Sempra Energy/SDG&E/PE/SoCalGas 12/31/2009 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, 2009

 

 

 

OR

 

 

[   ]

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

 

For the transition period from

 

 

to

 

 

 

 

 

Commission File No.

Exact Name of Registrants as Specified in their Charters, Address and Telephone Number

State of Incorporation

I.R.S. Employer
Identification Nos.

1-14201

SEMPRA ENERGY

California

33-0732627

 

101 Ash Street

 

 

 

San Diego, California 92101

 

 

 

(619)696-2034

 

 

 

 

 

 

1-3779

SAN DIEGO GAS & ELECTRIC COMPANY

California

95-1184800

 

8326 Century Park Court

 

 

 

San Diego, California 92123

 

 

 

(619)696-2000

 

 

 

 

 

 

1-40

PACIFIC ENTERPRISES

California

94-0743670

 

101 Ash Street

 

 

 

San Diego, California 92101

 

 

 

(619)696-2020

 

 

 

 

 

 

1-1402

SOUTHERN CALIFORNIA GAS COMPANY

California

95-1240705

 

555 West Fifth Street

 

 

 

Los Angeles, California 90013

 

 

 

(213)244-1200

 

 

 

 

 

 

 

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

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

 

Sempra Energy Common Stock, without par value

 

NYSE

 


SDG&E Preference Stock (Cumulative)
         Without Par Value (except $1.70 Series)

SDG&E Cumulative Preferred Stock, $20 Par
         Value (except 4.60% Series)

 


NYSE Amex


NYSE Amex

 


Pacific Enterprises Preferred Stock:
        $4.75 dividend, $4.50 dividend
        $4.40 dividend, $4.36 dividend

 


NYSE Amex

 

 

 

 

 

 

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.

 

 

 

 

 

 

Sempra Energy

Yes

X

 

No

 

San Diego Gas & Electric Company

Yes

 

 

No

X

Pacific Enterprises

Yes

 

 

No

X

Southern California Gas Company

Yes

 

 

No

X


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

 

 

 

 

 

 

Sempra Energy

Yes

 

 

No

X

San Diego Gas & Electric Company

Yes

 

 

No

X

Pacific Enterprises

Yes

 

 

No

X

Southern California Gas Company

Yes

 

 

No

X


Indicate by check mark whether the registrants (1) have 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) have been subject to such filing requirements for the past 90 days.

 

 

 

 

 

 

 

Yes

X

 

No

 


Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).

 

 

 

 

 

 

Sempra Energy

Yes

X

 

No

 

San Diego Gas & Electric Company

Yes

 

 

No

 

Pacific Enterprises

Yes

 

 

No

 

Southern California Gas Company

Yes

 

 

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 registrants' 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, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

Large
accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Sempra Energy

[  X  ]

[      ]

[       ]

[      ]

San Diego Gas & Electric Company

[       ]

[      ]

[  X  ]

[      ]

Pacific Enterprises

[       ]

[      ]

[  X  ]

[      ]

Southern California Gas Company

[       ]

[      ]

[  X  ]

[      ]


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

 

 

 

 

 

 

Sempra Energy

Yes

 

 

No

X

San Diego Gas & Electric Company

Yes

 

 

No

X

Pacific Enterprises

Yes

 

 

No

X

Southern California Gas Company

Yes

 

 

No

X

 

 

 

 

 

 

Exhibit Index on page 47. Glossary on page 56.


 

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009:

 

 

Sempra Energy

$12.1 billion (based on the price at which the common equity was last sold as of the last business day of the most recently completed second fiscal quarter)

San Diego Gas & Electric Company

$0

Pacific Enterprises

$0

Southern California Gas Company

$0

 

Common Stock outstanding, without par value, as of February 23, 2010:

 

 

Sempra Energy

247,003,443 shares

San Diego Gas & Electric Company

Wholly owned by Enova Corporation, which is wholly owned by Sempra Energy

Pacific Enterprises

Wholly owned by Sempra Energy

Southern California Gas Company

Wholly owned by Pacific Enterprises

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

 

 

 

 

 

Portions of the 2009 Annual Report to Shareholders of Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company are incorporated by reference into Parts I, II and IV.

 

 

 

 

 

 

Portions of the Sempra Energy Proxy Statement prepared for the May 2010 annual meeting of shareholders are incorporated by reference into Parts II and III.

 

Portions of the San Diego Gas & Electric Company, Southern California Gas Company and Pacific Enterprises Information Statement are incorporated by reference into Part III.

 

 

 

 

 

 

  






SEMPRA ENERGY FORM 10-K
TABLE OF CONTENTS

 

 

Page

Information Regarding Forward-Looking Statements

3

 

 

PART I

 

 

Item 1.

Business

4

 

Description of Business

5

 

Company Websites

5

 

Government Regulation

5

 

California Natural Gas Utility Operations

7

 

Electric Utility Operations

9

 

Rates and Regulation – Sempra Utilities

12

 

Sempra Global

12

 

Environmental Matters

14

 

Executive Officers of the Registrants

15

 

Other Matters

17

Item 1A.

Risk Factors

18

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

26

Item 4.

Submission of Matters to a Vote of Security Holders

26

 

 

 

PART II

 

 

Item 5.

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

27

Item 6.

Selected Financial Data

28

Item 7.

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

28

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 8.

Financial Statements and Supplementary Data

28

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

28

Item 9A.

Controls and Procedures

28

Item 9B.

Other Information

28

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

29

Item 11.

Executive Compensation

29

Item 12.

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

29

Item 13.

Certain Relationships and Related Transactions, and Director Independence

29

Item 14.

Principal Accountant Fees and Services

29

 

 

 

 

 

 



    





SEMPRA ENERGY FORM 10-K
TABLE OF CONTENTS (CONTINUED)

 




 


Page

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

30

 

 

 

Sempra Energy: Consent of Independent Registered Public Accounting Firm and Report on Schedule

31

San Diego Gas & Electric Company: Consent of Independent Registered Public Accounting Firm

32

Southern California Gas Company: Consent of Independent Registered Public Accounting Firm

33

Pacific Enterprises: Report of Independent Registered Public Accounting Firm

34

 

 

 

Schedule I – Sempra Energy Condensed Financial Information of Parent

35

Schedule I – Pacific Enterprises Condensed Financial Information of Parent

39

 

 

 

Signatures

 

43

Exhibit Index

47

Glossary

56

 

 


This combined Form 10-K is separately filed by Sempra Energy, San Diego Gas & Electric Company, Pacific Enterprises and Southern California Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.


You should read this report in its entirety as it pertains to each respective reporting company. No one section of the report deals with all aspects of the subject matter. Separate Item 6 and 8 sections are provided for each reporting company, except for the Notes to Consolidated Financial Statements. The Notes to Consolidated Financial Statements for all of the reporting companies are combined. All Items other than 6 and 8 are combined for the reporting companies.



    




INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

§

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

§

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

§

capital markets conditions and inflation, interest and exchange rates;

§

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

§

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

§

weather conditions and conservation efforts;

§

war and terrorist attacks;

§

business, regulatory, environmental and legal decisions and requirements;

§

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

§

the timing and success of business development efforts;

§

the resolution of litigation; and

§

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

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



    




PART I

ITEM 1. BUSINESS

DESCRIPTION OF BUSINESS

We provide a description of Sempra Energy and its subsidiaries in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2009 Annual Report to Shareholders (Annual Report), which is incorporated by reference.

This report includes information for the following separate registrants:

§

Sempra Energy and its consolidated entities

§

San Diego Gas & Electric Company (SDG&E)

§

Pacific Enterprises (PE), the holding company for Southern California Gas Company

§

Southern California Gas Company (SoCalGas)

References in this report to "we," "our" and "our company" are to Sempra Energy and its subsidiaries, collectively.  SDG&E and SoCalGas are collectively referred to as the Sempra Utilities.

Sempra Energy has five separately managed reportable segments consisting of SDG&E, SoCalGas, Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage. Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage, and an additional business unit, Sempra LNG (liquefied natural gas) are subsidiaries of Sempra Global. Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation.

SDG&E, PE and SoCalGas are subsidiaries of Sempra Energy. Sempra Energy directly or indirectly owns all the common stock and substantially all of the voting stock of each of the three companies.

Sempra Commodities - Pending Transaction

In April 2008, Sempra Energy formed a partnership with The Royal Bank of Scotland plc (RBS) to purchase and operate our commodities-marketing businesses, which generally comprised the Sempra Commodities segment. In November 2009, RBS announced its intention to divest its interest in this joint venture, RBS Sempra Commodities LLP (RBS Sempra Commodities), following a directive from the European Commission to dispose of certain assets. On February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement with J.P. Morgan Ventures Energy Corporation (J.P. Morgan Ventures), whereby J.P. Morgan Ventures will purchase the following businesses from the joint venture:

§

the global oil, metals, coal, emissions (other than emissions related to the joint venture’s North American power business), plastics, agricultural commodities and concentrates commodities trading and marketing business

§

the European power and gas business

§

the investor products business

RBS Sempra Commodities will retain its North American power and natural gas trading businesses and its retail energy solutions business. These businesses have historically generated 40 to 60 percent of total earnings of the businesses in the partnership, and have averaged more than 50 percent.

