Sempra Energy 2006 10-K



  

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, 2006

  

 


[   ]

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

  



1





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, 2006 was $11.8 billion.

  

Registrant's common stock outstanding as of January 31, 2007, was 262,918,638 shares.

  

 

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

 

 

Portions of the 2006 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV.

  

 

 

 

Portions of the Proxy Statement prepared for the April 2007 annual meeting of shareholders are incorporated by reference into Part III.

  



2




TABLE OF CONTENTS

Page

PART I

 

 

Item 1.

Business and Risk Factors

5

Item 2.

Properties

26

Item 3.

Legal Proceedings

27

Item 4.

Submission of Matters to a Vote of Security Holders

27

  

 

 

PART II

 

 

Item 5.

Market for Registrant's Common Equity and Related Stockholder Matters

28

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

34

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

 

 

 




3



 

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 and other environmental and regulatory bodies in the United States and other countries; capital markets conditions, inflation rates, interest rates and exchange rates; energy and trading markets, including the timing and extent of changes in commodity prices; the availability of natural gas and liquefied natural gas; weather conditions and conservation efforts; war and terrorist attacks; business, regulatory, environmental and legal decisions and requirements; th e 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.




4




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 2006 Annual Report to Shareholders, which is incorporated by reference. The company has five separately managed reportable segments comprising 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."

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.



5




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 Discus sion and Analysis of Financial Condition and Results of Operations" included in the 2006 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, 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 CPUC and rel ating to the Sempra Utilities' rates, costs, incentive mechanisms, performance-based regulation and compliance with affiliate and holding company rules are discussed in the notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations."


For major capital programs, the Sempra Utilities may expend funds prior to receiving regulatory approval to proceed with the capital project. If the project does not receive regulatory approval or a decision is made 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 forecasts of capital and operating costs. If the Sempra Utilities' actual capital and operating costs were to exceed the amount approved by the CPUC, it would adversely affect earnings and cash flows.


To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC 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



6



solely on expanding utility plant to increase earnings. The three areas that are eligible for PBR rewards are: operational incentives based on measurements of safety, reliability and customer satisfaction; energy efficiency rewards based on the effectiveness of the programs; and natural gas procurement rewards. Although the Sempra Utilities have received PBR rewards in the past, there can be no assurance that they will receive rewards in the future, 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.


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


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


·

the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;

·

limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and

·

uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.


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

The California energy crisis of 2000 - 2001 has generated numerous lawsuits, governmental investigations and regulatory proceedings involving many energy companies, including Sempra Energy and the Sempra Utilities. During 2006, Sempra Energy and the Sempra Utilities reached agreement to settle several of these lawsuits including, subject to court and other approvals, the principal class action antitrust lawsuits in which they are defendants. However, the companies remain defendants in several additional lawsuits arising out of the energy crisis, including various antitrust actions. Sempra Energy and the Sempra Utilities have expended and continue to expend substantial amounts defending these lawsuits and in connection with related investigations and regulatory proceedings. They have established reserves that they believe to be appropriate for the ultimate resolution of these remaining matters. However, uncertainties inher ent in complex legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of



7



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


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

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

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


Sempra Generation generates electricity that it sells under long-term contracts and into the spot market or other competitive markets. It purchases 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.


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



8



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 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 conditi on.


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.


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 ad dition, if these lines were to become unavailable or to be inadequate to meet margin or other credit enhancement requirements, Sempra Commodities' trading partners could exercise other remedies such as liquidating and netting their exposures to Sempra Commodities, making it more difficult or impossible for Sempra 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.




9



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 megawatts to the state. Sempra Energy expects the contract with the DWR will be a source of significant revenue over the 10-year period. The validity of the power sales agreement with the DWR continues to be the subject of extensive litigation between the parties before the FERC, in California 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 15 of the no tes to Consolidated Financial Statements, the company unilaterally reduced its price to the DWR in connection with the agreement to settle other litigation.


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

The electric generation and wholesale power sales industries have become highly competitive. As more plants are built and competitive pressures increase, wholesale electricity prices 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, Sempra Energy's sales may be



10



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 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 conditio n. In addition, Sempra LNG does not intend to commence significant construction of its Port Arthur terminal or expansion of its Energía Costa Azul or Cameron terminals until it has obtained such long-term agreements. 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, including the proposed Cameron expansion.


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 p roblems, construction delays and contractor performance shortfalls, work stoppages, adverse weather conditions, environmental and geological conditions, and other factors. If the company is unable to complete the development of a facility, it typically will not be able to recover its investment in the project.


The operation of 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,



11



including higher maintenance costs and penalties, and could adversely affect Sempra Energy's business, cash flows and results of operations.


Competition among developers and operators of LNG terminals has increased, which may adversely affect the costs of construction and future profitability of Sempra LNG's proposed LNG terminals.

Although there are only a limited number of LNG terminal facilities operating in North America today, many companies have announced plans to develop LNG facilities to serve the North American market. Some of these competitors have more operating experience, more development experience, larger staffs and greater financial resources than the company. Industry analysts have predicted that, if all of the proposed LNG facilities in North America that have been announced by developers are actually built, there will likely be substantial excess capacity at such terminals in the near future. Although its LNG facilities in Mexico, Louisiana and Texas are more advanced in the siting, permitting and regulatory approval processes than the proposed projects of many of its competitors, there can be no assurance that Sempra Energy will be able to maintain that advantage.  In addition, increased development of LNG terminal facilities has increased competit ion for the resources required for their development, resulting in rising engineering and procurement costs, which may adversely affect development costs and timing of the expansion of existing facilities.


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 ad ditional 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.  




12



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 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 plants or trading operations of the company's subsidiaries.


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


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;



13



·

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.


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 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 operations.


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 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 relating to greenhouse gases (including carbon dioxide, methane, nitrous 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 lim its and the possible requirement of the purchase of emission credits. Similarly, the Sempra Utilities may be affected if costs are not recoverable in rates and because the effects of significantly tougher standards may cause rates to increase to levels that substantially reduce customer demand and growth.


In addition, existing and future laws and regulation on mercury, nitrogen oxide and sulfur dioxide emissions could result in requirements for additional pollution control equipment or emission fees



14



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 13 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 plants, electric transmission 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 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 risks 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. 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, rate of return, 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 jurisdiction over the proposed construction of major new electric transmission, electric distribution and natural gas transmission facilities.  The CPUC conducts various reviews of utility performance, conducts audits of the company’s records 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



15



and transactions of the utilities with Sempra Energy, as discussed further in Note 14 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.


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. The California Legislature established CARB in 1967 to attain and maintain healthy air quality and to conduct research into the causes of and solutions to air pollution. CARB is made up of eleven members appointed by the Governor.


United States Utility Regulation


The FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale. Both the FERC and the CPUC are currently investigating prices charged to the California investor-owned utilities (IOUs) by various suppliers of natural gas and electricity. Further discussion is provided in Notes 13, 14 and 15 of the notes to Consolidated Financial Statements.


The NRC oversees the licensing, construction and operation of nuclear facilities. NRC regulations require extensive review of the safety, radiological and environmental aspects of these facilities. Periodically, the NRC requires that newly developed data and techniques be used to 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 240 legal jurisdictions in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas in streets and other public places. Some franchises, such as that for the city of Los Angeles, which expires in 2012, have fixed expiration dates ranging from 2007 to 2048. Most of the franchises have indeterminate 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



16



territory. These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas in streets and other public places. Most of the franchises have indeterminate lives, except for the electric and natural gas franchises with the cities of 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 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 Sempra Generation operates a natural gas-fired power plant in Baja California, Mexico. These operations are regulated by labor and environmental agencies of city and state governments. Sempra Generation, Sempra LNG, and Sempra Pipelines & Storage have operations in Nevada, Arizona, California, Louisiana, Maine and North Carolina.  These entities are regulated by the respective states and local utilities commissions 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 Financial Services Authority and the London International Futures Exchange.


Sempra Generation and Sempra LNG have operations in the United States that are subject to regulation by the FERC and operations in Mexico that are subject to regulation by the Comisión Reguladora de Energía.


Sempra Pipelines & Storage's operations in Mexico are subject to Mexico's federal regulations. The primary regulatory body is the Comisión Reguladora de Energía.


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 13 and 14 of the notes to Consolidated Financial Statements.




17



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 14 and 15 of the notes to Consolidated Financial Statements.


Customers


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


Most core customers purchase natural gas directly from the Sempra Utilities. Core customers are permitted to aggregate their natural gas requirement and purchase directly from brokers or producers. The Sempra Utilities continue to be obligated to purchase 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 customers, SoCalGas is committed to firm pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation entitlements. SoCalGas sells any 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 2007 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. SDG&E continues its ongoing assessment of its pipeline capacity portfolio, including the release of a portion of this capacity to third parties. In accordance with regulatory directives, SDG&E continues to reconfigure its pipeline capacity portfolio to secure firm transportation rights from a diverse mix of U.S. and Canadian supply sources for its projected core customer natural gas requirements. All of SDG&E's natural gas is delivered through SoCalGas' pipelines under a long-term transportation agreement. In addition, under separate agree ments expiring in March 2008, SoCalGas provides SDG&E up to nine billion cubic feet (bcf) of storage capacity.




18



According to "Btu's Daily Gas Wire", the average spot price of natural gas at the California/Arizona border was $6.15 per million British thermal units (mmbtu) in 2006 ($6.74 per mmbtu in December 2006), compared with $7.62 per mmbtu in 2005 and $5.57 per mmbtu in 2004. The Sempra Utilities' weighted average cost (including transportation charges) per mmbtu of natural gas was $6.54 in 2006, $7.83 in 2005 and $5.94 in 2004.


Natural Gas Storage


SoCalGas provides natural gas storage services for use by core, noncore and off-system customers. Core customers are allocated a portion of SoCalGas' storage capacity. Other customers, including SDG&E, can bid and negotiate the desired amount of storage on a contract basis. The storage service program provides opportunities for these customers to store natural gas, usually during the summer, to reduce winter purchases when natural gas costs are generally higher. This allows customers to select the level of service they desire to assist them in managing their fuel procurement and transportation needs.


Demand for Natural Gas


The 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 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 United States and Canada. In addition, natural gas use is impacted by the performance of other generation sources in the western United States, including nuclear and coal, and other natural gas facilities outside the service area. Natural gas use is also impacted by changes in end-use electricity demand. For example, natural gas use generally increases during summer heat waves. Over the long-term, natural gas used to generate electricity will be influenced by additional factors such as the location of new power plant construction and the development of renewable resources. More generation capacity currently is being constructed outside Southern California than within the Sempra Utilities' service area. This new generation will likely displace the output of older, less-efficient local generation, reducing the use of natural gas for local 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 United States. Although electric industry restructuring has no direct impact on the company's natural gas operations, future volumes of natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes divert electric generation from the 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 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 85,000 and 86,000 new customer meters in 2006 and 2005, respectively,



19



representing growth rates of 1.3 percent and 1.4 percent, respectively. The Sempra Utilities expect that their growth rate for 2007 will approximate that of 2006.


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 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, 2006, SDG&E had 1.4 million customer meters consisting of 1,202,000 residential, 144,000 commercial, 500 industrial, 2,000 street and highway lighting, and 5,800 direct access. The company's service area covers 4,100 square miles. The company added 17,000 new electric customer meters in 2006 and 20,000 in 2005, representing growth rates of 1.3 percent and 1.5 percent, respectively. The company expects that its growth rate for 2007 will approximate that of 2006.


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 13, 14 and 15 of the notes to Consolidated Financial Statements.



20



Electric Resources


Based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its Palomar and Miramar generating plants and its 20-percent ownership interest in SONGS, the supply of electric power available to SDG&E as of December 31, 2006 is as follows:


 

 

 

 

 

 

 

 

 

 

 

Expiration

 

Megawatts

Supplier

 

Source

 

date

 

(MW)

 

 

 

 

 

 

 

PURCHASED-POWER CONTRACTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

DWR-allocated contracts:

 

 

 

 

 

 

 

Williams Energy Marketing & Trading

 

Natural gas

 

2007 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

 

102

 

 

Yuma Cogeneration

 

Cogeneration

 

2024

 

50

 

 

Goal Line Limited Partnership

 

Cogeneration

 

2025

 

50

 

 

Other (18 contracts)

 

Cogeneration

 

2009 and thereafter

 

56

 

 

Total

 

 

 

 

 

258

 

Other contracts with renewable sources:

 

 

 

 

 

 

 

Oasis Power Partners

 

Wind

 

2019

 

60

 

 

Kumeyaay

 

Wind

 

2025

 

50

 

 

AES Delano

 

Bio-mass

 

2007

 

49

 

 

PPM Energy

 

Wind

 

2018

 

25

 

 

WTE / FPL

 

Wind

 

2019

 

17

 

 

Other (6 contracts)

 

Bio-gas

 

2007 to 2014

 

24

 

 

Total

 

 

 

 

 

225

 

Other long-term contracts:

 

 

 

 

 

 

 

 

Portland General Electric (PGE)

 

Coal

 

2013

 

89

 

 

Celerity

 

Natural Gas

 

2016

 

5

 

Total contracted

 

 

 

 

 

2,116

 

  

 

 

 

 

 

 

 

GENERATION:

 

 

 

 

 

 

 

 

Palomar

 

Natural Gas

 

 

 

550

 

 

SONGS

 

Nuclear

 

 

 

430

 

 

Miramar

 

Natural Gas

 

 

 

45

 

Total generation

 

 

 

 

 

1,025

 

TOTAL CONTRACTED AND GENERATION

 

 

 

 

 

3,141

 


* Effective January 1, 2007, after 1,206 MW were reallocated to Southern California Edison (Edison) by the CPUC, as described in Note 13 of the notes to Consolidated Financial Statements.  

   

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




21



SONGS


SDG&E owns 20 percent of SONGS, which is located south of San Clemente, California. SONGS consists of three nuclear generating units. The city of Riverside owns 1.79 percent of Units 2 and 3, and Edison, the operator of SONGS, owns the remaining interests. The city of Anaheim sold its 3.16 percent interest in SONGS Units 2 and 3 to Edison effective December 28, 2006.


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


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


SDG&E has fully recovered its SONGS capital investment through December 31, 2003 and earns a return only on subsequent 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 6, 13 and 15 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 the independent spent fuel storage installation, where storage capacity is expected to be adequate 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 2010 at the earliest.


Additional information concerning nuclear-fuel costs and the storage and movement of spent fuel is provided in Notes 13 and 15, 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 270 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.



22




Transmission Arrangements


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


Power originating from sources utilizing the Pacific Intertie, as well as power from other sources, can be imported into SDG&E's system via the Edison - SDG&E interconnection at the SONGS switchyard. Five 230-kilovolt transmission lines into SDG&E's system from that interconnection comprise the "South of SONGS" path, which is normally rated at 2,200 MW.


Subject to the FERC's approval and any litigation concerning term, the Pacific Intertie agreement will expire no earlier than July 31, 2007. SDG&E is currently evaluating its participation in the agreement, and has not yet determined whether or not to propose an extension of the agreement.


SDG&E's 500-kilovolt Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona, to San Diego. SDG&E's share of the line is 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-kilovolt 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 planning stages for the Sunrise Powerlink, a new 500-kilovolt 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 or higher. The project is subject to CPUC approval and is estimated to cost $1.3 billion, of which SDG&E's participation is expected to be $1 billion. The project, subject to timely regulatory approval and permitting, is planned to be in service in 2010.


Transmission Access


The National Energy Policy Act governs procedures for others' requests for transmission service. The FERC approved the California IOUs' transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998.


Additional information regarding the FERC, ISO and transmission issues is provided in Note 13 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 2, 3, 4, 15 and 16 of the notes to Consolidated Financial Statements.  




23



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, 13 and 14 of the notes to Consolidated Financial Statements.


ENVIRONMENTAL MATTERS


Discussions about environmental issues affecting the company are included in Notes 13 and 15 of the notes to Consolidated Financial Statements. The following additional information should be read in conjunction with those discussions.

Hazardous Substances  


In 1994, the CPUC approved the Hazardous Waste Collaborative Memorandum account, allowing California's IOUs to recover their hazardous waste cleanup costs, including those related to Superfund sites or similar sites requiring cleanup. 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, 2006, 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 $39.3 million, of which 90 percent is authorized to be recovered through the Hazardous Waste Collaborative mechanism. This estimated cost excludes remediation costs of $8.9 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.


