150

 

 

 

150

 

 

 

1,025

 

Expenditures for property, plant and equipment

 

 

(13

)

 

 

(19

)

 

 

(16

)

Increase in investments and other assets

 

 

(4

)

 

 

(207

)

 

 

(6

)

Purchase of trust assets

 

 

(59

)

 

 

(65

)

 

 

(70

)

Proceeds from sales by trust

 

 

21

 

 

 

19

 

 

 

28

 

Decrease (increase) in loans to affiliates, net

 

 

532

 

 

 

(23

)

 

 

(189

)

 

Cash provided by (used in) investing activities

 

 

627

 

 

 

(145

)

 

 

772

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends paid

 

(316

)

 

 

(283

)

 

 

(268

)

Issuances of common stock

 

40

 

 

 

97

 

 

 

694

 

Repurchases of common stock

 

 

(185

)

 

 

(37

)

 

 

(95

)

Issuances of long-term debt

 

82

 

 

 

--

 

 

 

--

 

Payments on long-term debt

 

 

(990

)

 

 

(12

)

 

 

(511

)

Increase (decrease) in loans from affiliates, net

 

 

59

 

 

 

273

 

 

 

(762

)

Other

 

 

22

 

 

 

29

 

 

 

--

 

 

Cash provided by (used in) financing activities

 

(1,288

)

 

 

67

 

 

 

(942

)

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(421

)

 

 

244

 

 

 

160

 

Cash and cash equivalents, January 1

 

 

427

 

 

 

183

 

 

 

23

 

Cash and cash equivalents, December 31

 

$

6

 

 

$

427

 

 

$

183

 

See Notes to Condensed Financial Information of Parent.






39




SEMPRA ENERGY


NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT



Note 1. Basis of Presentation


Equity in Earnings of Subsidiaries on the Condensed Statements of Income includes income (loss) of $(26) million, $315 million and $7 million related to discontinued operations for 2007, 2006 and 2005, respectively.


Note 2. Long-Term Debt


 

 

 

 December 31,

 

(Dollars in millions)

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

 

6.0% notes February 1, 2013

 

$

400

 

$

400

 

 

Notes at variable rates after fixed-to-floating swap

 

 

300

 

 

300

 

 

(7.42% at December 31, 2007) March 1, 2010

 

4.75% notes May 15, 2009

 

 

300

 

 

300

 

 

7.95% notes March 1, 2010

 

 

200

 

 

200

 

 

Employee Stock Ownership Plan

 

 

 

 

 

 

 

 

Bonds at 5.781% (fixed rate to July 1, 2010) November 1, 2014

 

 

50

 

 

82

 

 

Bonds at variable rates (4.99% at December 31, 2007)

 

 

33

 

 

10

 

 

November 1, 2014

 

4.621% notes May 17, 2007

 

 

--

 

 

600

 

 

Notes at variable rates May 21, 2008

 

 

--

 

 

300

 

 

Market value adjustments for interest rate swap, net

 

 

8

 

 

(1

)

 

(expires March 1, 2010)

 

 

 

1,291

 

 

2,191

 

 

Current portion of long-term debt

 

 

--

 

 

(600

)

 

Unamortized discount on long-term debt

 

 

(1

)

 

(1

)

 

 

$

1,290

 

$

1,590

 


Maturities of long-term debt, excluding market value adjustments for the interest rate swap, are $300 million in 2009, $500 million in 2010 and $483 million after 2012.


Additional information on Sempra Energy's long-term debt is provided in Note 6 of the Notes to Consolidated Financial Statements.


Note 3. Contingencies and Commitments


For material contingencies and guarantees related to Sempra Energy, refer to Note 16 of the Notes to Consolidated Financial Statements.



40





SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

SEMPRA ENERGY,
(Registrant)

 

 

 

By: /s/ Donald E. Felsinger

 

Donald E. Felsinger
Chairman and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

 

 

Name/Title

Signature

Date

Principal Executive Officer:
Donald E. Felsinger
Chairman and Chief Executive Officer



/s/ Donald E. Felsinger



February 26, 2008

 

 

 

Principal Financial Officer:
Mark A. Snell
Executive Vice President and
Chief Financial Officer




/s/ Mark A. Snell




February 26, 2008

 

 

 

Principal Accounting Officer:
Joseph A. Householder
Senior Vice President, Controller and Chief Accounting Officer




/s/ Joseph A. Householder




February 26, 2008

 

 

 

Directors:

 

 

Donald E. Felsinger, Chairman

/s/ Donald E. Felsinger

February 26, 2008

 

 

 

 

 

 

James G. Brocksmith, Jr., Director

/s/ James G. Brocksmith, Jr.

February 26, 2008

 

 

 

 

 

 

Richard A. Collato, Director

/s/ Richard A. Collato

February 26, 2008

 

 

 

 

 

 

Wilford D. Godbold, Jr., Director

/s/ Wilford D. Godbold, Jr.

February 26, 2008

 

 

 

 

 

 

William D. Jones, Director

/s/ William D. Jones

February 26, 2008

 

 

 

 

 

 

Richard G. Newman, Director

/s/ Richard G. Newman

February 26, 2008

 

 

 

 

 

 

William G. Ouchi, Director

/s/ William G. Ouchi

February 26, 2008

 

 

 

 

 

 

William C. Rusnack, Director

/s/ William C. Rusnack

February 26, 2008

 

 

 

 

 

 

William P. Rutledge, Director

/s/ William P. Rutledge

February 26, 2008

 

 

 

 

 

 

Carlos Ruiz Sacristán, Director

/s/ Carlos Ruiz Sacristán

February 26, 2008

 

 

 

 

 

 

Neal E. Schmale, Director

/s/ Neal E. Schmale

February 26, 2008

 

 

 



41




EXHIBIT INDEX


The Registration Statements and Forms S-8, 8-K, 10-K and 10-Q referred to herein were filed under Commission File Number 1-14201 (Sempra Energy), Commission File Number 1-40 (Pacific Enterprises/Pacific Lighting Corporation), Commission File Number 1-3779 (San Diego Gas & Electric Company), Commission File Number 1-1402 (Southern California Gas Company) and/or Commission File Number 1-11439 (Enova Corporation).


3.a The following exhibits relate to Sempra Energy and its subsidiaries


Exhibit 3 -- Bylaws and Articles of Incorporation


Bylaws


3.01   Amended Bylaws of Sempra Energy effective December 4, 2007 (Form 8-K filed on December 5, 2007, Exhibit 3(ii)).


3.02   Amended and Restated Bylaws of Sempra Energy effective May 26, 1998 (incorporated by reference from the Registration Statement on Form S-8 Sempra Energy Registration Statement No. 333-56161 dated June 5, 1998, Exhibit 3.2).


Articles of Incorporation


3.03   Amended and Restated Articles of Incorporation of Sempra Energy effective May 8, 2006 (June 30, 2006 Form 10-Q, Exhibit 3.01)


Exhibit 4 -- Instruments Defining the Rights of Security Holders, Including Indentures


The company agrees to furnish a copy of each such instrument to the Commission upon request.


4.01   Description of rights of Sempra Energy Common Stock (incorporated by reference from Amended and Restated Articles of Incorporation of Sempra Energy effective May 8, 2006, Exhibit 3.03 above).


San Diego Gas & Electric Company


4.02   Mortgage and Deed of Trust dated July 1, 1940 (incorporated by reference from SDG&E Registration Statement No. 2-49810, Exhibit 2A).


4.03   Ninth Supplemental Indenture dated as of August 1, 1968 (incorporated by reference from SDG&E Registration Statement No. 2-68420, Exhibit 2D).


4.04   Sixteenth Supplemental Indenture dated August 28, 1975 (incorporated by reference from SDG&E Registration Statement No. 2-68420, Exhibit 2E).


4.05   Thirtieth Supplemental Indenture dated September 28, 1983 (incorporated by reference from SDG&E Registration Statement No. 33-34017, Exhibit 4.3).



42




Southern California Gas Company


4.06   First Mortgage Indenture of Southern California Gas Company to American Trust Company dated as of October 1, 1940 (Registration Statement No. 2-4504 filed by Southern California Gas Company on September 16, 1940, Exhibit B-4).


4.07   Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of August 1, 1955 (Registration Statement No. 2-11997 filed by Pacific Lighting Corporation on October 26, 1955, Exhibit 4.07).


4.08   Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of June 1, 1956 (Registration Statement No. 2-12456 filed by Southern California Gas Company on April 23, 1956, Exhibit 2.08).


4.09

Supplemental Indenture of Southern California Gas Company to American Trust Company dated as of December 1, 1956 (2006 Sempra Energy Form 10-K, Exhibit 4.09).


4.10

Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank dated as of June 1, 1965 (2006 Sempra Energy Form 10-K, Exhibit 4.10).


4.11   Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of August 1, 1972 (Registration Statement No. 2-59832 filed by Southern California Gas Company on September 6, 1977, Exhibit 2.19).


4.12   Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank, National Association dated as of May 1, 1976 (Registration Statement No. 2-56034 filed by Southern California Gas Company on April 14, 1976, Exhibit 2.20).


4.13   Supplemental Indenture of Southern California Gas Company to Manufacturers Hanover Trust Company of California, successor to Wells Fargo Bank, National Association, and Crocker National Bank as Successor Trustee dated as of May 18, 1984 (Southern Gas Company 1984 Form 10-K, Exhibit 4.29).


Exhibit 10 -- Material Contracts


10.01 Form of Limited Liability Partnership Agreement of RBS Sempra Commodities LLP among The Royal Bank of Scotland plc, Sempra Global, Sempra Energy Trading International, B.V., RBS Sempra Commodities LLP and Sempra Energy (Form 8-K filed on July 9, 2007, Exhibit 10.1).


10.02 Master Formation and Equity Interest Purchase Agreement, dated as of July 9, 2007, by and among Sempra Energy, Sempra Global, Sempra Energy Trading International, B.V. and The Royal Bank of Scotland plc (Form 8-K filed on July 9, 2007, Exhibit 10.2).


10.03 Form of Indemnity Agreement among Sempra Energy and The Royal Bank of Scotland plc. (Form 8-K filed on July 9, 2007, Exhibit 10.3).


10.04 Form of Continental Forge and California Class Action Price Reporting Settlement Agreement dated as of January 4, 2006 (Form 8-K filed on January 5, 2006, Exhibit 99.1).




43



10.05 Form of Nevada Antitrust Settlement Agreement dated as of January 4, 2006 (Form 8-K filed on January 5, 2006, Exhibit 99.2).


10.06 Energy Purchase Agreement between Sempra Energy Resources and the California Department of Water Resources, executed May 4, 2001 (2001 Form 10-K, Exhibit 10.01).


San Diego Gas & Electric Company


10.07 Operating Agreement between San Diego Gas & Electric and the California Department of Water Resources dated April 17, 2003 (2003 Sempra Energy Form 10-K, Exhibit 10.06).


10.08 Servicing Agreement between San Diego Gas & Electric and the California Department of Water Resources dated December 19, 2002 (2003 Sempra Energy Form 10-K, Exhibit 10.07).


Compensation


10.09 Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Performance-Based Restricted Stock Unit Award.


10.10 Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Non-Qualified Stock Option Agreement.


10.11

Sempra Energy Excess Cash Balance Plan dated December 5, 2005 (2006 Form 10-K, Exhibit 10.08).


10.12

Form of Sempra Energy 1998 Non-Employee Directors' Stock Plan Non-Qualified Stock Option Agreement (2006 Form 10-K, Exhibit 10.09).


10.13 Form of Sempra Energy Severance Pay Agreement (2004 Form 10-K, Exhibit 10.10).


10.14 Sempra Energy 2005 Deferred Compensation Plan (Form 8-K filed on December 7, 2004, Exhibit 10.1).


10.15 Sempra Energy Employee Stock Incentive Plan (September 30, 2004 Form 10-Q, Exhibit 10.1).


10.16 Sempra Energy Amended and Restated Executive Life Insurance Plan (September 30, 2004 Form 10-Q, Exhibit 10.2).


10.17 Sempra Energy Supplemental Executive Retirement Plan (September 30, 2004 Form 10-Q, Exhibit 10.7).


10.18 Neal Schmale Restricted Stock Award Agreement (September 30, 2004 Form 10-Q, Exhibit 10.8).


10.19 Severance Pay Agreement between Sempra Energy and Donald E. Felsinger (September 30, 2004 Form 10-Q, Exhibit 10.9).


10.20 Severance Pay Agreement between Sempra Energy and Neal Schmale (September 30, 2004 Form 10-Q, Exhibit 10.10).


10.21 Sempra Energy Executive Personal Financial Planning Program Policy Document (September 30, 2004 Form 10-Q, Exhibit 10.11).



44




10.22 2003 Sempra Energy Executive Incentive Plan (2003 Form 10-K, Exhibit 10.10).


10.23 Amended and Restated Sempra Energy 1998 Long-Term Incentive Plan (June 30, 2003 Form 10-Q, Exhibit 10.2).


10.24 Sempra Energy Executive Incentive Plan effective January 1, 2003 (2002 Form 10-K, Exhibit 10.09).


10.25 Amended Sempra Energy Retirement Plan for Directors (2002 Form 10-K, Exhibit 10.10).


10.26 Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan (September 30, 2002 Form 10-Q, Exhibit 10.3).


10.27 Sempra Energy 1998 Non-Employee Directors' Stock Plan (incorporated by reference from the Registration Statement on Form S-8 Sempra Energy Registration Statement No. 333-56161 dated June 5, 1998, Exhibit 4.2).


Nuclear


San Diego Gas & Electric Company


10.28 Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.7).


10.29 Amendment No. 1 to the Qualified CPUC Decommissioning Master Trust Agreement dated September 22, 1994 (see Exhibit 10.28 above)(1994 SDG&E Form 10-K, Exhibit 10.56).


10.30 Second Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.28 above)(1994 SDG&E Form 10-K, Exhibit 10.57).


10.31 Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.28 above)(1996 SDG&E Form 10-K, Exhibit 10.59).


10.32 Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.28 above)(1996 SDG&E Form 10-K, Exhibit 10.60).


10.33 Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generation Station (see Exhibit 10.28 above)(1999 SDG&E Form 10-K, Exhibit 10.26).


10.34 Sixth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.28 above)(1999 SDG&E Form 10-K, Exhibit 10.27).




45



10.35 Seventh Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station dated December 24, 2003 (see Exhibit 10.28 above) (2003 Sempra Energy Form 10-K, Exhibit 10.42).


10.36 Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station, approved November 25, 1987 (1992 SDG&E Form 10-K, Exhibit 10.8).


10.37 First Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.36 above)(1996 SDG&E Form 10-K, Exhibit 10.62).


10.38 Second Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.36 above)(1996 SDG&E Form 10-K, Exhibit 10.63).


10.39 Third Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.36 above)(1999 SDG&E Form 10-K, Exhibit 10.31).


10.40 Fourth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.36 above)(1999 SDG&E Form 10-K, Exhibit 10.32).


10.41 Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Non-Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station dated December 24, 2003 (see Exhibit 10.36 above)(2003 Sempra Energy Form 10-K, Exhibit 10.48).


10.42 Second Amended San Onofre Operating Agreement among Southern California Edison Company, SDG&E, the City of Anaheim and the City of Riverside, dated February 26, 1987 (1990 SDG&E Form 10-K, Exhibit 10.6).


10.43 U. S. Department of Energy contract for disposal of spent nuclear fuel and/or high-level radioactive waste, entered into between the DOE and Southern California Edison Company, as agent for SDG&E and others; Contract DE-CR01-83NE44418, dated June 10, 1983 (1988 SDG&E Form 10-K, Exhibit 10N).



46




Exhibit 12 -- Statement re: Computation of Ratios


12.01 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2007, 2006, 2005, 2004 and 2003.


Exhibit 13 -- Annual Report to Security Holders


13.01 Sempra Energy 2007 Annual Report to Shareholders. (Such report, except for the portions thereof which are expressly incorporated by reference in this Annual Report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this Annual Report).


Exhibit 21 -- Subsidiaries


21.01 Schedule of Significant Subsidiaries at December 31, 2007.


Exhibit 23 -- Consent of Independent Registered Public Accounting Firm and Report on Schedule, page 36.


Exhibit 31 -- Section 302 Certifications


31.1   Statement of Registrant's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.


31.2   Statement of Registrant's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.


Exhibit 32 -- Section 906 Certifications


32.1   Statement of Registrant's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350.


32.2   Statement of Registrant's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350.





47



GLOSSARY


AEP

American Electric Power


AFUDC

Allowance for Funds Used During Construction


ALJ

Administrative Law Judge


APBO

Accounting Principles Board Opinion


ARB

Accounting Research Bulletin


BCAP

Biennial Cost Allocation Proceeding


Bcf

Billion Cubic Feet (of natural gas)


Black-Scholes Model

Black-Scholes Option-Pricing Model


Cal Fire

California Department of Forestry and Fire Protection


CARB

California Air Resources Board


CEC

California Energy Commission


CEQA

California Environmental Quality Act


CFE

Comisión Federal de Electricidad


Coleto Creek

Coleto Creek Power Station


Conoco

ConocoPhillips


CPUC

California Public Utilities Commission


CRRs

Congestion Revenue Rights


DOE

Department of Energy


DRA

Division of Ratepayer Advocates


DSM

Demand-Side Management


DWR

Department of Water Resources  


Edison

Southern California Edison Company


EIR

Environmental Impact Report


EIS

Environmental Impact Study


EITF

Emerging Issues Task Force



48




Elk Hills

Elk Hills Power


ENI

ENI USA Gas Marketing LLC


EPS

Earnings per Share


ESOP

Employee Stock Ownership Plan


FASB

Financial Accounting Standards Board


FERC

Federal Energy Regulatory Commission


FIN

FASB Interpretation


FSA

Financial Services Authority


FSP

FASB Staff Position


GAAP

Accounting Principles Generally Accepted in the United States of America


GCIM

Gas Cost Incentive Mechanism


GHG

Greenhouse Gas


GRC

General Rate Case


ICSID

International Center for the Settlement of Investment Disputes


IFRS

International Financial Reporting Standards


IOUs

Investor-Owned Utilities


IRS

Internal Revenue Service


ISFSI

Independent Spent Fuel Storage Installation


ISO

Independent System Operator


KMP

Kinder Morgan Energy Partners, L.P.


Liberty

Liberty Gas Storage


LIFO

Last-in first-out inventory costing method


LNG

Liquefied Natural Gas


LTPP

Long-Term Procurement Plan


Luz del Sur

Luz del Sur S.A.A.




49



MLC

Merrill Lynch Commodities, Inc.