Subject to obtaining various regulatory approvals and other conditions, the transaction is expected to close in the second quarter of 2010. J.P. Morgan Ventures will pay an aggregate purchase price equal to the estimated book value at closing of the businesses purchased, generally computed on the basis of international financial reporting standards (as adopted by the European Union), plus an amount equal to $468 million. Sempra Energy will be entitled to 53 -1/3 percent of the aggregate purchase price, and RBS will be entitled to 46-2/3 percent of the aggregate purchase price.

In connection with the transaction, we and RBS entered into a letter agreement to negotiate, prior to closing of the transaction, definitive documentation to amend certain provisions of the Limited Liability Partnership Agreement dated April 1, 2008 between Sempra Energy and RBS. As RBS continues to be obligated to divest its remaining interest in the partnership, the letter agreement also provides for negotiating the framework for the entertaining bids for the remaining part of the partnership’s business.

We provide further discussion about RBS Sempra Commodities and the pending transaction with J.P. Morgan Ventures in Notes 3, 4, 6 and 20 of the Notes to Consolidated Financial Statements. The partnership is also discussed in "Sempra Global – Competition - Sempra Commodities" below.




COMPANY WEBSITES

Company website addresses are:

Sempra Energy – http://www.sempra.com
SDG&E – http://www.sdge.com
PE/SoCalGas – http://www.socalgas.com

We make available free of charge on our website our 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 Sempra Energy’s board of directors (the board), the board's corporate governance guidelines, and Sempra Energy's code of business conduct and ethics for directors and officers are posted on Sempra Energy's website.

SDG&E and SoCalGas make available free of charge via a hyperlink on their websites their annual reports 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.  

Printed copies of all of these materials may be obtained by writing to our Corporate Secretary at Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017.

GOVERNMENT REGULATION

The most significant government regulation affecting Sempra Energy is the regulation of our utility subsidiaries.

California Utility Regulation

The Sempra Utilities are regulated in California by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC), and the California Air Resources Board (CARB).

The California Public Utilities Commission:

§

consists of five commissioners appointed by the Governor of California for staggered, six-year terms.

§

regulates SDG&E’s and SoCalGas’ rates and conditions of service, sales of securities, rates of return, capital structure, rates of depreciation, and long-term resource procurement, except as described below in "United States Utility Regulation."

§

has jurisdiction over the proposed construction of major new electric transmission, electric distribution, and natural gas storage, transmission and distribution facilities in California.

§

conducts reviews and audits of utility performance and compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies.

§

regulates the interactions and transactions of the Sempra Utilities with Sempra Energy and its other affiliates.

We provide further discussion in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.

SDG&E is also subject to regulation by the CEC, which publishes 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 conservation programs;

§

sponsors alternative-energy research and development projects;

§

promotes energy conservation programs;

§

maintains a statewide plan of action in case of energy shortages; and

§

certifies power-plant sites and related facilities within California.

The CEC conducts a 20-year forecast of available supplies and prices for every market sector that consumes 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 one of many resource materials used to support the Sempra Utilities’ long-term investment decisions.

The State of California requires certain California electric retail sellers, including SDG&E, to deliver 20 percent of their 2010 retail demand from renewable energy sources. The rules governing this requirement, administered by both the CPUC and the CEC, are generally known as the Renewables Portfolio Standard (RPS) Program. Certification of a generation project by the CEC as an Eligible

Renewable Energy Resource (ERR) allows the purchase of output from a generation facility to be counted towards fulfillment of the RPS Program requirements. This may affect the demand for output from renewables projects developed by Sempra Generation, particularly from California utilities. Final certification as an ERR for Sempra Generation’s El Dorado solar generation facility was approved in June 2009.

In September 2009, the Governor of California issued an Executive Order which directs the California utilities to procure 33 percent of their electric energy requirements from renewable sources by 2020. This Executive Order designates the CARB as the agency responsible for establishing the compliance rules and regulations for this program.

California Assembly Bill 32, the California Global Warming Solutions Act of 2006, assigns responsibility to CARB for monitoring and establishing policies for reducing greenhouse gas (GHG) emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions, including a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a department within the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government.  As the CARB formulates its plan, provisions of the plan may apply to the Sempra Utilities.

United States Utility Regulation

The Sempra Utilities are also regulated by the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory Commission (NRC).

In the case of SDG&E, the FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale.

In the case of SoCalGas, the FERC regulates the interstate sale and transportation of natural gas and the uniform systems of accounts.

The NRC oversees the licensing, construction and operation of nuclear facilities in the United States, including the San Onofre Nuclear Generating Station (SONGS), in which SDG&E owns a 20-percent interest. 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, may require plant modifications as a condition of continued operation.

Sempra Pipelines & Storage operates Mobile Gas Service Corporation (Mobile Gas), a small natural gas distribution utility serving Southwest Alabama that is regulated by the Alabama Public Service Commission (APSC).  The FERC regulates Mobile Gas’ interstate transportation of natural gas, the uniform systems of accounts, and rates of depreciation.

Local Regulation Within the U.S.

SoCalGas has natural gas franchises with the 243 separate counties and cities in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. Most of the franchises have indefinite lives with no expiration date. Some franchises have fixed expiration dates, ranging from 2010 to 2048.

SDG&E has

§

electric franchises with the two counties and the 26 cities in its electric service territory, and

§

natural gas franchises with the one county and the 18 cities in its natural gas service territory.

These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas. Most of the franchises have indefinite lives with no expiration dates. Some franchises have fixed expiration dates, ranging from 2012 to 2035.

Sempra Generation, Sempra LNG and Sempra Pipelines & Storage have operations or development projects in Alabama, Arizona, California, Indiana, Louisiana, Mississippi, Nevada, Texas, and Hawaii. These entities are subject to state and local laws, and to regulations in the states in which they operate.

Other Regulation

RBS Sempra Commodities is subject to regulation by the U.K. Financial Services Authority, the New York Mercantile Exchange, the Commodity Futures Trading Commission, the FERC, the London Metals Exchange, NYSE Euronext, the U.S. Federal Reserve Bank and the National Futures Association.


In the United States, the FERC regulates Sempra Generation’s, Sempra Pipelines & Storage’s and Sempra LNG’s operations.  Sempra Pipelines & Storage also owns an interest in the Rockies Express Pipeline, a natural gas pipeline which operates in several states in the United States and is subject to regulation by the FERC.

Sempra Pipelines & Storage’s Bay Gas Storage Company (Bay Gas) is regulated by the APSC and its intrastate storage contracts are subject to APSC approval. Bay Gas provides long-term services for customers that include storage and transportation of natural gas from interstate and intrastate sources. As an intrastate facility, Bay Gas is regulated by the FERC as a 311 facility, and the FERC has also approved market-based rates for interstate storage services and cost-based rates for transportation services.

Several of our segments operate in Mexico as follows:

§

Sempra Generation owns and operates a natural gas-fired power plant in Baja California, Mexico

§

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

§

Sempra Pipelines & Storage transports gas between the U.S. border and Baja California, Mexico

§

Sempra LNG owns and operates the Energía Costa Azul LNG receipt terminal located in Baja California, Mexico

These operations are subject to regulation by the Comisión Reguladora de Energía and by the labor and environmental agencies of city, state and federal governments in Mexico.

Sempra Pipelines & Storage also has investments in South America that are subject to laws and regulations in the localities and countries in which they operate.

Licenses and Permits

The Sempra Utilities obtain numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity and the operation and construction of related assets. Because these permits, authorizations and licenses require periodic renewal, the Sempra Utilities are continuously regulated by the granting agencies.

Our 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 the wholesale distribution of electricity.

Sempra Pipelines & Storage’s Mexican subsidiaries obtain numerous permits, authorizations and licenses for their natural gas distribution and transmission systems from the local governments where the service is provided. Sempra Pipelines & Storage’s U.S. operations obtain licenses and permits for natural gas storage facilities and pipelines.

Sempra LNG obtains licenses and permits for the construction and operation of LNG facilities.

We describe other regulatory matters in Notes 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.

CALIFORNIA NATURAL GAS UTILITY OPERATIONS

SoCalGas and SDG&E sell, distribute, and transport natural gas. SoCalGas purchases and stores natural gas for itself and SDG&E on a combined portfolio basis and provides natural gas storage services for others. The Sempra Utilities’ resource planning, natural gas procurement, contractual commitments, and related regulatory matters are discussed below. We also provide further discussion in the Annual Report in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Notes 16 and 17 of the Notes to Consolidated Financial Statements.