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


Electric and Magnetic Fields (EMFs)


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


To respond to public concerns, the CPUC previously directed California IOUs to adopt a low-cost EMF-reduction policy that requires reasonable design changes to achieve noticeable reduction of EMF levels that are anticipated from new projects. In 2006, the CPUC reviewed the resultant policy



24



in an Order Instituting Ratemaking and found no new scientific research to support a change to the existing policy, finding existing policy of prudent avoidance to be sufficient and reasonable.


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. Costs to comply with these standards are recovered in rates.


In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached 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 $35 million, of which $18 million had been incurred at December 31, 2006, and $17 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


Research, Development and Demonstration (RD&D)


Effective January 2005, a surcharge was established by the CPUC for natural gas public interest RD&D. The program is administered by the CEC. SoCalGas and SDG&E funding for the program was $8 million and $1 million, respectively, in 2006 and $6 million and $1 million, respectively, in 2005. SoCalGas operates a separate natural gas RD&D program, focused on utility operations, end-use utilization, advanced distributed power generation and transportation. Each of these activities provides benefits to customers and society by providing more cost-effective, efficient natural gas equipment with lower emissions, increased safety and reduced operating costs. SoCalGas' RD&D expenditures were $8 million, $11 million and $9 million in 2006, 2005 and 2004, respectively.


SDG&E continues to fund the California Public Interest Energy Research (PIER) Program for electric research. SDG&E's funding level for the PIER program was $6 million for each of 2006, 2005 and 2004.


Employees of Registrant


As of December 31, 2006, the company had 14,061 employees, compared to 13,420 at December 31, 2005.

 

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 agreements for these employees covering wages, hours, working conditions, and medical and other benefit plans are 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 field, technical and some clerical employees at SDG&E covering wages, hours and working conditions



25



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, 2007 and December 4, 2009, respectively.


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, 2006, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. The electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona, and consist of 1,879 miles of transmission lines and 21,887 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, 2006, the Sempra Utilities' natural gas facilities included 3,054 miles of transmission and storage pipeline, 57,071 miles of distribution pipeline and 53,051 miles of service pipelines. They also included 13 transmission compressor stations and 4 underground storage reservoirs with a combined working capacity of 129 bcf.


Energy Properties - Sempra Global


At December 31, 2006, 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 2 and 3 of the notes to Consolidated Financial Statements.


At December 31, 2006, Sempra Pipelines & Storage's operations in Mexico included 1,726 miles of distribution pipeline, 165 miles of transmission pipeline and one compressor station.


Sempra Pipelines & Storage also operates two small natural gas utilities, Frontier Energy and Bangor Gas, located in North Carolina and Maine, respectively, which own 148 miles of transmission lines, 238 miles of distribution lines and 24 miles of service lines.  In June 2006, the company decided to sell these facilities, and in January 2007, entered into agreements to do so, as discussed in Note 4 of the notes to Consolidated Financial Statements.




26



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 the 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, to be developed into a natural gas storage project.


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.


SDG&E occupies an office complex in San Diego pursuant to two separate operating leases. One lease ends in 2007, with two five-year renewal options.  The second lease ends in 2017, and has four five-year renewal options.


Sempra Global leases office facilities at various locations in the U.S., Mexico and Europe with the leases ending from 2007 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 13, 14 and 15 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.


The County of San Diego filed and then withdrew litigation against Sempra Energy and SDG&E that sought unspecified civil penalties for alleged violations of environmental standards applicable to the abatement, handling and disposal of asbestos-containing materials during the 2001 demolition of a natural gas storage facility. In addition, in November 2006, a federal court dismissed all charges against SDG&E and two employees in a federal criminal indictment charging them with having violated these standards and for related charges of conspiracy and having made false statements to governmental authorities. On February 12, 2007, the court granted the federal government's motion for reconsideration with respect to the false statement count and the matter will proceed to trial in 2007.  


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


None.



27




PART II



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


Sempra Energy common stock is traded on the New York Stock Exchange. At January 31, 2007, there were 50,000 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 2006 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."


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 company's 1998 Long Term Incentive Plan and Employee Stock Incentive Plan permit the grant of a wide variety of equity and equity-based incentive awards to officers and key employees. At December 31, 2006, outstanding awards consisted of stock options and restricted stock held by 336 employees.


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


The Employee Stock Incentive Plan was adopted in November 2000 and is administered by the Compensation Committee of the Sempra Energy Board of Directors.  Shares under the plan may consist of nonqualified stock options, restricted stock and/or stock awards. Shares may be granted to any employee who is not an officer within the meaning of Section 16a-1(f) of the Exchange Act. The number of shares initially available for grant under the plan was 10 million, and approximately 8 million shares remain available for grant as of December 31, 2006.  No shares have been granted under this plan since 2003.   




28



The following table sets forth information regarding these plans at December 31, 2006.  


Equity Compensation Plan Information


 

Number of shares to

 

Number of additional

 

be issued upon

Weighted-average

shares remaining

 

exercise of outstanding

exercise price of

available for future

 

options (A)

outstanding options

issuance

Equity compensation

 

 

 

 

plans approved by

 

 

 

 

shareholders:

 

 

 

 

  

 

 

 

 

1998 Long Term

 

 

 

 

Incentive Plan

6,574,160

$29.08

9,083,501

 

 

 

(B) (C) (D)

 

Non-employee Directors

 

 

 

 

Stock Plan

420,000

$28.92

793,260

 

 

 

(E)

Equity compensation

 

 

 

 

plans not approved by

 

 

 

 

shareholders:

 

 

 

 

  

 

 

 

 

Employee Stock

 

 

 

 

Incentive Plan

309,275

$24.38

8,199,805

 

 

 

(B) (C)

 

 

 

 

(A)

Consists solely of options to purchase common stock, all of which were granted at an exercise price of 100% of the grant date fair market value of the shares subject to the option.


(B)

Excludes shares subject to outstanding stock options and those subject to other outstanding awards, consisting of unvested shares of restricted stock which total 2,872,003 shares for the 1998 Long Term Incentive Plan and no shares for the Employee Stock Incentive Plan.


(C)

The number of shares available for future issuance is increased by the number of shares withheld to satisfy related tax withholding obligations relating to awards and by the number of shares subject to awards that lapse, expire or are otherwise terminated or settled other than by the issuance of shares.


(D)

The number of shares available for future issuance also is increased at the beginning of each year by 1.5 percent of the total number of shares of common stock then outstanding.


(E)

The number of shares available for future issuance is increased by the number of shares subject to awards that lapse, expire or are otherwise terminated or settled other than by the issuance of shares.


Additional discussion of stock-based compensation is provided in Note 9 of the notes to Consolidated Financial Statements.




29



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, at any time and from time to time, in the open market, in negotiated transactions and otherwise, of which $88 million (representing 2,266,500 shares) has been utilized through December 31, 2006. The maximum dollar value of the shares that may yet be purchased under this program is $162 million.


In addition to the program 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, 2006, the company purchased 455,931 shares, at a price of $56.15 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)

 

2006

 

 

 

2005

 

 

 

2004

 

 

 

2003

 

 

 

2002

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

11,761

 

 

$

11,512

 

 

$

9,234

 

 

$

7,697

 

 

$

5,943

 

 

Operating income

 

$

1,785

 

 

$

1,089

 

 

$

1,272

 

 

$

1,012

 

 

$

989

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before extraordinary item and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cumulative effect of changes in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles

 

$

1,091

 

 

$

913

 

 

$

915

 

 

$

745

 

 

$

591

 

 

Net income

 

$

1,406

 

 

$

920

 

 

$

895

 

 

$

649

 

 

$

591

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

28,949

 

 

$

29,246

 

 

$

23,847

 

 

$

22,053

 

 

$

20,289

 

 

Long-term debt

 

$

4,525

 

 

$

4,815

 

 

$

4,182

 

 

$

3,828

 

 

$

4,067

 

 

Short-term debt (a)

 

$

933

 

 

$

1,141

 

 

$

783

 

 

$

1,429

 

 

$

815

 

 

Trust preferred securities

 

$

--

 

 

$

--

 

 

$

200

*

 

$

200

 

 

$

200

 

 

Shareholders’ equity

 

$

7,511

 

 

$

6,160

 

 

$

4,865

 

 

$

3,890

 

 

$

2,825

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before extraordinary item and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cumulative effect of changes in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

4.25

 

 

$

3.71

 

 

$

4.01

 

 

$

3.53

 

 

$

2.88

 

 

Diluted

 

$

4.17

 

 

$

3.62

 

 

$

3.92

 

 

$

3.48

 

 

$

2.87

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

5.48

 

 

$

3.74

 

 

$

3.92

 

 

$

3.07

 

 

$

2.88

 

 

Diluted

 

$

5.38

 

 

$

3.65

 

 

$

3.83

 

 

$

3.03

 

 

$

2.87

 

 

Dividends declared

 

$

1.20

 

 

$

1.16

 

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

 

Book value

 

$

28.67

 

 

$

23.95

 

 

$

20.77

 

 

$

17.17

 

 

$

13.79

 

 

(a) 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. Prior period amounts have been revised to reflect the decisions to sell or dispose of various assets.  See Note 4 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 40 of the 2006 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 29 through 33 of the 2006 Annual Report to Shareholders.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The information required by Item 8 is incorporated by reference from pages 45 through 124 of the 2006 Annual Report to Shareholders. Item 15(a)1 includes a listing of financial statements included in the 2006 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 c ost-benefit relationship of other possible controls and procedures. In addition, the company has investments in unconsolidated entities that it does not control or manage and, consequently, its disclosure controls and procedures with respect to these entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.


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 controls 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 procedures as of December 31, 2006, the end of the period covered by this report. Based on that



32



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 2006 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 April 2007 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

59

Chairman and Chief Executive Officer

Neal E. Schmale

60

President and Chief Operating Officer

Javade Chaudhri

54

Executive Vice President and General Counsel

Edwin A. Guiles

57

Executive Vice President, Corporate Development

Jessie J. Knight, Jr.

56

Executive Vice President, External Affairs

Mark A. Snell

50

Executive Vice President and Chief Financial Officer

Joseph A. Householder

51

Senior Vice President, Controller, and Chief Tax Counsel

Charles A. McMonagle

57

Senior Vice President and Treasurer

G. Joyce Rowland

52

Senior Vice President, Human Resources

 

 

 

* As of February 22, 2007.

 

 


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.



33



ITEM 11. EXECUTIVE COMPENSATION


The information required by Item 11 is incorporated by reference from "Corporate Governance", "Compensation Discussion and Analysis", "Compensation Committee Report" and "Executive Compensation" in the Proxy Statement prepared for the April 2007 annual meeting of shareholders.


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 included in Item 5.


Additional discussion of stock-based compensation is provided in Note 9 of the notes to Consolidated Financial Statements.


Security Ownership of Certain Beneficial Owners


The security ownership information required by Item 12 is incorporated by reference from "Share Ownership" in the Proxy Statement prepared for the April 2007 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 April 2007 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 - Board of Directors Proposals - Proposal 2: Ratification of Independent Registered Public Accounting Firm" in the Proxy Statement prepared for the April 2007 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

41

  

 

Management's Report On Internal Control Over Financial Reporting

41

  

 

Reports of Independent Registered Public Accounting Firm

42

  

 

Statements of Consolidated Income for the years

 

    ended December 31, 2006, 2005 and 2004

45

  

 

Consolidated Balance Sheets at December 31, 2006 and 2005

46

  

 

Statements of Consolidated Cash Flows for the

 

    years ended December 31, 2006, 2005 and 2004

48

  

 

Statements of Consolidated Comprehensive Income and Changes in

 

    Shareholders' Equity for the years ended December 31,

 

    2006, 2005 and 2004

50

  

 

Notes to Consolidated Financial Statements

51

 

 


* Incorporated by reference from the indicated pages of the 2006 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 21, 2007 relating to the financial statements of Sempra Energy (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. 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 FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143, effective December 31, 2005) and management's report on the effectiveness of internal contro l over financial reporting, incorporated by reference in this Annual Report on Form 10-K of Sempra Energy for the year ended December 31, 2006.


Our audits of the financial statements referred to in our aforementioned reports also included the financial statement schedule of Sempra Energy, listed in Item 15. This financial statement schedule is the responsibility of the Company's management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.


/S/ DELOITTE & TOUCHE LLP


San Diego, California
February 21, 2007




36




Schedule I -- Condensed Financial Information of Parent


SEMPRA ENERGY


Condensed Statements of Income
(Dollars in millions, except per share amounts)


 

 

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

 

 

      2006

 

      2005

 

       2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

188

 

 

$

186

 

 

$

168

 

Interest expense

 

 

(202

)

 

 

(197

)

 

 

(202

)

Litigation expense

 

 

(2

)

 

 

(316

)

 

 

(44

)

Operating expenses and other

 

 

(97

)

 

 

(41

)

 

 

(8

)

Income tax benefits

 

 

61

 

 

 

195

 

 

 

93

 

Income (losses) before subsidiary earnings

 

(52

)

 

 

(173

)

 

 

7

 

Subsidiary earnings

 

1,458

 

 

 

1,093

 

 

 

888

 

Net income

 

$

1,406

 

 

$

920

 

 

$

895

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5.48

 

 

$

3.74

 

 

$

3.92

 

 

Weighted-average number of shares outstanding (thousands)

 

256,477

 

 

 

245,906

 

 

 

228,271

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5.38

 

 

$

3.65

 

 

$

3.83

 

 

Weighted-average number of shares outstanding (thousands)

261,368

 

 

 

252,088

 

 

 

233,852

 


See notes to Condensed Financial Information of Parent.




37




SEMPRA ENERGY


Condensed Balance Sheets
(Dollars in millions)


 

 

 

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

427

 

 

$

183

 

Due from affiliates

 

 

 

17

 

 

 

58

 

Other current assets

 

 

 

65

 

 

 

84

 

 

Total current assets

 

 

509

 

 

 

325

 

  

 

 

 

 

 

 

 

 

Investments in subsidiaries

 

 

7,824

 

 

 

6,369

 

Due from affiliates

 

 

2,845

 

 

 

2,822

 

Other assets

 

 

699

 

 

 

620

 

 

 Total assets

 

$

11,877

 

 

$

10,136

 

  

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

600

 

 

$

--

 

Income taxes payable

 

 

453

 

 

 

286

 

Due to affiliates

 

 

891

 

 

 

619

 

Other current liabilities

 

 

313

 

 

 

336

 

 

Total current liabilities

 

 

2,257

 

 

 

1,241

 

  

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,590

 

 

 

2,203

 

Other long-term liabilities

 

 

519

 

 

 

532

 

Shareholders' equity

 

 

7,511

 

 

 

6,160

 

 

 Total liabilities and shareholders' equity

 

$

11,877

 

 

$

10,136

 


See notes to Condensed Financial Information of Parent.





38




SEMPRA ENERGY


Condensed Statements of Cash Flows
(Dollars in millions)


< TD style="background-color:#CCFFCC" valign=top width=48.733>

 

< TD style="background-color:#CCFFCC" valign=top width=4.733>

 

 

 

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

322

 

 

$

330

 

 

$

(7

)

  

 

 

 

 

 

 

 

 

 

 

 

Dividends received from subsidiaries

 

 

150

 

 

 

1,025

 

 

 

200

 

Expenditures for property, plant and equipment

 

 

(19

)

 

 

(16

)

 

 

(10

)

Increase in investments and other assets

 

 

(207

)

 

 

(6

)

 

 

(5

)

Purchase of trust assets

 

 

(65

)

 

 

(70

)

 

 

(75

)

Proceeds from sales by trust

 

 

19

 

 

 

28

 

 

 

14

 

Increase in loans to affiliates, net

 

 

(23

)

 

 

(189

)

 

 

(229

)

 

Cash provided by (used in) investing activities

 

 

(145

)

 

 

772

 

 

 

(105

)

  

 

 

 

 

 

 

 

 

 

 

Common stock dividends paid

 

(283

)

 

 

(268

)

 

 

(195

)

Issuances of common stock

 

97

 

 

 

694

 

 

 

110

 

Repurchase of common stock

 

 

(37

)

 

 

(95

)

 

 

(5

)

Issuances of long-term debt

 

--

 

 

 

--

 

 

 

625

 

Payment on long-term debt

 

 

(12

)

 

 

(511

)

 

 

(511

)

Increase (decrease) in loans from affiliates, net

 

 

273

 

 

 

(762

)

 

 

55

 

Other

 

 

29

 

 

 

--

 

 

 

(3

)

 

Cash provided by (used in) financing activities

 

67

 

 

 

(942

)

 

 

76

 

  

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

244

 

 

 

160

 

 

 

(36

)

Cash and cash equivalents, January 1

 

 

183

 

 

 

23

 

 

 

59

 

Cash and cash equivalents, December 31

 

$

427

 

 

$

183

 

 

$

23

 


See notes to Condensed Financial Information of Parent.