MMBtu

Million British Thermal Units

(of natural gas)


MSCI

Morgan Stanley Capital International


MW

Megawatt


Ninth Circuit Court

of Appeals

U.S. Court of Appeals for the Ninth Circuit


NRC

Nuclear Regulatory Commission


OIR

Order Instituting Rulemaking


OMEC

Otay Mesa Energy Center


OMEC LLC

Otay Mesa Energy Center, LLC


OTC

Over-the-counter


Overthrust

Overthrust Pipeline Company


PBR

Performance-Based Regulation


PE

Pacific Enterprises


PGE

Portland General Electric Company


PRP

Potentially Responsible Party


PX

Power Exchange


QFs

Qualifying Facilities


RBS

The Royal Bank of Scotland plc


RBS Sempra

Commodities

RBS Sempra Commodities LLP


REX

Rockies Express Pipeline


Rockies Express

Rockies Express Pipeline LLC


ROE

Return on Equity


RPS

Renewable Portfolio Standards


SDG&E

San Diego Gas & Electric Company




50



Sempra Utilities

Southern California Gas Company and San Diego Gas & Electric Company


SEPCO

Sempra Energy Production Company


SFAS

Statement of Financial Accounting Standards


SoCalGas

Southern California Gas Company


SONGS

San Onofre Nuclear Generating Station


Tangguh PSC

Tangguh PSC Contractors


Topaz

Topaz Power Partners


Trust

ESOP Trust


TURN

The Utility Reform Network


Twin Oaks

Twin Oaks Power Plant


VaR

Value at Risk


VIE

Variable Interest Entity




51



Sempra Energy -- Form of 2008 Restricted Stock Award Unit Agreement Ex. 10.09

Exhibit 10.09

SEMPRA ENERGY

1998 LONG TERM INCENTIVE PLAN

2008 PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD

You have been granted a performance-based restricted stock unit award representing the right to receive the number of shares of Sempra Energy Common Stock set forth below, subject to the vesting conditions set forth below.  The restricted stock units, and dividend equivalents with respect to the restricted stock units, under your award may not be sold or assigned and will be subject to forfeiture unless and until they vest based upon the satisfaction of total shareholder return performance criteria for a performance period beginning on January 1, 2008 and ending in January 2012.   Shares of Common Stock will be distributed to you after the completion of the performance period ending in January 2012, if the restricted stock units vest under the terms and conditions of your award.


The terms and conditions of your award are set forth in the attached Year 2008 Restricted Stock Unit Award Agreement and in the Sempra Energy 1998 Long Term Incentive Plan, which is enclosed.  The summary below highlights selected terms and conditions but it is not complete and you should carefully read the attachments to fully understand the terms and conditions of your award.

 

SUMMARY

 

 

 

Date of Award:

January 2, 2008

Name of Recipient:

 

Recipient’s Employee Number:

 

Number of Restricted Stock Units (prior to any dividend equivalents):

 

At Target:

 

At Maximum (150% of Target)

 

Award Date Fair Market Value per Share of Common Stock:

$61.41

Restricted Stock Units:

Your restricted stock units represent the right to receive shares of Common Stock in the future, subject to the terms and conditions of your award.  Your restricted stock units are not shares of Common Stock.  The target number of restricted stock units will vest (as described below), if the target total shareholder return (a return at the 50th percentile) is achieved.  If above target total shareholder return is achieved, you may vest in up to the maximum number of restricted stock units.

Vesting/Forfeiture of Restricted Stock Units:

Your restricted stock units will vest only upon and only to the extent that the Compensation Committee determines and certifies that Sempra Energy has met specified total shareholder return performance criteria for the performance period beginning on January 1, 2008 and ending at the close of trading on the first New York Stock Exchange trading day of 2012.  Any restricted stock units that do not vest upon the Compensation Committee's determination and certification  will be forfeited.

Transfer Restrictions:

Your restricted stock units may not be sold or otherwise transferred and will remain subject to forfeiture conditions until they vest.

Termination of Employment:

Your restricted stock units also may be forfeited if your employment terminates.   






SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





Dividend Equivalents:

You also have been awarded dividend equivalents with respect to your restricted stock units.  Your dividend equivalents represent the right to receive additional shares of Common Stock in the future, subject to the terms and conditions of your award.  Your dividend equivalents will be determined based on the dividends that you would have received, had you held shares of Common Stock equal to the vested number of your restricted stock units from the date of your award to the date of the distribution of shares of Common Stock following the vesting of your restricted stock units, and assuming that the dividends were reinvested in Common Stock (and any dividends on such shares were reinvested in Common Stock).  The dividends will be deemed reinvested in Common Stock in the same manner as dividends reinvested pursuant to the terms of the Sempra Dividend Reinvestment Plan. &nb sp;Your dividend equivalents will be subject to the same transfer restrictions and forfeiture and vesting conditions as the shares represented by your restricted stock units.

Distribution of Shares:

Shares of Common Stock will be distributed to you to the extent your restricted stock units vest.  The shares will be distributed to you after the completion of the performance period ending in January 2012 and the Compensation Committee’s determination and certification of Sempra Energy’s total shareholder return for the performance period.  The shares of Common Stock will include the additional shares to be distributed pursuant to your dividend equivalents.

Taxes:

Upon distribution of shares of Common Stock to you, you will be subject to income taxes on the value of the distributed shares at the time of distribution and must pay applicable withholding taxes.  

To accept your award you must sign the accompanying copy of this page and promptly return it to Sempra Energy.  By doing so, you agree to all of the terms and conditions set forth in this Cover Page/Summary, the attached Year 2008 Restricted Stock Unit Award Agreement and the Sempra Energy 1998 Long Term Incentive Plan.


Recipient:

 

X

 

 

(Signature)

Sempra Energy:

 

/S/ Donald E. Felsinger

 

 

(Signature)

Title:

 

Chairman & Chief Executive Officer




Page 2



SEMPRA ENERGY

1998 LONG TERM INCENTIVE PLAN


Year 2008 Restricted Stock Unit Award Agreement


Award:

You have been granted a performance-based restricted stock unit award under Sempra Energy’s 1998 Long Term Incentive Plan.  The award consists of the number of restricted stock units set forth on the Cover Page/Summary to this Agreement, and dividend equivalents with respect to the restricted stock units (described below).  


Your restricted stock units represent the right to receive shares of Common Stock in the future, subject to the terms and conditions of your award.  Your restricted stock units are not shares of Common Stock.


Each restricted stock unit represents the right to receive one share of Common Stock upon the vesting of the unit.


Unless and until they vest, your restricted stock units and any dividend equivalents (as described below) will be subject to transfer restrictions and forfeiture and vesting conditions.  

Your restricted stock units (and dividend equivalents) will vest only upon and only to the extent that the Compensation Committee of Sempra Energy's Board of Directors determines and certifies that Sempra Energy has met specified total shareholder return criteria for the performance period beginning January 1, 2008 and ending in January 2012.  Any restricted stock units (and dividend equivalents) that do not vest upon the Compensation Committee's determination and certification will be forfeited.

Your restricted stock units (and dividend equivalents) also may be forfeited if your employment terminates before they vest.

See “Vesting/Forfeiture,” “Transfer Restrictions,” and “Termination of Employment” below.




Page 3



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





Vesting/Forfeiture:

Your restricted stock units (and dividend equivalents, as described below) will vest only upon and only to the extent that the Compensation Committee of Sempra Energy's Board of Directors determines and certifies that Sempra Energy has met the following total shareholder return performance criteria for the performance period beginning on January 1, 2008 and ending on the close of trading on the first New York Stock Exchange trading day of 2012:


§

Your target number of restricted stock units will vest based on the percentile ranking of Sempra Energy’s cumulative total shareholder return (consisting of per share appreciation in Common Stock plus dividends and other distributions paid on Common Stock), as determined and certified by the Compensation Committee, for the performance period among the companies (ranked by cumulative total shareholder returns) in the Standard & Poors  500 Utility Index.


§

The percentage of your target number of restricted stock units that vest will be determined as follows, based on the percentile ranking of Sempra Energy’s cumulative total shareholder return among the companies (ranked by cumulative total shareholder returns) in the S&P 500 Utility Index, as determined and certified by the Compensation Committee.


Total Shareholder

Percentage of Target
Return Percentile

Number of Restricted
       Ranking

Stock Units that Vest


75th

150%

70th

140%

65th

130%

60th

120%

55th

110%

50th

100%

45th

70%

40th  

40%

35th

0


If the percentile ranking does not equal a ranking shown in the above table, the percentage of your target number of restricted stock units that vest will be determined by a linear interpolation between the next lowest  percentile shown in the table and the next highest percentile shown on the table.


o

If the percentile ranking is at or above the 75th percentile, 150% of your target number of restricted stock units will vest.

o

If the percentile ranking is at or below the 35th percentile, none of your restricted stock units will vest.

·

The Compensation Committee also will determine and certify the percentile ranking of Sempra Energy’s cumulative total shareholder return (consisting of per share appreciation in Common Stock plus dividends and other distributions paid on Common Stock) for the performance period beginning on January 1, 2008 and ending on the close of trading on the first New York Stock Exchange trading day of 2012 among the companies (ranking by cumulative total shareholder returns) in the S&P 500 Composite Index.  If the Compensation Committee determines and certifies that Sempra Energy’s cumulative total shareholder return is at or above the 50th percentile among the companies in the S&P 500 Composite Index, the percentage of your target number of restricted stock units that vest will be not less than 100%.

·

As soon as reasonably practicable following the end of the performance period, the Compensation Committee will determine and certify the extent to which Sempra Energy has met the performance criteria and the extent, if any, as to which your restricted stock units have then vested.  You will receive the number of shares of Common Stock equal to the number of your vested restricted stock units after the Compensation Committee’s determination and certification.  Also, you will receive the number of shares of Common Stock equal to your dividend equivalents after the Compensation Committee’s determination and certification.  Certificates for the shares will be issued to you or  transferred to an account that you designate.  When the shares of Common Stock are issued to you, your restricted stock units (vested and unvested) and your dividend equival ents will terminate.   

·

Examples illustrating the application of the vesting provisions are shown in Exhibit A to this Award Agreement.



Page 4



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





Transfer Restrictions:

You may not sell or otherwise transfer or assign your restricted stock units (or your dividend equivalents).

Dividend Equivalents:

You also have been awarded dividend equivalents with respect to your restricted stock units.  Your dividend equivalents represent the right to receive additional shares of Common Stock in the future, subject to the terms and conditions of your award.  Your dividend equivalents will be determined based on the dividends that you would have received, had you held shares of Common Stock equal to the vested number of your restricted stock units from the date of your award to the date of the distribution of shares of Common Stock following the vesting of your restricted stock units, and assuming that the dividends were reinvested in Common Stock (and any dividends on such shares were reinvested in Common Stock).  The dividends will be deemed reinvested in Common Stock in the same manner as dividends reinvested pursuant to the terms of the Sempra Dividend Reinv estment Plan.  

Your dividend equivalents will be subject to the same transfer restrictions and forfeiture and vesting conditions.  Your dividend equivalents will vest when your restricted stock units vest.

Also, your restricted stock units (and dividend equivalents) will be adjusted to reflect stock dividends on shares of Common Stock or as the result of a stock-split, recapitalization, reorganization or other similar transaction in accordance with the terms and conditions of the 1998 Long Term Incentive Plan.   Any additional restricted stock units (and dividend equivalents) awarded to you as a result of such an adjustment also will be subject to the same transfer restrictions, forfeiture and vesting conditions and other terms and conditions that are applicable to your restricted stock units.

No Shareholder Rights:

Your restricted stock units (and dividend equivalents) are not shares of Common Stock.  You will have no rights as a shareholder unless and until shares of Common Stock are issued to you following the vesting of your restricted stock units (and dividend equivalents) as provided in this Agreement and the 1998 Long Term Incentive Plan.  



Page 5



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





Distribution of Shares:

As described in “Vesting/Forfeiture” above, the Compensation Committee will determine and certify the extent to which Sempra Energy has met the performance criteria and the extent, if any, as to which your restricted stock units have then vested.

You will receive the number of shares of Common Stock equal to the number of your restricted stock units that have vested.  However, in no event will you receive under this award, and other awards granted to you under the 1998 Long Term Incentive Plan in the same fiscal year of Sempra Energy, more than the maximum number of shares of Common Stock permitted under the 1998 Long Term Incentive Plan.  Also, you will receive the number of shares of Common Stock equal to your dividend equivalents after the Compensation Committee’s determination and certification.

You will receive the shares as soon as practicable following the Compensation Committee’s determination and certification (and in no event later than March 15, 2012).  Once you receive the shares of Common Stock, your vested and unvested restricted stock units (and dividend equivalents) will terminate.

Termination of Employment:

§

Termination:

If your employment with Sempra Energy and its subsidiaries terminates for any reason prior to the vesting of your restricted stock units (and dividend equivalents) (other than under the circumstances set forth in the next paragraph), all of your restricted stock units (and dividend equivalents) will be forfeited.  The vesting of your restricted stock units does not occur until the date of the Compensation Committee’s determination and certification described above.

If your employment terminates after December 31, 2008 and at the date of termination you had both (a) attained age 55 and (b) completed five years of continuous service with Sempra Energy and its subsidiaries, your restricted stock units (and dividend equivalents) will not be forfeited but will continue to be subject to the transfer restrictions and vesting conditions and other terms and conditions of this Agreement.

§

Leaves of Absence:

Your employment does not terminate when you go on military leave, a sick leave or another bona fide leave of absence, if the leave was approved by your employer in writing.  But your employment will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract.  And your employment terminates in any event when the approved leave ends, unless you immediately return to active work.  Your employer determines which leaves count for this purpose.

Taxes:

The following is a general summary of the federal income tax consequences of your Restricted Stock Unit Award.  The summary may not cover your particular circumstances because it does not consider foreign, state, local or other tax laws and does not describe future changes in tax rules.  You are urged to consult your tax advisor regarding the specific tax consequences applicable to you rather than relying on this general summary.



Page 6



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





§

Generally:

You will not be subject to federal income taxes on your award until you receive shares of Common Stock following the vesting of your restricted stock units.  

When you receive your shares, you will realize taxable income based on the fair market value of the shares at the time you receive the shares.

When you sell your shares you may also realize taxable gain (or loss) based upon the difference between the sales price and the amount that you have previously recognized as income.  

§

Withholding Taxes:

When you become subject to income taxes upon your receipt of the shares of Common Stock, Sempra Energy or its subsidiary is required to withhold taxes.  Unless you instruct otherwise and pay or make arrangements satisfactory to Sempra Energy to pay these taxes, upon the distribution of your shares, Sempra Energy will withhold a sufficient number of the shares (valued at the distribution date fair market value) to cover the minimum required withholding taxes and transfer to you only the remaining balance of your shares.

Retention Rights:

Neither your restricted stock unit award nor this Agreement gives you any right to be retained by Sempra Energy or any of its subsidiaries in any capacity and your employer reserves the right to terminate your employment at any time, with or without cause.  The value of your award will not be included as compensation or earnings for purposes of any other benefit plan offered by Sempra Energy or any of its subsidiaries.

Change in Control:

Subject to certain limitations set forth in the 1998 Long Term Incentive Plan, in the event of a Change in Control (as defined in the plan) of Sempra Energy during the performance period beginning on January 1, 2008 and ending on the first New York Stock Exchange trading day of 2012, unless your restricted stock units have been forfeited prior to the Change in Control, 150% of your target number of restricted stock units will vest in the event of a Change in Control.

You will receive the number of shares of Common Stock equal to the number of your restricted stock units that have vested.  Also, you will receive the number of shares of Common Stock equal to your dividend equivalents.  You will receive the shares of Common Stock immediately prior to the Change in Control.

Upon the Change in Control, your vested and unvested restricted stock units (and dividend equivalents) will terminate.

Further Actions:

You agree to take all actions and execute all documents appropriate to carry out the provisions of this Agreement.

You also appoint as your attorney-in-fact each individual who at the time of so acting is the Secretary or an Assistant Secretary of Sempra Energy with full authority to effect any transfer of any shares of Common Stock distributable to you, including any transfer to pay withholding taxes, that is authorized by this Agreement.

Applicable Law:

This Agreement will be interpreted and enforced under the laws of the State of California.



Page 7



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement





Other Agreements:

In the event of any conflict between the terms of this Agreement and any written employment, severance or other employment-related agreement between you and Sempra Energy, the terms of this Agreement, or the terms of such other agreement, whichever are more favorable to you, shall prevail.


By signing the Cover Sheet/Summary of this Agreement, you agree

to all of the terms and conditions described above and in the 1998 Long Term Incentive Plan



Page 8



Exhibit A


Examples Illustrating the Determination
of the Vested Percentage of the

Target Number of Restricted Stock Units



The following examples illustrate how the percentage of the target number of restricted stock units is to be determined.  The examples assume that Sempra Energy achieves certain total cumulative shareholder returns for the performance period.  The vested percentage of your target number of restricted stock units will be determined based on Sempra Energy’s actual cumulative total shareholder return for the performance period.  No assurance is given that Sempra Energy will achieve the cumulative total shareholder returns shown in the examples.

Example 1

Sempra Energy’s total cumulative shareholder return for the performance period among the companies (ranked by total shareholder returns) in the S&P 500 Utility Index, as determined and certified by the Compensation Committee, is at the 80th percentile.

Because Sempra Energy’s cumulative total cumulative shareholder return is above the 75th percentile, 150% of the target number of restricted stock units vest.  This is the maximum number of restricted stock units under the award.

Example 2

Sempra Energy’s cumulative total shareholder return for the performance period among the companies (ranked by total shareholder returns) in the S&P 500 Utility Index, as determined and certified by the Compensation Committee, is at the 67th percentile.

The percentage of the target number of restricted stock units that vest is determined by a linear interpolation between the percentage based on the achievement of the 65th percentile (130%) and the percentage based on the achievement of the 70th percentile (140%).

The percentage is determined as follows:  

(a)

130% (the percentage based on the achievement of the 65th percentile), plus

(b)

10% (the percentage based on the achievement of the 75th percentile, less the percentage based on the achievement of the 65th percentile), multiplied by an interpolation factor.   

The interpolation factor equals (67th percentile, less 65th percentile), divided by (70th percentile, less 65th percentile), or two fifths (2/5).  

The percentage based on the achievement of the 67th percentile equals:  (a) 130%, plus (b) 10%, multiplied by 2/5, or 134%.   Based on Sempra Energy’s cumulative total shareholder return, 134% of the target number of restricted stock units vest.




Page 9



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Restricted Stock Unit Award Agreement



Example 3

Sempra Energy’s cumulative total shareholder return for the performance period among the companies (ranked by total shareholder returns) in the S&P 500 Utility Index, as determined and certified by the Compensation Committee, is at the 45th percentile.

Sempra Energy’s cumulative total shareholder return for the performance period among the companies (ranked by total shareholder returns) in the S&P 500 Composite Index, as determined and certified by the Compensation, is at or above the 50th percentile.

Because Sempra Energy’s cumulative total shareholder return is at the 45th percentile when ranked among the companies in the S&P 500 Utility Index, 70% of the target number of restricted stock units would vest (before taking into account Sempra Energy’s performance among the companies in the S&P 500 Composite Index).  

However, because Sempra Energy’s cumulative total shareholder return is at or above the 50th percentile when ranked among the companies in the S&P 500 Composite Index, 100% of the target number of restricted stock units vest.

Example 4

Sempra Energy’s cumulative total shareholder return for the performance period among the companies (ranked by total shareholder returns) in the S&P 500 Utility Index, as determined and certified by the Compensation  Committee, is at the 30th percentile.

Also, Sempra Energy’s total shareholder return for the performance period among the companies (ranked by cumulative total shareholder returns) in the S&P 500 Composite Index, as determined and certified by the Compensation Committee, is below the 50th percentile.