Customers

For regulatory purposes, end-use customers are classified as either core or noncore customers. Core customers are primarily residential and small commercial and industrial customers. Noncore customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and enhanced oil recovery customers. Noncore customers at SDG&E consist primarily of electric generation, and large commercial and industrial customers.

Most core customers purchase natural gas directly from SoCalGas or SDG&E. While core customers are permitted to purchase directly from producers, marketers or brokers, the Sempra Utilities are obligated to provide reliable supplies of natural gas to serve the requirements of their core customers. Noncore customers are responsible for the procurement of their natural gas requirements.

In 2009, SoCalGas added 27,000 new customer natural gas meters at a growth rate of 0.5 percent; in 2008, it added 41,000 new meters at a growth rate of 0.7 percent. In 2009, SDG&E added 4,200 new customer natural gas meters at a growth rate of 0.5 percent; in

2008, it added 3,000 new meters at a growth rate of 0.4 percent. We expect levels to remain low in 2010, and both SoCalGas and SDG&E expect new meter growth in 2010 to be comparable to that in 2009.

Natural Gas Procurement and Transportation

SoCalGas purchases natural gas under short-term and long-term contracts for the Sempra Utilities’ core customers. SoCalGas purchases natural gas from Canada, the U.S. Rockies and the southwestern U.S. to meet customer requirements and maintain pipeline reliability. It also purchases some California natural gas production and additional supplies delivered directly to California for its remaining requirements. Natural gas prices for substantially all contracts are based on published monthly bid-week indices.

To ensure the delivery of the natural gas supplies to its distribution system and to meet the seasonal and annual needs of customers, SoCalGas has entered into firm interstate pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation rights. Interstate pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company, and Kern River Gas Transmission Company, provide transportation services into SoCalGas' intrastate transmission system for supplies purchased by SoCalGas or its transportation customers from outside of California. The FERC regulates the rates that interstate pipeline companies may charge for natural gas and transportation services.

SoCalGas has natural gas transportation contracts with various interstate pipelines. These contracts expire on various dates between 2010 and 2025.

Natural Gas Storage

SoCalGas provides natural gas storage services for core, noncore and non-end-use customers. The Sempra Utilities’ core customers are allocated a portion of SoCalGas' storage capacity. SoCalGas offers the remaining storage capacity for sale to others through an open bid process. The storage service program provides opportunities for these customers to purchase and store natural gas when natural gas costs are low, usually during the summer, thereby reducing purchases when natural gas costs are expected to be higher. This program allows customers to better manage their fuel procurement and transportation needs.

Demand for Natural Gas

Growth in the demand for natural gas largely depends on the health and expansion of the Southern California economy, prices of alternative energy products, environmental regulations, renewable energy, legislation, and the effectiveness of energy efficiency programs. External factors such as weather, the price of electricity, electric deregulation, the use of hydroelectric power, development of renewable energy resources, development of new natural gas supply sources, and general economic conditions can also result in significant shifts in demand and market price.

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 noncore industrial market, some customers are capable of securing alternate fuel supplies from other suppliers which can affect the demand for natural gas. The Sempra Utilities’ ability to maintain their respective industrial market shares is largely dependent on the relative spread between delivered energy prices.

Natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the Sempra Utilities’ respective service areas. We provide additional information regarding electric industry restructuring in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

Short-Term Demand. The demand for natural gas by electric generators is influenced by a number of factors, including:

§

the availability of alternative sources of generation; for example, the availability of hydroelectricity is highly dependent on precipitation in the western U.S. and Canada;

§

the performance of other generation sources in the western U.S., including nuclear and coal, renewable energy and other natural gas facilities outside the service area; and

§

the changes in end-use electricity demand; for example, natural gas use generally increases during extended heat waves.

Long-Term Demand. The demand for natural gas used to generate electricity will be influenced by additional factors such as the location of new power plants and the development of renewable energy resources. Recently, more generation capacity has been constructed outside the Sempra Utilities' service area than within it. This new generation will displace the output of older, less-efficient local generation, thereby reducing the use of natural gas for local electric generation. Over the next few years, however, the construction of smaller natural gas-fired peaking and other electric generation facilities within the Sempra Utilities’ respective service areas are expected to result in a slight overall increase in the demand for local natural gas for electric generation.

The natural gas distribution business is seasonal, and revenues generally are greater during the winter heating months. As is prevalent in the industry, SoCalGas 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

SDG&E’s service area covers 4,100 square miles. At December 31, 2009, SDG&E had 1.4 million customer meters consisting of:

§

1,225,500 residential

§

146,700 commercial

§

500 industrial

§

2,000 street and highway lighting

§

4,500 direct access

In 2009, SDG&E added 7,000 new electric customer meters at a growth rate of 0.5 percent; in 2008, it added 7,400 new customers at a growth rate of 0.5 percent. Based on forecasts of new housing starts, SDG&E expects that its new meter growth rate in 2010 will be comparable to that in 2009.

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 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.

Electric Resources

The supply of electric power available to SDG&E for resale is based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its Palomar and Miramar generating facilities, its 20-percent ownership interest in SONGS and purchases on a spot basis. This supply as of December 31, 2009 is as follows:


SDG&E ELECTRIC RESOURCES

Supplier

 

Source

 

Expiration date

Megawatts (MW)

PURCHASED-POWER CONTRACTS:

 

 

 

 

 

 

Department of Water Resources (DWR)-

 

 

 

 

 

 

     allocated contracts:

 

 

 

 

 

 

 

JP Morgan

 

Natural gas

 

2010 

 

 325 

 

Sunrise Power Co. LLC

 

Natural gas

 

2012 

 

 570 

 

Other (5 contracts)

 

Natural gas/Wind

 

2011 to 2013

 

 259 

 

    Total

 

 

 

 

 

 1,154 

Other contracts with Qualifying Facilities (QFs)(1):

 

 

 

 

 

 

 

Applied Energy Inc.

 

Cogeneration

 

2019 

 

 116 

 

Yuma Cogeneration

 

Cogeneration

 

2024 

 

 56 

 

Goal Line Limited Partnership

 

Cogeneration

 

2025 

 

 50 

 

Other (18 contracts)

 

Cogeneration

 

2009(2) and thereafter

 

 48 

 

    Total

 

 

 

 

 

 270 

Other contracts with renewable sources:

 

 

 

 

 

 

 

Oasis Power Partners

 

Wind

 

2019 

 

 60 

 

Kumeyaay

 

Wind

 

2025 

 

 50 

 

Covanta Delano

 

Bio-mass

 

2017 

 

 49 

 

Iberdrola Renewables

 

Wind

 

2018 

 

 25 

 

WTE/FPL

 

Wind

 

2019 

 

 17 

 

PacificCorp

 

Wind

 

2010 

 

 200 

 

NaturEner

 

Wind

 

2024 

 

 210 

 

Other (9 contracts)

 

Bio-gas/Hydro

 

2012 to 2022

 

 33 

 

    Total

 

 

 

 

 

 644 

Other long-term and tolling contracts(3):

 

 

 

 

 

 

 

Cabrillo Power I, LLC

 

Natural gas

 

2010 

 

 964 

 

Dynegy South Bay Holdings, LLC

 

Natural gas

 

2009(4)

 

 704 

 

Otay Mesa Energy Center LLC

 

Natural gas

 

2019 

 

 573 

 

Portland General Electric (PGE)

 

Coal

 

2013 

 

 89 

 

Enernoc

 

Demand response/

 

 

 

 

 

 

 

Distributed generation

 

2016 

 

 25 

 

    Total

 

 

 

 

 

 2,355 

Total contracted

 

 

 

 

 

 4,423 

 

 

 

 

 

 

 

 

GENERATION:

 

 

 

 

 

 

 

Palomar

 

Natural gas

 

 

 

 560 

 

SONGS

 

Nuclear

 

 

 

 430 

 

Miramar

 

Natural gas

 

 

 

 96 

Total generation

 

 

 

 

 

 1,086 

TOTAL CONTRACTED AND GENERATION

 

 

 

 

 

 5,509 

(1)

A QF is a generating facility which meets the requirements for QF status under the Public Utility Regulatory Policies Act of 1978. It includes cogeneration facilities, which produce electricity and another form of useful thermal energy (such as heat or steam) used for industrial, commercial, residential or institutional purposes. It also includes small power production facilities, which are generating facilities whose primary energy source is renewable (hydro, wind, solar, etc.), biomass, waste, or geothermal resources. Small power production facilities are generally limited in size to 80 MW.

(2)

One 25-MW contract expired effective January 1, 2010.

(3)

Tolling contracts are purchased-power agreements under which we provide the fuel for generation to the energy supplier.

(4)

This contract expired effective January 1, 2010.