39




SEMPRA ENERGY


Notes to Condensed Financial Information of Parent


Note 1. Basis of Presentation


Certain prior-year amounts have been reclassified to conform to the current year's presentation.  Subsidiary Earnings on the Condensed Statements of Income include income (loss) of $315 million, $7 million and ($20) million related to discontinued operations for 2006, 2005, and 2004, respectively.


Note 2. Long-term Debt


 

 

 

        December 31,

 

(Dollars in millions)

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

 

4.621% notes May 17, 2007

 

$

600

 

$

600

 

 

6.0% notes February 1, 2013

 

 

400

 

 

400

 

 

Notes at variable rates after fixed-to-floating swap

 

 

 

 

 

 

 

 

      (8.3% at December 31, 2006) March 1, 2010

 

 

300

 

 

300

 

 

Notes at variable rates (5.85% at December 31, 2006) May 21, 2008

 

 

300

 

 

300

 

 

4.75% notes May 15, 2009

 

 

300

 

 

300

 

 

7.95% notes March 1, 2010

 

 

200

 

 

200

 

 

Employee Stock Ownership Plan

 

 

 

 

 

 

 

 

Bonds at 4.213% November 1, 2014

 

 

82

 

 

82

 

 

Bonds at variable rates (5.9% at December 31, 2006)

 

 

 

 

 

 

 

 

      November 1, 2014

 

 

10

 

 

22

 

    Market value adjustments for interest rate swap, net

 

 

 

 

 

 

 

          (expires March 1, 2010)

 

 

(1

)

 

1

 

 

 

 

2,191

 

 

2,205

 

 

Current portion of long-term debt

 

 

(600

)

 

--

 

 

Unamortized discount on long-term debt

 

 

(1

)

 

(2

)

 

 

$

1,590

 

$

2,203

 


Maturities of long-term debt are $600 million in 2007, $300 million in 2008, $300 million in 2009, $500 million in 2010 and $492 million thereafter.


Additional information on Sempra Energy's long-term debt is provided in Note 5 of the notes to Consolidated Financial Statements.


Note 3. Contingencies and Commitments


For material contingencies and guarantees related to Sempra Energy, refer to Note 15 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 15, 2007

  

 

 

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




/s/ Mark A. Snell




February 15, 2007

  

 

 

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




/s/ Joseph A. Householder




February 15, 2007

  

 

 

Directors:

 

 

Donald E. Felsinger, Chairman

/s/ Donald E. Felsinger

February 15, 2007

  

 

 

  

 

 

James G. Brocksmith, Jr., Director

/s/ James G. Brocksmith, Jr.

February 15, 2007

  

 

 

  

 

 

Richard A. Collato, Director

/s/ Richard A. Collato

February 15, 2007

  

 

 

  

 

 

Wilford D. Godbold, Jr., Director

/s/ Wilford D. Godbold, Jr.

February 15, 2007

  

 

 

  

 

 

William D. Jones, Director

/s/ William D. Jones

February 15, 2007

  

 

 

  

 

 

Richard G. Newman, Director

/s/ Richard G. Newman

February 15, 2007

  

 

 

  

 

 

William G. Ouchi, Director

/s/ William G. Ouchi

February 15, 2007

  

 

 

  

 

 

William C. Rusnack, Director

/s/ William C. Rusnack

February 15, 2007

  

 

 

  

 

 

William P. Rutledge, Director

/s/ William P. Rutledge

February 15, 2007

  

 

 

  

 

 

Neal E. Schmale, Director

/s/ Neal E. Schmale

February 15, 2007

  

 

 




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), Commission File Number 1-11439 (Enova Corporation) and/or Commission File Number 333-30761 (SDG&E Funding LLC).


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


Exhibit 3 -- Bylaws and Articles of Incorporation


Bylaws


3.01   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


3.02   Amended 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 Sempra Energy Amended and Restated Articles of Incorporation effective May 8, 2006, Exhibit 3.02 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.


4.10

Supplemental Indenture of Southern California Gas Company to Wells Fargo Bank dated as of June 1, 1965.


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 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 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).  


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


10.03 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


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


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



43




10.06 Transition Property Purchase and Sale Agreement dated December 16, 1997 (incorporated by reference from Form 8-K filed by SDG&E Funding LLC on December 23, 1997, Exhibit 10.1).


10.07 Transition Property Servicing Agreement dated December 16, 1997 (incorporated by reference from Form 8-K filed by SDG&E Funding LLC on December 23, 1997, Exhibit 10.2).


Compensation


10.08

Sempra Energy Excess Cash Balance Plan dated December 5, 2005.


10.09

Form of Sempra Energy 1998 Non-Employee Directors' Stock Plan Nonqualified Stock Option Agreement.


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


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


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


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


10.14 Form of Sempra Energy 1998 Long Term Incentive Plan Performance-Based Restricted Stock Award (September 30, 2004 Form 10-Q, Exhibit 10.4).


10.15 Form of Sempra Energy 1998 Long Term Incentive Plan Nonqualified Stock Option Agreement (September 30, 2004 Form 10-Q, Exhibit 10.5).


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


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


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


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


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


10.21 2003 Sempra Energy Executive Incentive Plan B (2003 Form 10-K, Exhibit 10.10).


10.22 2003 Executive Incentive Plan (June 30, 2003 Form 10-Q, Exhibit 10.1).


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




44



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 Executive Security Bonus Plan effective January 1, 2001 (2001 Form 10-K, Exhibit 10.08).


10.28 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


10.29 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).


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


10.31 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 10.29 above)(1994 SDG&E Form 10-K, Exhibit 10.57).


10.32 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 10.29 above)(1996 SDG&E Form 10-K, Exhibit 10.59).


10.33 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 10.29 above)(1996 SDG&E Form 10-K, Exhibit 10.60).


10.34 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 10.29 above)(1999 SDG&E Form 10-K, Exhibit 10.26).


10.35 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 10.29 above)(1999 SDG&E Form 10-K, Exhibit 10.27).


10.36 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 10.29 above) (2003 Sempra Energy Form 10-K, Exhibit 10.42).




45



10.37 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).


10.38 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 10.37 above)(1996 SDG&E Form 10-K, Exhibit 10.62).


10.39 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 10.37 above)(1996 SDG&E Form 10-K, Exhibit 10.63).


10.40 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 10.37 above)(1999 SDG&E Form 10-K, Exhibit 10.31).


10.41 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 10.37 above)(1999 SDG&E Form 10-K, Exhibit 10.32).


10.42 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 10.37 above)(2003 Sempra Energy Form 10-K, Exhibit 10.48).


10.43 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).


10.44 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).


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, 2006, 2005, 2004, 2003 and 2002.


Exhibit 13 -- Annual Report to Security Holders


13.01 Sempra Energy 2006 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).




46



Exhibit 21 -- Subsidiaries


21.01 Schedule of Significant Subsidiaries at December 31, 2006.


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


The Act

The Medicare Prescription Drug, Improvement

                         

and Modernization Act of 2003


AEG                  

Atlantic Electric & Gas


AEP                      

American Electric Power


AFUDC                   

Allowance for Funds Used During Construction


ALJ                      

Administrative Law Judge


AMI                      

Advanced Metering Infrastructure


APBO                     

Accounting Principles Board Opinion


ARB

Accounting Research Bulletin


bcf                     

Billion Cubic Feet (of natural gas)


Black-Scholes Model     Black-Scholes Option-Pricing Model


BP

British Petroleum


Calpine                  

Calpine Corporation


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


DOE                      

Department of Energy


DRA                      

Division of Ratepayer Advocates


DSM                      

Demand Side Management


DWR                     

Department of Water Resources  


EAP                      

Energy Action Plan




48



Edison                   

Southern California Edison Company


EITF                     

Emerging Issues Task Force


Elk Hills                

Elk Hills Power


EMFs                     

Electric and Magnetic Fields


EPS                      

Earnings per Share


ERMG                     

Energy Risk Management Group


ERMOC                    

Energy Risk Management Oversight Committee


ESOP                     

Employee Stock Ownership Plan

    

FASB                    

Financial Accounting Standards Board


FERC                     

Federal Energy Regulatory Commission


FIN                    

FASB Interpretation Number


GAAP                     

Accounting Principles Generally Accepted in

                        

the United States of America


GCIM                     

Gas Cost Incentive Mechanism


GHG                      

Greenhouse Gas


GRC                      

General Rate Case

 

IID

Imperial Irrigation District


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


Luz del Sur              

Luz del Sur S.A.A.




49



MLC                      

Merrill Lynch Commodities, Inc.


mmbtu                    

Million British Thermal Units (of natural gas)


MOA                      

Memorandum of Agreement


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, LLC


OTC                     

Over-the-counter


Overthrust              

Overthrust Pipeline Company


PBR                      

Performance-Based Regulation


PE                       

Pacific Enterprises


PGE

Portland General Electric Company


PIER                     

Public Interest Energy Research


PPA                      

Power Purchase Agreement


ProLiance                

ProLiance Transportation and Storage, LLC


PRP                      

Potentially Responsible Party


PSEG

PSEG Global


PX                       

Power Exchange


QF                       

Qualifying Facility

 

QUIPS                    

Cumulative Quarterly Income Preferred Securities


RD&D                     

Research, Development and Demonstration


REX                      

Rockies Express Pipeline


RMC

Risk Management Committee




50



Rockies Express          

Rockies Express Pipeline LLC


ROE                      

Return on Equity


SAB                      

Staff Accounting Bulletin


SCAQMD                   

South Coast Air Quality Management District


SDG&E                    

San Diego Gas & Electric Company


SEC

Securities and Exchange Commission


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


SURMD                    

Sempra Utilities’ Risk Management Department


TDM                      

Termoeléctrica de Mexicali


Topaz                    

Topaz Power Partners


Trust

ESOP Trust


Twin Oaks               

Twin Oaks Power Plant


VaR

Value at Risk




51



SoCalGas Supplemental Indenture 12/1/1956









EXHIBIT 4.09




This Supplemental Indenture is, among other things,

A MORTGAGE OF CHATTELS


Southern California Gas Company


TO


American Trust Company

TRUSTEE





SUPPLEMENTAL INDENTURE







DATED AS OF DECEMBER 1, 1956




















TABLE OF CONTENTS

Page

PARTIES...

1

RECITALS...

1


ARTICLE I.

AMENDMENTS TO INDENTURE.

SECTION 1.01.

Amendments of certain portions of the definition of "net

bondable value of property additions" ...

3

SECTION 1.02.

(a) Amendment of clause (iv) of paragraph (5) of subdivi-

sion (b) Section 4.04 ...

4

(b) Amendment of clause (iii) of paragraph (8) of subdivi-

sion (b) Section 4.04 ...

4


ARTICLE II.


MISCELLANEOUS.

SECTION 2.01. Ratification of Original Indenture, and indentures supple-

mental thereto, as amended ...

5

SECTION 2.02.Recitals are by the Corporation and not by the Trustee...

5

SECTION 2.03.References in Original Indenture or supplemental indentures

to articles, sections, subdivisions, or provisions of Original

Indenture which are amended by this Supplemental Indenture

are, unless context otherwise requires, references thereto as so

amended ...

6

SECTION 2.04.Date of this Supplemental Indenture is for convenient identifi-

cation thereof. ..

6

SECTION 2.05.Required provisions of Section 3.10 to 3.17 of Trust Indenture

Act of 1939 control over conflicting provisions of Original

Indenture as amended and now in effect ...

6

SECTION 2.06.Conditions of Trustee's execution of this Supplemental Indenture

6

SECTION 2.07.Execution of this Supplemental Indenture in counterparts...

6

TESTIMONIUM …

7

SIGNATURES AND SEALS …

7

ACKNOWLEDGMENTS ...

8


i
















This Supplemental Indenture is, among other things,

A MORTGAGE OF CHATTELS.

THIS SUPPLEMENTAL INDENTURE, dated as of the 1st day of December, 1956, made and entered into by and between SOUTHERN CALIFORNIA GAS COMPANY, a corporation duly organized and existing under the laws of the State of California, and having its principal place of business in the City of Los Angeles, State of California (hereinafter sometimes called the "Corporation"), party of the first part, and AMERICAN TRUST COMPANY, a corporation duly organized and existing under and by virtue of the laws of California, and having its principal place of business in the City and County of San Francisco, in said State (hereinafter sometimes called the "Trustee"), party of the second part,


WITNESSETH:

WHEREAS, the Corporation has heretofore executed and delivered to the Trustee a certain Indenture (hereinafter sometimes called the "Original Indenture") dated October 1, 1940, to secure bonds of the Corporation designated generally as its "First Mortgage Bonds" to be issued from time to time in one or more series, and the Corporation has heretofore executed and delivered to the Trustee indentures dated, respectively, as of July 1, 1947, May 1, 1948, June 1, 1950, April 1, 1952, August 1, 1955, and June 1, 1956, supplemental to the Original Indenture; the Original Indenture and said Supplemental Indentures dated, respectively, as of July 1, 1947, May 1, 1948, June 1, 1950, April 1, 1952, and August 1, 1955 (said Supplemental Indenture dated as of August 1, 1955, being hereinafter sometimes referred to as the "Amendment of 1955"), being recorded in the office of the County Recorder of each of the Counties listed below, in the Official Records thereof, as stated in said Supplemental Indenture dated as of June 1, 1956, which last mentioned Supple-

1













mental Indenture is recorded in the offices of the County Recorders of the Counties in the State of California as follows:

County

Reference


Los Angeles

Book

51271,page

346,Official Records

Kern

Book

2612,page

119,Official Records

Tulare

Vol.

1925,page

360,Official Records

Kings

Vol.

650,page

104,Official Records

Ventura

Book

1408,page

435,Official Records

Fresno

Book

3774,page

127,Official Records

Orange

Book

3523,page

402,Official Records

Riverside

Book

1917,page

186,Official Records

San Bernardino

Book

3947,page

63,Official Records

Imperial

Book

944,page

376,Official Records

Santa Barbara

Book

1380,page

587,Official Records

WHEREAS, bonds of the Corporation of six series designated, respectively, as its "First Mortgage Bonds, 3 1/4% Series due 1970", "First Mortgage Bonds, 2 7/8% Series due 1977", "First Mortgage Bonds, 3 1/4% Series due 1978", "First Mortgage Bonds, 2 7/8% Series due 1980", "First Mortgage Bonds, Series A, due 1982" and "First Mortgage Bonds, Series B, due 1981" have heretofore been issued as a part of the First Mortgage Bonds referred to in the Original Indenture and are now outstanding, each such series of bonds, unless and until the taking of further appropriate action by the Board of Directors of the Corporation, being without limitation as to agg regate authorized principal amount; and

WHEREAS, the Corporation desires to supplement and amend the Original Indenture, as heretofore amended, supplemented and now in effect, as hereinafter set forth; and

WHEREAS, the execution and delivery of this Supplemental Indenture has been duly authorized by resolution of the Board of Directors of the Corporation, has been duly consented to in writing pursuant to Section 16.05 of the Original Indenture by the holders of not less than two-thirds in principal amount of all the bonds now outstanding under the Original Indenture as heretofore supplemented and has been duly authorized and approved by the Public Utilities Commission of the State of California; and

2













WHEREAS, the Corporation has requested the Trustee to join in the execution and delivery of this Supplemental Indenture; and

WHEREAS, all other acts and things necessary to make this Supplemental Indenture (hereinafter, and in the portions of the Original Indenture which are hereby amended, being for convenience sometimes referred to as the "Amendment of 1956") a valid, binding and legal instrument, and a valid, binding and legal amendment of the Original Indenture, having been duly performed and done :

Now, THEREFORE, in consideration of the premises it is hereby agreed and provided:


ARTICLE I.

AMENDMENTS TO INDENTURE.