Because Sempra Energy’s total shareholder return for the performance period among companies in the S&P 500 Utility Index is below the 35th percentile, none of the target number of restricted stock units vest.



Page 10



SEMPRA ENERGY Form of 2008 Nonqualified Stock Option Agreement Ex. 10.10

 

Exhibit 10.10

SEMPRA ENERGY

1998 LONG TERM INCENTIVE PLAN

2008 NONQUALIFIED STOCK OPTION AGREEMENT

You have been granted an option to purchase the number of shares of Sempra Energy Common Stock set forth below.  


The terms and conditions of your option are set forth in the attached Year 2008 Nonqualified Stock Option Agreement and in the Sempra Energy 1998 Long Term Incentive Plan, which is enclosed.  The summary below highlights selected terms and conditions but it is not complete and you should carefully read the attachments to fully understand the terms and conditions of your grant.

 

SUMMARY

 

 

 

Date of Option Grant:

January 2, 2008

Name of Optionee:

 

Optionee’s Employee Number:

 

Number of Shares of Sempra Energy Common Stock Covered by Option:

 

Exercise Price per Share:

$61.41

Vesting:
Your option vests (becomes exercisable) in four equal annual cumulative installments of 25% each over a four-year period.  Once an installment becomes exercisable, it will remain exercisable until it is exercised or your option expires or terminates.

Option Term:
Ten years subject to earlier expiration if your employment terminates.

Termination of Employment:
Your option may expire or cease to vest if your employment is terminated.

No Dividend Equivalents:
No dividend equivalents will be paid by the Company with respect to your option or the shares covered by your option.

Exercise of Option/Taxes:
Upon exercise of your option you must pay (or make acceptable arrangements to pay) the exercise price for each share for which you exercise your option and any withholding taxes that may be due as a result of exercise.  

To accept your grant you must sign this page and promptly return it to Sempra Energy. By doing so, you agree to all of the terms and conditions described in the attached Year 2008 Nonqualified Stock Option Agreement and in the Sempra Energy 1998 Long Term Incentive Plan.


Recipient:

 

X

 

 

(Signature)

Sempra Energy:

 

/S/ Donald E. Felsinger

 

 

(Signature)

Title:

 

Chairman & Chief Executive Officer




 



SEMPRA ENERGY
1998 LONG TERM INCENTIVE PLAN

2008 NONQUALIFIED STOCK OPTION AGREEMENT

Company

“Company” as used in this agreement refers to your employer, which may be Sempra Energy or a subsidiary of Sempra Energy.

Vesting

Your option vests (becomes exercisable) in equal annual cumulative installments over a four-year period.  Each installment is 25% of the original number of shares covered by your option and an installment vests on each of the first four anniversaries of the Date of Option Grant shown on the cover sheet.  Once an installment of your option becomes exercisable, it will remain exercisable until it is exercised or your option expires.

No Dividend Equivalents

No dividend equivalents will be paid by the Company with respect to your option or the shares covered by your option.

Term

Your option will expire at the close of business at Sempra Energy head­quarters on the day before the 10th anniversary of the Date of Option Grant shown on the cover sheet, and is subject to earlier expiration (as described below) if your employment with the Company terminates.

Termination of Employment

If your employment with the Company terminates for any reason (other than under the circumstances set forth below), your option will expire at the close of business at Sempra Energy headquarters on the 90th day after the date your employment terminated or upon the earlier expiration of the ten-year term of your option.  Your option will not continue to vest after your employment terminates and will be exercisable only as to the number of shares for which it was exercisable on the date of your employment terminated.

If your employment terminates for any reason (including as a result of your death or total and permanent disability) after you have attained age 55 and at the time your employment terminated you had completed five years of continuous service, your option will expire at the close of business at Sempra Energy headquarters on the date three years (five years if you have attained age 62) after the date your employment terminated or upon the earlier expiration of the ten-year term of your option.  Your option will continue to vest during that period.

If your employment terminates as a result of your death or total and permanent disability and at the date your employment terminated you had not attained age 55 and completed five years of continuous service, your option will expire at the close of business at Sempra Energy headquarters on the date 12 months after the date your employment terminated or upon the earlier expiration of the ten-year term of your option.  Your option will not continue to vest following your death and will be exercisable only as to the number of shares for which it was exercisable at the date your employment terminated.




Page 1



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Nonqualified Stock Option Agreement







 

“Total and permanent disability” means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year.

Leaves of Absence

For purposes of this plan, your employment does not terminate when you go on:

·

Military leave,

·

Sick leave that is approved in writing by the Company, or

·

Other bona fide leave of absence that is approved in writing by the Company.

Your employment will be deemed to have terminated at the end of your approved leave unless (a) you immediately return to active work when your approved leave ends; or (b) your right to return to active work is otherwise guaranteed by law or contract; or (c) for military leaves, you return to active work within the 90-day period prescribed by law.

Restrictions on Exercise

You will not be permitted to exercise your option at any time at which Sempra Energy determines that the issuance of shares may violate any law, regulation or Sempra Energy policy.

Notice of Exercise

When you wish to exercise your option, you must notify Sempra Energy by filing the proper “Notice of Exercise” form at the address given on the form.  Your notice must specify how many shares you wish to purchase.   Your notice must also specify how your shares should be registered.  The notice will be effective when Sempra Energy receives it.

 

If someone else wants to exercise your option after your death, that person must prove to Sempra Energy’s satisfaction that he or she is entitled to do so.

Payment of Option Price and Withholding Taxes

When you submit your notice of exercise, you must pay the option price for the shares you are purchasing and any related withholding taxes.  Payment may be made by one (or a combination of two or more) of the following methods:

 

-

Personal check, cashier’s check or money order.

 

-

Effecting a net share exercise by instructing Sempra Energy to retain a number of the shares as to which you are exercising your option that, taken at their fair market value, is sufficient to pay the option price and any related withholding taxes.  In that event, the number of shares that will be issued to you will have a fair market value (at the date your option is exercised) that equals the spread or “in the money value” of the shares as to which you are exercising your option.

 

-

To the extent permitted by law, making arrangements for a “cashless exercise” directing a securities broker approved by Sempra Energy to sell your option shares and to deliver sufficient sale proceeds to Sempra Energy in payment.  




Page 2



SEMPRA ENERGY 1998 LONG TERM INCENTIVE PLAN

Year 2008 Nonqualified Stock Option Agreement







Restrictions on Resale

You agree not to sell any option shares at a time when applicable laws, regulations or Sempra Energy policies prohibit a sale.

Transfer of Option

Prior to your death, only you or the trustee of a revocable living trust established by you  may exercise this option.  You cannot otherwise transfer or assign this option.  For example, you may not sell this option or use it as security for a loan.  If you attempt to do any of these things, your option will immediately become invalid.  You may, however, dispose of your option in your will, and your option may be transferred pursuant to a “qualified domestic relations order” as defined in the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act of 1974, as amended.

Retention Rights

Neither your option nor this Agreement gives you the right to be retained by the Company in any capacity.  The Company reserves the right to terminate your employment at any time, with or without cause.  The value of the shares subject to your option will not be included as compensation or earnings for purposes of any other benefit plan offered by the Company or any of its subsidiaries.

Shareholder Rights

You have no rights as a shareholder of Sempra Energy until your option shares have been issued.  No adjustments are made for dividends or other rights if the applicable record date occurs before your option shares are issued.

Adjustments

In the event of a stock split, a stock dividend or a similar change in Sempra Energy common stock the number of shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan.

Change in Control

Subject to certain limitations set forth in the Plan, in the event of a Change in Control (as defined in the Plan) of Sempra Energy, your option will automatically become fully vested and exercisable as of the date of the Change in Control, and may, in the discretion of Sempra Energy’s compensation committee, be cashed-out.

Nonqualified Stock Option

This option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code.

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of California.

The Plan and Other Agreements

The text of the Plan is incorporated in this Agreement by reference.

In the event of any conflict between the terms of this Agreement and any written employment, severance or other employment-related agreement between you and Sempra Energy, the terms of such other agreement shall prevail.

By signing the cover sheet of this Agreement, you agree to
all of the terms and conditions described above and in the Plan.






Page 3



Sempra Energy - Exhibit 12.1




EXHIBIT 12.1

SEMPRA ENERGY

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

Fixed charges and preferred stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 $                       345

 

 $                       332

 

 $                       342

 

 $                       413

 

 $                      379

 

 

 

 

 

 

 

 

 

 

 

 

Interest portion of annual rentals

 

 

                              4

 

                              4

 

                              5

 

                              6

 

                             6

 

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends of subsidiaries (1)

 

 

                            11

 

                            12

 

                            10

 

                            15

 

                           14

 

 

 

 

 

 

 

 

 

 

 

 

     Total fixed charges

 

 

                          360

 

                          348

 

                          357

 

                          434

 

                         399

 

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends for purpose of ratio

 

 

                              -

 

                              -

 

                              -

 

                              -

 

                             -

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed charges and preferred dividends for purpose of ratio                        

 

 

 $                       360

 

 $                       348

 

 $                       357

 

 $                       434

 

 $                      399

 

 

 

 

 

 

 

 

 

 

 

 

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income from continuing operations

 

 

 $                       814

 

 $                     1,105

 

 $                       947

 

 $                     1,732

 

 $                    1,649

 

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

 

 

  Total fixed charges (from above)

 

 

                          360

 

                          348

 

                          357

 

                          434

 

                         399

 

 

 

 

 

 

 

 

 

 

 

 

  Distributed income of equity investees

 

 

                            72

 

                            59

 

                            73

 

                          431

 

                           19

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

  Interest capitalized

 

 

                            26

 

                              8

 

                            28

 

                            58

 

                         100

 

 

 

 

 

 

 

 

 

 

 

 

  Equity in income (loss) of unconsolidated subsidiaries and joint ventures

 

 

                              5

 

                            36

 

                            66

 

                          156

 

                           90

 

 

 

 

 

 

 

 

 

 

 

 

  Minority interest in income of consolidated subsidiaries

 

 

                            -   

 

                            -   

 

                            -   

 

                              7

 

                           31

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings for purpose of ratio

 

 

 $                     1,215

 

 $                     1,468

 

 $                     1,283

 

 $                     2,376

 

 $                    1,846

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to combined fixed charges and preferred stock dividends

 

 

                         3.38

 

                         4.22

 

                         3.59

 

                         5.47

 

                        4.63

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges

 

 

                         3.38

 

                         4.22

 

                         3.59

 

                         5.47

 

                        4.63

 

 

 

 

 

 

 

 

 

 

 

 

(1)  In computing this ratio, “Preferred dividends of subsidiaries” represents the before-tax earnings necessary to pay such dividends, computed at the effective tax rates for the applicable periods.




Sempra Energy 2007 Annual Report / Exhibit 13


Exhibit 13


SEMPRA ENERGY

 

FINANCIAL REPORT

 

TABLE OF CONTENTS

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2

  

 

Information Regarding Forward-Looking Statements

40

  

 

Quarterly Common Stock Data

41

  

 

Performance Graph – Comparative Total Shareholder Returns

42

  

 

Five-Year Summary

43

  

 

Management’s Responsibility for Financial Statements

44

 

 

Management’s Report on Internal Control over Financial Reporting

44

 

 

Reports of Independent Registered Public Accounting Firm

45

  

 

Sempra Energy Consolidated Financial Statements

48

  

 

Notes to Consolidated Financial Statements

54

 

 




1




MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



INTRODUCTION


This section of the 2007 Annual Report includes management's discussion and analysis of operating results from 2005 through 2007, and provides information about the capital resources, liquidity and financial performance of Sempra Energy and its subsidiaries (collectively referred to as "the company"). This section also focuses on the major factors expected to influence future operating results and discusses investment and financing activities and plans. It should be read in conjunction with the Consolidated Financial Statements included in this Annual Report.


OVERVIEW


Sempra Energy

 

Sempra Energy is a Fortune 500 energy services holding company. Its business units provide electric, natural gas and other energy products and services to its customers. Operations are divided into the Sempra Utilities and Sempra Global, as described below.


[mastersempraannualreport002.gif]

Summary descriptions of the operating business units are provided below and further detail is provided throughout this section of the Annual Report.




2



Major 2007 issues, some of which may also affect future years (and the page number where each is discussed), included the following:


·

Joint venture agreement in 2007 with The Royal Bank of Scotland plc (RBS) to form RBS Sempra Commodities LLP, a partnership of RBS and Sempra Energy, which is expected to purchase and operate Sempra Energy's commodity-marketing businesses (generally comprising the Sempra Commodities segment) (25);


·

Final regulatory decision increasing San Diego Gas & Electric Company's (SDG&E's) return on equity beginning in 2008 from 10.7 percent to 11.1 percent (110);


·

California Public Utility Commission (CPUC) approval of SDG&E's advanced metering infrastructure project (108);


·

Expected resolution of the regulatory review process setting rates for 2008 and future years for Southern California Gas Company (SoCalGas) and SDG&E (109);


·

Southern California wildfires (112 and 117);


·

Delay in regulatory review process of SDG&E's proposed Sunrise Powerlink project (106);


·

Near-completion of Sempra LNG's Energía Costa Azul liquefied natural gas (LNG) receipt terminal (27); and


·

Continued development of the Rockies Express Pipeline (REX) (26).


The Sempra Utilities


SoCalGas and SDG&E (collectively, the Sempra Utilities) serve 23 million consumers from California's Central Valley to the Mexican border. Natural gas service is provided throughout Southern California and portions of central California through 6.5 million meters. Electric service is provided throughout San Diego County and portions of Orange County, both in Southern California, through 1.4 million meters.


Sempra Global


Sempra Global is a holding company for most of the subsidiaries of Sempra Energy that are not subject to California utility regulation. Sempra Global's principal subsidiaries provide the following energy-related products and services:


·

Sempra Commodities is primarily a wholesale and retail trader of physical and financial products, including natural gas, power, petroleum and petroleum products, and other commodities; and it is also a trader and wholesaler of base metals. On July 9, 2007, the company entered into an agreement with RBS to form a partnership to purchase and operate the company's commodity-marketing businesses, which generally comprise the Sempra Commodities segment. This agreement is discussed in "Factors Influencing Future Performance."


·

Sempra Generation develops, owns and operates electric generation facilities.



3




·

Sempra LNG is developing receipt terminals for the importation of LNG and has an agreement to supply natural gas to Mexico's government-owned electric utility.


·

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


RESULTS OF OPERATIONS


Overall Operations


Income from continuing operations for 2007 increased by $34 million (3%) over 2006 to $1.125 billion primarily due to higher earnings from SDG&E. In 2006, a $221 million after-tax impairment of Sempra Pipelines & Storage's Argentine investments was offset by a $204 million after-tax gain from Sempra Generation's sale of its investment in Topaz Power Partners (Topaz).


Net income was $1.1 billion in 2007, 22 percent lower than 2006 results. Results for 2006 included $315 million in after-tax income from discontinued operations primarily due to asset sales. Diluted earnings per share was $4.16, a decrease of 23 percent. The decrease in net income primarily resulted from higher income from discontinued operations in 2006 due to asset sales. The asset sales are discussed further in Note 5 of the Notes to Consolidated Financial Statements.


Net income increased $486 million (53%) in 2006 compared to 2005, primarily due to 2006 asset sales, partially offset by the 2006 impairment of Argentine investments. The results for 2005 included litigation expense of $311 million related to a settlement of matters arising from the 2000 - 2001 California energy crisis, partially offset by $156 million related to the favorable resolution of prior years' income tax issues. Additional information is provided in "Business Unit Results" below.


The following table shows income from continuing operations, net income and diluted earnings per share for each of the last five years.


(Dollars in millions,

except per share amounts)

Income from Continuing Operations

 

Net Income

Diluted

Earnings Per Share

2007

$ 1,125

 

$ 1,099

$ 4.16

2006

$ 1,091

 

$ 1,406

$ 5.38

2005

$    913

 

$    920

$ 3.65

2004

$    915

 

$    895

$ 3.83

2003

$    745

*

$    649

$ 3.03

*

Before cumulative effect of changes in accounting principles.




4



Net Income (Loss) by Business Unit


 

Years ended December 31,

(Dollars in millions)

2007

 

2006

 

2005

Sempra Utilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Southern California Gas Company*

$

230

 

21

%

 

$

223

 

16

%

 

$

211

 

23

%

  San Diego Gas & Electric Company*

 

283

 

25

 

 

 

237

 

17

 

 

 

262

 

28

 

  Total Sempra Utilities

 

513

 

46

 

 

 

460

 

33

 

 

 

473

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Global

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Sempra Commodities

 

499

 

45

 

 

 

504

 

36

 

 

 

460

 

50

 

  Sempra Generation**

 

162

 

15

 

 

 

375

 

27

 

 

 

149

 

16

 

  Sempra Pipelines & Storage**

 

64

 

6

 

 

 

(165

)

(12

)

 

 

64

 

7

 

  Sempra LNG

 

(46

)

(4

)

 

 

(42

)

(3

)

 

 

(25

)

(3

)

  Total Sempra Global

 

679

 

62

 

 

 

672

 

48

 

 

 

648

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent and other***

 

(67

)

(6

)

 

 

(41

)

(3

)

 

 

(208

)

(22

)

Income from continuing operations

 

1,125

 

102

 

 

 

1,091

 

78

 

 

 

913

 

99

 

Discontinued operations, net of income tax

 

(26

)

(2

)

 

 

315

 

22

 

 

 

7

 

1

 

Consolidated net income

$

1,099

 

100

%

 

$

1,406

 

100

%

 

$

920

 

100

%

*

After preferred dividends.

**

Excludes amounts now classified as discontinued operations.

***

Includes after-tax interest expense ($82 million, $101 million and $104 million in 2007, 2006 and 2005, respectively), after-tax litigation expense ($1 million and $193 million in 2006 and 2005, respectively), intercompany eliminations recorded in consolidation and certain corporate costs incurred at Sempra Global.


Regulation


The Sempra Utilities are subject to regulation by federal, state and local governmental agencies. The primary regulatory agency is the CPUC, which regulates utility rates and operations in California, except for SDG&E's electric transmission operations, which are regulated by the Federal Energy Regulatory Commission (FERC). The FERC also regulates interstate transportation of natural gas and various related matters. The Nuclear Regulatory Commission regulates nuclear generating plants. Municipalities and other local authorities regulate the location of utility assets, including natural gas pipelines and electric lines. Other business units are also subject to regulation by the FERC, various state commissions, local governmental entities, and various similar authorities in countries other than the United States.


Sempra Utility Operations


Natural Gas Revenues and Cost of Natural Gas. Natural gas revenues increased by $106 million (2%) to $4.9 billion, and the cost of natural gas remained constant at $2.8 billion in 2007. The increase in revenues in 2007 was primarily due to a $71 million increase in authorized base margin and $34 million of higher revenues for recoverable expenses, which are fully offset in other operating expenses. The company's weighted average cost (including transportation charges) per million British thermal units (MMBtu) of natural gas was $6.49 in 2007, $6.54 in 2006 and $7.83 in 2005.