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


Natural Gas Supply

SDG&E buys natural gas under short-term contracts for its Palomar and Miramar generating facilities and for the Cabrillo Power I, LLC and Otay Mesa Energy Center LLC tolling contracts. Purchases are from various southwestern U.S. suppliers and are primarily based on published monthly bid-week indices. SDG&E's natural gas is delivered from southern California border receipt points to the SoCal CityGate pool via firm access rights which expire on March 31, 2011.  The natural gas is then delivered from the SoCal CityGate pool to the generating facilities through SoCalGas' pipelines in accordance with a transportation agreement that expires on May 31, 2011. SDG&E has also contracted with SoCalGas for natural gas storage from April 1, 2009 to March 31, 2010.

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

SONGS

SDG&E has a 20-percent ownership interest in SONGS, which is located south of San Clemente, California. SONGS consists of two operating nuclear generating units: Units 2 and 3. Unit 1 is permanently shut down and is being decommissioned. The city of Riverside owns 1.79 percent of Units 2 and 3, and Southern California Edison (Edison), the operator of SONGS, owns the remaining interest.

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

Unit 1 was removed from service in November 1992 when the CPUC issued a decision to permanently shut it down. The decommissioning of Unit 1 is now in progress and its spent nuclear fuel is being stored on site in an independent spent fuel storage installation (ISFSI) licensed by the NRC.

SDG&E has fully recovered the capital invested through December 31, 2003 in SONGS and earns a return only on subsequent capital additions, including SDG&E’s share of costs associated with the steam generator replacement project, which is currently in progress.

We provide additional information concerning the SONGS units and nuclear decommissioning below in "Environmental Matters" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 7, 15 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.

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 that extend through 2020. The supply contracts are index-priced and provide nuclear fuel supply through 2022, the expiration of SONGS’ NRC license.

Spent fuel from SONGS is being stored on site in both the ISFSI and spent fuel pools. With the completion of the current phase of Unit 1 decommissioning, the site has adequate space to build ISFSI storage capacity through 2022. 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. It is uncertain when the DOE will begin accepting spent fuel from any nuclear generation facility.

We provide additional information concerning nuclear-fuel costs and the storage and movement of spent fuel in Notes 15 and 17, respectively, of the Notes to Consolidated Financial Statements in the Annual Report.

Power Pools

SDG&E is a participant in the Western Systems Power Pool, which includes an electric-power and transmission-rate agreement with utilities and power agencies located throughout the United States and Canada. More than 300 investor-owned and municipal utilities, state and federal power agencies, energy brokers and power marketers share power and information in order to increase efficiency and competition in the bulk power market. Participants are able to make power transactions on standardized terms, including market-based rates, preapproved by the FERC.

Transmission Arrangements

SDG&E's 500-kV Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona to San Diego, California. SDG&E's share of the line is 1,162 MW, although it can be less under certain system conditions.


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

In December 2008, the CPUC approved SDG&E’s Sunrise Powerlink, a new 120-mile, 500-kV transmission line between the Imperial Valley and the San Diego region. The project is in the pre-construction phase, including final engineering, design and procurement activities. SDG&E expects the line to be in commercial operation in 2012. The Sunrise Powerlink is designed to have a path rating of 1,000 MW. We provide further discussion in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

Transmission Access

The National Energy Policy Act governs procedures for requests for transmission service. The FERC approved the California investor-owned utilities' (IOUs) transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998. We provide additional information regarding transmission issues in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

RATES AND REGULATION – SEMPRA UTILITIES

We provide information concerning rates and regulation applicable to the Sempra Utilities in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1, 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.

SEMPRA GLOBAL

Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation. Sempra Global includes Sempra Commodities, Sempra Generation, Sempra Pipelines & Storage and Sempra LNG. We provide descriptions of these business units and information concerning their operations under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1, 3, 4, 5, 17, 18 and 20 of the Notes to Consolidated Financial Statements in the Annual Report.  

Competition

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

Sempra Commodities

Sempra Commodities is primarily comprised of our investment in RBS Sempra Commodities, a joint venture formed in April 2008. This business unit also includes Sempra Rockies Marketing, which holds firm service capacity on the Rockies Express Pipeline.

All aspects of RBS Sempra Commodities’ business are intensely competitive and are expected to remain so. Sources of competition include the following:

§

other brokers and dealers,

§

investment banking firms,

§

energy companies, and

§

other companies that offer similar products and services in the U.S. and globally.

RBS Sempra Commodities’ competition is based on a number of factors, including transaction execution, financing, products and services, innovation, reputation and price.

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

RBS Sempra Commodities’ competitors include Goldman Sachs, JPMorgan, Morgan Stanley and Barclay’s Capital.

The partnership is discussed in Notes 3, 4 and 20 of the Notes to the Consolidated Financial Statements. As we discuss above under “Description of Business,” on February 16, 2010, Sempra Energy, RBS and the partnership entered into an agreement to sell certain businesses within the partnership.

Sempra Generation

For sales of non-contracted power, Sempra Generation is subject to competition from energy marketers, utilities, industrial companies and other independent power producers. For a number of years, natural gas has been the fuel of choice for new power generation

facilities for economic, operational and environmental reasons. While natural gas-fired facilities will continue to be an important part of the nation’s generation portfolio, some regulated utilities are now constructing units powered by renewable resources, often with subsidies or under legislative mandate. These utilities generally have a lower cost of capital than most independent power producers and often are able to recover fixed costs through rate base mechanisms. This recovery allows them to build, buy and upgrade generation without relying exclusively on market clearing prices to recover their investments.

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

Sempra Generation’s competitors include

§

Edison Mission Energy

§

Reliant Energy

§

FPL Energy LLC

§

Mirant Energy

§

Calpine

§

Dynegy

Sempra Pipelines & Storage

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

Sempra Pipelines & Storage’s competitors include

§

Iberdrola Renewables (Enstor)

§

Kinder Morgan

§

Spectra Energy

§

Enterprise Product Partners LP

§

Energy Transfer Partners LP

§

Boardwalk Pipeline Partners

§

Plains All-American LP

§

El Paso Corporation

§

The Williams Companies

§

TransCanada

§

Various independent midstream asset developers

 

Sempra LNG

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

§

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

§

frontier basins in Alaska, Canada, and offshore North America;

§

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

§

previously inaccessible or uneconomic natural gas reserves through the use of new extraction techniques; and

§

LNG imported into LNG receipt terminals in operation or under development in the United States, Canada and Mexico.

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

Sempra LNG competes with other companies to construct and operate LNG receiving terminals and to purchase LNG. According to the FERC, as of December 31, 2009, there were 15 existing and operating LNG receipt terminals in North America. There are 3 LNG receipt terminals currently under construction. In addition, as of December 31, 2009, there were 63 LNG receipt terminals in 18 countries. There are also other proposed LNG receipt terminals worldwide with which Sempra LNG will compete to be the most economical delivery point for LNG supply of both long-term contracted and spot volumes.


Sempra LNG’s major domestic and international competitors include the following companies and their related LNG affiliates:

§

 Cheniere Energy, Inc.

§

Cheniere Energy Partners, L.P.

§

Excelerate Energy, LLC

§

Dominion Resources, Inc.

§

GDF Suez S.A.

§

Southern Union Company

§

El Paso Corporation

§

Royal Dutch Shell plc

§

Eni, S.p.A.

§

OAO Gazprom

§

Chevron Corporation

§

Statoil A.S.A.

ENVIRONMENTAL MATTERS

We discuss environmental issues affecting us in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report. You should read the following additional information in conjunction with those discussions.

Hazardous Substances  

In 1994, the CPUC approved the Hazardous Waste Collaborative mechanism, allowing California's IOUs to recover hazardous waste cleanup costs for certain sites, including those related to certain Superfund sites. This mechanism permits the Sempra Utilities to recover in rates 90 percent of hazardous waste cleanup costs and related third-party litigation costs, and 70 percent of the related insurance-litigation expenses. In addition, the Sempra Utilities have the opportunity to retain a percentage of any recoveries from insurance carriers and other third parties to offset the cleanup and associated litigation costs not recovered in rates.

At December 31, 2009, we had accrued estimated remaining investigation and remediation liabilities of $1.5 million at SDG&E and $27.9 million at SoCalGas, both related to hazardous waste sites for which the Hazardous Waste Collaborative mechanism authorizes us to recover 90 percent of the costs. The accruals include costs for numerous locations, most of which had been manufactured-gas plants. This estimated cost excludes remediation costs of $5.9 million associated with SDG&E's former fossil-fuel power plants and other locations for which the cleanup costs are not being recovered in rates. We believe that any costs not ultimately recovered through rates, insurance or other means will not have a material adverse effect on our consolidated results of operations or financial position.

We record estimated liabilities for environmental remediation when amounts are probable and estimable. In addition, we record amounts authorized to be recovered in rates under the Hazardous Waste Collaborative mechanism as regulatory assets.

Air and Water Quality   

The transmission and distribution of natural gas require the operation of compressor stations, which are subject to increasingly stringent air-quality standards, such as those established by the CARB. We discuss these standards in "Government Regulation – California Utility Regulation" above. The Sempra Utilities generally recover in rates the costs to comply with these standards.