The Original Indenture, as heretofore amended, supplemented and now in effect, is hereby further amended and supplemented as follows (page and section references being to the printed forms of the Original Indenture, or the Amendment of 1955, as the case may be, as originally executed) :

SECTION 1.01. In the definition of "net bondable value of property additions" in Section 1.02 of the Original Indenture:

(a) Amend that portion of said definition which precedes paragraph (1) thereof (page 92 of Original Indenture) to read as follows:

"The term net bondable value of property additions'
shall mean, at any particular time, the aggregate of the
cost to the Corporation or, as to such property additions
which have not been retired, the fair value to the Corpo-
ration, if the fair value is less than cost, of all gross prop-
erty additions purchased, constructed or otherwise acquired
by the Corporation, after deducting therefrom the amounts
specified in the following paragraphs (1), (2) and (3)

3













and the greater of the amounts specified in the following
paragraphs (A) or (B) after each of the amounts specified
in said paragraphs (A) and (B) has been reduced by the
amount of all credits taken in 1956 and in subsequent
years pursuant to subdivision (a) of Section 3.02 on the
basis of cash and bonds delivered to the Trustee pursuant
to Section 8.01:"

(b) Amend clause (iv) of paragraph (1) of said definition, as heretofore amended by Section 1.05(a), page 4, of the Amendment of 1955, to read as follows:

"(iv) the amount by which all credits taken pursuant to subdivision (b) of Section 8.02 on the basis of property additions shall exceed whichever is the greater of the amounts specified in paragraphs (A) or (B) of this definition;"

SECTION 1.02. In subdivision (b) of Section 4.04 of the Original Indenture :

(a) Amend clause (iv) of paragraph (5), as heretofore amended by Section 1.13, pages 6-7, of the Amendment of 1955, to read as follows:

"(iv) the amount by which all credits taken during the total retirement period pursuant to subdivision (b) of Section 3.02 on the basis of property additions shall exceed whichever is the greater of the two items stated pursuant to subdivisions (3) and (4) above."

(b) Amend clause (iii) of paragraph (8) of said subdivision (b), at pages 122-3 of the Original Indenture and as heretofore amended by Section 1.03, page 4, of the Amendment of 1955, to read as follows:

"(iii) in the case of the first such certificate filed subsequent to the date of execution of the Amendment of 1956, the excess of the amount stated pursuant to sub-

4













Division (3) above (Depreciation and Retirement Reserves) reduced as hereafter in this clause (iii) provided, or of the amount stated pursuant to subdivision (4) above (Property Retired) as similarly reduced, whichever of said amounts as so reduced is the greater, over the amount of the greater of such two items stated in the engineer's certificate dated May 23, 1956, heretofore filed; and in the case of subsequent certificates, the amount by which the greater of the two items stated pursuant to said subdivisions (3) and (4) above in the current certificate then being filed, after each of such items has been reduced as hereafter in this clause (iii) provided, exceeds the amount of the greater of such two items stated in the most recent certificate previously filed as similarly reduced; it being hereby provided that each amount stated pursuant to such subdivisions (3) or (4) above ( except with respect to said engineer's certificate dated May 23, 1956) shall be reduced by the amount of all credits taken in 1956 and in subsequent years to the date of the particular certificate pursuant to subdivision (a) of Section 8.02 on the basis of cash and bonds delivered to the Trustee pursuant to Section 8.01;"

ARTICLE 11.

MISCELLANEOUS.

SECTION 2.01. Except as amended, supplemented or modified
by this Amendment of 1956, the Original Indenture and the above-
mentioned Supplemental Indentures dated, respectively, as of July 1,
1947, May 1, 1948, June 1, 1950, April 1, 1952, August 1, 1955,
and June 1, 1956, as now in effect, are in all respects ratified and
confirmed by this Amendment of 1956, and this Amendment of 1956
and all of its provisions shall be deemed to be a part of the Original
Indenture.

SECTION 2.02. The recitals herein contained are made by the Corporation and not by the Trustee.

5














SECTION 2.03. All references in the Original Indenture, or in the above-mentioned Supplemental Indentures dated, respectively, as of July 1, 1947, May 1, 1948, June 1, 1950, April 1, 1952, August 1, 1955, and June 1, 1956, or in this Amendment of 1956, to any Article, Section, subdivision or provision of the Original Indenture which is amended as hereinabove provided shall be deemed, unless the context otherwise requires, references to such Article, Section, subdivision or provision of the Original Indenture as so amended.


SECTION 2.04. The date of this instrument is intended as and for a date for the convenient identification of this instrument and is not intended to indicate that this instrument was executed and delivered on said date; it being hereby provided that this instrument may be executed and delivered either on said date, or before or after said date, and this instrument being in fact executed and delivered on the dates of the respective certificates of acknowledgment hereto attached.


SECTION 2.05. If any provision of this instrument limits, qualifies or conflicts with any other provision hereof or of the Original Indenture, as amended, supplemented and now in effect, which is required to be included herein or therein by any of Sections 3.10 to 3.17, inclusive, of the Trust Indenture Act of 1939, such required provision shall control.


SECTION 2.06. The Trustee executes this instrument solely on the condition that, in addition to any and all rights, powers, privileges and immunities given to it by this instrument, it shall have and enjoy with respect to this instrument all of the rights, powers, privileges and immunities as set forth in the Original Indenture.


SECTION 2.07. This instrument may be simultaneously executed in several counterparts and all of said counterparts, executed and delivered each as an original, shall constitute but one and the same instrument.

6













IN WITNESS WHEREOF, Southern California Gas Company has caused this instrument to be signed in its corporate name, by its President or one of its Vice Presidents, and its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereunto duly affixed, and American Trust Company, in token of its acceptance of the trust hereby created, has caused this instrument to be signed in its corporate name by its President or one of its Vice Presidents, and its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereunto duly affixed, all as of the day and year first above

written.

SOUTHERN CALIFORNIA GAS COMPANY,

By

W. J.HERRMAN

Vice President

(Corporate Seal)

By

S. W. BINCKLEY

Secretary


AMERICAN TRUST COMPANY,


By

J. G. HATFIELD

Vice President

(Corporate Seal)

By

C. W. CADIGAN

Assistant Secretary











7













 



STATE OF CALIFORNIA

ss.

COUNTY OF Los ANGELES


On this 28th day of December, 1956, before me, LILLIAN ABRAMS, a Notary Public in and for the County of Los Angeles, State of California, residing therein, duly commissioned and sworn, personally appeared W. J. HERRMAN, known to me to be a Vice President, and S. W. BINCKLEY, known to me to be the Secretary, of SOUTHERN CALIFORNIA GAS COMPANY, one of the corporations named in and which executed the foregoing instrument, known to me to be the persons who executed the within instrument on behalf of said Corporation, and acknowledged to me that said Corporation executed the same, and acknowledged to me that said Corporation executed the within instrument pursuant to its by-laws or a resolution of its board of directors.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.


LILLIAN ABRAMS

Notary Public in and for the County of Los Angeles.

(NOTARIAL SEAL)

State of California


My Commission Expires April 8, 1957














8
















STATE OF CALIFORNIA

ss.

CITY AND COUNTY OF SAN FRANCISCO













On this 31st day of December, 1956, before me, HAZEL E. THOMPSON, a Notary Public in and for the City and County of San Francisco, State of California, residing therein, duly commissioned and sworn, personally appeared J. G. HATFIELD, known to me to be a Vice President, and C. W. CADIGAN, known to me to be an Assistant Secretary, of AMERICAN TRUST COMPANY, one of the corporations named in and which executed the foregoing instrument, known to me to be the persons who executed the within instrument on behalf of said Corporation, and acknowledged to me that said Corporation executed the same, and acknowledged to me that said Corporation executed the within instrument pursuant to its by-laws or a resolution of its board of directors.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.


HAZEL E. THOMPSON

Notary Public in and for the City and County of

San Francisco, State of California

(NOTARIAL SEAL)

My Commission Expires October 14, 1958
















9













RECORDATION DATA

The foregoing Supplemental Indenture from Southern California Gas Company to American Trust Company, Trustee, dated as of December 1, 1956, was recorded in the following Counties of California (and indexed in each of said Counties as a deed, mortgage, trust deed, chattel mortgage, assignment, and power of attorney) on the respective dates, and at the respective places indicated in the following schedule:




County

Date

 

Reference

Los Angeles

January 4, 1957

Book

53278, Page 166, Official Records

Kern

January 4, 1957

Book

2711, Page 398, Official Records

Tulare

January 4, 1957

Vol.

1966, Page 510, Official Records

Kings

January 4, 1957

Vol.

668, Page 447, Official Records

Ventura

January 4, 1957

Book

1471, Page 516, Official Records

Fresno

January 4, 1957

Book

3864, Page 555, Official Records

Orange

January 4, 1957

Book

3760, Page 375, Official Records

Riverside

January 4, 1957

Book

2019, Page 210, Official Records

San Bernardino

January 4, 1957

Book

4123, Page 539, Official Records

Imperial

January 4, 1957

Book

959, Page 228, Official Records

Santa Barbara

January 4, 1957

Book

1422, Page 19, Official Records

 

 

 

 














10






Southern California Gas Company Supplemental Indenture 6/1/1965





EXHIBIT 4.10



Southern California Gas Company



TO


Wells Fargo Bank

(formerly named American Trust Company)

TRUSTEE





SUPPLEMENTAL INDENTURE





DATED AS OF JUNE 1, 1965






















TABLE OF CONTENTS

PAGE

PARTIES ---------

1

RECITALS----------------

1



ARTICLE I.

AMENDMENTS TO INDENTURE DATED OCTOBER 1, 1940

AND SUPPLEMENTAL PROVISIONS

SECTION 1.01. Amendment adding new Article II-A-------------------------------------------

4



ARTICLE II-A.

APPOINTMENT AND POWERS OF AUTHENTICATING AGENTS:

CERTAIN PERMISSIBLE VARIATIONS IN THE

TERMS OF BONDS OF THE SAME SERIES

SECTION 2a.01. Amendment permitting Corporation to appoint an authen-

ticating agent or agents with specified powers ----------------

4

SECTION 2a.02. Amendment specifying qualifications of authenticating

agent and provisions for termination of its agency------------

6

SECTION 1.02. Amendment permitting coupon bonds of the 31/4% Series

due 1970, the 2%% Series due 1977, the 31/4% Series due

1978, the 2%8 % Series due 1980 and Series A, due 1982 to be

exchanged for fully registered bonds--------------------------------------------

7

SECTION 1.03. Amendment of Section 2.03 of Original Indenture permitting

coupon bonds surrendered for exchange to be retained uncan-

celled in safekeeping-------------------------------------------------------------

7

SECTION 1.04. Amendment of Section 2.04 of Original Indenture to provide

that books for registration, transfer and exchange of bonds

shall be kept in San Francisco and other specified places --------

8

SECTION 1.05. Amendment of Section 2.05 of Original Indenture relating to

delivery by Trustee or an authenticating agent of coupon bonds

when interest is in default--------------------------------------------------------------

9

SECTION 1.06. Amendment to Section 2.08 of Original Indenture providing that

Trustee and any authenticating agent may regard bearer as

absolute owner of coupon or coupon bonds------------

10


i













dated, respectively, as of June 1, 1956 and December 1, 1956 are so recorded as stated in said Supplemental Indenture dated as of July 1, 1957; said Supplemental Indenture dated as of July 1, 1957 is so recorded as stated in said Supplemental Indenture dated as of October 1, 1959; said Supplemental Indenture dated as of October 1, 1959 is so recorded as stated in said Supplemental Indenture dated as of July 1, 1963; said Supplemental Indenture dated as of July 1, 1963, is so recorded as stated in said Supplemental Indenture dated as of September 1, 1964; and said Supplemental Indenture dated as of September 1, 1964 is recorded in the offices of the County Recorders in the Counties of the State of California as follows:

County

Reference


Los Angeles

BookD2615,Page 874,Official Records

Kern

Book

3762,Page 644,Official Records

Tulare

Vol.

2534,Page 334,Official Records

Kings

Vol.

859,Page 819,Official Records

Ventura

Book

2619,Page 523,Official Records

Fresno

Book

5060,Page 545,Official Records

Orange

Book

7206,Page 631,Official Records

Riverside

Book

3793,Page 107,Official Records

San Bernardino

Book

6226,Page 1, Official Records

Imperial

Book

1190,Page 879,Official Records

Santa Barbara

Book

2068,Page 470,Official Records

WHEREAS, bonds of the Corporation of eight series designated, respectively, as its "First Mortgage Bonds, 31/4% Series due 1970", "First Mortgage Bonds, 27/s% Series due 1977", "First Mortgage Bonds, 31/4% Series due 1978", "First Mortgage Bonds, 27/s% Series due 1980", "First Mortgage Bonds, Series A, due 1982", "First Mortgage Bonds, Series B, due 1981", "First Mortgage Bonds, Series E, due 1988", and "First Mortgage Bonds, Series F, due 1989" have heretofore been issued as a part of the First Mortgage Bonds referred to in the Original Indenture and are now outstanding, each such series of bonds, unless and until the taking of further appropriate action by the Board of Directors of the Corporation,


2













being without limitation as to aggregate authorized principal amount;
and


WHEREAS, the Corporation desires to supplement and amend the Original Indenture, as heretofore amended, supplemented and now in effect, as hereinafter set forth; and


WHEREAS, the execution and delivery of this Supplemental Indenture has been duly authorized by resolution of the Board of Directors of the Corporation, has been duly authorized and approved by the Public Utilities Commission of the State of California and has been duly consented to in writing pursuant to Section 16.05 of the Original Indenture by the holders of the required principal amount of said outstanding bonds; and


WHEREAS, the Corporation has requested the Trustee to join in the execution and delivery of this Supplemental Indenture; and


WHEREAS, all other acts and things necessary to make this Supplemental Indenture a valid, binding and legal instrument, and a valid, binding and legal amendment of and supplement to the Original Indenture, have been duly performed and done:


Now, THEREFORE, in consideration of the premises it is hereby agreed and provided:


ARTICLE I


AMENDMENTS AND SUPPLEMENTAL PROVISIONS

The Original Indenture, as heretofore amended, supplemented and now in effect, is hereby further amended and supplemented as follows (page and section references being to the Original Indenture in form as now recorded in the offices of the County Recorders hereinabove referred to):


3











SECTION 1.01. The Original Indenture is hereby amended so as to add thereto, immediately following ARTICLE II, a new ARTICLE II-A, reading as follows:


ARTICLE II-A

APPOINTMENT and POWERS OF AUTHENTICATING AGENTS

CERTAIN PERMISSIBLE VARIATIONS

IN THE TERMS OF BONDS OF THE SAME SERIES

SECTION 2a.01. Notwithstanding that any of the other terms or provisions of the Indenture, or any of the terms or provisions of any of the bonds now or hereafter outstanding, may to any extent or in any way be contrary to or may vary from any of the terms or provisions of this Section 2a.01:

(a) At any time or from time to time the Corporation

may appoint an authenticating agent or agents. Each such

appointment shall become effective when the authenticating
agent shall have filed with the Corporation and the Trustee
a written acceptance of the appointment, and shall have fur-
nished the Trustee, in form satisfactory to the Trustee, a written
agreement to indemnify the Trustee against any loss, liability
or expense incurred by the Trustee by reason of the acts, or
failure to act, of the authenticating agent, including the costs
and expenses of defending against any claim of liability. There-
upon the authenticating agent so appointed shall without further
act or deed become vested with, and while holding office pursuant
to such appointment shall be authorized to exercise in the
manner and upon the conditions provided in this Section 2a.01,
the following powers, viz:

1. the power to authenticate and deliver, with like effect as if authenticated and delivered by the Trustee, bonds of any series (including series heretofore issued) hereafter to be authenticated pursuant to Sections 2.03, 2.06, 2.07, 15.02 or 16.05 of the Original Indenture


4













upon the same terms and conditions as those upon which the Trustee is authorized to act by such Sections, except that no bond shall be authenticated by an authenticating agent pursuant to said Section 15.02 in any transaction which, after giving effect to this Supplemental Indenture, is not covered by any of said Sections 2.03, 2.06, 2.07 or 16.05. No such authenticating agent shall authenticate and/or deliver any bond pursuant to any of the provisions of Article IV or Section 2.09 of the Original Indenture.

2. the power to receive, cancel, retain in safekeeping or otherwise deal with any bond presented to the authenticating agent for any purpose specified in said Section 2.03, and, in any manner provided in said Section, to deal with any bond authenticated and delivered by the authenticating agent pursuant to subparagraph 1 of this Section 2a.01, such power being upon the same conditions prescribed in Section 2.03 of the Original Indenture, as amended by Section 1.03 hereof, with respect to similar action therein authorized to be taken by the Trustee under the provisions of said Section 2.03, as so amended, and being in addition to that vested in the authenticating agent by the provisions of said subparagraph 1 but not including the power therein mentioned to approve arrangements for the safekeeping of any bonds.