Natural gas revenues decreased by $490 million (9%) to $4.8 billion, and the cost of natural gas decreased by $476 million (15%) to $2.8 billion in 2006 compared to 2005. The decreases in 2006 were due to lower average costs of natural gas, which are passed on to customers, offset by higher volumes. In addition, natural gas revenues decreased at SoCalGas due to the CPUC's decision in 2005 eliminating 2004 revenue sharing (for which $18 million was included in revenue in 2005), $14 million in demand-side management (DSM) awards in 2005 and $50 million of lower revenues for decreased recoverable



5



expenses. The decreases at SoCalGas were offset by a $52 million increase in authorized base margin and $10 million from the positive resolution in 2006 of a natural gas royalty matter.


Although the current regulatory framework provides that the cost of natural gas purchased for customers and the variations in that cost are passed through to the customers on a substantially concurrent basis, SoCalGas' Gas Cost Incentive Mechanism (GCIM) and SDG&E's natural gas procurement Performance-Based Regulation (PBR) mechanism allow them to share in the savings or costs from buying natural gas for their customers below or above market-based monthly benchmarks. The mechanisms permit full recovery of all costs within a tolerance band around the benchmark price. The costs or savings outside the tolerance band are shared between customers and shareholders. Further discussion is provided in Notes 1 and 15 of the Notes to Consolidated Financial Statements.


Electric Revenues and Cost of Electric Fuel and Purchased Power. Electric revenues increased by $48 million (2%) to $2.2 billion, and the cost of electric fuel and purchased power decreased by $22 million (3%) to $699 million in 2007. The increased revenue in 2007 was primarily due to $33 million from higher authorized transmission and electric generation margins, $22 million from the resolution of a regulatory matter, a $24 million increase in authorized base margin on electric distribution and $12 million of higher revenues for recoverable expenses, which are fully offset in other operating expenses. The increases were offset by $20 million from the favorable resolution of a prior year cost recovery issue in 2006 and $22 million lower recovery of electric fuel and purchased power costs in 2007.


Electric revenues increased by $347 million (19%) to $2.1 billion, and the cost of electric fuel and purchased power increased by $97 million (16%) to $721 million in 2006 compared to 2005. The increase in revenue was due to $206 million of increased authorized distribution, generation and transmission base margins, $60 million of higher revenues for recoverable expenses, and the $20 million favorable resolution of a prior year cost recovery issue. The increases were offset by a $28 million DSM awards settlement in 2005 and $23 million from the 2005 Internal Revenue Service (IRS) decision relating to the sale of SDG&E's former South Bay power plant. In addition, electric revenues and costs increased due to the commencement of commercial operations of the Palomar generating facility in 2006, which contributed $112 million to both 2006 revenues and costs, offset by lower purchased power costs.





6



The tables below summarize the Sempra Utilities' natural gas and electric volumes and revenues by customer class for the years ended December 31, 2007, 2006 and 2005.


Natural Gas Sales, Transportation and Exchange

(Volumes in billion cubic feet, dollars in millions)


 

 

 

 

 

 

 

 

 

 

 

 Transportation

 

 

 

 

 

 

 

 

 

 

 

 Natural Gas Sales

 and Exchange

 Total

 

 

 

 

 

 

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

277

 

$

3,065

 

1

 

$

5

 

278

 

$

3,070

 

Commercial and industrial

 

127

 

 

1,159

 

282

 

 

215

 

409

 

 

1,374

 

Electric generation plants

 

--

 

 

1

 

264

 

 

112

 

264

 

 

113

 

Wholesale

 

--

 

 

--

 

19

 

 

8

 

19

 

 

8

 

 

 

 

 

 

 

404

 

$

4,225

 

566

 

$

340

 

970

 

 

4,565

 

Balancing accounts and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

304

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,869

2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

278

 

$

3,124

 

1

 

$

5

 

279

 

$

3,129

 

Commercial and industrial

 

124

 

 

1,157

 

276

 

 

223

 

400

 

 

1,380

 

Electric generation plants

 

--

 

 

2

 

248

 

 

118

 

248

 

 

120

 

Wholesale

 

--

 

 

--

 

21

 

 

8

 

21

 

 

8

 

 

 

 

 

 

 

402

 

$

4,283

 

546

 

$

354

 

948

 

 

4,637

 

Balancing accounts and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,763

2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

271

 

$

3,193

 

1

 

$

6

 

272

 

$

3,199

 

Commercial and industrial

 

123

 

 

1,257

 

273

 

 

190

 

396

 

 

1,447

 

Electric generation plants

 

1

 

 

3

 

201

 

 

88

 

202

 

 

91

 

Wholesale

 

--

 

 

--

 

19

 

 

6

 

19

 

 

6

 

 

 

 

 

 

 

395

 

$

4,453

 

494

 

$

290

 

889

 

 

4,743

 

Balancing accounts and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

510

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Electric Distribution and Transmission

(Volumes in millions of kilowatt-hours, dollars in millions)


 

 

 

 

 

2007

2006

2005

 

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

Residential

 

7,520

 

$

980

 

7,501

 

$

910

 

7,075

 

$

738

Commercial

 

7,154

 

 

852

 

6,983

 

 

723

 

6,674

 

 

654

Industrial

 

2,264

 

 

228

 

2,250

 

 

180

 

2,148

 

 

141

Direct access

 

3,220

 

 

118

 

3,390

 

 

133

 

3,213

 

 

114

Street and highway lighting

 

107

 

 

12

 

102

 

 

10

 

93

 

 

11

 

 

 

 

 

 

20,265

 

 

2,190

 

20,226

 

 

1,956

 

19,203

 

 

1,658

Balancing accounts and other

 

 

 

 

(6

)

 

 

 

180

 

 

 

 

131

 

Total

 

 

 

 

 

 

$

2,184

 

 

 

$

2,136

 

 

 

$

1,789


Although commodity costs associated with long-term contracts allocated to SDG&E from the California Department of Water Resources (DWR) (and the revenues to recover those costs) are not included in the Statements of Consolidated Income, as discussed in Note 1 of the Notes to Consolidated Financial Statements, the associated volumes and distribution revenues are included in the above table.



7



Sempra Global and Parent Operating Revenues and Cost of Sales. The following table provides a breakdown of operating revenues and cost of sales at Sempra Global and the parent companies by business unit.


 

 

Years ended December 31,

(Dollars in millions)

 

2007

 

2006

 

2005

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Commodities*

 

$

2,674

 

61

%

 

$

3,256

 

67

%

 

$

2,724

 

61

%

Sempra Generation*

 

 

1,476

 

34

 

 

 

1,454

 

30

 

 

 

1,708

 

38

 

Sempra Pipelines & Storage*

 

 

314

 

7

 

 

 

295

 

6

 

 

 

317

 

7

 

Sempra LNG

 

 

(22

)

(1

)

 

 

(21

)

(1

)

 

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sempra Global

 

 

4,442

 

101

 

 

 

4,984

 

102

 

 

 

4,749

 

106

 

Parent and other**

 

 

(57

)

(1

)

 

 

(122

)

(2

)

 

 

(279

)

(6

)

 

Total Operating Revenues

 

$

4,385

 

100

%

 

$

4,862

 

100

%

 

$

4,470

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES***

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Generation*

 

$

1,058

 

81

%

 

$

996

 

82

%

 

$

1,067

 

81

%

Sempra Pipelines & Storage*

 

 

255

 

20

 

 

 

233

 

19

 

 

 

261

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sempra Global

 

 

1,313

 

101

 

 

 

1,229

 

101

 

 

 

1,328

 

101

 

Parent and other**

 

 

(11

)

(1

)

 

 

(8

)

(1

)

 

 

(7

)

(1

)

 

Total Cost of Natural Gas, Electric Fuel and Purchased Power

 

$

1,302

 

100

%

 

$

1,221

 

100

%

 

$

1,321

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Commodities*

 

$

988

 

100

%

 

$

1,468

 

100

%

 

$

1,267

 

100

%

Sempra Generation*

 

 

1

 

--

 

 

 

23

 

2

 

 

 

142

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sempra Global

 

 

989

 

100

 

 

 

1,491

 

102

 

 

 

1,409

 

111

 

Parent and other**

 

 

(1

)

--

 

 

 

(23

)

(2

)

 

 

(142

)

(11

)

 

Total Other Cost of Sales

 

$

988

 

100

%

 

$

1,468

 

100

%

 

$

1,267

 

100

%

*

Does not include unconsolidated affiliates that are part of this business unit.

**

Includes intercompany eliminations recorded in consolidation, including the Palomar facility as discussed in Note 3 of the Notes to Consolidated Financial Statements.

***

Excludes depreciation, which is shown separately on the Statements of Consolidated Income.


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


Sempra Global and Parent operating revenues in 2006 were $4.9 billion, an increase of $392 million (9%) in 2006 compared to 2005. The cost of natural gas, electric fuel and purchased power decreased $100 million (8%) to $1.2 billion, while other cost of sales increased $201 million (16%) to $1.5 billion in 2006. Increases in Sempra Global and Parent operating revenues and other cost of sales in 2006 compared to 2005 reflected increased trading activity and higher commodity prices at Sempra Commodities, primarily as a result of increased volatility in the natural gas and metals markets, and higher sales to merchant customers at Sempra Generation. The increases at Sempra Generation were offset by the decreased value of its sales to the DWR, primarily due to lower natural gas prices.



8



Other Operating Expenses. This table provides a breakdown of other operating expenses by business unit.


 

 

Years ended December 31,

(Dollars in millions)

 

2007

 

2006

 

2005

 

OTHER OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Southern California Gas Company

 

$

1,020

 

35

%

 

$

951

 

34

%

 

$

954

 

37

%

   San Diego Gas & Electric Company

 

 

797

 

27

 

 

 

774

 

28

 

 

 

603

 

23

 

   Total Sempra Utilities

 

 

1,817

 

62

 

 

 

1,725

 

62

 

 

 

1,557

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Global

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Sempra Commodities

 

 

860

 

29

 

 

 

869

 

31

 

 

 

811

 

32

 

   Sempra Generation

 

 

102

 

4

 

 

 

96

 

3

 

 

 

99

 

4

 

   Sempra Pipelines & Storage

 

 

42

 

1

 

 

 

36

 

1

 

 

 

37

 

1

 

   Sempra LNG

 

 

42

 

1

 

 

 

38

 

1

 

 

 

34

 

1

 

   Total Sempra Global

 

 

1,046

 

35

 

 

 

1,039

 

36

 

 

 

981

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent and other*

 

 

91

 

3

 

 

 

50

 

2

 

 

 

45

 

2

 

Total

 

$

2,954

 

100

%

 

$

2,814

 

100

%

 

$

2,583

 

100

%

*

Includes intercompany eliminations recorded in consolidation.


The increase in operating expenses in 2007 was primarily attributable to higher recoverable expenses (offset in revenues) and other operational costs at the Sempra Utilities.


Other operating expenses for 2006 increased compared to 2005 primarily due to the growth in Sempra Commodities' revenues noted previously and increases at SDG&E. SDG&E's other operating expenses increased due to $72 million higher recoverable expenses, $33 million related to the 2005 recovery of line losses and grid management charges arising from a favorable settlement with the Independent System Operator (ISO), an independent operator of California's wholesale transmission grid, and increases in other operational costs.


Litigation Expense. Litigation expense was $73 million, $56 million and $551 million for 2007, 2006 and 2005, respectively. The higher amount in 2005 was primarily due to an increase in litigation reserves related to a settlement of matters arising from the 2000 - 2001 California energy crisis. Note 16 of the Notes to Consolidated Financial Statements provides additional information concerning this matter.


Gains on Sale of Assets, Net. Net pretax gains on the sale of assets were $6 million, $1 million and $112 million in 2007, 2006 and 2005, respectively. The 2005 gain included $106 million ($67 million after related costs) associated with Sempra Commodities' sale of its two natural gas storage facilities, Bluewater Gas Storage and Pine Prairie Energy Center.


Impairment Losses. Impairments included a $63 million pretax write-down in 2005 of unused gas and steam turbines at Sempra Generation.


Other Income, Net. Other income, net, as discussed further in Note 1 of the Notes to Consolidated Financial Statements and which consists primarily of equity earnings from unconsolidated subsidiaries, allowance for equity funds used during construction and regulatory interest, was $81 million, $381 million and $51 million in 2007, 2006 and 2005, respectively. In 2006, the company recorded a $344 million pretax gain on the sale of the Topaz power plants (by a joint venture 50-percent owned by Sempra Generation). The gain was included in equity earnings from unconsolidated subsidiaries, as discussed in Note 4 of the Notes to Consolidated Financial Statements. The decrease in 2007 was partially offset by a



9



$24 million net pretax gain from interest-rate swaps. Further discussion on the interest-rate swaps related to Sempra LNG's Energía Costa Azul project is provided in Note 11 of the Notes to Consolidated Financial Statements.


Interest Income. Interest income was $72 million, $109 million and $72 million in 2007, 2006 and 2005, respectively. Interest income in 2006 included $12 million from a favorable resolution of a state income tax matter, $13 million from the resolution of an insurance claim at Pacific Enterprises (PE) (the parent company of SoCalGas) related to a quasi-reorganization issue (discussed in Note 1 of the Notes to Consolidated Financial Statements) and $6 million from an income tax audit settlement at SoCalGas.


The increase in 2006 compared to 2005 was primarily due to the items noted above and higher interest resulting from increases in short-term investments, offset by a decrease at SDG&E due to $12 million lower interest as a result of income tax audit settlements in 2005.


Interest Expense. Interest expense was $272 million, $351 million and $310 million in 2007, 2006 and 2005, respectively. The decrease in 2007 was due to $41 million higher capitalized interest at Sempra LNG and Sempra Pipelines & Storage, and $22 million lower interest expense due to repayment and early redemption of long-term debt. The increase in 2006 compared to 2005 was primarily due to increased borrowings at SDG&E to finance the purchase of the Palomar generating facility, increased short-term borrowings at Sempra Commodities, lower capitalized interest at Sempra Generation due to completion of the Palomar generating facility, higher interest expense at SoCalGas associated with the $250 million first mortgage bonds issued in November 2005, higher variable interest rates and interest expense related to the accretion of the California energy crisis litigation settlement liability. The increases were offset by higher capitalized interest at Sempra LNG.


Income Taxes. Income tax expense was $524 million, $641 million and $34 million for 2007, 2006 and 2005, respectively, and the corresponding effective income tax rates were 34 percent, 33 percent and 4 percent. The decrease in 2007 income tax expense was primarily due to lower pretax income. The increase in 2006 expense compared to 2005 was due to higher pretax income and the higher effective tax rate. The increase in the 2006 effective rate was due primarily to $156 million of favorable resolutions of prior years' income tax issues in 2005 compared to $45 million in 2006, an increased portion of income earned in high tax rate jurisdictions, and lower synthetic fuels credits generated in 2006 compared to 2005 as a percentage of income.


Equity in Earnings (Losses) of Certain Unconsolidated Subsidiaries. For the years ended 2007, 2006 and 2005, equity in earnings (losses) of certain unconsolidated subsidiaries, net of tax, as discussed further in Note 4 of the Notes to Consolidated Financial Statements, was $99 million, $(182) million and $55 million, respectively. In February 2007, Sempra Commodities sold its interests in an equity-method investment, along with a related cost-basis investment, receiving cash and a 12.7-percent interest in a newly formed entity. The after-tax gain on this transaction, recorded in Equity in Earnings (Losses) of Certain Unconsolidated Subsidiaries, was $30 million. The 2006 amount included a $221 million impairment loss associated with Sempra Pipelines & Storage's Argentine investments.


Discontinued Operations. Income (loss) from discontinued operations was $(26) million, $315 million and $7 million in 2007, 2006 and 2005, respectively. Results for 2006 included $351 million in gains from the disposal of Sempra Generation's Twin Oaks Power plant, its Energy Services and Facilities Management businesses, and Sempra Energy Production Company (SEPCO), its exploration and production subsidiary, offset by $42 million, primarily from an impairment loss related to Bangor Gas and Frontier Energy. Note 5 of the Notes to Consolidated Financial Statements provides further details on these discontinued operations.




10



Net Income. Variations in net income were summarized previously in "Overall Operations."


Business Unit Results


Southern California Gas Company


SoCalGas recorded net income of $230 million, $223 million and $211 million in 2007, 2006 and 2005, respectively. The increase in 2007 was due primarily to $9 million of higher authorized base margins, net of higher operating expenses, and $10 million of lower income tax expense due to a lower effective tax rate in 2007, offset by $7 million from the favorable resolution of a natural gas royalty matter in 2006.


The increase in 2006 compared to 2005 was due primarily to the California energy crisis reserve of $57 million recorded in litigation expense in 2005 and $7 million from the positive resolution in 2006 of a natural gas royalty matter, offset by $24 million in 2005 from the favorable resolution of prior years' income tax issues, $11 million from the reversal in 2005 of the 2004 revenue-sharing reserve resulting from the CPUC's 2004 Cost of Service decision, higher income tax expense in 2006 of $13 million due to a higher effective tax rate in 2006 (excluding the effect of the resolution of prior years' income tax issues in 2005) and a DSM awards settlement of $9 million in 2005.


San Diego Gas & Electric Company


SDG&E recorded net income of $283 million, $237 million and $262 million in 2007, 2006 and 2005, respectively. The increase in 2007 was primarily due to $18 million from the higher favorable resolution of prior years' income tax issues in 2007, $15 million from higher electric transmission earnings and $7 million due to the Palomar electric generation facility operating for twelve months in 2007 as compared to nine months in 2006. Net income in 2007 also included $26 million from the resolution of a regulatory item associated with the disposition of a power plant in a prior year. Regulatory items in 2006 included a $13 million resolution of a prior-year cost recovery issue, $8 million due to the CPUC authorization for retroactive recovery on the San Onofre Nuclear Generating Station (SONGS) revenues related to a computational error in the 2004 Cost of Service, and $4 million due to FERC approval to recover prior-year ISO charges in 200 6.


The decrease in 2006 compared to 2005 was primarily due to $60 million associated with the favorable resolution of prior years' income tax issues in 2005, the $23 million recovery of costs in 2005 associated with an IRS decision relating to the sale of the South Bay power plant and $22 million related to a DSM awards settlement in 2005. These items were offset by a $42 million increase in earnings from electric generation activities including the commencement of commercial operation of the Palomar generating facility in 2006, $29 million due to the litigation expense in 2005 related to the California energy crisis matter and a $13 million increase in earnings due to lower income tax expense primarily resulting from a lower effective tax rate in 2006 (excluding the effect of the resolution of prior years' income tax issues in 2005). Resolution of regulatory items was $25 million in 2006 as compared to $24 million in 2005. The 2005 regulatory item of $24 million resulted from FERC approval to recover prior-year ISO charges (as discussed further in Note 16 of the Notes to Consolidated Financial Statements).


Sempra Commodities


Sempra Commodities recorded net income of $499 million, $504 million and $460 million in 2007, 2006 and 2005, respectively. The decrease in 2007 was primarily due to a $19 million net income effect of an increase in reserves related to energy crisis litigation, a $25 million reduction due to the phase-out of synthetic fuels tax credits, and decreased margins in the natural gas market. These decreases were largely offset by increased margins primarily for metals and power. Margin for 2007 also included $32 million in



11



the power product line representing the value of preferred stock received for services rendered. A portion of the decrease in margins was also the result of earnings variability associated with certain commodity inventories and storage and transportation capacity contracts not being marked to market while the corresponding hedges qualify as derivative instruments and are marked to market. Earnings variability will continue in future periods as a result of these factors. Results for 2007 also included an $18 million gain (after related costs) on the sale of equity-method investments.