In connection with the issuance of operating permits, SDG&E and the other owners of SONGS have an agreement with the California Coastal Commission to mitigate the environmental damage to the marine environment attributed to the cooling-water discharge from SONGS. SDG&E's share of the mitigation costs is estimated to be $47 million, of which $33 million had been incurred through December 31, 2009, and $14 million is accrued for the remaining costs through 2050. In 2008, an artificial kelp reef project was completed. The remaining costs are to complete a wetlands project and maintain both projects through 2050.


EXECUTIVE OFFICERS OF THE REGISTRANTS

Sempra Energy

Name

Age(1)

Position(1)(2)

Donald E. Felsinger

62

Chairman and Chief Executive Officer

Neal E. Schmale

63

President and Chief Operating Officer

Javade Chaudhri

57

Executive Vice President and General Counsel

Jessie J. Knight, Jr. (until April 3, 2010)(2)

59

Executive Vice President – External Affairs

Debra L. Reed (effective April 3, 2010)(2)

53

Executive Vice President

Mark A. Snell

53

Executive Vice President and Chief Financial Officer

Joseph A. Householder

54

Senior Vice President, Controller and Chief Accounting Officer

Charles A. McMonagle (until July 1, 2010)(3)

60

Senior Vice President and Treasurer

G. Joyce Rowland

55

Senior Vice President – Human Resources

(1) Ages and, except as otherwise noted, positions are as of February 25, 2010.

(2) On April 3, 2010, the following organizational changes will be effective:

§

Mr. Knight will become the Chief Executive Officer of SDG&E and relinquish his position as Executive Vice President – External Affairs of Sempra Energy.

§

Ms. Reed will become an Executive Vice President of Sempra Energy and relinquish her positions with SDG&E, PE and SoCalGas.

(3) Mr. McMonagle will retire effective July 1, 2010.


Each officer has been an officer of Sempra Energy or its subsidiaries for more than the last five years, except for Mr. Knight. Prior to joining Sempra Energy in 2006, Mr. Knight was the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce since 1999.


SDG&E, PE and SoCalGas

Name

Age(1)

Position(1)(2)

SAN DIEGO GAS & ELECTRIC COMPANY

Debra L. Reed (until April 3, 2010)(2)

53

Chairperson, President and Chief Executive Officer

Jessie J. Knight, Jr. (effective April 3, 2010)(2)

59

Chief Executive Officer

Michael R. Niggli

60

Chief Operating Officer

Michael R. Niggli (effective April 3, 2010)(2)

60

President and Chief Operating Officer

James P. Avery

53

Senior Vice President – Power Supply

J. Chris Baker

50

Senior Vice President and Chief Information Officer

Lee Schavrien (until April 3, 2010)(2)

55

Senior Vice President – Regulatory and Finance

Lee Schavrien (effective April 3, 2010)(2)

55

Senior Vice President – Finance, Regulatory and Legislative Affairs

Anne S. Smith (until April 3, 2010)(2)

56

Senior Vice President – Customer Services

W. Davis Smith (until April 3, 2010)(2)

60

Senior Vice President and General Counsel

W. Davis Smith (effective April 3, 2010)(2)

60

Vice President and General Counsel

Lee M. Stewart (until April 3, 2010)(2)

64

Senior Vice President – Gas Operations

Robert M. Schlax

54

Vice President, Controller, Chief Financial Officer and Chief Accounting Officer

 

 

 

PACIFIC ENTERPRISES

 

 

Debra L. Reed (until April 3, 2010)(2)

53

Chairperson, President and Chief Executive Officer

Michael W. Allman (effective April 3, 2010)(2)

49

President and Chief Executive Officer

Michael R. Niggli (until April 3, 2010)(2)

60

Chief Operating Officer

Anne S. Smith (effective April 3, 2010)(2)

56

Chief Operating Officer

Robert M. Schlax(3)

54

Vice President, Controller, Chief Financial Officer and Chief Accounting Officer

 

 

 

SOUTHERN CALIFORNIA GAS COMPANY

Debra L. Reed (until April 3, 2010)(2)

53

Chairperson, President and Chief Executive Officer

Michael W. Allman (effective April 3, 2010)(2)

49

President and Chief Executive Officer

Michael R. Niggli (until April 3, 2010)(2)

60

Chief Operating Officer

Anne S. Smith (effective April 3, 2010)(2)

56

Chief Operating Officer

J. Chris Baker

50

Senior Vice President and Chief Information Officer

Michael Gallagher (effective May 1, 2010)(4)

45

Senior Vice President – Operations

Lee Schavrien (until April 3, 2010)(2)

55

Senior Vice President – Regulatory and Finance

Lee Schavrien (effective April 3, 2010)(2)

55

Senior Vice President – Finance, Regulatory and Legislative Affairs

Anne S. Smith (until April 3, 2010)(2)

56

Senior Vice President – Customer Services

W. Davis Smith (until April 3, 2010)(2)

60

Senior Vice President and General Counsel

Lee M. Stewart(2)(5)

64

Senior Vice President – Gas Operations

Robert M. Schlax(3)

54

Vice President Controller, Chief Financial Officer and Chief Accounting Officer

(1) Ages and, except as otherwise noted, positions are as of February 25, 2010.

(2) On April 3, 2010, the following organizational changes will be effective:

§

Ms. Reed will become an Executive Vice President of Sempra Energy and relinquish her positions with SDG&E, PE and SoCalGas.

§

Mr. Knight will become the Chief Executive Officer of SDG&E and relinquish his position as Executive Vice President – External Affairs of Sempra Energy.

§

Mr. Niggli will become the President and remain the Chief Operating Officer of SDG&E and relinquish his positions with PE and SoCalGas.

§

Mr. Schavrien will become the Senior Vice President – Finance, Regulatory and Legislative Affairs of SDG&E and SoCalGas.

§

Ms. Smith will become the Chief Operating Officer of PE and SoCalGas and relinquish her Senior Vice President positions with SDG&E and SoCalGas.

§

Mr. Smith will become Vice President and General Counsel of SDG&E and relinquish his positions with SoCalGas.

§

Mr. Allman will become the President and Chief Executive Officer of PE and SoCalGas and relinquish his position as Vice President of Sempra Energy.

§

Mr. Stewart will remain the Senior Vice President – Gas Operations of SoCalGas and relinquish his position with SDG&E.

(3) Mr. Schlax will remain the Vice President, Controller, Chief Financial Officer and Chief Accounting Officer of SDG&E and relinquish his positions with PE and SoCalGas at a date yet to be determined.

(4) Mr. Gallagher will become the Senior Vice President – Operations of SoCalGas effective May 1, 2010.

(5) Mr. Stewart will retire from SoCalGas in late 2010.


Each executive officer of SDG&E, PE and SoCalGas has been an officer or employee of Sempra Energy or its subsidiaries for more than the last five years, except for Messrs. Knight, Schlax and Gallagher. Prior to joining Sempra Energy in 2006, Mr. Knight was the President and Chief Executive Officer of the San Diego Regional Chamber of Commerce since 1999. Prior to joining SDG&E in 2005, Mr. Schlax was Chief Financial Officer, Treasurer and Vice President of Finance of Mercury Air Group, Inc. since 2002. Prior to joining Sempra Energy in 2006, from 1999 through 2006, Mr. Gallagher was a partner and director of Sterling Energy Operations, LLC, which provides management consulting services to electric/power companies.


OTHER MATTERS

Employees of Registrants

As of December 31, each company had the following number of employees:


 

December 31,

 

2009 

2008 

Sempra Energy Consolidated

 

 13,839 

 

 13,673 

SDG&E

 

 5,067 

 

 4,833 

SoCalGas

 

 7,136 

 

 7,188 


Labor Relations

Field, technical and most clerical employees at SoCalGas are represented by the Utility Workers Union of America or the International Chemical Workers Union Council. The collective bargaining agreement for these employees covering wages, hours, working conditions, and medical and other benefit plans expires on September 30, 2011.

Field employees and some clerical and technical employees at SDG&E are represented by the International Brotherhood of Electrical Workers. The collective bargaining agreement for these employees covering wages, hours and working conditions is in effect through August 31, 2011. For these same employees, the agreement covering pension and savings plan benefits is in effect through December 4, 2010, and the agreement covering health and welfare benefits is in effect through December 31, 2011.


ITEM 1A.  RISK FACTORS

When evaluating our company and its subsidiaries, you should consider carefully the following risk factors and all other information contained in this report. These risk factors could affect our actual results and cause such results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Other risks and uncertainties, in addition to those that are described below, may also impair our business operations. If any of the following occurs, our business, cash flows, results of operations and financial condition could be seriously harmed. In addition, the trading price of our 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 our company set forth in the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results o f Operations" in the Annual Report.