The vesting as aforesaid of the foregoing powers in any authenticating agent shall not in any way divest the Trustee of the same or any similar powers conferred upon it by any of the provisions of the Indenture, and all such powers may be exercised by either an authenticating agent or the Trustee.

(b) All bonds of any series now or hereafter existing which are hereafter authenticated by either the Trustee or an authenticating agent pursuant to any of the provisions of the


5













Indenture shall bear endorsed thereon the form of certificate of authentication as provided in the Indenture which form of certificate, however, shall make provision for signature by the Trustee or an authenticating agent. Each of such bonds hereafter so authenticated and delivered shall contain a statement that such bond shall not become valid or obligatory for any purpose or be entitled to any benefit under the Indenture until Wells Fargo Bank, or its successor as Trustee under the Indenture, or an authenticating agent, shall have signed the form of certificate endorsed on such bond.


SECTION 2a.02. Each authenticating agent shall at all times be a corporation organized and doing business under the laws of the United States or of any State or Territory or of the District of Columbia authorized under such laws to act as authenticating agent, having a combined capital and surplus of at least ten million dollars, subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. Any corporation into which any authenticating agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which any authenticating agent shall be a party, or any corporation succeeding to the business of any authenticating agent, shall, if it meets the foregoing requirements, become and be the authenticating agent without any further act on i ts part or on the part of the Corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Corporation. The Corporation may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent. Upon receiving such a notice of resignation or upon the giving of notice of such termination, or in case at any time any authenticating agent shall cease to be qualified under the foregoing requirements, the powers hereunder of such agent shall terminate except that any bond authenticated and delivered by an authenticating agent before it receives notice of termination of its agency shall be for all purposes of the Indenture deemed validly authenticated. Forth-


6












with upon any aforesaid termination of its powers, such authenticating agent shall as directed by the Corporation deliver to the Trustee, or to another authenticating agent, all records, unauthenticated bonds and cancelled bonds then held by such authenticating agent and all bonds then held by it in safekeeping pursuant to the first paragraph of Section 2.03 of the Original Indenture as amended by Section 1.03 hereof. The Corporation shall notify the Trustee promptly and in writing of the dispatch of a notice terminating the authority of an authenticating agent, of the receipt from an authenticating agent of notice of resignation, or of any knowledge which the Corporation has obtained indicating that an existing authenticating agent is no longer qualified under the provisions of this Section 2a.02.

SECTION 1.02. The following paragraph is hereby added at the end of Section 2.03 (page 106) :

Coupon bonds of each of the following series, namely, the 3 ¼ % Series due 1970, the 2 7/8 % Series due 1977, the 3 1/4 % Series due 1978, the 2 7/8 % Series due 1980 and Series A, due 1982, may, in each case, be exchanged for a like aggregate principal amount of fully registered bonds without coupons of authorized denomination or denominations of the same series upon payment of the charges and subject to the terms and conditions set forth in the Indenture.

SECTION 1.03. The last sentence of the first paragraph of Section 2.03 (page 105) is amended to read as follows:

All bonds surrendered for exchange as aforesaid shall forthwith
be cancelled by the Trustee or the authenticating agent, as the
case may be, except that, if the Corporation shall so elect, any
coupon bonds so surrendered may be retained uncancelled in
safekeeping by either the Trustee or the authenticating agent
under such arrangements as shall be approved by the Trustee
and the Corporation. Any coupon bond so surrendered and re-
tained uncancelled may be delivered by the Trustee or an
authenticating agent as if it were a newly executed and authen-
ticated bond.
















SECTION 1.04.  Section 2.04 of the Original Indenture (pages

106 and 107) is hereby amended to read as follows:

SECTION 2.04. Books for the registration, transfer or exchange of bonds shall be kept by the Corporation at the principal office of the Trustee in the City and County of San Francisco, State of California, and/or at such other place or places elsewhere specified in the Indenture or specified in the bonds at the time issued and outstanding hereunder, or designated by the

Corporation at any time or from time to time, as a place for registration and transfer of registered bonds without coupons, or of coupon bonds entitled to be registered as to principal, or as a place for exchange of any of the bonds. Such books shall be open to the inspection of the Trustee at all reasonable times.

Upon presentation for such purpose at any such place of any bond entitled to be registered, transferred or exchanged at such place of presentation, the person in charge of such books shall, under such reasonable regulations as such person may prescribe, cause the transaction to be entered in such books so kept at said place. Neither the transfer of any registered bond of any series without coupons, nor the issuance of any such registered bond upon any such exchange, shall be permitted during the ten days next preceding each interest payment date for any bonds so presented, except at the option of the Corporation.

No charge shall be made (a) for any such registration or transfer except such amount as may be necessary to cover any tax or governmental charge required to be paid with respect to such registration or transfer, or (b) for any such exchange except as otherwise provided in the Indenture or in the bond surrendered for exchange.

Whenever any such registration, transfer or exchange shall be entered in the aforesaid books which are kept at said office of the Trustee or at any such other place where any such books are kept, the person in charge of such books shall promptly


8













notify the Trustee of such action by mail and, subject to the pro-
visions of Sections 14.02 and 14.03 hereof, the Trustee shall
be fully protected for all purposes in relying upon the advice
so received.

Notwithstanding that any of the other terms or provisions of the Indenture, or any of the terms or provisions of any of the bonds now or hereafter outstanding, may to any extent or in any way be contrary to or may vary from any of the terms or provisions of this Section 2.04, whenever any exchange of bonds of the same series is made pursuant to the terms of such bonds and/or the Indenture, such exchange may be made at any place specified in such bonds and also at any other place, whether or not specified in such bonds, which at the time of such exchange is a place designated by the Corporation as a place for the making of such exchange, and in the event of any such exchange there shall be issued, authenticated and/or delivered such bond or bonds as the owner of the bond or bonds surrendered for exchange is entitled in accordance with the terms of the Indenture and/or the terms of the bond or bonds surrendered in such exchange.


SECTION 1.05. Section 2.05 of the Original Indenture (page 107) is hereby amended to read as follows:

SECTION 2.05. Before the delivery by the Trustee or
any authenticating agent of any coupon bond, all matured
coupons thereon shall be cut off and cancelled by the Trustee
or the authenticating agent, as the case may be, and shall be
delivered to the Corporation, except as otherwise required by
Section 2.09 and except that if any coupon bond of any series
is delivered upon any exchange of bonds at a time when in-
terest is in default on the bonds of such series, the bond so
delivered shall have attached thereto all coupons maturing
after the latest date to which interest on the bonds of such series
has been paid.


9















SECTION 1.06. The last sentence of Section 2.08 of the Original Indenture (page 109) is hereby amended to read as follows:

The Corporation, the Trustee and each authenticating agent may deem and treat the bearer of any coupon bond which is not registered as to principal, and the bearer of any coupon for interest on any coupon bond, as the absolute owner of such bond or coupon for the purpose of receiving payment thereof, and for all other purposes whatsoever, whether such bond or coupon be overdue or not, and neither the Corporation, the Trustee nor any authenticating agent shall be affected by any notice to the contrary.


SECTION 1.07. The third sentence of the first paragraph of Section 2.09 of the Original Indenture (page 109) is hereby amended to read as follows:

Any indemnity bond shall name as obligees the Corporation, the Trustee, and, if requested by the Corporation, any authenticating agent, fiscal agent and/or registrar.


SECTION 1.08. The last sentence of the first paragraph of Section 2.09 of the Original Indenture (page 110) is hereby amended to read as follows:

The applicant for any substituted bond or coupon, or any such payment, shall, if requested by the Corporation as a condition precedent to the issue of any such substituted bond or coupon or any such payment, pay all expenses, including counsel fees, incurred by the Corporation, the Trustee and/or any authenticating agent in connection therewith.


SECTION 1.09. Section 2.10 (page 111) is hereby amended to read as follows:


SECTION 2.10. Only such of the bonds as shall have been authenticated by the Trustee, or an authenticating agent,


10













by signing the form of certificate of authentication endorsed thereon, and only the coupons, if any, for interest on such bonds, shall be valid or obligatory for any purpose or be secured by this Indenture, or be entitled to any lien or benefit hereunder; and such certificate of the Trustee, or of the authenticating agent, as the case may be, when so signed shall be conclusive evidence that the bond so authenticated was duly authorized for issue hereunder and that the holder or registered owner thereof (other than the Corporation itself) is entitled to the lien and security hereof and the benefit of the trusts hereby created.

SECTION 1.10. Subdivision (2) of the second paragraph of Section 14.19 of the Original Indenture  (page  219) is hereby amended to read as follows:

(2) The bonds secured hereby shall be authenticated and delivered by either the Trustee or an authenticating agent, but all powers, duties, obligations and rights, conferred upon the Trustee in respect of the custody of all bonds and other securities and of cash pledged or deposited hereunder, shall be exercised solely by Wells Fargo Bank or its successor in the trust hereunder, except as provided in Section 2.03 as amended by Section 1.03 hereof.

SECTION 1.11. Notwithstanding any of the terms or provisions of the Indenture, or any of the terms or provisions of any of the bonds now or hereafter outstanding, whenever in the Indenture or in any bond of any series (including series heretofore issued) hereafter authenticated and delivered under any provision of the Indenture reference is made to the execution, issue or signing of such bond by the Corporation or an officer thereof, or to the attestation of its corporate seal affixed thereto, the signature of the proper officer of the Corporation acting for any such purpose may be either a manual signature of such officer or a facsimile thereof.

SECTION 1.12. The recitals herein contained are made by the Corporation and not by the Trustee, and the Trustee assumes no re-


11















sponsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture.

SECTION 1.13. If any provision of this instrument limits, qualifies or conflicts with any other provision hereof or of the Original Indenture as amended, supplemented and now in effect, which is required to be included herein or therein by any of Sections 3.10 to 3.17, inclusive, of the Trust Indenture Act of 1939, such required provision shall control.

SECTION 1.14. The Trustee executes this instrument solely on the condition that, in addition to any and all rights, powers, privileges and immunities given to it by this instrument, it shall have and enjoy with respect to this instrument all of the rights, powers, privileges and immunities as set forth in the Original Indenture.


























12













IN WITNESS WHEREOF, Southern California Gas Company has caused this Supplemental Indenture to be signed in its corporate name, by its President or one of its Vice Presidents, and its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereunto duly affixed, and Wells Fargo Bank, in token of its acceptance of the trust hereby established, has caused this Supplemental Indenture to be signed in its corporate name by its President or one of its Vice Presidents, and its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereunto duly affixed, all as of the day and year first above written.

SOUTHERN CALIFORNIA GAS COMPANY,

By

F. M. BANKS

President

(Seal)

By

S. W. BINCKLEY

Secretary


WELLS FARGO BANK,


By W. E. DANFORTH

Vice President

(Seal)

By

R. A. PRESCOTT

Assistant Secretary













13

















STATE OF CALIFORNIA

ss.

COUNTY OF Los ANGELES


On this 19th day of May, 1965, before me, Lillian Abrams, a Notary Public of the State of California, duly commissioned and sworn, personally appeared F. M. BANKS, known to me to be President, and S. W. BINCKLEY, known to me to be the Secretary, of SOUTHERN CALIFORNIA GAS COMPANY, one of the corporations named in and which executed the foregoing instrument, known to me to be the persons who executed the within instrument on behalf of said Corporation, and acknowledged to me that said Corporation executed the same, and acknowledged to me that said Corporation executed the within instrument pursuant to its by-laws or a resolution of its board of directors.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.


LILLIAN ABRAMS

Notary Public of the State of California

My Commission Expires April 8, 1969

(Seal)


LILLIAN ABRAMS

NOTARY PUBLIC, CALIFORNIA

PRINCIPAL OFFICE IN

LOS ANGELES COUNTY














14




















STATE OF CALIFORNIA

ss.

CITY AND COUNTY OF SAN FRANCISCO


On this 20th day of May, 1965, before me, Geraldine D. Cohen,
a Notary Public of the State of California, duly commissioned and
sworn, personally appeared W. E. DANFORTH, known to me to be
a Vice President, and R. A. PRESCOTT, known to me to be an
Assistant Secretary, Of WELLS FARGO BANK, one of the corporations
named in and which executed the foregoing instrument, known to
me to be the persons who executed the within instrument on behalf
of said Corporation, and acknowledged to me that said Corporation
executed the same, and acknowledged to me that said Corporation
executed the within instrument pursuant to its by-laws or a resolution
of its board of directors.


IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written.


GERALDINE D. COHEN

Notary Public of the State of California


GERALDINE D. COHEN

Notary Public in and for the City & County

of San Francisco, State of California

My Commission Expires January 11, 1969


(Seal)


GERALDINE D. COHEN

NOTARY PUBLIC - CALIFORNIA

 CITY AND COUNTY OF

SAN FRANCISCO


































RECORDATION DATA

The foregoing Supplemental Indenture from Southern California Gas Company to Wells Fargo Bank, Trustee, dated as of June 1, 1965, was recorded in the following Counties of California (and indexed in each of said Counties as a deed, mortgage, trust deed, chattel mortgage, assignment and power of attorney) on the respective dates, and at the respective places indicated in the following schedule:



 

County

Date

Reference

Los Angeles

May 24, 1965

Book D2915, Page 398, Official Records

 

*Re-recorded

July 23, 1965

Book D2988, Page 534, Official Records

Kern

May 26, 1965

Book 3843, Page 699, Official Records

 

*Re-recorded

July 22, 1965

Book 3859, Page 912, Official Records

Tulare

May 24, 1965

Book 2588, Page 523, Official Records

Kings

May 24, 1965

Book 872, Page 874, Official Records

Ventura

May 24, 1965

Book 2793, Page 531, Official Records

Fresno

May 24, 1965

Book 5172, Page 299, Official Records

Orange

May 24, 1965

Book 7530, Page 852, Official Records

Riverside

May 24, 1965

Document No. 59744, Official Records

 

 

 

(Microfilmed)

 

*Re-recorded

July 23, 1965

Document No. 85430, Official Records

 

 

 

(Microfilmed)

San Bernardino

May 25, 1965

6397, Page 920, Official Records

 

*Re-recorded

July 23, 1965

6437, Page 944, Official Records

Imperial

May 24, 1965

1207, Page 728, Official Records

Santa Barbara

May 24, 1965

Book 2106, Page 41, Official Records


* For indexing to include chattel mortgage.



Sempra Energy Excess Cash Balance Plan

 


EXHIBIT 10.08

SEMPRA ENERGY

EXCESS CASH BALANCE PLAN













Ver: 3

 

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


1.

EFFECTIVE DATE

July 1, 1998.

2.

PURPOSE

This Plan serves three purposes. First, it provides benefits for certain employees in excess of the limitations on benefits under the Sempra Energy Account Plan ("Basic Plan") imposed by Section 415 of the Internal Revenue Code of 1986. The portion of the Plan providing these benefits is intended to be an "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") . Second, it provides benefits for certain employees in excess of the limitations on benefits under the Basic Plan imposed by Section 401(a) (17) of the Internal Revenue Code of 1986 ("Code") . Third, the Plan provides benefits for certain employees whose benefits are decreased under the Basic Plan because of deferral of salary made under the Sempra Energy Deferred Compensation Plans("Deferred Compensation Plan& quot;).

3.

ADMINISTRATION

This Plan shall be administered by the Compensation Committee of Sempra Energy ("Compensation Committee") in a manner consistent with the administration of the Basic Plan.  However, the portion of this Plan which is an unfunded "excess benefit plan" as defined in Section 3(36) of ERISA shall be administered as such and is exempt from the provisions of Title I of ERISA pursuant to Section 4(b) (5) of ERISA, and the rest of this Plan shall be administered as an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management employees.  The Compensation Committee's decisions in all matters involving the interpretation and application of this Plan shall be final.  The Company's Senior Human Resources Officer shall have discretionary authority with respect to administrative matters relating to this Plan, except when exercise of such authority would materially affect the cost of the Plan to the Employer, materially increase benefits to Participants, or affect such Senior Officer in a manner materially different from other Participants.

4.

ELIGIBILITY

All employees whose pension benefits under the Basic Plan are limited by compensation and earnings limitations imposed by the Code shall be eligible for benefits under this Plan. In no event shall an employee who is not entitled to benefits under the Basic Plan be eligible for a benefit under this Plan.




Ver: 3

1

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


5.