The increase in 2006 compared to 2005 was due to improved margins in North America and in natural gas and metals, offset by decreased margins for petroleum and power, the $41 million after-tax gain on the sale of two natural gas storage facilities in 2005 and lower income from synthetic fuels tax-credit operations.


Margin by geographical region and product line, presented below, is a key performance measure used by management to evaluate the Sempra Commodities business, and similarly enhances the understanding of the business by investors and investment analysts. Margin represents the contribution to earnings of the Sempra Commodities business relative to its overhead costs, and consists primarily of Operating Revenues less Cost of Sales. Cost of Sales for Sempra Commodities is comprised primarily of transportation and storage costs. Margin also is net of transaction-related execution costs (primarily brokerage and other fees) and net interest income/expense.

 

 

Years ended December 31,

Margin (Dollars in millions)

2007

 

 

2006

 

 

2005

 

Geographical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    North America

$

1,202

 

77

%

 

$

1,313

 

80

%

 

$

1,091

 

81

%

    Europe and Asia

 

359

 

23

 

 

 

325

 

20

 

 

 

255

 

19

 

 

$

1,561

 

100

%

 

$

1,638

 

100

%

 

$

1,346

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Gas

$

570

 

37

%

 

$

792

 

49

%

 

$

439

 

32

%

    Power

 

460

 

29

 

 

 

431

 

26

 

 

 

443

 

33

 

    Oil – crude and products

 

195

 

12

 

 

 

198

 

12

 

 

 

292

 

22

 

    Metals

 

292

 

19

 

 

 

138

 

8

 

 

 

54

 

4

 

    Other

 

44

 

3

 

 

 

79

 

5

 

 

 

118

 

9

 

 

$

1,561

 

100

%

 

$

1,638

 

100

%

 

$

1,346

 

100

%

 

For the years ended December 31, 2007, 2006 and 2005, "Other" included synthetic fuels credit operations of $31 million, $97 million and $110 million, respectively, which contributed $6 million, $31 million and $36 million to net income for the same periods, respectively.


Margin is a non-GAAP financial measure and may be different from non-GAAP financial measures used by other companies (GAAP represents accounting principles generally accepted in the United States of America). Management believes this non-GAAP financial measure provides meaningful supplementary information regarding Sempra Commodities' results, as it presents the information used by management to evaluate its performance. As noted above, the calculation of margin is substantively the net of the GAAP financial measures of Revenues and Cost of Sales, adjusted for other transaction-related costs as noted above. Margin has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the company's results under GAAP. Some of the limitations of margin are that it does not reflect other operating expenses and income taxes, and other companies in this industry may calculate this measure differently than presente d above. The company compensates for these limitations



12



by relying primarily on GAAP results and by using margin only supplementally. A reconciliation of GAAP information to margin for Sempra Commodities is as follows:


 

 

Years ended December 31,

(Dollars in millions)

 

2007

2006

2005

Revenues

 

$

2,674

 

$

3,256

 

$

2,724

 

Cost of sales

 

 

(988

)

 

(1,468

)

 

(1,267

)

 

 

 

1,686

 

 

1,788

 

 

1,457

 

Other related costs

 

 

(125

)

 

(150

)

 

(111

)

Margin

 

$

1,561

 

$

1,638

 

$

1,346

 


A summary of Sempra Commodities' unrealized revenues for trading activities follows:


 

Years ended December 31,

(Dollars in millions)

 

2007

 

 

2006

 

 

2005

 

Balance at January 1

$

1,913

 

$

1,488

 

$

1,193

 

Additions

 

2,252

 

 

3,069

 

 

1,241

 

Realized

 

(2,981

)

 

(2,644

)

 

(946

)

SFAS 157 cumulative effect*

 

19

 

 

--

 

 

--

 

Balance at December 31

$

1,203

 

$

1,913

 

$

1,488

 

*

Notes 2 and 11 of the Notes to Consolidated Financial Statements provide additional information on Statement of Financial Accounting Standards (SFAS) 157.


The estimated fair values as of December 31, 2007, and the scheduled maturities related to the unrealized revenues are (dollars in millions):


 

 

 

 

 

 

 

Fair Market

Scheduled Maturity (in months)

Source of fair value

 

Value

 

 

0-12

 

 

 

13-24

 

 

 

25-36

 

 

 

>36

 

Over-the-counter (OTC) fair value of forwards, swaps and options*

 

 

$


1,381

 

 


$


1,074

 

 


$


95

 

 


$


23

 

 


$


189

 

Exchange contracts**

 

 

 

(178

)

 

 

(274

)

 

 

118

 

 

 

(7

)

 

 

(15

)

Total

 

 

$

1,203

 

 

$

800

 

 

$

213

 

 

$

16

 

 

$

174

 

*

The present value of unrealized revenue to be received from outstanding OTC contracts.

**

Cash received (paid) associated with open exchange contracts.


Sempra Generation


Sempra Generation recorded net income of $162 million, $375 million and $149 million in 2007, 2006 and 2005, respectively. Results for 2006 included a $204 million gain from the sale of the Topaz power plants and $6 million of related operational earnings, and $16 million of earnings related to the construction of the Palomar generating facility for SDG&E, offset by $18 million of litigation expense primarily related to the April 2006 DWR arbitration decision, which is discussed in Note 16 of the Notes to Consolidated Financial Statements.


In addition to the gain on the sale of the Topaz power plants and the litigation reserves related to the DWR arbitration decision, the change in 2006 compared to 2005 was also due to a 2005 impairment loss of $38 million related to the write-down of unused gas and steam turbines, and in 2006, $23 million of higher interest income, offset by a $35 million decrease in mark-to-market earnings on long-term forward contracts with Sempra Commodities for the sale of power during 2007 to 2012.




13



Sempra Pipelines & Storage


Net income (loss) for Sempra Pipelines & Storage was $64 million, $(165) million and $64 million in 2007, 2006 and 2005, respectively. The decrease in 2006 was primarily due to a $221 million impairment loss associated with the decision to sell its Argentine investments and $24 million of income tax expense related to repatriation of foreign earnings.


Sempra LNG


Sempra LNG recorded net losses of $46 million, $42 million and $25 million in 2007, 2006 and 2005, respectively. The increased loss in 2007 compared to 2006 was due to a $2 million increase in mark-to-market loss related to a natural gas marketing agreement with Sempra Commodities and higher development and general and administrative expenses. The increased loss in 2006 compared to 2005 was due to a $13 million mark-to-market loss related to the natural gas marketing agreement and higher development and general and administrative expenses.


Parent and Other


Net losses for Parent and Other were $67 million, $41 million and $208 million in 2007, 2006 and 2005, respectively. Net losses consist primarily of interest expense, litigation expense and tax-related adjustments. Interest expense was $82 million, $101 million and $104 million for 2007, 2006 and 2005, respectively. The increase in net loss for 2007 was due to a $38 million favorable resolution of a state income tax matter in 2006, $12 million for contributions to fund the Sempra Energy Foundation (a private charitable foundation) in 2007 and $8 million in interest income related to an insurance claim in 2006, partially offset by $26 million lower net interest expense in 2007 primarily due to the 2006 Sempra Generation asset sales and a $14 million net gain from interest-rate swaps. The decrease in net losses in 2006 compared to 2005 was due to $193 million of California energy crisis litigation reserves recorded in 2005, the favorable resolution of a s tate income tax matter in 2006 and interest income from the insurance claim at PE in 2006, offset by the $42 million favorable resolution of prior years' income tax issues in 2005 and $24 million lower 2006 affordable-housing credits at Sempra Financial.


Book Value Per Share


Book value per share was $31.93, $28.67 and $23.95, at December 31, 2007, 2006 and 2005, respectively. The increases in 2007 and 2006 were primarily the result of comprehensive income exceeding dividends.


CAPITAL RESOURCES AND LIQUIDITY


A substantial portion of the funding of the company's capital expenditures and its ability to pay dividends is dependent on the relatively stable pattern of earnings by the Sempra Utilities and Sempra Generation's long-term power sale contracts. However, in order to fund a significant capital expenditures program, SDG&E is not expected to pay common dividends to Sempra Energy over the next few years. The availability of capital for other business operations is also greatly affected by Sempra Commodities' liquidity and margin requirements, which fluctuate substantially. The company's expansion also requires the issuances of securities from time to time.


At December 31, 2007, the company had $668 million in unrestricted cash and cash equivalents, and $5.2 billion in available unused, committed lines of credit to provide liquidity and support commercial paper. Management believes that these amounts and cash flows from operations and security issuances, combined with current cash balances, will be adequate to finance capital expenditures and meet liquidity



14



requirements and to fund shareholder dividends and anticipated share repurchases, any new business acquisitions or start-ups, and other commitments. Forecasted capital expenditures for the next five years are discussed in "Future Construction Expenditures and Investments." If cash flows from operations were to be significantly reduced or the company were to be unable to raise funds under acceptable terms, neither of which is considered likely, the company would be required to reduce non-utility capital expenditures, share repurchases, trading operations and/or investments in new businesses. Management continues to regularly monitor the company's ability to finance the needs of its operating, investing and financing activities in a manner consistent with its intention to maintain strong, investment-quality credit ratings.


As discussed above and in "Factors Influencing Future Performance," the company has entered into an agreement with RBS to form RBS Sempra Commodities LLP (RBS Sempra Commodities), a partnership which will absorb the operations of Sempra Commodities. RBS will provide the joint venture with all growth capital, working-capital requirements and credit support. Accordingly, following the closing of the transaction, the company intends to reduce the amount of available credit under its existing facilities to a level consistent with its reduced liquidity requirements. Also following the closing, the company expects that its board of directors will increase the company’s quarterly common stock dividend to $0.35 per share ($1.40 annually), an increase of $0.03 per share ($0.12 annually) from the $0.32 per share ($1.28 annually) authorized in February 2008, and target an annual dividend payout ratio of 35 percent to 40 percent of net income. As a r esult of the transaction, the company expects to receive proceeds of approximately $1 billion in cash upon closing, net of its investment in the partnership, and to begin a $1 billion purchase program of the company’s common stock. Following the expected completion of this program in 2008, the company intends to continue purchasing common shares in 2009, up to a total of $1.5 billion to $2 billion in purchases, which may require additional borrowings, including a hybrid capital issuance.


Until completion of the transaction with RBS, Sempra Commodities will continue to provide or require cash as the level of its net trading assets fluctuates with prices, volumes, margin requirements (which are substantially affected by commodity price fluctuations and are dependent on credit ratings) and the length of its various trading positions. At December 31, 2007, Sempra Commodities' intercompany borrowings were $95 million, down from $376 million at December 31, 2006. Sempra Commodities' external debt was $443 million and $201 million at December 31, 2007 and 2006, respectively. Company management continuously monitors the level of Sempra Commodities' cash requirements in light of the company's overall liquidity.


At the Sempra Utilities, cash flows from operations, security issuances and/or capital contributions by Sempra Energy are expected to continue to be adequate to meet utility capital expenditure requirements. As a result of SDG&E's projected capital expenditure program, SDG&E has elected to suspend the payment of dividends on its common stock to Sempra Energy, and the level of future common dividends may be affected during periods of increased capital expenditures. In connection with SDG&E’s purchase of the Palomar generating facility in 2006, the company made a capital contribution of $200 million to SDG&E.


Sempra Generation's projects have been financed through a combination of operating cash flow, project financing, funds from the company and external borrowings. Its 2006 asset sales provided funds to assist in financing company projects.


Sempra Generation's long-term power sale contracts may contain collateral requirements. The DWR contracts do not contain such requirements. The collateral arrangements provide for Sempra Generation and/or the counterparty to post cash, guarantees or letters of credit to the other party for exposure in excess of established thresholds. Sempra Generation may be required to provide collateral when market



15



price movements adversely affect the counterparty's cost of replacement energy supplies were Sempra Generation to fail to deliver the contracted amounts. Sempra Generation had no outstanding collateral requirements under these contracts at December 31, 2007 and 2006.


Sempra Pipelines & Storage is expected to require funding from the company or external sources, or both, to continue the expansion of its existing natural gas operations in Mexico, its Liberty Gas Storage (Liberty) facility and other natural gas storage projects, its participation in the development of REX, a natural gas pipeline, and its planned development of pipelines to serve Sempra LNG facilities being developed in Baja California, Mexico; Louisiana and Texas, as discussed in "Capital Expenditures and Investments." The sale of interests in Argentina, as discussed in Note 4 of the Notes to Consolidated Financial Statements, is expected to provide cash for company projects.


Sempra LNG requires funding for its development of LNG receiving facilities. While Sempra LNG's $1.25 billion credit facility and other Sempra Energy sources are expected to be adequate for these requirements, the company may decide to use project financing if management determines its use to be advantageous. As the projects currently under construction are put in service, Sempra LNG is expected to provide operating cash flow for further development.


CASH FLOWS FROM OPERATING ACTIVITIES


Net cash provided by operating activities totaled $2.1 billion, $1.6 billion and $524 million for 2007, 2006 and 2005, respectively. Cash provided by operating activities in 2007 increased by $459 million (28%). The change was primarily due to a $303 million decrease in net trading assets in 2007 compared to a $543 million increase in 2006 and a $190 million increase in income from continuing operations (adjusted for noncash items), offset by an $82 million decrease in accounts payable in 2007 compared to an increase of $227 million in 2006, a $63 million increase in accounts and notes receivable in 2007 compared to a $94 million decrease in 2006 and a $107 million higher increase in other current assets in 2007 compared to 2006.


The increase in cash provided by operating activities in 2006 compared to 2005 was primarily due to a $562 million lower increase in net trading assets in 2006, a $170 million increase in overcollected regulatory balancing accounts in 2006 compared to a $321 million decrease in 2005, a $565 million increase in income from continuing operations (adjusted for noncash items) and a $94 million reduction in accounts receivable in 2006 compared to a $79 million increase in 2005. The increases were offset by a $416 million higher increase in other liabilities in 2005, and a $79 million decrease in current liabilities in 2006 compared to a $189 million increase in 2005.


The company made pension plan and other postretirement benefit plan contributions of $35 million and $45 million, respectively, during 2007, $35 million and $32 million, respectively, during 2006 and $24 million and $45 million, respectively, during 2005.


CASH FLOWS FROM INVESTING ACTIVITIES


Net cash used in investing activities totaled $2.1 billion, $866 million and $1.2 billion for 2007, 2006 and 2005, respectively. Cash used in investing activities in 2007 increased by $1.2 billion (139%). The change was primarily attributable to activity in 2006, which included $789 million in proceeds from asset sales, primarily the sales of Twin Oaks, the Energy Services and Facilities Management businesses and SEPCO at Sempra Generation, and $404 million in dividends received from unconsolidated affiliates related to the sale of the Topaz power plants.




16



The decrease in cash used in investing activities in 2006 compared to 2005 was primarily attributable to the proceeds from the asset sales and dividends received from unconsolidated subsidiaries in 2006 discussed above, offset by a $530 million increase in capital expenditures and $247 million in proceeds from the sale in 2005 of the Bluewater Gas Storage and Pine Prairie Energy Center natural gas storage sites at Sempra Commodities.


Capital Expenditures and Investments


Expenditures for property, plant and equipment and for investments are presented in the following table.


(Dollars in millions)

Property, plant and equipment

 

Investments in and acquisitions of subsidiaries

2007

$

2,011

 

$

121

2006

$

1,907

 

$

257

2005

$

1,377

 

$

86

2004

$

1,065

 

$

74

2003

$

1,012

 

$

192


Capital expenditure information by segment is provided in Note 17 of the Notes to Consolidated Financial Statements.


Investment and acquisition costs were $121 million, $257 million and $86 million for 2007, 2006 and 2005, respectively. The 2007 amount included a contribution of $100 million to Rockies Express Pipeline LLC (Rockies Express) and $21 million for purchases of available-for-sale securities and other investments. The 2006 amount included a $128 million investment in industrial development bonds in connection with the Liberty project, discussed in Note 6 of the Notes to Consolidated Financial Statements, and a $104 million initial capital contribution to Rockies Express during the first half of 2006. The 2006 contribution was returned to Sempra Pipelines & Storage later that year in connection with financing received by Rockies Express during the second quarter of 2006 and was reported in Distributions from Investments on the Statements of Consolidated Cash Flows. The 2005 amount included Sempra Generation's purchase of Reliant Energy's 50-percent inter est in El Dorado, discussed below.


Sempra Utilities


Capital expenditures for property, plant and equipment by the Sempra Utilities were $1.2 billion in 2007 compared to $1.5 billion in 2006 and $825 million in 2005. The larger amount in 2006 compared to 2007 and 2005 was primarily due to the addition of the Palomar generating facility in 2006. This purchase is substantially eliminated in consolidation in 2006, as the capital expenditures were recorded by Sempra Energy over the construction period from 2004 through the first quarter of 2006.


Sempra Generation


Sempra Generation develops, owns and operates generation facilities in the Pacific Southwest and Mexico, which sell electricity under long-term contracts and into spot market and other competitive markets. It purchases natural gas to fuel its power plants and may also purchase electricity in the open market to satisfy its contractual obligations. The following table lists the megawatt (MW) capacity of each operating power plant.




17






Power Plant

 

Maximum Generating Capacity (MW)

 

Location

Mesquite Power

 

1,250

 

Arlington, AZ

Termoeléctrica de Mexicali

 

625

 

Mexicali, Baja California, Mexico

El Dorado

 

480

 

Boulder City, NV

Elk Hills (50% owned)

 

275

*

Bakersfield, CA

 

Total MW in operation

 

2,630

 

 

*

Sempra Generation's share

 

 

 

 


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


In July 2005, Sempra Generation purchased Reliant Energy's 50-percent interest in El Dorado for $132 million (including assumed debt), resulting in its having full ownership of the plant.


Additional information concerning Sempra Generation's facilities is provided in Notes 3, 4, 5 and 16 of the Notes to Consolidated Financial Statements.


Sempra LNG


Sempra LNG develops and builds, and will operate LNG receipt terminals and sell regasified LNG.


Energía Costa Azul LNG receipt terminal


In early 2005, Sempra LNG began construction of the Energía Costa Azul LNG receipt terminal in Baja California, Mexico, which will be capable of processing 1 billion cubic feet (Bcf) of natural gas per day and is expected to begin operations in the second quarter of 2008. The estimated costs of this project, including capitalized interest, are approximately $975 million (excluding pre-expansion costs, which are $66 million to date) for the base facility and approximately $125 million for a nitrogen-injection facility. The nitrogen-injection facility will allow the terminal to process LNG cargoes from a wider variety of sources and will provide additional revenue from long-term firm capacity payments for the injection service. Through December 31, 2007, Sempra LNG has made expenditures of $936 million related to the terminal (including breakwater) and proposed expansion project, including $298 million, $302 million and $273 million in 2007, 2006 and 2005, respectively.