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

Sempra Energy's ability to pay dividends and meet its debt obligations depends on cash flows from its subsidiaries and, in the short term, its ability to raise capital from external sources. In the long term, cash flows from the subsidiaries depend on their ability to generate operating cash flows in excess of their own capital expenditures and long-term debt obligations. In addition, the subsidiaries are separate and distinct legal entities and could be precluded from making such distributions under certain circumstances, including as a result of legislation or regulation or in times of financial distress.

Our businesses may be adversely affected by conditions in the financial markets and economic conditions generally.

Our businesses are capital intensive and we rely significantly on long-term debt to fund a portion of our capital expenditures and refund outstanding debt, and on short-term borrowings to fund a portion of day-to-day business operations.

The credit markets and financial services industry have recently experienced a period of extreme world-wide turmoil characterized by the bankruptcy, failure, collapse or sale of many financial institutions and by extraordinary levels of government intervention and proposals for further intervention and additional regulation.

Limitations on the availability of credit and increases in interest rates or credit spreads may adversely affect our liquidity and results of operations. In difficult credit markets, we may find it necessary to fund our operations and capital expenditures at a higher cost or we may be unable to raise as much funding as we need to support business activities. This could cause us to reduce capital expenditures and could increase our cost of funding, both of which could reduce our short-term and long-term profitability.

The availability and cost of credit for our businesses may be greatly affected by credit ratings. If the credit ratings of SoCalGas or SDG&E were to be reduced, their businesses could be adversely affected and any reduction in Sempra Energy's ratings could adversely affect its non-utility subsidiaries.

Risks Related to All Sempra Energy Subsidiaries

Our 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 that applies to the electric power and natural gas industries has undergone significant changes, on both federal and state levels. These changes have affected the nature of these industries and the manner in which their participants conduct their businesses. These changes are ongoing, and we cannot predict the future course of changes in this regulatory environment or the ultimate effect that this changing regulatory environment will have on our businesses. Moreover, existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us and our facilities. Our business is subject to increasingly complex accounting and tax requirements, and the laws and regulations that affect us may change in response to economic or political conditions. Compliance with these requirements could increase our operating costs, and new tax legislation, regulations or other interpretat ions could materially affect our tax expense. Future changes in laws and regulations may have a detrimental effect on our business, cash flows, financial condition and results of operations.  

Our operations are subject to rules relating to transactions among the Sempra Utilities and other Sempra Energy operations. These rules are commonly referred to as the Affiliate Transaction Rules. These businesses could be adversely affected by changes in these rules or by additional CPUC or FERC rules that further restrict our ability to sell electricity or natural gas, or to trade with the Sempra Utilities and with each other. Affiliate Transaction Rules also could require us to obtain prior approval from the CPUC before entering into any such transactions with the Sempra Utilities. Any such restrictions or approval requirements could adversely affect the LNG receiving terminals, natural gas pipelines, electric generation facilities, or trading operations of our subsidiaries.


Sempra Generation has various proceedings, inquiries and investigations relating to its business activities currently pending before the FERC. A description of such proceedings, inquiries and investigations is provided in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.

Our businesses require numerous permits and other governmental approvals from various federal, state, local and foreign governmental agencies; any failure to obtain or maintain required permits or approvals could cause our sales to decline and/or our costs to increase.

All of our existing and planned development projects require multiple permits. 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. Once received, approvals may be subject to litigation, and projects may be delayed or approvals reversed in litigation. If there is a delay in obtaining any required regulatory approvals or if we fail to obtain or maintain any required approvals or to comply with any applicable laws or regulations, we may not be able to operate our facilities, or we may be forced to incur additional costs.  

Our businesses have significant environmental compliance costs, and future environmental compliance costs could adversely affect our profitability.

We are subject to extensive federal, state, local and foreign statutes, rules and regulations relating to environmental protection, including, in particular, climate change and GHG emissions. We are required to obtain numerous governmental permits, licenses and other approvals to construct and operate our businesses. Additionally, to comply with these legal requirements, we must spend significant sums on environmental monitoring, pollution control equipment, mitigation costs and emissions fees. In addition, we are generally responsible for all on-site liabilities associated with the environmental condition of our electric generation facilities and other energy projects, regardless of when the liabilities arose and whether they are known or unknown. If we fail to comply with applicable environmental laws, we may be subject to penalties, fines and/or curtailments of our operations.

The scope and effect of new environmental laws and regulations, including their effects on our current operations and future expansions, are difficult to predict. Increasing international, national, regional and state-level concerns as well as new or proposed legislation and regulation may have substantial effects on our operations, operating costs, and the scope and economics of proposed expansion. In particular, state-level laws and regulations, as well as proposed national and international legislation and regulation relating to the control and reduction of GHG emissions (including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride), may limit or otherwise adversely affect our operations. The implementation of recent California legislation and proposed federal legislation and regulation may adversely affect our unregulated businesses by imposing additional costs associated with emission limits, controls and the possible requirement of carbon taxes or the purchase of emissions credits. Similarly, the Sempra Utilities may be affected if costs are not recoverable in rates. The effects of existing and proposed greenhouse gas emission reduction standards may cause rates to increase to levels that substantially reduce customer demand and growth. In addition, SDG&E may be subject to penalties if certain mandated renewable energy goals are not met.

In addition, existing and future laws and regulation on mercury, nitrogen and sulfur oxides, particulates, or other emissions could result in requirements for additional pollution control equipment or emission fees and taxes that could adversely affect us. Moreover, existing rules and regulations may be interpreted or revised in ways that may adversely affect us and our facilities and operations. 

We provide further discussion of these matters in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements in the Annual Report. 

Natural disasters, catastrophic accidents or acts of terrorism could materially adversely affect our business, earnings and cash flows.

Like other major industrial facilities, ours may be damaged by natural disasters, catastrophic accidents, or acts of terrorism. Such facilities include

§

generation

§

chartered LNG tankers

§

electric transmission and distribution

§

natural gas pipelines and storage

§

LNG receipt terminals and storage

 

Such incidents could result in severe business disruptions, significant decreases in revenues, or significant additional costs to us. Any such incident could have a material adverse effect on our financial condition, earnings and cash flows.

Depending on the nature and location of the facilities affected, any such incident also could cause fires, leaks, explosions, spills or other significant damage to natural resources or property belonging to third parties, or cause personal injuries. Any of these consequences could lead to significant claims against us. Insurance coverage may become unavailable for certain of these risks, and any insurance proceeds we receive may be insufficient to cover our losses or liabilities, which could materially adversely affect our financial condition, earnings and cash flows.


Our future results of operations, financial condition, and cash flows may be materially adversely affected by the outcome of pending litigation against us.

Sempra Energy and its subsidiaries are defendants in numerous lawsuits. We have spent, and continue to spend, substantial amounts defending these lawsuits, and in related investigations and regulatory proceedings. In particular, SDG&E is subject to numerous lawsuits arising out of San Diego County wildfires in 2007, and Sempra Generation is subject to extensive litigation regarding a major long-term power agreement. We discuss these and other litigation in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report. The uncertainties inherent in legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of resolving these matters. In addition, California juries have demonstrated an increasing willingness to grant large awards, including punitive damages, in personal injury, product liability, property damage and other claims. Accordingly, actual costs incurred may differ materially from insured or reserved amounts and could materially adversely affect our business, cash flows, results of operations and financial condition.

We discuss these proceedings in Note 17 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.

Risks Related to the Sempra Utilities

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

The CPUC regulates the Sempra Utilities' rates, except SDG&E's electric transmission rates, which are regulated by the FERC. The CPUC also regulates the Sempra Utilities':

§

conditions of service

§

rates of depreciation

§

capital structure

§

long-term resource procurement

§

rates of return

§

sales of securities

The CPUC conducts various reviews and audits of utility performance, compliance with CPUC regulations and standards, affiliate relationships and other matters. These reviews and audits may result in disallowances and penalties that could adversely affect earnings and cash flows. We discuss various CPUC proceedings relating to the Sempra Utilities' rates, costs, incentive mechanisms, and performance-based regulation in Notes 15 and 16 of the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.

The Sempra Utilities may spend funds related to a major capital project prior to receiving regulatory approval. If the project does not receive regulatory approval or if management decides not to proceed with the project, they may not be able to recover all amounts spent for that project, which could adversely affect earnings and cash flows.

The CPUC periodically approves the Sempra Utilities' rates based on authorized capital expenditures, operating costs and an authorized rate of return on investment. If actual capital expenditures and operating costs were to exceed the amount approved by the CPUC, earnings and cash flows could be adversely affected.

The CPUC applies performance-based measures and incentive mechanisms to all California utilities. Under these, earnings potential above authorized base margins is tied to achieving or exceeding specific performance and operating goals, rather than relying solely on expanding utility plant to increase earnings. At the Sempra Utilities, the areas that are eligible for incentives are operational activities such as employee safety, energy efficiency programs and, at SoCalGas, natural gas procurement and unbundled natural gas storage and system operator hub services. Although the Sempra Utilities have received incentive awards in the past, there can be no assurance that they will receive awards in the future, or that any future awards earned would be in amounts comparable to prior periods. Additionally, if the Sempra Utilities fail to achieve certain minimum performance levels established under such 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, the FERC or other regulatory bodies. New legislation, regulations, decisions, orders or interpretations could change how they operate, could affect their ability to recover various costs through rates or adjustment mechanisms, or could require them to incur additional expenses.