AMOUNT OF BENEFITS

(A)

415 Make-Up

The benefits payable under this subparagraph (a) to an eligible employee whose benefits under the Basic Plan are limited by the provisions of Section 415 of the Internal Revenue Code incorporated in the Basic Plan, or to his beneficiary(ies), shall equal the excess, if any, of:

(i)

the benefits which would be paid to such employee or on his behalf to his beneficiary(ies) under the Basic Plan, if the provisions of such Plan were administered without regard to the special benefit limitations set forth in the Basic Plan, over

(ii)

the benefits which are paid to such employee or on his behalf to his beneficiary(ies) under the Basic Plan.

(B)

401(a) (17) Make-Up

The benefits payable under this subparagraph (B) to an eligible employee whose benefits under the Basic Plan are limited by the covered compensation limitations of Internal Revenue Code Section 401(a) (17) incorporated in the Basic Plan, or to his beneficiary(ies), shall equal the excess, if any, of:

(i)

the benefits which would be paid to such employee or on his behalf to his beneficiary(ies) under the Basic Plan, and, if applicable, to the participant, under subparagraph (a), if the provisions of such Plan were administered without regard to the covered compensation maximum set forth in the Basic Plan, over

(ii)

the benefits which are paid to such employee or on his behalf to his beneficiary(ies) under the Basic Plan and, if applicable to the Participant, under subparagraph (a) .

6.

PAYMENT OF BENEFITS

(A)

Distribution Options for Certain SERP Participants

(i)

In the case of an employee who is eligible for benefits under this Plan, and is a participant under the Sempra Energy Supplemental Executive Retirement Plan, as of December 31, 2005, the payment of benefits to such employee under this Plan shall be made in accordance with this subsection (A).

(ii)

Unless the employee exercises the Lump Sump Option and receives a lump sum distribution from the Basic Plan, the payment of such employee’s Pre-Section 409A Benefit under this Plan shall be in the same payment form and at the same time as the payment of benefits to the employee or on his behalf to his beneficiary(ies) under the Basic Plan. In the event an employee receives a lump sum distribution from the Basic Plan, payment of such employee’s Pre-Section 409A Benefit under this Plan will be made in the form of a straight life annuity.



Ver: 3

2

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


However, the employee may request, in writing, payment of such employee’s Pre-Section 409A Benefit under one of the following alternatives provided such request is filed with Sempra Energy ("Company") at least three months prior to his Retirement Date or Termination under the Basic Plan:

(a)

The employee may request payment of such employee’s Pre-Section 409A Benefit under any of the other annuity options for which he is eligible under the Basic Plan. The amount of such optional annuity benefit with respect to his or her Pre-Section 409A Benefit under this Plan shall be computed as specified in Section 5 of this Plan using the interest and mortality factors specified in the Basic Plan. The request will be subject to approval of the Company's Senior Human Resources Officer and, if approved, will be irrevocable as long as the employee receives a lump sum distribution from the Basic Plan.

(b)

The employee may request payment of such employee’s Pre-Section 409A Benefit in a lump sum. The amount of the distribution with respect to his or her Pre-Section 409A Benefit under this Plan shall be computed as specified in Section 5 of this Plan using the actuarial factors specified in the Basic Plan. In the event such a request is timely filed, the request shall be considered by the Senior Human Resources Officer who shall have the sole discretion, considering the best interests of the Company, to allow a lump sum distribution. The decision of the Senior Human Resources Officer shall be final. The employee will be required to show good reason for receiving a lump sum distribution and, file the request at least three months prior to separation from service as a condition of having the request approved. If the lump sum pay out is approved, the lump sum form of pay out shall b e irrevocable even if the employee changes his election under the Basic Plan.

The employee's beneficiary(ies) with respect to his or her Pre-Section 409A Benefit under this Plan shall be exactly the same as his beneficiary(ies) under the Basic Plan unless he elects and receives a lump sum distribution from the Basic Plan. In this event, the following provisions will apply if such employee’s Pre-Section 409A Benefit under this Plan is paid in the form of a joint and survivor annuity.

The joint and survivor annuity is only available with respect to such employee’s Pre-Section 409A Benefit the employee designates his or her spouse as beneficiary or obtains spousal consent to the designation of another beneficiary in the same manner as under the Basic Plan. If the spouse, or beneficiary dies before the employee's Retirement Date under the Basic Plan, the joint and survivor annuity with respect to such employee’s Pre-Section 409A Benefit is canceled and the benefit is paid in the form of a straight life annuity.

(iii)

The payment of such employee’s Post-Section 409A Benefit under this Plan shall be in a lump sum following the employee’s separation from service, unless the employee elects to receive an optional annuity form of payment under subparagraph (a).  The amount of the employee’s lump sum distribution with respect to his Post-Section 409A Benefit under this Plan shall be



Ver: 3

3

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


computed as specified in Section 5 of this Plan using the actuarial factors specified in the Basic Plan.  

(a)

The employee may elect, in writing, payment following the employee’s separation from service under any of the following annuity options:  (I) a straight life annuity, (II) a joint and 50% survivor annuity, and (III) a joint and 100% survivor annuity.  The amount of such optional annuity benefit with respect to such employee’s Post-Section 409A Benefit under this Plan shall be computed as specified in Section 5 of this Plan using the interest and mortality factors specified in the Basic Plan. The election will be subject to approval of the Company's Senior Human Resources Officer, in his or her discretion, and, if approved, will be irrevocable (except as provided in subsection (C)).

(b)

An employee’s election under subparagraph (a) may be made with respect to an employee’s Post-Section 409A Benefit on or before December 31, 2006 in accordance with the transitional relief under Section 409A of the Internal Revenue Code; provided, however, that an employee’s election may not be made in 2006 with respect to payments the employee would otherwise receive in 2006, or to cause payments to be made in 2006.  

(c)

The joint and survivor annuity is only available under clause (a)(II) or (III) if the employee designates his or her spouse as beneficiary or obtains spousal consent to the designation of another beneficiary in the same manner as under the Basic Plan. If the spouse, or beneficiary dies before the employee’s separation from service, the joint and survivor annuity is canceled and the benefit is paid in the form of a straight life annuity.

(d)

Except as provided in subsection (C), such employee may not change the form and time of payment of such employee’s Post-Section 409A Benefit under this Plan after December 31, 2006.

(iv)

Notwithstanding the foregoing, in no event shall a distribution option be available or apply to an employee’s Pre-Section 409A Benefit if such distribution option would result in a material modification of the employee’s Pre-Section 409A Benefit, as determined under Section 409A of the Code.  

(B)

Distribution Options for other Employees

Except as provided in subsection (A), in the case of an employee who first became eligible for benefits under this Plan (as determined under Section 4) on or before December 31, 2005, the payment of benefits under this Plan shall be made in a lump sum in accordance with this subsection (B) following the employee’s separation from service, unless the employee elects to receive an optional annuity form of payment under paragraph (i).  The amount of the employee’s lump sum distribution under this Plan shall be computed as specified in Section 5 of this Plan using the actuarial factors specified in the Basic Plan.



Ver: 3

4

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


(i)

The employee may elect, in writing, payment following the employee’s separation from service under any of the following annuity options:  (a) a straight life annuity, (b) a joint and 50% survivor annuity, and (c) a joint and 100% survivor annuity.  The amount of such optional annuity benefit under this Plan shall be computed as specified in Section 5 of this Plan using the interest and mortality factors specified in the Basic Plan. The election will be subject to approval of the Company's Senior Human Resources Officer, in his or her discretion, and, if approved, will be irrevocable (except as provided in subsection (C)).

(ii)

An employee’s election under paragraph (i) may be made with respect to an employee’s benefit under this Plan on or before December 31, 2006 in accordance with the transitional relief under Section 409A of the Internal Revenue Code; provided, however, that an employee’s election may not be made in 2006 with respect to payments the employee would otherwise receive in 2006, or to cause payments to be made in 2006.  

(iii)

The joint and survivor annuity is only available under paragraph (i)(b) or (c) if the employee designates his or her spouse as beneficiary or obtains spousal consent to the designation of another beneficiary in the same manner as under the Basic Plan. If the spouse, or beneficiary dies before the employee's separation from service, the joint and survivor annuity is canceled and the benefit is paid in the form of a straight life annuity.

(iv)

Except as provided in subsection (C), such employee may not change the form and time of payment of benefits under this Plan after December 31, 2006.

(C)

Changes in Distribution Option

An employee described in subsection (A) or (B) may elect to change the form of the payment of such employee’s Post-Section 409A Benefit under this Plan, as follows:


(i)

The employee may elect, in writing, to change the form of  payment of such employee’s Post-Section 409A Benefit to any of the following options:  (a) a lump sum, (b) a straight life annuity, (c) a joint and 50% survivor annuity, and (d) a joint and 100% survivor annuity.  The amount of such optional benefit under this Plan shall be computed as specified in Section 5 of this Plan using the interest and mortality factors specified in the Basic Plan.  The employee’s election shall be subject to paragraphs (ii) and (iii).  Except as provided in paragraph (iv), the employee’s election under this paragraph (i) shall be irrevocable.  The joint and survivor annuity is only available under paragraph (c) or (d) if the employee designates his or her spouse as beneficiary or obtains spousal consent to the designation of another beneficiary in the sa me manner as under the Basic Plan.  If the spouse, or beneficiary dies before the employee’s separation from service, the joint and survivor annuity is canceled and the benefit is paid in the form of a straight life annuity.

(ii)

The employee’s election under paragraph (i) shall not take effect until at least 12 months after his election is made.



Ver: 3

5

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


(iii)

In the event the employee’s election under paragraph (i) becomes effective, the payment of such employee’s Post-Section 409A Benefit under the option shall commence following the fifth anniversary of the employee’s separation from service.


(iv)

The employee may change the annuity option elected under paragraph (i) to another annuity option specified under paragraph (i), provided that such change is made prior to the commencement of the payment of benefits under this Plan.

(D)

Mandatory Distribution

The foregoing notwithstanding, if present value of the employee’s benefit hereunder is less than $10,000, the benefit shall be distributed in a lump sum following the employee’s separation from service.  

(E)

Pre-Section 409A Benefit; Post-Section 409A Benefit.

(i)

An employee’s “Pre-Section 409A Benefit” means the portion of the employee’s benefit under the Plan, if any, to which the employee had a legal binding right, and which was earned and vested, as of December 31, 2004, determined in accordance with Section 409A of the Code.  

(ii)

An employee’s “Post-Section 409A Benefit” means an employee’s benefit under this Plan, less such employee’s Pre-Section 409A Benefit (if any).

(F)

Distributions to Newly Eligible Employees


(i)

In the case of an employee who first becomes eligible for benefits under this Plan (as determined under Section 4) after December 31, 2005, the payment of benefits under this Plan shall be made in a lump sum in accordance with this subsection (F) following the employee’s separation from service, except as provided in paragraph (ii).


(ii)

The employee may elect to change the form of the payment of benefits under this Plan, as follows:


(a)

The employee may elect, in writing, payment following the employee’s separation from service under any of the following annuity options:  (I) a straight life annuity, (II) a joint and 50% survivor annuity, and (III) a joint and 100% survivor annuity.  The amount of such optional annuity benefit under this Plan shall be computed as specified in Section 5 of this Plan using the interest and mortality factors specified in the Basic Plan.  The employee’s election shall be subject to clauses (II) and (III).  Except as provided in subparagraph (d), the employee’s election under this subparagraph (a) shall be irrevocable.  The joint and survivor annuity is only available under clause (II) or (III) if the employee designates his or her spouse as beneficiary or obtains spousal consent to the designation of another beneficiary in the same manner as under the Basic Plan. If t he spouse, or beneficiary dies before the employee's separation from service, the



Ver: 3

6

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


joint and survivor annuity is canceled and the benefit is paid in the form of a straight life annuity.


(b)

The employee’s election under subparagraph (a) shall not take effect until at least 12 months after his election is made.


(c)

In the event the employee’s election under subparagraph (a) becomes effective, the payment of benefits under the annuity option shall commence following the fifth anniversary of the employee’s separation from service.


(d)

The employee may change the annuity option elected under subparagraph (a) to another annuity option specified under subparagraph (a), provided that such change is made prior to the commencement of the payment of benefits under this Plan.

(G)

Separation from Service

“Separation from service” shall mean, with respect to an employee, such employee’s “separation from service,” within the meaning of Section 409A(a)(2)(A)(i) of the Code, as determined by the Secretary of the Treasury.

(H)

Distributions to Specified Employees

Notwithstanding the foregoing, in the case of the separation from service of an employee who is a “specified employee,” as defined in Section 409A(a)(2)(B)(i) of the Code with respect to the Company, the payment of such employee’s Post-Section 409A Benefit to such employee shall not be made before the date which is six months after the date of such employee’s separation from service (or, if earlier, the date such employee’s death) in accordance with Section 409A(a)(2)(B)(i) of the Code and the Treasury Regulations thereunder.

(I)

Prohibition on Acceleration of Distributions

The time or schedule of payment of any payment of an employee’s Post-Section 409A Benefit under the Plan shall not be subject to acceleration, except as provided under Treasury Regulations promulgated in accordance with Section 409A(a)(3) of the Code.

7.

EMPLOYEE’S RIGHTS

An employee shall not be entitled to any payments from the Basic Plan on the basis of any benefits to which he may be entitled under this Plan. Benefits under this Plan shall be payable only from the general assets of the Company.

8.

AMENDMENT AND DISCONTINUANCE

The Company expects to continue this Plan indefinitely, but reserves to the Compensation Committee the right to amend or discontinue the Plan if, in the Compensation Committee's sole judgment, such a



Ver: 3

7

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


change is deemed necessary or desirable. However, if the Compensation Committee shall amend or discontinue this Plan, the Company shall be liable for any benefits accrued under this Plan as of the date of such amendment or termination determined on the basis of each employee's presumed termination of employment as of such date. Provided further, that if the Department of Labor determines, or issues regulations under which, the Plan would be subject to Parts 2 and/or 3 of Title I of the Employees Retirement Income Security Act of 1974, as amended, the Compensation Committee may taken such action or actions as it deems appropriate. Such actions may include, but are not limited to, modification, termination or partial termination of the Plan. In the event of such modification, termination, or partial termination, the Compensation Committee may make immediate distribution of some or al l Accounts, as it deems necessary or appropriate.

9.

OFFSET FOR CERTAIN BENEFITS PAYABLE UNDER SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS

(A)

Some of the Participants under this Plan own life insurance policies (the "Policies") purchased on their behalf to fund their retirement benefits. The ownership of these Policies by each Participant is, however, subject to certain conditions (set forth in a "Split-Dollar Life Insurance Agreement" or comparable agreements between the Participant and the Company) and, if the Participant fails to meet the conditions set forth in the Split-Dollar Life Insurance Agreement, the Participant may lose certain rights under the Policy. In the event that a Participant satisfies the conditions specified in Section 5 or 6 of the Split-Dollar Life Insurance Agreement, so that the Participant or his beneficiary becomes entitled to benefits under one of those sections, the value of those benefits shall constitute an offset to any benefits otherwise payable under this Plan. As th e case may be, this offset (the "Offset Value") shall be calculated by determining the value of benefits payable under the Split-Dollar Life Insurance Agreement, that is, the cash surrender value of the Policy, or in the case of the Participant's death, the death benefits payable to the beneficiary under the Policy. The Offset Value shall then be compared to the Actuarial Equivalent (as defined in Section 9(D) of the benefits payable under this Plan (the "Plan Value"), and the Plan Value shall be reduced by the Offset Value.

(B)

At the time when the Participant terminates employment for any reason, if the Plan Value exceeds the present value (determined using the interest rate specified in Section 9(D) of the Offset Value, the excess of the Value over the present value of the Offset Value shall be paid to the Participant or beneficiary at that time in a lump sum if the value does exceed $25,000 otherwise it shall be paid in accordance with the terms of this Plan. Such payment shall completely discharge all obligations owed under this Plan on account of Participant's participation in this Plan.

(C)

If the Policy described in Section 9(A) is not on the life of the Participant, the insured dies prior to the Participant becoming eligible for benefits under the Plan, and the Participant or the Participant's beneficiary subsequently becomes eligible for benefits hereunder, the Actuarial Equivalent (as defined in Section 9(D) below) of the benefits payable hereunder shall be offset by the Actuarial Equivalent of the payments previously paid to the Participant in the Split-Dollar Life Insurance Agreement. Any remaining amount due the Participant or the Participant's beneficiary shall thereupon be paid in a cash lump sum.