Cameron LNG receipt terminal


Sempra LNG’s Cameron LNG receipt terminal is currently under construction in Hackberry, Louisiana. The estimated costs of this project, including capitalized interest, are approximately $800 million (excluding pre-expansion costs, which are $41 million to date). Construction is expected to be completed in late 2008, with capacity revenues starting in early 2009. Through December 31, 2007, Sempra LNG has made expenditures of $641 million related to the terminal and proposed expansion project, including $224 million, $279 million and $60 million in 2007, 2006 and 2005, respectively.




18



Additional information concerning Sempra LNG's projects is provided in "Factors Influencing Future Performance" below.


Sempra Pipelines & Storage


Sempra Pipelines & Storage, Kinder Morgan Energy Partners, L.P. (KMP) and ConocoPhillips are jointly pursuing through Rockies Express the development of a natural gas pipeline, the REX, that would link producing areas in the Rocky Mountain region to the upper Midwest and the eastern United States. The project cost is estimated to be $4.9 billion. A subsidiary of Sempra Global entered into an agreement with Rockies Express for 200 million cubic feet per day of capacity on the REX, which will have capacity of 1.8 Bcf per day.


In connection with financing received by Rockies Express in 2006, Sempra Pipelines & Storage and KMP were repaid their initial 2006 capital contributions. The company's 25-percent participation in the project required a contribution to the partnership of $100 million in 2007 and is expected to require cash outflows of approximately $150 million in 2008 and $300 million in 2009.


Liberty, as currently permitted, is a 17 Bcf salt-cavern natural gas storage facility located in Calcasieu Parish, Louisiana. The facility has been under construction by the company and its 25-percent partner, Proliance Transportation and Storage, LLC, and will be connected to the Cameron and Port Arthur Pipelines under development by Sempra Pipelines & Storage to connect area LNG regasification terminals to an interstate gas transmission system. The estimated project cost is approximately $250 million, of which $181 million has been expended through December 31, 2007. Pipeline and compressor systems are currently in operation and can provide transportation services. Liberty is expected to be able to provide 12 Bcf of storage beginning in the second quarter of 2008.


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


Sempra Pipelines & Storage is currently expanding its existing pipelines in Baja California, Mexico, and adding a spur line to connect Sempra LNG’s Energía Costa Azul terminal to an existing Sempra Energy natural gas pipeline in Mexico with interconnections to the U.S. border. The estimated cost of this project is approximately $200 million. Expenditures were $204 million through December 31, 2007. The expansion is expected to be completed in early 2008, and commercial operation of the pipeline is expected to begin upon completion of Sempra LNG’s Energía Costa Azul terminal in the second quarter of 2008.


Additional information regarding Sempra Pipeline’s projects is provided in "Factors Influencing Future Performance" below.




19



Future Construction Expenditures and Investments


The company expects to make capital expenditures and investments of $2.1 billion in 2008. Significant capital expenditures and investments are expected to include $1.1 billion for Sempra Utility plant improvements and $1 billion of capital expenditures at its other subsidiaries, including the development of LNG facilities and natural gas pipelines. The $2.1 billion does not include the expected investment in RBS Sempra Commodities. These expenditures and investments are expected to be financed by cash flows from operations, cash on hand and security issuances.


Over the next five years, the company expects to make capital expenditures and investments of $7.1 billion at the Sempra Utilities, and $4.3 billion of capital expenditures at the other subsidiaries, including the development of LNG facilities and natural gas pipelines.


SDG&E has an application on file with the CPUC for the Sunrise Powerlink, a proposed new transmission power line between the San Diego region and the Imperial Valley of Southern California. The proposed line would be able to deliver 1,000 MW and is estimated to cost $1.2 billion. Additional information on the Sunrise Powerlink is provided in Note 14 of the Notes to Consolidated Financial Statements.


Capital expenditure amounts include capitalized interest and the portion of AFUDC (allowance for funds used during construction) related to debt, and exclude the portion of AFUDC related to equity. AFUDC is discussed in Note 1 of the Notes to Consolidated Financial Statements.


Construction, investment and financing programs are periodically reviewed and revised by the company in response to changes in regulation, economic conditions, competition, customer growth, inflation, customer rates, the cost of capital and environmental requirements, as discussed in Notes 14 and 16 of the Notes to Consolidated Financial Statements.


The company's level of construction expenditures and investments in the next few years may vary substantially, and will depend on the availability of financing, regulatory approvals and business opportunities providing desirable rates of return. The company intends to finance its capital expenditures in a manner that will maintain its strong investment-grade ratings and capital structure.


The amounts and timing of capital expenditures are subject to approvals by the CPUC, the FERC and other regulatory bodies.


CASH FLOWS FROM FINANCING ACTIVITIES


Net cash provided by (used in) financing activities totaled $(296) million, $(612) million and $1.0 billion for 2007, 2006 and 2005, respectively. Cash used in financing activities in 2007 decreased by $316 million (52%). The change was primarily due to an $812 million increase in short-term debt in 2007 compared to a $791 million decrease in 2006, offset by an $809 million increase in long-term debt payments, a $148 million decrease in issuances of long-term debt, a $148 million increase in common stock repurchases and an $83 million decrease due to proceeds in 2006 from the sale of the company’s interests in affordable-housing projects. The increase in short-term debt was primarily to fund the repayment of maturing long-term debt, and to a lesser extent, from increased borrowings at Sempra Commodities.


The 2006 change from 2005 was due to a $600 million issuance of common stock in 2005 in connection with the Equity Units' $600 million purchase contract settlement, a $791 million reduction in short-term debt in 2006 compared to $659 million of net borrowings in 2005 and a $210 million decrease in



20



issuances of long-term debt in 2006, offset by the redemption of $200 million of mandatorily redeemable preferred securities in 2005, $266 million of higher payments on long-term debt in 2005 primarily from the retirement of El Dorado's project finance debt and an $88 million open-market repurchase of common stock in the first half of 2005. Further discussion of Equity Units is provided in Note 13 of the Notes to Consolidated Financial Statements. Additionally, in June 2006, Sempra Financial effectively sold the majority of its interests in affordable-housing projects to an unrelated party subject to certain guarantees. Because of the guarantees, the $83 million of proceeds from the transaction was recorded as a financing rather than as a sale.


Long-Term Debt


During 2007, the company’s long-term debt decreased $646 million to $4.6 billion. At December 31, 2007, the company’s long-term debt had a weighted average life to maturity of 11.8 years and a weighted average interest rate of 5.47 percent. In 2007, the company repaid $1.1 billion and issued $404 million in long-term debt.


In September 2007, SDG&E publicly offered and sold $250 million of 6.125-percent first mortgage bonds, maturing in 2037. SDG&E’s variable interest entity, OMEC LLC, had construction loan borrowings of $63 million.


In September 2006, SDG&E issued $161 million of variable-rate first mortgage bonds, maturing in 2018, and applied the proceeds in November 2006 to retire an identical amount of first mortgage bonds and related tax-exempt industrial development bonds of a similar weighted-average maturity. The bonds will secure the repayment of tax-exempt industrial development bonds of an identical amount, maturity and interest rate issued by the City of Chula Vista, the proceeds of which have been loaned to SDG&E and will be repaid with payments on the first mortgage bonds.


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


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


In November 2005, SDG&E and SoCalGas each publicly offered and sold $250 million of 5.30-percent and 5.75-percent, respectively, first mortgage bonds, maturing in 2015 and 2035, respectively.


In May 2005, SDG&E publicly offered and sold $250 million of 5.35-percent first mortgage bonds, maturing in 2035.


Payments on long-term debt in 2007 primarily consisted of $600 million of notes payable that matured in May 2007, $300 million of notes payable that were due in May 2008 but redeemed in August 2007 and $66 million, the remaining outstanding balance of SDG&E’s rate-reduction bonds.


Payments on long-term debt in 2006 primarily included $161 million of SDG&E's first mortgage bonds and $66 million of rate-reduction bonds. Also in 2006, Sempra Financial repaid $24 million of debt incurred to acquire limited partnership interests.


Payments on long-term debt in 2005 included $300 million of notes payable that matured in December 2005 and $66 million related to SDG&E's rate-reduction bonds. Also in 2005, Sempra Generation repaid



21



$122 million of debt assumed in its purchase of the remaining interest in El Dorado, and Sempra Financial repaid $28 million of debt incurred to acquire limited partnership interests.


Note 6 of the Notes to Consolidated Financial Statements provides information concerning lines of credit and further discussion of debt activity.


Capital Stock Transactions


During 2007, the company repurchased almost 3 million shares of common stock for $161 million in connection with the share repurchase program authorized in 2005, as discussed in Note 13 of the Notes to Consolidated Financial Statements. Cash provided by employee stock option exercises was $32 million, $79 million and $90 million in 2007, 2006 and 2005, respectively.


During 2005, 19.7 million shares of common stock were issued at $30.52 per share in settlement of the 2002 share purchase contracts included in the company's $600 million of Equity Units. Also during 2005, the company repurchased common stock for $95 million, including 2.3 million shares of common stock at a cost of $88 million in connection with the share repurchase program authorized in 2005.


Dividends


Dividends paid on common stock were $316 million in 2007, $283 million in 2006 and $268 million in 2005. The increases were primarily due to increases in the per-share quarterly dividend from $0.29 in 2005 to $0.30 in 2006 and $0.31 in 2007. In February 2008, the company’s board of directors approved an increase in quarterly dividends from $0.31 per share to $0.32 per share. Following the expected closing of the transaction with RBS, the company expects that its board of directors will increase the company’s quarterly common stock dividend to $0.35 per share ($1.40 annually) and target an annual dividend payment ratio of 35 percent to 40 percent of net income.


The payment and amount of future dividends are at the discretion of the company's board of directors. The CPUC's regulation of the Sempra Utilities' capital structure limits the amounts that are available for loans and dividends to the company from the Sempra Utilities. At December 31, 2007, SoCalGas and SDG&E could have provided a total (combined loans and dividends) of $30 million and $29 million, respectively, to Sempra Energy.


Capitalization


At December 31, 2007, total capitalization, including short-term debt and the current portion of long-term debt, was $14.3 billion. The debt-to-capitalization ratio was 39 percent at December 31, 2007. Significant changes affecting capitalization during 2007 included common stock issuances and repurchases, a net decrease in long-term debt, increases in short-term borrowings, an increase in minority interest, and comprehensive income exceeding dividends. Additional discussion related to the significant changes is provided in Notes 6 and 13 of the Notes to Consolidated Financial Statements and "Results of Operations" above.



22



Commitments


The following is a summary of the company's principal contractual commitments at December 31, 2007. Additional information concerning commitments is provided above and in Notes 2, 6, 9, 12 and 16 of the Notes to Consolidated Financial Statements.


(Dollars in millions)

 

2008

 


2009

and 2010

 


2011

and 2012

 



Thereafter

 

 

Total

Short-term debt

$

1,064

 

$

--

 

$

--

 

$

--

 

$

1,064

Long-term debt

 

7

 

 

936

 

 

528

 

 

3,089

 

 

4,560

Interest on debt (1)

 

250

 

 

439

 

 

345

 

 

1,864

 

 

2,898

Due to unconsolidated affiliates

 

60

 

 

--

 

 

102

 

 

--

 

 

162

Preferred stock of subsidiaries subject to mandatory redemption

 


14

 

 


--

 

 


--

 

 


--

 

 


14

Operating leases

 

120

 

 

214

 

 

121

 

 

223

 

 

678

Litigation reserves

 

51

 

 

53

 

 

52

 

 

49

 

 

205

Purchased-power contracts

 

399

 

 

795

 

 

688

 

 

2,542

 

 

4,424

Natural gas contracts

 

1,486

 

 

1,304

 

 

444

 

 

236

 

 

3,470

LNG contract (2)

 

--

 

 

1,790

 

 

2,569

 

 

22,223

 

 

26,582

Construction commitments

 

275

 

 

8

 

 

1

 

 

--

 

 

284

SONGS decommissioning

 

10

 

 

1

 

 

--

 

 

400

 

 

411

Other asset retirement obligations

 

19

 

 

34

 

 

39

 

 

655

 

 

747

Pension and postretirement benefit obligations (3)

 

108

 

 

201

 

 

288

 

 

962

 

 

1,559

Environmental commitments

 

40

 

 

17

 

 

6

 

 

4

 

 

67

Other

 

9

 

 

28

 

 

7

 

 

9

 

 

53

Totals

$

3,912

 

$

5,820

 

$

5,190

 

$

32,256

 

$

47,178


(1)

Expected interest payments were calculated using the stated interest rate for fixed rate obligations, including floating-to-fixed interest-rate swaps. Expected interest payments were calculated based on forward rates in effect at December 31, 2007 for variable rate obligations, including fixed-to-floating interest-rate swaps.

(2)

Sempra LNG has a purchase agreement with Tangguh PSC Contractors (Tangguh PSC) for the supply of 500 million cubic feet of natural gas per day from Indonesia’s Tangguh liquefaction facility to Sempra LNG’s Energía Costa Azul regasification terminal at a price based on the Southern California border index. The expected minimum payments under the contract are based on the Southern California border index price plus an estimated 1 percent escalation per year. Sempra LNG has a contract to sell a portion of the volumes purchased from Tangguh PSC to Mexico’s national electric company, Comisión Federal de Electricidad (CFE) at prices that are based on the Southern California border index for natural gas.

(3)

Amounts are after reduction for the Medicare Part D subsidy and only include expected payments to the plans for the next 10 years.


The table excludes trading liabilities and commitments, which are primarily offset by trading assets; contracts between consolidated affiliates; intercompany debt; individual contracts that have annual cash requirements less than $1 million; and employment contracts. The table also excludes income tax liabilities of $105 million recorded in accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), because the company is unable to reasonably estimate the timing of future payments of these liabilities due to uncertainties in the



23



timing of the effective settlement of tax positions. Additional information on FIN 48 is provided in Note 2 of the Notes to Consolidated Financial Statements.


Off Balance-Sheet Arrangements


The company has provided guarantees aggregating $686 million at December 31, 2007, to related parties, including the guarantee related to Rockies Express project financing discussed in Note 6.


Credit Ratings


Credit ratings of the company and its principal subsidiaries remained unchanged at investment grade levels in 2007. As of January 31, 2008, credit ratings for Sempra Energy and its principal subsidiaries were as follows:


 

 

Standard

 

Moody's Investor

 

 

 

 

& Poor's

 

 Services, Inc.

 

Fitch

SEMPRA ENERGY

 

 

 

 

 

 

Unsecured debt

 

BBB+

 

Baa1

 

A

 

 

 

 

 

 

 

SDG&E

 

 

 

 

 

 

Secured debt

 

A+

 

A1

 

AA

Unsecured debt

 

A-

 

A2

 

AA-

Preferred stock

 

BBB+

 

Baa1

 

A+

Commercial paper

 

A-1

 

P-1

 

F1+

 

 

 

 

 

 

 

SOCALGAS

 

 

 

 

 

 

Secured debt

 

A+

 

A1

 

AA

Unsecured debt

 

A-

 

A2

 

AA-

Preferred stock

 

BBB+

 

Baa1

 

A+

Commercial paper

 

A-1

 

P-1

 

F1+

 

 

 

 

 

 

 

PACIFIC ENTERPRISES

 

 

 

 

 

 

Preferred stock

 

BBB+

 

--

 

A

 

 

 

 

 

 

 

SEMPRA GLOBAL

 

 

 

 

 

 

Unsecured debt guaranteed by Sempra Energy

 

--

 

Baa1

 

--

Commercial paper guaranteed by Sempra Energy

 

A-2

 

P-2

 

F1


As of January 31, 2008, the companies have a stable ratings outlook from all three credit rating agencies.


FACTORS INFLUENCING FUTURE PERFORMANCE


The Sempra Utilities' operations and Sempra Generation's long-term contracts generally provide relatively stable earnings and liquidity. However, for the next few years SDG&E is planning to reinvest its earnings in significant capital projects and is not expected to pay common dividends to Sempra Energy during that time. Also, Sempra Generation’s contract with the DWR, which provides a significant portion of Sempra Generation’s revenues, ends in late 2011. Due to the inability to forecast with certainty future electricity prices and the cost of natural gas, contracts entered into to replace this capacity may provide substantially lower revenue. Sempra LNG and Sempra Pipelines & Storage are expected to provide relatively stable earnings and liquidity upon the completion of their construction programs, but to require substantial funding during the construction period. Also, until firm supply or capacity contracts are in place and effecti ve for Sempra LNG’s Cameron and Energía Costa Azul LNG regasification facilities, Sempra LNG will seek to obtain interim LNG supplies, which may result in greater variability in revenues and earnings.



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Sempra Commodities experiences significant volatility in earnings and liquidity requirements. In July 2007, the company and RBS entered into an agreement to form a partnership, RBS Sempra Commodities, to purchase and operate the company's commodity-marketing businesses, which generally comprise the company’s Sempra Commodities segment. This transaction will eliminate the company’s requirements for trading guarantees and credit support for this business. The company expects somewhat lower earnings from the commodities business in the near term due to its reduced ownership after the formation of the partnership.


RBS Sempra Commodities has been formed as a United Kingdom limited liability partnership. Due to increased regulatory capital requirements for the partnership, Sempra Energy's expected equity investment in the partnership has increased from $1.3 billion - $1.5 billion to $1.6 billion - $1.7 billion. The partnership concurrently will purchase Sempra Energy’s commodity-marketing subsidiaries at a price (after deducting certain expenses to be paid by Sempra Energy in terminating pre-existing contractual arrangements) equal to their book value computed on the basis of International Financial Reporting Standards (IFRS) as adopted by the European Union.


RBS will provide any additional funding required for the ongoing operating expenses of the partnership’s businesses. RBS will also provide all growth capital, credit and liquidity for the partnership, replacing the trading guarantees and credit support currently maintained for these businesses by the company. RBS will terminate or replace Sempra Energy’s credit support arrangements for the commodity-marketing businesses acquired by RBS Sempra Commodities that are reasonably capable of being terminated or replaced. To the extent that Sempra Energy’s credit support arrangements have not been terminated or replaced, RBS will indemnify Sempra Energy for any claims or losses arising in connection with those arrangements.


Sempra Energy and RBS intend that RBS Sempra Commodities will distribute all of its net income on an annual basis, although the distributions are within the discretion of the board of directors of the partnership. Subject to certain limited exceptions, partnership pretax income, calculated in accordance with IFRS, will be allocated as follows:


·

Sempra Energy will receive a preferred 15-percent return on its adjusted equity capital;

·

RBS will receive a preferred 15-percent return on any capital in excess of capital attributable to Sempra Energy that is required by the U.K. Financial Services Authority to be maintained by RBS in respect of the operations of the partnership;

·

Sempra Energy will receive 70 percent of the next $500 million in pretax income, with RBS receiving the remaining 30 percent; and

·

Sempra Energy will receive 30 percent, and RBS 70 percent, of any remaining pretax income.


Any losses of the partnership would be shared equally between Sempra Energy and RBS.


After closing the transaction, the company will account for its investment in the partnership under the equity method, and the company's share of partnership earnings will be reported in the Sempra Commodities segment. In limited cases, earnings allocable to the partnership may be retained by the partnership to replenish capital depleted through losses.