The construction and expansion of the Sempra Utilities' natural gas pipelines, SoCalGas' storage facilities, and SDG&E's electric transmission and distribution facilities require numerous permits and approvals from federal, state and local governmental agencies. If there are delays in obtaining required approvals, or failure to obtain or maintain required approvals, or to comply with applicable laws

or regulations, the Sempra Utilities' business, cash flows, results of operations and financial condition could be materially adversely affected.

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

SDG&E has a 20-percent ownership interest in SONGS, a 2,150-MW nuclear generating facility near San Clemente, California, operated by Southern California Edison Company. The 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 replacing steam generators or other equipment, and the decommissioning of nuclear plants.

Risks Related to our Electric Generation, LNG, Pipelines & Storage, Commodities Marketing and Other Businesses

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

Sempra Generation generates electricity that it sells under long-term contracts and into the spot market or other competitive markets. It purchases natural gas to fuel its power plants and may also purchase electricity in the open market to satisfy its contractual obligations. As part of its risk management strategy, Sempra Generation may hedge a substantial portion of its electricity sales and natural gas purchases to manage its portfolio.

We buy energy-related and other commodities from time to time, for power plants or for LNG receipt terminals to satisfy contractual obligations with customers, in regional markets and other competitive markets in which we compete. Our revenues and results of operations could be adversely affected if the prevailing market prices for electricity, natural gas, LNG or other commodities that we buy change in a direction or manner not anticipated and for which we had 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

§

expropriation of assets by foreign countries

The FERC 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 we operate. The FERC may impose additional price limitations, bidding rules and other mechanisms, or terminate existing price limitations from time to time. Any such action by the FERC may result in prices for electricity changing in an unanticipated direction or manner and, as a result, may have an adverse effect on our sales and results of operations.

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

The acquisition, development, construction and expansion of LNG receiving terminals, natural gas pipelines and storage facilities, electric generation facilities, and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, fuel supply, resource exploration, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built.


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

§

timely implementation and satisfactory completion of construction

Successful completion of a particular project may be adversely affected by:

§

unforeseen engineering problems

§

construction delays and contractor performance shortfalls

§

work stoppages

§

equipment supply

§

adverse weather conditions

§

environmental and geological conditions

§

other factors

If we are unable to complete the development of a facility, we typically will not be able to recover our 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, including higher maintenance costs and penalties. Such occurrences could adversely affect our business, cash flows and results of operations.

We 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 our projects, which would subject our sales to increased volatility and our 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 that expires in 2011, our sales may be subject to increased price volatility. As a result, we may be unable to sell the power generated by Sempra Generation's facilities or operate those facilities profitably.  

Sempra LNG utilizes its receipt terminals by entering into long-term capacity agreements. Under these agreements, customers pay Sempra LNG capacity reservation fees to receive, store and regasify the customer's LNG. Sempra LNG also may enter into short-term and/or long-term supply agreements to purchase LNG to be received, stored and regasified at its terminals for sale to other parties. The long-term supply agreement contracts are expected to reduce our exposure to changes in natural gas prices through corresponding natural gas sales agreements or by tying LNG supply prices to prevailing natural gas price market price indices. However, if Sempra LNG is unable to obtain sufficient long-term agreements or if the counterparties, customers or suppliers to one or more of the key agreements for the LNG facilities were to fail or become unable to meet their contractual obligations on a timely basis, it could have a material adverse effect on our business, results of operations, cash flows and financial condition. In addition, reduced availability of LNG to the United States and Mexico due to inadequate supplies, increased demand and higher prices in other countries, abundant domestic supplies of natural gas and delays in the development of new liquefaction capacity could affect the timing of development of new LNG facilities and expansion of our existing LNG facilities. These conditions also are likely to delay attainment of full-capacity utilization at our facilities. Our 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 are dependent on supplies of LNG and/or natural gas from their transportation customers, which may include Sempra LNG facilities.

We provide information about these matters in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.

Our businesses depend on counterparties, business partners, customers, and suppliers performing in accordance with their agreements. If they fail to perform, we could incur substantial expenses and be exposed to commodity price risk and volatility, which could adversely affect our liquidity, cash flows and results of operations.

We 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, we may be required to acquire alternative hedging arrangements or to honor the underlying commitment at then-current market prices. In such event, we may incur additional losses to the extent of amounts already paid to such counterparties or suppliers. In addition, we often extend credit to counterparties and customers. While we perform significant credit analyses prior to extending credit, we are exposed to the risk that we may not be able to collect amounts owed to us.  

Sempra LNG's obligations and those of its suppliers for LNG supplies are contractually subject to 1) suspension or termination for "force majeure" events beyond the control of the parties; and 2) 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 of costs for breach of the agreements.

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

In 2001, Sempra Generation entered into a 10-year power sales agreement with the DWR to supply up to 1,900 MW to the state. The power sales agreement with the DWR continues to be the subject of extensive litigation between the parties before the FERC, in the courts and in arbitration proceedings. If the DWR were to succeed in setting aside its obligations under the contract, or if the DWR fails or is unable to meet its contractual obligations on a timely basis, it could have a material adverse effect on our business, results of operations, cash flows and financial condition. These proceedings are described in the Notes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. As described in Note 17 of the Notes to Consolidated Financial Statements, we unilaterally reduced our price to the DWR in connection with an agreement to settle other litigation.

We rely on transportation assets and services that we do not own or control to deliver electricity and natural gas.

We depend on electric transmission lines, natural gas pipelines, and other transportation facilities owned and operated by third parties to:

1) deliver the electricity and natural gas we sell to wholesale markets,

2) supply natural gas to our electric generation facilities, and

3) 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 relies on specialized ships to transport LNG to its facilities and on natural gas pipelines to transport natural gas for customers of the facilities. If transportation is disrupted, or if capacity is inadequate, our ability to sell and deliver our products and services may be hindered. As a result, we may be responsible for damages incurred by our customers, such as the additional cost of acquiring alternative natural gas supplies at then-current spot market rates.

We cannot and do not attempt to fully hedge our assets or contract positions against changes in commodity prices. Our hedging procedures may not work as planned.

To reduce financial exposure related to commodity price fluctuations, we may enter into contracts to hedge our known or anticipated purchase and sale commitments, inventories of natural gas and LNG, electric generation capacity, and natural gas storage and pipeline capacity. As part of this strategy, we may use forward contracts, physical purchase and sales contracts, futures, financial swaps, and options. We do not hedge the entire exposure to market price volatility of our assets or our contract positions, and the coverage will vary over time. To the extent we have unhedged positions, or if our hedging strategies do not work as planned, fluctuating commodity prices could have a material adverse effect on our business, results of operations, cash flows and financial condition.

Risk management procedures may not prevent losses.

Although we 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 as required by the companies 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 us from significant losses. As a result of these and other factors, there is no assurance that our risk management procedures will prevent losses that would negatively affect our business, results of operations, cash flows and financial condition.

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

We have interests in electricity generation and transmission, natural gas distribution and transportation, and LNG terminal projects in Mexico. Sempra Pipelines & Storage has ownership interests in electricity and natural gas distribution businesses in Argentina, Chile and Peru. We have an ownership interest in RBS Sempra Commodities, which has trading, marketing and risk management operations

in Canada, Europe and Asia. Developing infrastructure projects, owning energy assets, and operating businesses in foreign jurisdictions subject us to significant political, legal and financial risks that vary by country, including:

§

changes in foreign laws and regulations, including tax and environmental laws and regulations, and U.S. laws and regulations related to foreign operations

§

high rates of inflation

§

changes in government policies or personnel

§

trade restrictions

§

limitations on U.S. company ownership in foreign countries

§

permitting and regulatory compliance

§

changes in labor supply and labor relations

§

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

§

general political, economic and business conditions  

Our international businesses also are subject to foreign currency risks. These risks arise from both volatility in foreign currency exchange and inflation 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. Fluctuations in foreign currency exchange and inflation rates may result in increased taxes in foreign countries. While Sempra Pipelines & Storage believes that it has contracts and other measures in place to mitigate its most significant foreign currency exchange risks, some exposure is not fully mitigated.

Other Risks

Sempra Energy has substantial investments and other obligations in businesses that it does not control or manage.

Sempra Energy is a partner with RBS in RBS Sempra Commodities, a commodities-marketing firm in which we invested $1.6 billion. RBS, which has been greatly affected by the world-wide turmoil in banking and is now indirectly controlled by the government of the United Kingdom, is obligated to provide all of the additional capital required for the operation and expansion of the commodities-marketing business. As we discuss above under “Description of Business,” on February 16, 2010, Sempra Energy, RBS and RBS Sempra Commodities entered into an agreement to sell certain businesses within the joint venture.