Ver: 3

8

 


 OC\789027.5



Sempra Energy

Excess Cash Balance Plan


(D)

For purposes of this Section, the Actuarial Equivalent shall mean a benefit in the form of a lump sum payment which has the equivalent value computed using the actuarial factors specified in the Basic Plan.


Executed at San Diego, California this 5th day of December, 2005


By:      __________________________

G. Joyce Rowland


Title:    Sr. Vice President, Human Resources


Date:    December 5, 2005




Ver: 3

9

 


 OC\789027.5


Sempra Energy Non-Employee Nonqualified Stock Option Agreement

EXHIBIT 10.09

SEMPRA ENERGY
1998 NON-EMPLOYEE DIRECTORS’ STOCK PLAN

NONQUALIFIED STOCK OPTION AGREEMENT


Sempra Energy, a California corporation, hereby grants an option to purchase shares of its common stock to the optionee named below.  The terms and conditions of the option are set forth in this cover sheet, in the attachment hereto, and in the Sempra Energy 1998 Non-Employee Directors’ Stock Plan (the “Plan”).

Date of Option Grant:  

 

Name of Optionee:

Name

Optionee's Social Security Number:

SSN

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

 

Exercise Price per Share:  

 

Normal Vesting Date:

 

Expiration Date:  

Tenth anniversary of Date of Option Grant or if earlier five years after termination of service

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

Optionee:

 

x

 

 

(Signature)

Sempra Energy:

 

 

 

 

(Signature)

Title:

 

Chairman & Chief Executive Officer


Attachment



Initial GrantLA_DOCS\235250.5



SEMPRA ENERGY
1998 NON-EMPLOYEE DIRECTORS’ STOCK PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

Vesting

Your right to exercise this option fully vests and becomes exercisable on the date of the Sempra Energy (year) Annual Meeting of Shareholders.

 

In the event that you cease to be a member of the Board of Directors of Sempra Energy (the “Board”) as a result of death, disability, Retirement (as defined in the Plan) or your involuntary termination of service on the Board other than for cause, your option shall thereupon become fully vested and exercisable.

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 service on the Board terminates.

Exercise of Option Following Termination of Service

If you cease to be a member of the Board for any reason, then (A) you shall have the right, subject to the terms and conditions of this Agreement and the Plan, to exercise your option, to the extent that it has vested as of the date of such termination of service, at any time within five years after the date of such termination or the earlier expiration of the ten-year term of the option, and (B) the unvested portion of your option shall be forfeited as of the date of such termination.

Restrictions on Exercise

Sempra Energy will not permit you to exercise this option if the issuance of shares at that time would violate any law or regulation.

Notice of Exercise

When you wish to exercise this 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 (in your name only or in your and your spouse’s names as community property or as joint tenants with right of survivorship).  The notice will be effective when it is received.




LA_DOCS\235250.5

- 1 -

Initial Grant







 

If someone else wants to exercise this option after your death, that person must establish that he or she is entitled to do so.

Form of Payment

When you submit your notice of exercise, you must include payment of the option price for the shares you are purchasing.  Payment may be made in one (or a combination of two or more) of the following forms:

 

?

Your personal check, a cashier’s check or a money order.

 

?

Certificates for shares of Sempra Energy common stock that you have owned for at least six months, along with any forms needed to effect a transfer of the shares to Sempra Energy.  The value of the shares, determined as of the effective date of the option exercise, will be applied to the option price.

 

?

To the extent permitted by law, arrangements can be made to permit a “cashless exercise” whereby you direct a securities broker approved by Sempra Energy to sell your option shares and to deliver sufficient sale proceeds to Sempra Energy in payment of the option price and any required withholding.  The directions must be given by signing a special “Notice of Exercise” form provided by Sempra Energy.

Withholding Taxes

You will not be permitted to exercise this option unless you make acceptable arrangements to pay any withholding taxes that may be due as a result of the option exercise.  Payment of withholding taxes may be made by any combination of the methods described under “Form of Payment.”

Restrictions on Resale

By signing this Agreement, you agree not to sell any option shares at a time when applicable laws 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 or your spouse 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, this option will immediately become invalid.  You may, however, dispose of this option in your will, and this 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.




LA_DOCS\235250.5

- 2 -

Initial Grant







Retention Rights

Neither your option nor this Agreement creates any obligation on the part of the Board to nominate you for reelection to the Board, or confers upon you the right to remain a member of the Board for any period of time, or at any particular rate of compensation.

Shareholder Rights

You, or your estate or heirs, have no rights as a shareholder of Sempra Energy until a certificate for your option shares has been issued.  No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan.

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), 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.

No Dividend Equivalents

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

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.

This Agreement and the Plan constitute the entire understanding between you and Sempra Energy regarding this option.  Any prior agreements, commitments or negotiations concerning this option are superseded.

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



LA_DOCS\235250.5

- 3 -

Initial Grant


Sempra Energy Ex 12.1




EXHIBIT 12.1

SEMPRA ENERGY

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

Fixed charges and preferred stock dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 $                       350

 

 $                       345

 

 $                       332

 

 $                       342

 

 $                       413

 

 

 

 

 

 

 

 

 

 

 

Interest portion of annual rentals

 

                              4

 

                              4

 

                              4

 

                              5

 

                              6

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends of subsidiaries (1)

 

                            14

 

                            11

 

                            12

 

                            10

 

                            15

 

 

 

 

 

 

 

 

 

 

 

     Total fixed charges

 

                          368

 

                          360

 

                          348

 

                          357

 

                          434

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends for purpose of ratio

 

                              -

 

                              -

 

                              -

 

                              -

 

                              -

 

 

 

 

 

 

 

 

 

 

 

Total fixed charges and preferred

 

 

 

 

 

 

 

 

 

 

    dividends for purpose of ratio                        

 

 $                       368

 

 $                       360

 

 $                       348

 

 $                       357

 

 $                       434

 

 

 

 

 

 

 

 

 

 

 

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax income from continuing operations

 

 $                       736

 

 $                       814

 

 $                     1,105

 

 $                       947

 

 $                     1,732

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

 

  Total fixed charges (from above)

 

                          368

 

                          360

 

                          348

 

                          357

 

                          434

 

 

 

 

 

 

 

 

 

 

 

  Distributed income of equity investees

 

                            11

 

                            72

 

                            59

 

                            73

 

                          431

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

  Interest capitalized

 

                            29

 

                            26

 

                              8

 

                            28

 

                            58

 

 

 

 

 

 

 

 

 

 

 

  Equity in income (loss) of unconsolidated

 

 

 

 

 

 

 

 

 

 

  subsidiaries and joint ventures

 

                           (55)

 

                              5

 

                            36

 

                            66

 

                          156

 

 

 

 

 

 

 

 

 

 

 

  Minority interest in income of consolidated

 

 

 

 

 

 

 

 

 

 

  subsidiaries

 

                              -

 

                              -

 

                              -

 

                              -

 

                              7

 

 

 

 

 

 

 

 

 

 

 

Total earnings for purpose of ratio

 

 $                     1,141

 

 $                     1,215

 

 $                     1,468

 

 $                     1,283

 

 $                     2,376

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to combined fixed charges

 

 

 

 

 

 

 

 

 

 

   and preferred stock dividends

 

                         3.10

 

                         3.38

 

                         4.22

 

                         3.59

 

                         5.47

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges

 

                         3.10

 

                         3.38

 

                         4.22

 

                         3.59

 

                         5.47



 

 

 

 

 

 

 

 

 

 

 

(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 2006 Financial Report (Exhibit 13)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



INTRODUCTION


This section of the 2006 Annual Report includes management's discussion and analysis of operating results from 2004 through 2006, 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.




1


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.



[s2006annualreport001.jpg]


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




2


Major 2006 events, some of which may also affect future years, (and the page number where each is discussed) include the following:


·

The 2006 sales of Sempra Generation's Twin Oaks Power plant (Twin Oaks); its Energy Services and Facilities Management businesses; and Sempra Energy Production Company (SEPCO), its exploration and production subsidiary (70);


·

Sale of the Topaz Power Partners (Topaz) power plants in July 2006 (68);


·

The 2006 decisions to sell Sempra Pipelines & Storage's investments in its two Argentine natural gas companies (67), and its domestic natural gas distribution companies, Bangor Gas and Frontier Energy (70);


·

Continued development of the liquefied natural gas (LNG) business (64);


·

Sempra Generation's transfer of the Palomar power plant to San Diego Gas & Electric Company (SDG&E) (102); and


·

Settlements of certain litigation, subject to court approvals (107).


The Sempra Utilities


Southern California Gas Company (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 6.4 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 other than the Sempra Utilities. 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 also is a trader and wholesaler of base metals;


·

Sempra Generation owns and operates power plants;


·

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; and


·

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. In 2006, the company decided to sell its interests in the Argentine utilities, as discussed in Note 3 of the notes to Consolidated Financial Statements.



3


RESULTS OF OPERATIONS


Overall Operations


Net income was $1.4 billion in 2006, a 53% increase over 2005, and diluted earnings per share was $5.38, an increase of 47%, as described below. The increase in net income and diluted earnings per share was primarily due to Sempra Generation's asset sales and lower litigation expense, offset by the impairment of Sempra Pipelines & Storage's Argentine investments. The smaller percentage increase in diluted earnings per share was due primarily to the higher weighted-average number of shares outstanding primarily resulting from the additional shares of common stock issued in mid-2005 in settlement of the equity unit contracts discussed in Note 12 of the notes to Consolidated Financial Statements.

 

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


(Dollars in millions,
except per share amounts)

 

Net Income

Diluted Earnings Per Share

2006

 

$ 1,406

$ 5.38

2005

 

$    920

$ 3.65

2004

 

$    895

$ 3.83

2003

 

$    649

$ 3.03

2002

 

$    591

$ 2.87




4


Comparison of Earnings


To assist the reader in understanding the trend of earnings, the following table summarizes the major unusual factors affecting net income and operating income in 2006, 2005 and 2004. The numbers in parentheses are the page numbers where each 2006 item is discussed.


 

 

Net Income

 

Operating Income

(Dollars in millions)

 

 

2006

 

 

2005

 

 

2004

 

 

 

2006

 

 

2005

 

 

2004

 

Reported amounts

 

$

1,406

 

$

920

 

$

895

 

 

$

1,785

 

$

1,089

 

$

1,272

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unusual items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations (70):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Loss (income) from

      operations

 

 

27

 

 

(16

)

 

18

 

 

 

--

 

 

--

 

 

--

 

   Loss (gain) on disposal

 

 

(342

)

 

9

 

 

2

 

 

 

--

 

 

--

 

 

--

 

Gain on sale of Topaz power

    plants (68)

 

 

(204

)

 

--

 

 

--

 

 

 

--

 

 

--

 

 

--

 

Impairment of investments at

    Sempra Pipelines & Storage

    (67)

 

 

221

 

 

--

 

 

--

 

 

 

--

 

 

--

 

 

--

 

California energy crisis

    litigation (108)

 

 

18

 

 

311

 

 

84

 

 

 

24

 

 

508

 

 

140

 

Resolution of prior years'

   income tax issues (11)

 

 

(45

)

 

(156

)

 

(56

)

 

 

--

 

 

--

 

 

--

 

Other regulatory matters (12)

 

 

(25

)

 

(24

)

 

(55

)

 

 

(39

)

 

(33

)

 

(51

)

Tax on repatriation (15)

 

 

24

 

 

--

 

 

--

 

 

 

--

 

 

--

 

 

--

 

Turbine impairments

 

 

--

 

 

38

 

 

--

 

 

 

--

 

 

63

 

 

--

 

DSM1 awards settlement

 

 

--

 

 

(31

)

 

--

 

 

 

--

 

 

(49

)

 

--

 

Sempra Commodities' gain on

   sale of natural gas storage

   facilities

 

 

--

 

 

(41

)

 

--

 

 

 

--

 

 

(67

)

 

--

 

South Bay charitable

   contribution deduction

 

 

--

 

 

(23

)

 

--

 

 

 

--

 

 

(23

)

 

--

 

Gains on sale of SoCalGas'

   partnership property and on

   partial sale of Luz del Sur

 

 

--

 

 

--

 

 

(14

)

 

 

--

 

 

--

 

 

(15

)

Resolution of vendor disputes

   in Argentina

 

 

--

 

 

--

 

 

(12

)

 

 

--

 

 

--

 

 

--

 

Gain on settlement of

   Cameron liability

 

 

--

 

 

--

 

 

(8

)

 

 

--

 

 

--

 

 

--

 

 

 

$

1,080

 

$

987

 

$

854

 

 

$

1,770

 

$

1,488

 

$

1,346

 

1Demand side management (DSM)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







5


Net Income (Loss) by Business Unit


 

Years ended December 31,

(Dollars in millions)

 

2006

 

2005

 

2004

Sempra Utilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Southern California Gas Company *

 

$

223

 

16

%

 

$

211

 

23

%

 

$

232

 

26

%

     San Diego Gas & Electric Company *

 

 

237

 

17

 

 

 

262

 

28

 

 

 

208

 

23

 

     Total Sempra Utilities

 

 

460

 

33

 

 

 

473

 

51

 

 

 

440

 

49

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Global

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Sempra Commodities

 

 

504

 

36

 

 

 

460

 

50

 

 

 

320

 

36

 

     Sempra Generation **

 

 

375

 

27

 

 

 

149

 

16

 

 

 

132

 

15

 

     Sempra Pipelines & Storage **

 

 

(165

)

(12

)

 

 

64

 

7

 

 

 

64

 

7

 

     Sempra LNG

 

 

(42

)

(3

)

 

 

(25

)

(3

)

 

 

(8

)

(1

)

     Total Sempra Global

 

 

672

 

48

 

 

 

648

 

70

 

 

 

508

 

57

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent and other ***

 

 

(41

)

(3

)

 

 

(208

)

(22

)

 

 

(33

)

(4

)

Income from continuing operations

 

 

1,091

 

78

 

 

 

913

 

99

 

 

 

915

 

102

 

Discontinued operations, net of income tax

 

 

315

 

22

 

 

 

7

 

1

 

 

 

(20

)

(2

)

Consolidated net income

 

$

1,406

 

100

%

 

$

920

 

100

%

 

$

895

 

100

%


    * After preferred dividends

  ** Excludes amounts now classified as discontinued operations.

*** Includes after-tax interest expense ($101 million, $104 million and $116 million in 2006, 2005 and 2004, respectively), after-tax litigation expense ($1 million, $193 million and $27 million in 2006, 2005 and 2004, respectively), intercompany eliminations recorded in consolidation and certain corporate costs incurred at Sempra Global.


As a result of the 2006 sale of the majority of its investments in tax-advantaged limited partnerships, as discussed in Note 3 of the notes to Consolidated Financial Statements, the company's Sempra Financial business unit, previously shown separately, is now included in Parent and Other in all periods presented.


Sempra Utility Operations


The Sempra Utilities are subject to regulation by federal, state and local governmental agencies. The primary regulatory agency is the California Public Utilities Commission (CPUC), which regulates utility rates and operations. The Federal Energy Regulatory Commission (FERC) regulates interstate transportation of natural gas and electricity 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.  


Natural Gas Revenue and Cost of Natural Gas. Natural gas revenues decreased by $490 million (9%) to $4.8 billion in 2006, and the cost of natural gas decreased by $476 million (15%) to $2.8 billion in 2006. 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 2005 Cost of Service decision eliminating 2004 revenue sharing (for which $18 million was included in revenue in 2005), $14 million in DSM awards in 2005 and $50 million of lower revenues for recoverable expenses, which are fully offset in other operating expenses. The decreases at SoCalGas were offset by a $52 million increase in authorized base margin indexing and $10 million from the positive resolution in 2006 of a natural gas royalty



6


matter. The company's weighted average cost (including transportation charges) per million British thermal units (mmbtu) of natural gas was $6.54 in 2006, $7.83 in 2005 and $5.94 in 2004.    


Natural gas revenues increased by $716 million (16%) to $5.3 billion in 2005, and the cost of natural gas increased by $639 million (25%) to $3.2 billion in 2005 compared to 2004. The increases in 2005 were due to higher natural gas prices, which are passed on to customers, offset by a decrease in volume. In addition, natural gas revenues increased at SoCalGas due to higher authorized base margin of $28 million, the CPUC's decision in 2005 eliminating 2004 revenue sharing, DSM awards and higher revenues for recoverable expenses, as discussed above. SDG&E's natural gas revenues further increased due to $7 million in DSM awards in 2005. Performance awards are discussed in Note 14 of the notes to Consolidated Financial Statements.  