Litigation


Note 16 of the Notes to Consolidated Financial Statements describes litigation, the ultimate resolution of which could have a material adverse effect on future performance.



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Sempra Utilities


Notes 14 and 15 of the Notes to Consolidated Financial Statements describe electric and natural gas regulation and rates, and other pending proceedings and investigations.


Sempra Global


Investments


As discussed in "Cash Flows From Investing Activities," the company's investments will significantly impact the company's future performance. In addition to the discussion below, information regarding these investments is provided in "Capital Resources and Liquidity."


Sempra Pipelines & Storage


Rockies Express Pipeline


The Rockies Express project is comprised of three segments: the Entrega Pipeline, REX-West and REX-East. The Entrega Pipeline, which runs from the Meeker Hub in Colorado to Wamsutter, Wyoming, and connects Wamsutter to an interconnection with REX at the Cheyenne Hub in Colorado, was placed into service in February 2007. REX-West extends 713 miles from the Cheyenne Hub to Audrain County in Missouri, and began interim service in January 2008 with full service expected in March 2008. REX-East, which will run 638 miles from Missouri to Clarington, Ohio, is expected to begin interim service in December 2008 and full service in June 2009.


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


Liberty Gas Storage


Liberty, as currently permitted, is a 17 Bcf salt-cavern natural gas storage facility located in Calcasieu Parish, Louisiana. The pipeline and compressor systems are currently in operation and can provide transportation services. Liberty is expected to be able to provide 12 Bcf of storage beginning in the second quarter of 2008.


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


Luz del Sur


Sempra Pipelines & Storage owns a 38-percent interest in Luz del Sur, a Peruvian electric utility, as discussed in Note 4 of the Notes to Consolidated Financial Statements.  In December 2007, AEI purchased a 38-percent interest in Luz del Sur from Sempra Pipelines & Storage’s previous partner, PSEG Global.  As part of its acquisition from PSEG Global, AEI is required to launch a tender offer to the minority shareholders to purchase their shares at a price as determined by an independent appraiser.  



26



The company expects to make an additional investment in Luz del Sur to maintain ownership of Luz del Sur equal to that of AEI.


Sempra LNG


Energía Costa Azul LNG Receipt Terminal


Sempra LNG’s Energía Costa Azul LNG receipt terminal, with a capacity of 1 Bcf per day, is currently under construction in Baja California, Mexico, and is expected to begin operations in the second quarter of 2008.


Upon commencement of operations, the facility will generate revenue under an agreement with Shell México Gas Natural, utilizing one-half of the terminal’s capacity. It is expected that LNG supplies will begin arriving in 2009 under a 20-year purchase and sale agreement with Tangguh PSC (discussed in "Commitments" above) that will fully utilize the remaining capacity. The company is negotiating for temporary supplies of LNG to utilize the available capacity until the Tangguh PSC supplies arrive.


In January 2005, Sempra LNG was awarded a 15-year natural gas supply contract by Mexico’s government-owned electric utility, the CFE. The contract revenue 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. The supply is expected to come from natural gas processed at the Energía Costa Azul terminal. 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.


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


Cameron LNG Receipt Terminal


Sempra LNG’s Cameron LNG receipt terminal is currently under construction in Hackberry, Louisiana. Construction is expected to be completed in late 2008 with capacity revenues starting in early 2009. In January 2007, Sempra LNG received approval from the FERC for a possible expansion of the terminal’s production capacity to 2.65 Bcf per day of natural gas from 1.5 Bcf per day. The ultimate scope and timing of the expansion project will depend on the outcome of negotiations for supply and/or terminal service agreements.


In August 2005, Sempra LNG executed a terminal services agreement with ENI USA Gas Marketing LLC (ENI). The 20-year, full-service capacity agreement utilizes over 40 percent of the Cameron terminal and will generate revenue within 90 days upon commencement of operation.


In March 2006, Sempra LNG executed a terminal services agreement with Merrill Lynch Commodities Inc. (MLC) to bring natural gas to the U.S. Gulf Coast, conditioned on MLC’s obtaining a contract for the supply of LNG. The 20-year, full-service capacity agreement provides MLC the capability to process 500,000 MMBtu per day through the Cameron LNG receipt terminal. MLC may terminate the agreement at various dates upon payment of an increasing early termination fee which, while significant, would not be material to the company. Sempra LNG and MLC have amended various provisions since the original agreement was executed, including a recent extension of an interim early-termination date to March 31, 2008. The final date for early termination is June 30, 2008.




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Port Arthur LNG Receipt Terminal


In June 2006, Sempra LNG received approval from the FERC to construct the Port Arthur LNG receipt terminal in Texas, which would be capable of processing up to 3 Bcf per day of natural gas. Construction of this facility has been delayed indefinitely until the company has obtained sufficient supply and capacity contracts for the terminal.


Sempra Generation


Sempra Generation is in the final development stages for construction of a proposed 600-MW natural gas-fired generation plant, Catoctin Power, in Adamstown, Maryland. The project has received the permits required for construction. Expenditures on this project have not been significant.


Other


As discussed in Note 8 of the Notes to Consolidated Financial Statements, income tax benefits from synthetic fuels credits were partially phased out in 2006. The partial phase-out extended into 2007, the last year of the program.


Market Risk


Market risk is the risk of erosion of the company's cash flows, net income, asset values and equity due to adverse changes in prices for various commodities, and in interest and foreign-currency rates.


The company has policies governing its market risk management and trading activities. As required by CPUC and FERC affiliate compliance rules, Sempra Energy and the Sempra Utilities maintain separate and independent risk management committees, organizations and processes for each of the Sempra Utilities and for all non-CPUC regulated affiliates to provide oversight of these activities. The committees, consisting of senior officers, establish policy for and oversee energy risk management activities and monitor the results of trading and other activities to ensure compliance with the company's stated energy risk management and trading policies. This includes monitoring daily, detailed information regarding market positions that create credit, liquidity and market risk. Independently from the company’s energy procurement departments, the respective oversight organizations and committees separately monitor energy price risk management and measure and report the credit, liquidity and market risk associated with these positions.


Along with other tools, the company uses Value at Risk (VaR) to measure daily its exposure to market risk. VaR is an estimate of the potential loss on a position or portfolio of positions over a specified holding period, based on normal market conditions and within a given statistical confidence interval. The company has adopted the variance/covariance methodology in its calculation of VaR, and uses both the 95-percent and 99-percent confidence intervals. VaR is calculated independently by the respective risk management oversight organizations. Historical and implied volatilities and correlations between instruments and positions are used in the calculation.


The Sempra Utilities use energy and natural gas derivatives to manage natural gas and energy price risk associated with servicing load requirements. The use of energy and natural gas derivatives is subject to certain limitations imposed by company policy and is in compliance with risk management and trading activity plans that have been filed and approved by the CPUC. Any costs or gains/losses associated with the use of energy and natural gas derivatives, which use is in compliance with CPUC approved plans, are considered to be commodity costs that are passed on to customers on a substantially concurrent basis.



28




Following is a summary of Sempra Commodities' trading VaR profile (using a one-day holding period, at the two confidence levels) in millions of dollars:


 

 

 

 

95%

 

 

99%

 

December 31, 2007

$

10.3

 

 

$

14.5

 

2007 range

$

6.1

 

to $ 32.1

 

$

8.6

 

to $ 45.2

December 31, 2006

$

13.4

 

 

 

$

18.8

 

 

2006 range

$

5.5

 

to $ 37.7

 

$

7.8

 

to $ 53.1


Revenue recognition is discussed in Notes 1 and 11 of the Notes to Consolidated Financial Statements and the additional market-risk information regarding derivative instruments is discussed in Note 11 of the Notes to Consolidated Financial Statements.


The following discussion of the company's primary market-risk exposures as of December 31, 2007 includes a discussion of how these exposures are managed.


Commodity Price Risk


Market risk related to physical commodities is created by volatility in the prices and basis of certain commodities. The company's market risk is impacted by changes in volatility and liquidity in the markets in which these commodities or related financial instruments are traded. The company's various subsidiaries are exposed, in varying degrees, to price risk, primarily in the petroleum, metals, natural gas and electricity markets. The company's policy is to manage this risk within a framework that considers the unique markets and operating and regulatory environments of each subsidiary.


Sempra Commodities


Sempra Commodities derives most of its revenue from its worldwide trading activities in natural gas, electricity, petroleum products, metals and other commodities. As a result, Sempra Commodities is exposed to price volatility in the related domestic and international markets. Sempra Commodities conducts these activities within a structured and disciplined risk management and control framework that is based on clearly communicated policies and procedures, position limits, active and ongoing management monitoring and oversight, clearly defined roles and responsibilities, and daily risk measurement and reporting.


Sempra Utilities


The Sempra Utilities’ market-risk exposure is limited due to CPUC-authorized rate recovery of the costs of commodity purchase, intrastate transportation and storage activity. However, the Sempra Utilities may, at times, be exposed to market risk as a result of SDG&E's natural gas PBR and electric procurement activities or SoCalGas' GCIM, which are discussed in Note 15 of the Notes to Consolidated Financial Statements. If commodity prices were to rise too rapidly, it is likely that volumes would decline. This would increase the per-unit fixed costs, which could lead to further volume declines. The Sempra Utilities manage their risk within the parameters of their market risk management framework. As of December 31, 2007, the total VaR of the Sempra Utilities' natural gas and electric positions was not material, and the procurement activities were in compliance with the procurement plans filed with and approved by the CPUC.




29



Interest Rate Risk


The company is exposed to fluctuations in interest rates primarily as a result of its short-term and long-term debt. Subject to regulatory constraints, interest-rate swaps may be used to adjust interest-rate exposures. The company periodically enters into interest-rate swap agreements to moderate its exposure to interest-rate changes and to lower its overall costs of borrowing.


At December 31, 2007, after the effects of interest-rate swaps, the Sempra Utilities had $2.7 billion of fixed-rate, long-term debt and $418 million of variable-rate, long-term debt. Interest on fixed-rate utility debt is fully recovered in rates on a historical cost basis and interest on variable-rate debt is provided for in rates on a forecasted basis. At December 31, 2007, utility fixed-rate, long-term debt, after the effects of interest-rate swaps, had a one-year VaR of $480 million and utility variable-rate, long-term debt, after the effects of interest-rate swaps, had a one-year VaR of $9 million. Non-utility long-term debt (fixed-rate and variable-rate) subject to VaR modeling totaled $1.5 billion at December 31, 2007, with a one-year VaR of $130 million, after the effects of interest-rate swaps.


At December 31, 2007, the total notional amount of interest-rate swap transactions ranges from $1.9 billion to $2.2 billion (ranges relate to amortizing notional amounts). Note 11 of the Notes to Consolidated Financial Statements provides further information regarding interest-rate swap transactions.


In addition, the company is subject to the effect of interest-rate fluctuations on the assets of its pension plans, other postretirement benefit plans and the nuclear decommissioning trusts. However, the effects of these fluctuations, as they relate to the Sempra Utilities, are expected to be passed on to customers.


Credit Risk


Credit risk is the risk of loss that would be incurred as a result of nonperformance by counterparties of their contractual obligations. As with market risk, the company has policies governing the management of credit risk that are administered by the respective credit departments for each of the Sempra Utilities and for all non-CPUC regulated affiliates and overseen by their separate risk management committees. Using rigorous models, this oversight includes calculating current and potential credit risk on a daily basis and monitoring actual balances in comparison to approved limits. The company avoids concentration of counterparties whenever possible, and management believes its credit policies significantly reduce overall credit risk. These policies include an evaluation of prospective counterparties' financial condition (including credit ratings), collateral requirements under certain circumstances, the use of standardized agreements that allow for t he netting of positive and negative exposures associated with a single counterparty, and other security such as lock-box liens and downgrade triggers. At December 31, 2007, Sempra Commodities' 20 largest customers had balances totaling $1.13 billion, of which $734 million corresponds to investment-grade customers, with individual customers varying from $212 million to $26 million. The company believes that adequate reserves have been provided for counterparty nonperformance.


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


When operational, development projects at Sempra LNG and Sempra Pipelines & Storage will place significant reliance on the ability of their suppliers to perform on long-term agreements and on the company’s ability to enforce contract terms in the event of non-performance. Also, factors considered in



30



the evaluation of a project for development include the negotiation of customer and supplier agreements, and therefore, reliance on these agreements for future performance. The decision to go forward on development projects may also be based on these agreements.


The company monitors credit risk through a credit-approval process and the assignment and monitoring of credit limits. These credit limits are established based on risk and return considerations under terms customarily available in the industry.


As noted above under "Interest Rate Risk," the company periodically enters into interest-rate swap agreements to moderate exposure to interest-rate changes and to lower the overall cost of borrowing. The company would be exposed to interest-rate fluctuations on the underlying debt should counterparties to the agreement not perform.


Foreign Currency Rate Risk


The company has investments in entities whose functional currency is not the U.S. dollar, exposing the company to foreign exchange movements, primarily in Latin American currencies. As a result of the devaluation of the Argentine peso that began at the end of 2001, Sempra Pipelines & Storage has reduced the carrying value of its Argentine investments downward by a cumulative total of $204 million as of December 31, 2007. These noncash adjustments continue to occur based on fluctuations in the Argentine peso and they generally do not affect net income, but affect other comprehensive income and accumulated other comprehensive income (loss). However, in 2006, the impairment of these investments reflected the cumulative effect of currency translation adjustments. Further discussion is provided in Note 4 of the Notes to Consolidated Financial Statements.


The company's primary objective with respect to currency risk is to preserve the economic value of its overseas investments and to reduce net income volatility that would otherwise occur due to exchange-rate fluctuations.


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


Because the company does not hedge its net investment in foreign countries, it is susceptible to volatility in other comprehensive income caused by exchange-rate fluctuations.




31



CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND KEY NONCASH PERFORMANCE INDICATORS


Certain accounting policies are viewed by management as critical because their application is the most relevant, judgmental and/or material to the company's financial position and results of operations, and/or because they require the use of material judgments and estimates.


The company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. The most critical policies, all of which are mandatory under generally accepted accounting principles in the United States of America and the regulations of the Securities and Exchange Commission, are the following:



Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Contingencies

 

 

 

 

SFAS 5, Accounting for Contingencies, establishes the amounts and timing of when the company provides for contingent losses. The company continuously assesses potential loss contingencies for litigation claims, environmental remediation and other events.


 

The company accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. For loss contingencies, the loss is accrued if (1) information is available that indicates it is probable that the loss has been incurred, given the likelihood of uncertain future events, and (2) the amounts of the loss can be reasonably estimated. SFAS 5 does not permit the accrual of contingencies that might result in gains.

 

Details of the company's issues in this area are discussed in Note 16 of the Notes to Consolidated Financial Statements.

 

 

 

 

 

Regulatory Accounting

 

 

 

 

SFAS 71, Accounting for the Effects of Certain Types of Regulation, has a significant effect on the way the Sempra Utilities record assets and liabilities, and the related revenues and expenses that would not be recorded absent the principles contained in SFAS 71.

 

The Sempra Utilities record a regulatory asset if it is probable that, through the ratemaking process, the utility will recover that asset from customers. Similarly, regulatory liabilities are recorded for amounts recovered in rates in advance of the expenditure. The Sempra Utilities review probabilities associated with regulatory balances whenever new events occur, such as changes in the regulatory environment or the utility's competitive position, issuance of a regulatory commission order or passage of new legislation. To the extent that circumstances associated with regulatory balances change, the regulatory balances could be adjusted.

 

Details of the Sempra Utilities' regulatory assets and liabilities are discussed in Note 1 of the Notes to Consolidated Financial Statements.

 

 

 

 

 



32




Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Income Taxes

 

 

 

 

SFAS 109, Accounting for Income Taxes, governs the way the company provides for income taxes.



 

The company's income tax expense and related balance sheet amounts involve significant management estimates and judgments. Amounts of deferred income tax assets and liabilities, as well as current and noncurrent accruals, involve judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities. The anticipated resolution of income-tax issues considers past resolutions of the same or similar issue, the status of any income-tax examination in progress and positions taken by taxing authorities with other taxpayers with similar issues. The likelihood of deferred tax recovery is based on analyses of the deferred tax assets and the company's expectation of future taxable income, based on its strategic planning.

 

Actual income taxes could vary from estimated amounts due to the future impacts of various items including changes in tax laws, the company's financial condition in future periods, and the resolution of various income tax issues between the company and the various taxing authorities. Details of the company's issues in this area are discussed in Note 8 of the Notes to Consolidated Financial Statements.


 

 

 

 

 

FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. FIN 48 addresses how an entity should recognize, measure, classify and disclose in its financial statements uncertain tax positions that it has taken or expects to take in an income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

For a position to qualify for benefit recognition under FIN 48, the position must have at least a "more likely than not" chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term "more likely than not" means a likelihood of more than 50 percent. If the company does not have a more likely than not position with respect to a tax position, then the company may not recognize any of the potential tax benefit associated with the position. A tax position that meets the "more likely than not" recognition shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon the effective resolution of the tax position.

 

Unrecognized tax benefits involve management judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the company’s results of operations, financial position and cash flows.

 

Additional information related to accounting for uncertainty in income taxes is discussed in Note 2 of the Notes to Consolidated Financial Statements.

 

 

 

 

 



33




Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Fair Value Measurements

 

 

 

 

SFAS 157, Fair Value Measurements, was adopted by the company in the first quarter of 2007. SFAS 157 defines fair value, establishes criteria to be considered when measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand the use of fair value accounting in any new circumstances.


Under Emerging Issues Task Force (EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3), the transaction price presumption prohibited recognition of a trading profit at inception of a derivative unless the positive fair value of that derivative was substantially based on quoted prices or a valuation process incorporating observable inputs. For transactions that did not meet this criterion at inception, trading profits that had been deferred were recognized in the period that inputs to value the derivative became observable or when the contract performed. SFAS 157 nullified this portion of EITF 02-3.

 

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). However, as permitted under SFAS 157, the company utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical expedient for valuing the majority of its assets and liabilities carried at fair value. The company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the comp any utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The company is able to classify fair value balances based on the observability of those inputs. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS 157 are as follows:

 

The company's assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. Also, for trading contracts, the time between inception and performance of the contract may affect the fair value. The determination of fair value may, therefore, affect the timing of recognition of revenues and net income.


As a result of adopting SFAS 157, the transition adjustment to beginning retained earnings was a gain of $12 million, net of income tax. Additional information relating to fair value measurement is discussed in Notes 2 and 11 of the Notes to Consolidated Financial Statements.

 

 

 

 

 



34




Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Fair Value Measurements (continued)

SFAS 157 also: (1) establishes that fair value is based on a hierarchy of inputs into the valuation process (as described in Note 11 of the Notes to Consolidated Financial Statements), (2) clarifies that an issuer's credit standing should be considered when measuring liabilities at fair value, (3) precludes the use of a liquidity or blockage factor discount when measuring instruments traded in an actively quoted market at fair value, and (4) requires costs related to acquiring instruments carried at fair value to be recognized as expense when incurred.


The following assets and liabilities are recorded at fair value on a recurring basis as of December 31, 2007: (1) derivatives, (2) certain inventories that are the hedged item in a fair value hedge, (3) certain trust assets, and (4) marketable securities.