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) allows SoCalGas to share in the savings or costs from buying natural gas for customers below or above market-based monthly benchmarks. The mechanism permits 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. In addition, SDG&E's natural gas procurement Performance-Based Regulation (PBR) mechanism provides an incentive mechanism by measuring SDG&E's procurement of natural gas against a benchmark price comprised of monthly natural gas indices, resulting in shareholder rewards for costs achieved below the benchmark and shareholder penalties when co sts exceed the benchmark. Further discussion is provided in Notes 1 and 14 of the notes to Consolidated Financial Statements.


Electric Revenue and Cost of Electric Fuel and Purchased Power. Electric revenues increased by $347 million (19%) to $2.1 billion in 2006, and the cost of electric fuel and purchased power increased by $97 million (16%) to $721 million in 2006. The increase in revenue was due to $206 million of increased authorized distribution, generation and transmission base margins, $60 million higher revenues for recoverable expenses, which are fully offset in other operating 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 plant in 2006, which contribute d $112 million to both 2006 revenues and costs, offset by lower purchased power costs.


Electric revenues increased by $131 million (8%) to $1.8 billion in 2005 compared to 2004, and the cost of electric fuel and purchased power increased by $48 million (8%) to $624 million in 2005 compared to 2004. The increase in revenue was due to $41 million of higher revenues for recoverable expenses, the DSM awards settlement in 2005 and the 2005 IRS decision, as discussed above.  In addition, revenues and costs increased $48 million due to higher purchased power costs.


The tables below summarize the Sempra Utilities' natural gas and electric volumes and revenues by customer class for the years ended December 31, 2006, 2005 and 2004.



7



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

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

2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

287

 

$

2,904

 

2

 

$

7

 

289

 

$

2,911

 

Commercial and industrial

 

126

 

 

1,013

 

276

 

 

198

 

402

 

 

1,211

 

Electric generation plants

 

--

 

 

2

 

252

 

 

90

 

252

 

 

92

 

Wholesale

 

--

 

 

--

 

20

 

 

6

 

20

 

 

6

 

 

 

413

 

$

3,919

 

550

 

$

301

 

963

 

 

4,220

 

Balancing accounts and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

317

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

< /TD>

 

 

 

 

 

 


Electric Distribution and Transmission

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


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

2005

2004

 

Volumes

Revenue

Volumes

Revenue

Volumes

Revenue

Residential

 

7,501

 

$

910

 

7,075

 

$

738

 

7,038

 

$

692

Commercial

 

6,983

 

 

723

 

6,674

 

 

654

 

6,592

 

 

644

Industrial

 

2,250

 

 

180

 

2,148

 

 

141

 

2,072

 

 

133

Direct access

 

3,390

 

 

133

 

3,213

 

 

114

 

3,441

 

 

105

Street and highway lighting

 

102

 

 

10

 

93

 

 

11

 

97

 

 

11

 

 

 

 

 

 

20,226

 

 

1,956

 

19,203

 

 

1,658

 

19,240

 

 

1,585

Balancing accounts and other

 

 

 

 

180

 

 

 

 

131

 

 

 

 

73

 

Total

 

 

 

 

 

 

$

2,136

 

 

 

$

1,789

 

 

 

$

1,658




8


Although commodity costs associated with long-term contracts allocated to SDG&E from the 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.


Sempra Global and Parent Operating Revenues and Cost of Sales. These tables provide 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)

 

2006

 

2005

 

2004

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

  ;

 

 

 

 

 

 

 

 

Sempra Commodities *

 

$

3,256

 

67

%

 

$

2,724

 

61

%

 

$

1,689

 

56

%

Sempra Generation *

 

 

1,454

 

30

 

 

 

1,708

 

38

 

 

 

1,472

 

48

 

Sempra Pipelines & Storage *

 

 

295

 

6

 

 

 

317

 

7

 

 

 

260

 

9

 

Sempra LNG

 

 

(21

)

(1

)

 

 

--

 

--

 

 

 

--

 

--

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sempra Global

 

 

4,984

 

102

 

 

 

4,749

 

106

 

 

 

3,421

 

113

 

Parent and other **

 

 

(122

)

(2

)

 

 

(279

)

(6

)

 

 

(382

)

(13

)

Total

 

$

4,862

 

100

%

 

$

4,470

 

100

%

 

$

3,039

 

100

%

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

 

 

 

 

 

 

 

 

  ;

 

 

 

 

 

 

 

 

Sempra Commodities *

 

$

1,468

 

55

%

 

$

1,267

 

49

%

 

$

597

 

37

%

Sempra Generation *

 

 

1,019

 

38

 

 

 

1,209

 

47

 

 

 

1,088

 

67

 

Sempra Pipelines & Storage *

 

 

233

 

8

 

 

 

261

 

10

 

 

 

205

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Sempra Global

 

 

2,720

 

101

 

 

 

2,737

 

106

 

 

 

1,890

 

116

 

Parent and other **

 

 

(31

)

(1

)

 

 

(149

)

(6

)

 

 

(261

)

(16

)

Total

 

$

2,689

 

100

%

 

$

2,588

 

100

%

 

$

1,629

 

100

%


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

**  Includes intercompany eliminations recorded in consolidation, including the Palomar plant as discussed in Note 13 of the notes to Consolidated Financial Statements.


Increases in 2006 revenues and cost of sales reflect 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 Sempra Generation's merchant customers. The increases were offset by the decreased value of Sempra Generation's sales to the DWR, primarily due to lower natural gas prices.


Increases in 2005 revenues and cost of sales compared to 2004 reflect increased trading activity and higher commodity prices at Sempra Commodities, primarily as a result of increased volatility in the power and natural gas markets, and the increased value of Sempra Generation power sales to the DWR as a result of higher natural gas prices.


Litigation Expenses.  Litigation expenses were $56 million, $551 million and $150 million for 2006, 2005 and 2004, respectively. The higher amount in 2005 was primarily due to increases in litigation reserves related to matters arising from the 2000 - 2001 California energy crisis. Note 15 of the notes to Consolidated Financial Statements provides additional information concerning this matter.  



9


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


 

Years ended December 31,

(Dollars in millions)

 

2006

 

2005

 

2004

OTHER OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Utilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Southern California Gas Company

 

$

951

 

34

%

 

$

954

 

37

%

 

$

908

 

42

%

     San Diego Gas & Electric Company

 

 

774

 

28

 

 

 

603

 

23

 

 

 

574

 

26

 

    Total Sempra Utilities

 

 

1,725

 

62

 

 

 

1,557

 

60

 

 

 

1,482

 

68

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sempra Global

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Sempra Commodities

 

 

869

 

31

 

 

 

811

 

32

 

 

 

556

 

25

 

     Sempra Generation

 

 

96

 

3

 

 

 

99

 

4

 

 

 

85

 

4

 

     Sempra Pipelines & Storage

 

 

36

 

1

 

 

 

37

 

1

 

 

 

38

 

2

 

     Sempra LNG

 

 

38

 

1

 

 

 

34

 

1

 

 

 

26

 

1

 

     Total Sempra Global

 

 

1,039

 

36

 

 

 

981

 

38

 

 

 

705

 

32

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent and other *

 

 

50

 

2

 

 

 

45

 

2

 

 

 

--

 

--

 

Total

 

$

2,814

 

100

%

 

$

2,583

 

100

%

 

$

2,187

 

100

%

* Includes intercompany eliminations recorded in consolidation.

 

 

 

 

 

 

 

 

 

 

 

 


Other operating expenses for 2006 increased primarily due to the growth in Sempra Commodities' revenues noted previously. 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 the favorable settlement with the Independent System Operator (ISO), an independent operator of California's wholesale transmission grid, and increases in other operational costs.  


Other operating expenses for 2005 increased compared to 2004 primarily due to an increase in expenses at Sempra Commodities attributable to the growth in revenues noted previously. Other operating expenses at the Sempra Utilities increased due to $59 million of favorable resolutions of regulatory matters in 2004 and $51 million of higher recoverable expenses in 2005, offset by the $42 million net effect related to the 2005 recovery of line losses and grid management charges arising from the favorable settlement with the ISO.


Gains on Sale of Assets, Net.  Net pretax gains on the sale of assets were $1 million, $112 million and $15 million in 2006, 2005 and 2004, 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. 2004 included SoCalGas' $15 million gain on the sale of partnership properties.


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 $381 million, $51 million and $32 million in 2006, 2005 and 2004, respectively. The increase in 2006 was primarily due to the $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 3 of the notes to Consolidated



10


Financial Statements. The increase in 2005 compared to 2004 was due to higher equity earnings of $14 million at Sempra Generation from the Topaz power plants (resulting from entering into the joint venture in July 2004) and $16 million lower equity losses at Sempra Financial (primarily due to the 2004 sale of an alternative-fuel investment).  The increases were offset by a $12 million decrease in regulatory interest at SoCalGas primarily due to a Cost of Service decision in 2004, and the $13 million pretax gain in 2004 on the settlement of an unpaid portion of the purchase price of the Cameron LNG project for an amount less than the liability (which had been recorded as a derivative).  


Interest Income. Interest income was $109 million, $72 million and $69 million in 2006, 2005 and 2004, respectively. The increase in 2006 was primarily due to $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 in 2006 as discussed in Note 1 of the notes to Consolidated Financial Statements, higher interest resulting from increases in short-term investments and $6 million from a 2006 income tax audit settlement at SoCalGas. The increases were 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 $351 million, $310 million and $320 million in 2006, 2005 and 2004, respectively. The increase in 2006 was primarily due to increased borrowings at SDG&E to finance the purchase of the Palomar generating plant, increased short-term borrowings at Sempra Commodities, lower capitalized interest at Sempra Generation due to completion of the Palomar generating plant, higher interest expense at SoCalGas associated with the $250 million first mortgage bonds issued in November 2005 and higher variable 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. For the years ended 2006, 2005 and 2004, the company had income tax expense of $641 million, $34 million and $190 million. The effective income tax rates were 33 percent, 4 percent and 18 percent, respectively. The increase in 2006 expense was due to higher pretax income and the higher effective tax rate. The increase in the 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 and $56 million in 2004, an increased portion of income earned in high tax rate jurisdictions, and lower synthetic fuels credits generated in 2006 compared to 2005 and 2004 as a percentage of income.


Equity in Earnings (Losses) of Certain Unconsolidated Subsidiaries.  For the years ended 2006, 2005 and 2004, equity in earnings (losses) of certain unconsolidated subsidiaries, net of tax, as discussed further in Note 3 of the notes to Consolidated Financial Statements, was $(182) million, $55 million and $62 million, respectively.  The 2006 amount included a $221 million impairment loss associated with Sempra Pipelines & Storage's Argentine investments.   


Discontinued Operations.  During 2006, Sempra Generation completed the sales of the Twin Oaks Power plant, its Energy Services and Facilities Management businesses, and SEPCO, its exploration and production subsidiary.  In June 2006, Sempra Energy's management decided to sell Bangor Gas and Frontier Energy, Sempra Pipelines & Storage's domestic natural gas distribution companies. In January 2007, Sempra Pipelines & Storage entered into agreements to sell the companies, subject to regulatory approvals.




11


In 2004, Sempra Energy disposed of its interest in Atlantic Electric & Gas Limited (AEG), a marketer of power and natural gas commodities to commercial and residential customers in the United Kingdom.


Note 4 of the notes to Consolidated Financial Statements provides further details on these discontinued operations.


Net Income. Variations in net income are summarized in the table shown previously under "Comparison of Earnings."


Business Unit Results


Southern California Gas Company


SoCalGas recorded net income of $223 million, $211 million and $232 million in 2006, 2005 and 2004, respectively.  The increase in 2006 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.


The decrease in 2005 compared to 2004 was due primarily to the resolution of the 2004 Cost of Service proceedings (as discussed further in Note 14 of the notes to Consolidated Financial Statements) which favorably affected 2004 net income by $34 million, an increase of $33 million after-tax in California energy crisis litigation expenses and the $9 million after-tax gain from the sale of the Hawaiian Gardens property in 2004, offset by favorable resolution of income tax issues in 2005 of $24 million, higher authorized base margins in 2005 of $17 million after-tax and the DSM awards settlement of $9 million in 2005.  


San Diego Gas & Electric Company


SDG&E recorded net income of $237 million, $262 million and $208 million in 2006, 2005 and 2004, respectively. The decrease in 2006 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 plant 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) . Also, the resolution of regulatory items increased 2006 net income by $25 million as compared to $24 million in 2005. The 2006 regulatory items include a $13 million resolution of 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 2006. The 2005 regulatory item of $24 million resulted from FERC approval to recover prior year



12


ISO charges in 2005 (as discussed further in Note 14 of the notes to Consolidated Financial Statements).


The increase in 2005 compared to 2004 was due primarily to the favorable settlement with the ISO, the DSM awards settlement, favorable resolution of income tax issues, and the 2005 IRS decision discussed above, offset by a $17 million increase in after-tax California energy crisis litigation expense, the favorable impact of $21 million from the resolution of the 2004 Cost of Service proceeding and $19 million lower electric transmission and distribution authorized base margins and higher operational costs in 2005.    


Sempra Commodities

Sempra Commodities recorded net income of $504 million, $460 million and $320 million in 2006, 2005 and 2004, respectively. The increase in 2006 was due to improved margins (as detailed below) 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.  The increase in 2005 compared to 2004 was due to improvements in its North American operations and most product line segments, the gain on the sale of natural gas storage facilities and a $26 million favorable resolution of prior years' income tax issues in 2005. In addition to the effect of changing prices and volumes, earnings variability will continue in future periods as a result of natural gas and oil inventories, and of storage and transportation capacity contracts' not being marked to market while the economically offsetting derivative instruments are marked to market.  Margin, summarized below by geographical region and product line, consists of net revenues less related costs (primarily brokerage, transportation and storage) plus or minus net interest income/expense, and is used by management in evaluating geographical and product line performance. Margin for 2006 and 2005 includes $110 million and $108 million, respectively, of gains recorded at the time a structured derivative is originated, commonly referred to as "day-one" gains.


 

Years ended December 31,

Margin (Dollars in millions)

2006

 

2005

 

2004

Geographical:

 

 

 

 

 

 

 

 

 

&nbs p;

 

 

 

 

 

 

 

     North America

$

1,313

 

80

%

 

$

1,091

 

81

%

 

$

689

 

67

%

     Europe and Asia

 

325

 

20

 

 

 

255

 

19

 

 

 

338

 

33

 

 

$

1,638

 

100

%

 

$

1,346

 

100

%

 

$

1,027

 

100

%

  

 

 

 

 

 

 

 

 

 

&nbs p;

 

 

 

 

 

 

 

Product Line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Gas

$

792

 

49

%

 

$

439

 

32

%

 

$

318

 

31

%

     Power

 

431

 

26

 

 

 

443

 

33

 

 

 

170

 

17

 

     Oil – crude and products

 

198

 

12

 

 

 

292

 

22

 

 

 

268

 

26

 

     Metals

 

138

 

8

 

 

 

54

 

4

 

 

 

180

 

17

 

     Other

 

79

 

5

 

 

 

118

 

9

 

 

 

91

 

9

 

 

$

1,638

 

100

%

 

$

1,346

 

100

%

 

$

1,027

 

100

%

          

The amounts reported as "Other" include synthetic fuels tax-credit operations of $97 million, $110 million and $97 million in 2006, 2005 and 2004, respectively, which contributed $31 million, $36 million and $29 million to net income in 2006, 2005 and 2004, respectively.




13


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


 

 

Years ended December 31,

(Dollars in millions)

 

2006

2005

2004

Balance at January 1

 

$

1,488

 

$

1,193

 

$

347

 

Additions

 

 

3,069

 

 

1,241

 

 

1,606

 

Realized

 

 

(2,644

)

 

(946

)

 

(760

)

Balance at December 31

 

$

1,913

 

$

1,488

 

$

1,193

 


The estimated fair values as of December 31, 2006, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

 

$

1,746

 

 

$

959

 

 

$

575

 

 

$

47

 

 

$

165

 

Prices provided by other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

external sources

 

 

 

28

 

 

 

(6

)

 

 

--

 

 

 

2

 

 

 

32

 

Prices based on models

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and other valuation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  ;

 

methods

 

 

 

(16

)

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(16

)

Over-the-counter (OTC)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  ;

 

revenue

 

 

 

1,758

*

 

 

953

 

 

 

575

 

 

 

49

 

 

 

181

 

Exchange contracts **

 

 

 

155

 

 

 

412

 

 

 

(188

)

 

 

55