 

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


Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as OTC forwards, options and repurchase agreements.


Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs. At each balance sheet date, the company performs an analysis of all instruments subject to SFAS 157 and includes in level 3 all of those whose fair value is based on significant unobservable inputs.

 

 



35




 

 

 

 

 

Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Derivatives

 

 

 

 

SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and related EITF Issues govern the accounting requirements for derivatives.

 

The company values derivative instruments at fair value on the balance sheet. Depending on the purpose for the contract and the applicability of hedge accounting, the impact of instruments may be offset in earnings, on the balance sheet, or in other comprehensive income. The company also utilizes normal purchase or sale accounting for certain contracts. As discussed elsewhere herein, the company uses exchange quotations or other third-party pricing to estimate fair values whenever possible. When no such data is available, it uses internally developed models and other techniques. The assumed collectibility of receivables considers the aging of the receivables, the credit-worthiness of customers and the enforceability of contracts, where applicable.

 

The application of hedge accounting to certain derivatives and the normal purchase or sale election is made on a contract-by-contract basis. Utilizing hedge accounting or the normal purchase or sale election in a different manner could materially impact reported results of operations. The effects of derivatives' accounting have a significant impact on the balance sheet of Sempra Commodities and the Sempra Utilities but have no significant effect on the Sempra Utilities' results of operations because of the principles contained in SFAS 71 and the application of the normal purchase or sale election. Details of the company's financial instruments are discussed in Note 11 of the Notes to Consolidated Financial Statements.

 

 

 

 

 

Impairments of Long-Lived Assets

SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that long-lived assets be evaluated as necessary for impairment whenever events or changes in circumstances indicate that the carrying amount of any such assets may not be recoverable or the assets meet the held-for-sale criteria under SFAS 144.

 

Whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable, the company applies SFAS 157 to estimate the fair value of its long-lived assets and may consider data from multiple market participants and multiple valuation methods. Judgment is exercised to estimate the future cash flows and the useful lives of long-lived assets and to determine management's intent to use the assets. Management's intent to use or dispose of assets is subject to re-evaluation and can change over time.

 

In connection with the evaluation of long-lived assets in accordance with the requirements of SFAS 144, the fair value of the asset can vary if different estimates and assumptions are used in the applied valuation techniques. Discussion of impairment of long-lived assets is included in Note 1 of the Notes to Consolidated Financial Statements. In addition, details of the company's impairment loss relating to Bangor Gas and Frontier Energy are discussed in Note 5 of the Notes to Consolidated Financial Statements.

 

 

 

 

 



36




Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Impairments of Equity Method Investments

Under Accounting Principles Board Opinion (APBO) 18, The Equity Method of Accounting for Investments in Common Stock, investments are generally accounted for under the equity method when the company has an ownership interest of 20 to 50 percent. For the investments the company accounts for under the equity method of accounting, the premium or excess cost over underlying fair value of net assets is referred to as equity method goodwill. In accordance with APBO 18, as amended by SFAS 142, Goodwill and Other Intangible Assets, equity method goodwill is not subject to amortization but rather to impairment testing, as is the equity method investment overall.

 

The company considers whether the fair value of each equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary. Therefore, in addition to the annual impairment test of goodwill, the company re-evaluates the amount at which the company carries the excess of cost over fair value of net assets accounted for under the equity method. Unamortized goodwill related to unconsolidated subsidiaries is discussed in Note 1 of the Notes to Consolidated Financial Statements.


When calculating estimates of fair or realizable values, the company considers whether it intends to sell the investment or continue to hold it. For certain investments that will be held, critical assumptions include the availability and costs of natural gas, competing fuels (primarily propane) and electricity.


Sempra Pipelines & Storage owns non-controlling interests in two Argentine natural gas distribution companies. In view of continuing disputes with the Argentine government, the company decided to sell its investments in these companies in December 2006. The company recorded a noncash impairment charge to net income of $221 million in the fourth quarter of 2006.

 

The company estimated the fair value of its Argentine investments using primarily an income-based valuation approach, including risk assumptions for similar investments. The risk assumptions applied by other market participants to value the investments could vary significantly, which could result in a different impairment charge, and ultimately additional loss or gain upon sale. Further details are discussed in Note 4 of the Notes to Consolidated Financial Statements.

 

 

 

 

 



37




Description

 

Assumptions & Approach Utilized

 

Effect if Different Assumptions Used

 

 

 

 

 

Defined Benefit Plans

 

 

 

 

The company has funded and unfunded noncontributory defined benefit plans that together cover substantially all of its employees. The company also has other postretirement benefit plans covering substantially all of its employees. The company accounts for its pension and other postretirement benefit plans under SFAS 87, Employers' Accounting for Pensions, and SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, respectively, and under SFAS 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).

 

The measurement of the company's pension and postretirement obligations, costs and liabilities is dependent on a variety of assumptions used by the company. The critical assumptions used in developing the required estimates include the following key factors: discount rate, expected return on plan assets, health-care cost trend rates, mortality rates, rate of compensation increases and payout elections (lump sum or annuity). These assumptions are reviewed on an annual basis prior to the beginning of each year and updated when appropriate. The company considers current market conditions, including interest rates, in making these assumptions.

 

The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter participant life spans, or more or fewer lump sum versus annuity payout elections made by plan participants. These differences, other than as related to the Sempra Utilities plans, where rate recovery offsets any effects of the assumptions on net income, may result in a significant impact to the amount of pension and postretirement benefit expense recorded. For the remaining plans, the approximate annual effect on net income of a 0.25 percent point increase or decrease in the assumed discount rate or the assumed rate of return on plan assets would be less than $1 million in each case.


The health-care cost trend rate is 9.48 percent for 2007. Increasing the health-care cost trend rate by one percentage point would increase the accumulated obligation for postretirement benefit plans by $93 million and total service and interest cost by $11 million. Decreasing the health-care cost trend rate by one percentage point would decrease the accumulated obligation by $77 million and total service and interest cost by $9 million.


Additional discussion of pension plan assumptions is included in Note 9 of the Notes to Consolidated Financial Statements.


Choices among alternative accounting policies that are material to the company's financial statements and information concerning significant estimates have been discussed with the audit committee of the board of directors.


Key noncash performance indicators for the company's subsidiaries include number of customers and natural gas volumes and electricity sold for the Sempra Utilities, and plant availability factors



38



at Sempra Generation's generating plants. For competitive reasons, Sempra Generation does not disclose its plant availability factors. The Sempra Utilities information is provided in "Overview" and "Results of Operations." Sempra Commodities does not use noncash performance factors. Its key indicators are profit margins by product line and by geographic area. The table under "Business Unit Results– Sempra Commodities" provides this information for Sempra Commodities. As of December 31, 2007, Sempra Pipelines & Storage's only consolidated operations are in Mexico. The natural gas distribution utility that operates in three separate areas in Mexico had a customer count of 95,600 and sales volume of 51 million cubic feet per day in 2007, which is comparable to amounts in 2006. The pipeline system in Mexico had contracted capacity of 450 million cubic feet per day in 2007 and 2006.


NEW ACCOUNTING STANDARDS


Relevant pronouncements that have recently become effective and have had or may have a significant effect on the company's financial statements are described in Note 2 of the Notes to Consolidated Financial Statements.




39




 


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, the Federal Energy Regulatory Commission, the Federal Reserve Board, the U.K. Financial Services Authority 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 electric power, natural gas and liquefied natural gas; weather conditions and conservation efforts; war and terrorist attacks; business, regulatory , environmental and legal decisions and requirements; the status of deregulation of retail natural gas and electricity delivery; the timing and success of business development efforts; the resolution of litigation; and other uncertainties, all of which are difficult to predict and many of which are beyond 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.





40







QUARTERLY COMMON STOCK DATA

 

 

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

Market price

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$63.03

 

 

$66.38

 

 

$62.25

 

 

$64.21

 

 

Low

 

$54.73

 

 

$57.04

 

 

$50.95

 

 

$57.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

Market price

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$49.54

 

 

$47.29

 

 

$50.91

 

 

$57.35

 

 

Low

 

$44.66

 

 

$42.90

 

 

$44.42

 

 

$50.19

 

Dividends declared were $0.31 and $0.30 per share in each quarter in 2007 and 2006, respectively.









41



PERFORMANCE GRAPH -- COMPARATIVE TOTAL SHAREHOLDER RETURNS


The following graph compares the percentage change in the cumulative total shareholder return on the company's common stock for the five-year period ending December 31, 2007, with the performance over the same period of the Standard & Poor's 500 Index and the Standard & Poor's Utilities Index.



[mastersempraannualreport004.gif]



These returns were calculated assuming an initial investment of $100 in the company's common stock, the S&P 500 Index and the S&P Utilities Index on December 31, 2002, and the reinvestment of all dividends.




42



FIVE-YEAR SUMMARY


(In millions, except per share amounts)

At December 31 or for the years then ended

 

 

2007

 

 

 

2006

 

 

 

2005

 

 

 

2004

 

 

 

2003

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

$

4,869

 

 

$

4,763

 

 

$

5,253

 

 

$

4,537

 

 

$

4,005

 

 

Electric

 

 

2,184

 

 

 

2,136

 

 

 

1,789

 

 

 

1,658

 

 

 

1,786

 

Sempra Global and parent

 

 

4,385

 

 

 

4,862

 

 

 

4,470

 

 

 

3,039

 

 

 

1,906

 

 

Total operating revenues

 

$

11,438

 

 

$

11,761

 

 

$

11,512

 

 

$

9,234

 

 

$

7,697

 

Operating income

 

$

1,679

 

 

$

1,785

 

 

$

1,089

 

 

$

1,272

 

 

$

1,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 < /P>

Income from continuing operations before cumulative effect of changes in accounting principles

 

$

1,125

 

 

$

1,091

 

 

$

913

 

 

$

915

 

 

$

745

 

Net income

 

$

1,099

 

 

$

1,406

 

 

$

920

 

 

$

895

 

 

$

649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

< P> 

 

Income per common share from continuing operations before cumulative effect of changes in accounting principles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.34

 

 

$

4.25

 

 

$

3.71

 

 

$

4.01

 

 

$

3.53

 

 

 

Diluted

 

$

4.26

 

 

$

4.17

 

 

$

3.62

 

 

$

3.92

 

 

$

3.48

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.24

 

 

$

5.48

 

 

$

3.74

 

 

$

3.92

 

 

$

3.07

 

 

 

Diluted

 

$

4.16

 

 

$

5.38

 

 

$

3.65

 

 

$

3.83

 

 

$

3.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

< P> 

 

Dividends declared per common share

 

$

1.24

 

 

$

1.20

 

 

$

 1.16

 

 

$

 1.00

 

 

$

 1.00

 

Return on common equity

 

 

13.9%

 

 

 

20.6%

 

 

 

16.7%

 

 

 

20.5%

 

 

 

19.3%

 

Effective income tax rate

 

 

34%

 

 

 

33%

 

 

 

4%

 

 

 

18%

 

 

 

9%

 

Price range of common shares

 

$

66.38-

 

 

$

57.35-

 

 

$

47.86-

 

 

$

37.93-

 

 

$

30.90-

 

 

 

 

 

50.95

 

 

 

 42.90

 

 

 

 35.53

 

 

 

 29.51

 

 

 

 22.25

 

Weighted average rate base:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SoCalGas

 

$

2,642

 

 

$

2,477

 

 

$

2,386

 

 

$

2,351

 

 

$

2,268

 

 

SDG&E

 

$

3,846

 

 

$

3,474

 

 

$

2,902

 

 

$

2,755

 

 

$

2,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 < /P>

AT DECEMBER 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

11,338

 

 

$

12,016

 

 

$

13,827

 

 

$

9,306

 

 

$

8,310

 

Total assets

 

$

30,091

 

 

$

28,949

 

 

$

29,246

 

 

$

23,847

 

 

$

22,053

 

Current liabilities

 

$

10,394

 

 

$

10,349

 

 

$

12,253

 

 

$

9,183

 

 

$

8,662

 

Long-term debt (excludes current portion)

 

$

4,553

 

 

$

4,525

 

 

$

4,815

 

 

$

4,182

 

 

$

3,828

 

Trust preferred securities

 

$

--

 

 

$

--

 

 

$

--

 

 

$

200

*

 

$

200

 

Shareholders’ equity

 

$

8,339

 

 

$

7,511

 

 

$

6,160

 

 

$

4,865

 

 

$

3,890

 

Common shares outstanding

 

 

261.2

 

 

 

262.0

 

 

 

257.2

 

 

 

234.2

 

 

 

226.6

 

Book value per share

 

$

31.93

 

 

$

28.67

 

 

$

23.95

 

 

$

20.77

 

 

$

17.17

 

* The company redeemed these securities in February 2005.


Note 5 of the Notes to Consolidated Financial Statements discusses discontinued operations. Note 16 of the Notes to Consolidated Financial Statements discusses litigation and other contingencies.


In 2003, the company recorded a $46 million decrease to net income from the cumulative effect of changes in accounting principles. The $46 million included $29 million from the initial effect of the rescission of Emerging Issues Task Force Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities and $17 million from the consolidation of two variable interest entities pursuant to FIN 46, Consolidation of Variable Interest Entities - an interpretation of Accounting Research Bulletin No. 51.




43



MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS


Management is responsible for the preparation of the company's consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly present the form and substance of transactions and that the financial statements reasonably present the company's financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Management also has included in the company's financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.


The board of directors of the company has an Audit Committee composed of six non-management directors. The committee meets periodically with financial management and the internal auditors to review accounting, control, auditing and financial reporting matters.


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 Rules 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, 2007. The effectiveness of the company’s internal control over financial reporting as of December 31, 2007, has been audited by Deloitte & Touche LLP, as stated in the ir report, which is included in Item 8.






44



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of Sempra Energy:


We have audited the internal control over financial reporting of Sempra Energy and subsidiaries (the "Company") as of December 31, 2007 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.


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


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


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


In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year



45



ended December 31, 2007 of the Company and our report dated February 25, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of two new accounting standards in 2007.


/S/ DELOITTE & TOUCHE LLP


San Diego, California
February 25, 2008





46



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of Sempra Energy:


We have audited the accompanying consolidated balance sheets of Sempra Energy and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related statements of consolidated income, comprehensive income and changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


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


In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sempra Energy and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.


As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 157, Fair Value Measurements, effective January 1, 2007 and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, effective January 1, 2007. As discussed in Note 9 to the consolidated financial statements, the Company adopted FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective December 31, 2006.


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.


/S/ DELOITTE & TOUCHE LLP


San Diego, California
February 25, 2008




47




SEMPRA ENERGY

 

STATEMENTS OF CONSOLIDATED INCOME

 

 

 

 

 

 

 

 

Years ended December 31,

(Dollars in millions, except per share amounts)

2007

 

2006

 

2005

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities

 

 

 

 

$

7,053

 

 

$

6,899

 

 

$

7,042

 

Sempra Global and parent

 

 

 

 

 

4,385

 

 

 

4,862

 

 

 

4,470

 

 

 

Total operating revenues

 

 

11,438

 

 

 

11,761

 

 

 

11,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of natural gas

 

 

2,763

 

 

 

2,756

 

 

 

3,232

 

 

Cost of electric fuel and purchased power

 

 

699

 

 

 

721

 

 

 

624

 

Sempra Global and parent:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of natural gas, electric fuel and purchased power

 

1,302

 

 

 

1,221

 

 

 

1,321

 

 

Other cost of sales

 

988

 

 

 

1,468

 

 

 

1,267

 

Litigation expense

 

 

73

 

 

 

56

 

 

 

551

 

Other operating expenses

 

 

2,954

 

 

 

2,814

 

 

 

2,583

 

Depreciation and amortization

 

 

686

 

 

 

657

 

 

 

626

 

Franchise fees and other taxes

 

 

295

 

 

 

275

 

 

 

246

 

Gains on sale of assets, net

 

 

(6

)

 

 

(1

)

 

 

(112

)

Impairment losses

 

 

5

 

 

 

9

 

 

 

85

 

 

 

Total operating expenses

 

 

9,759

 

 

 

9,976

 

 

 

10,423

 

Operating income

 

 

1,679

 

 

 

1,785

 

 

 

1,089

 

Other income, net

 

 

81

 

 

 

381

 

 

 

51

 

Interest income

 

 

72

 

 

 

109

 

 

 

72

 

Interest expense

 

 

(272

)

 

 

(351

)

 

 

(310

)

Preferred dividends of subsidiaries

 

 

(10

)

 

 

(10

)

 

 

(10

)

Income from continuing operations before income taxes and equity in earnings (losses) of certain unconsolidated subsidiaries

 

 

1,550

 

 

 

1,914

 

 

 

892

 

Income tax expense

 

 

524

 

 

 

641

 

 

 

34

 

Equity in earnings (losses) of certain unconsolidated subsidiaries

 

99

 

 

 

(182

)

 

 

55

 

Income from continuing operations

 

1,125

 

 

 

1,091

 

 

 

913

 

Discontinued operations, net of income tax

 

(26

)

 

 

315

 

 

 

7

 

Net income

 

$

1,099

 

 

$

1,406

 

 

$

920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

4.34

 

 

$

4.25

 

 

$

3.71

 

 

Discontinued operations, net of income tax

 

 

(0.10

)

 

 

1.23

 

 

 

0.03

 

 

Net income

 

$

4.24

 

 

$

5.48

 

 

$

3.74

 

 

Weighted-average number of shares outstanding (thousands)

 

 

259,269

 

 

 

256,477

 

 

 

245,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

4.26

 

 

$

4.17

 

 

$

3.62

 

 

Discontinued operations, net of income tax

 

 

(0.10

)

 

 

1.21

 

 

 

0.03

 

 

Net income

 

$

4.16

 

 

$

5.38

 

 

$

3.65

 

 

Weighted-average number of shares outstanding (thousands)

 

 

264,004

 

 

 

261,368

 

 

 

252,088

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

$

1.24

 

 

$

1.20

 

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 






48




SEMPRA ENERGY

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

December 31, 2007

December 31, 2006

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

668

 

 

$

920

 

 

Restricted cash

 

 

1

 

 

 

4

 

 

Trade accounts receivable, net

 

 

960

 

 

 

938

 

 

Other accounts and notes receivable, net

 

 

114

 

 

 

97

 

 

Income taxes receivable

 

 

99

 

 

 

--

 

 

Deferred income taxes

 

 

247

 

 

 

270

 

 

Interest receivable

 

 

4

 

 

 

40

 

 

Trading-related receivables and deposits, net

 

 

2,887

 

 

 

3,047

 

 

Derivative trading instruments

 

 

3,367

 

 

 

4,068

 

 

Commodities owned

 

 

2,231

 

 

 

1,845

 

 

Inventories

 

 

224

 

 

 

215

 

 

Regulatory assets

 

 

106

 

 

 

193

 

 

Other

 

 

430

 

 

 

317

 

 

Current assets of continuing operations

 

 

11,338

 

 

 

11,954

 

 

Current assets of discontinued operations

 

 

--

 

 

 

62

 

 

 

Total current assets

 

 

11,338

 

 

 

12,016