We also own a 25-percent interest in Rockies Express Pipeline LLC (Rockies Express), a joint venture which completed construction in 2009 of a 1,679-mile natural gas pipeline at an estimated cost of approximately $6.8 billion. Rockies Express is controlled by Kinder Morgan Energy Partners, which holds a 50-percent interest.

We have also guaranteed a portion of the debt and other obligations of RBS Sempra Commodities and debt of Rockies Express as we discuss in Note 6 of the Notes to Consolidated Financial Statements in the Annual Report. We also have smaller investments in other entities that we do not control or manage.

We do not control and have limited influence over these businesses and their management. In addition to the other risks inherent in these businesses, if their management were to fail to perform adequately or the other investors in the businesses were unable or otherwise failed to perform their obligations to provide capital and credit support for these businesses, it could have a material adverse effect on our results of operations, financial position and cash flows.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

ELECTRIC PROPERTIES – SDG&E

At December 31, 2009, SDG&E owns and operates three natural gas-fired power plants:

1.

 a 560-MW electric generation facility (the Palomar generation facility) in Escondido, California

2.

 a 47.6-MW electric generation peaking facility (the Miramar I generation facility) in San Diego, California

3.

 a 48.6-MW electric generation peaking facility (the Miramar II generation facility) in San Diego, California

SDG&E has exercised its option to purchase the 480-MW El Dorado natural gas-fired power plant located in Boulder City, Nevada from Sempra Generation in 2011.

SDG&E's interest in SONGS is described above in "Electric Utility Operations SONGS."

At December 31, 2009, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. These electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona. The facilities consist of 1,920 miles of transmission lines and 22,297 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, 2009, SDG&E's natural gas facilities, which are located in San Diego and Riverside counties of California, consisted of the Moreno and Rainbow compressor stations, 168 miles of transmission pipelines, 8,419 miles of distribution mains and 6,342 miles of service lines.

At December 31, 2009, SoCalGas’ natural gas facilities included 2,899 miles of transmission and storage pipelines, 49,595 miles of distribution pipelines and 47,256 miles of service pipelines. They also included 11 transmission compressor stations and 4 underground natural gas storage reservoirs with a combined working capacity of 133.4 billion cubic feet (Bcf).

ENERGY PROPERTIES – SEMPRA GLOBAL

At December 31, 2009, Sempra Generation operates or owns interests in power plants in Arizona, California, Nevada, Indiana, Hawaii and Mexico with a total capacity of 2,740 MW. We provide additional information in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra Generation leases or owns property in Arizona, Nevada, Hawaii and Mexico for potential development of solar and wind electric generation facilities.

At December 31, 2009, Sempra Pipelines & Storage's operations in Mexico included 1,858 miles of distribution pipelines, 216 miles of transmission pipelines and 2 compressor stations.   

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 in Cameron Parish, Louisiana, with plans for development of a natural gas storage facility.

Sempra Pipelines & Storage operates Mobile Gas, a small natural gas distribution utility located in Mobile and Baldwin counties in Alabama. Its property consists of distribution mains, service lines and regulating equipment.

In Washington County, Alabama, Sempra Pipelines & Storage operates an 11.4 Bcf natural gas storage facility under a land lease, with plans to expand total working capacity to 27 Bcf. Sempra Pipelines & Storage also owns land in Simpson County, Mississippi,

with plans to develop natural gas storage with a working capacity of 30 Bcf. Portions of both these properties are currently under construction.

Sempra LNG operates its Energía Costa Azul LNG receipt terminal on land it owns in Baja California, Mexico and has a land lease in Hackberry, Louisiana, where it operates its Cameron LNG receipt terminal. Sempra LNG also owns land in Port Arthur, Texas, for potential development.

OTHER PROPERTIES

Sempra Energy occupies its 19-story corporate headquarters building in San Diego, California, pursuant to an operating lease that expires in 2015. The lease has two five-year renewal options.

SoCalGas leases approximately half of a 52-story office building in downtown Los Angeles, California, pursuant to an operating lease expiring in 2011. The lease has six five-year renewal options.

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

Sempra Global leases office facilities at various locations in the U.S. and Mexico with the leases ending from 2010 to 2035.

Sempra Energy, SDG&E and SoCalGas own or lease other land, easements, rights of way, warehouses, offices, operating and maintenance centers, shops, service facilities and equipment necessary in the conduct of their business.

ITEM 3. LEGAL PROCEEDINGS

We are not party to, and our property is not the subject of, any material pending legal proceedings (other than ordinary routine litigation incidental to our businesses) except for the matters 1) described in Notes 15, 16 and 17 of the Notes to Consolidated Financial Statements, or 2) referred to in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.

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

None.



    




PART II

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

COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The common stock, related shareholder, and dividend restriction information required by Item 5 is included in "Common Stock Data" in the Annual Report.

PERFORMANCE GRAPH -- COMPARATIVE TOTAL SHAREHOLDER RETURNS

The performance graph required by Item 5 is provided in "Performance Graph – Comparative Total Shareholder Returns" in the Annual Report.

SEMPRA ENERGY EQUITY COMPENSATION PLANS

Sempra Energy has long term incentive plans that permit the grant of a wide variety of equity and equity-based incentive awards to directors, officers and key employees. At December 31, 2009, outstanding awards consisted of stock options, restricted stock, and restricted stock units held by 328 employees.

The following table sets forth information regarding our equity compensation plans at December 31, 2009.


 

 

Number of shares to

 

 

 

 

be issued upon

 

Number of

 

 

exercise of

Weighted-average

additional

 

 

outstanding

exercise price of

shares remaining

 

 

options, warrants

outstanding options,

available for future

 

 

and rights (A)

warrants and rights

issuance

Equity compensation plans approved

 

 

 

 

 

 

by shareholders:

 

 

 

 

 

 

    2008 Long Term Incentive Plan

 5,898,447 

$

 40.81 

 5,168,042 

(B)

 

 

 

 

 

 

 

Equity compensation plans not approved

 

 

 

 

 

 

by shareholders:

 

 

 

 

 

 

    2008 Long Term Incentive Plan for

 

 

 

 

 

 

        EnergySouth, Inc. Employees and

 

 

 

 

 

 

        Other Eligible Individuals (C)

 18,900 

$

 43.75 

 253,878 

(D)

 

 

 

 

 

 

 

Total

 5,917,347 

$

 40.93 

 5,421,920 

 

(A)

Consists solely of options to purchase shares of our 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)

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

(C)

Adopted in connection with our acquisition of EnergySouth in October 2008 to utilize shares remaining available under the 2008 Incentive Plan of EnergySouth, Inc., which had been previously approved by EnergySouth shareholders.

(D)

The number of shares available for future issuance is increased by the number of shares subject to awards that terminate without the issuance of shares.


We provide additional discussion of share-based compensation in Note 10 of the Notes to Consolidated Financial Statements in the Annual Report.



PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

On September 11, 2007, the Sempra Energy board of directors authorized the repurchase of Sempra Energy common stock provided that the amounts spent for such purposes do not exceed the greater of $2 billion or amounts spent to purchase no more than 40 million shares.

During 2008, we expended $1 billion to purchase a total of 18,416,241 shares. No shares were repurchased under this authorization during 2009. We discuss this repurchase in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

We have remaining authority to expend up to the greater of up to $1 billion or amounts required to repurchase approximately 21.5 million shares under our board of directors' 2007 share repurchase authorization. In addition, we purchase shares of our common stock from holders of our restricted stock and restricted stock units in amounts sufficient to meet minimum statutory tax withholding requirements upon vesting. Other than such purchases, there were no purchases made by us of our common stock during the fourth quarter of 2009.


ITEM 6. SELECTED FINANCIAL DATA

The information required by Item 6 is included in "Five-year Summaries" in the Annual Report.

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

The information required by Item 7 is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report, on pages 1 to 53.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Risk" in the Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is set forth on pages 69 through 198 of the Annual Report. Item 15(a)1 includes a listing of financial statements included.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

The information required by Item 9A is provided in "Controls and Procedures" in the Annual Report.

ITEM 9B. OTHER INFORMATION

None.



    




PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

SEMPRA ENERGY

We provide the information required by Item 10 with respect to executive officers for Sempra Energy in Part I, Item 1. Business under "Executive Officers of the Registrants – Sempra Energy." All other information required by Item 10 is incorporated by reference from "Corporate Governance" and "Share Ownership" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders.

SDG&E, PE AND SOCALGAS

We provide the information required by Item 10 with respect to executive officers for SDG&E, PE and SoCalGas in Part I, Item 1. Business under "Executive Officers of the Registrants – SDG&E, PE and SoCalGas." All other information required by Item 10 is incorporated by reference from the Information Statement prepared for the June 2010 annual meetings of shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from "Corporate Governance" and "Executive Compensation," including "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.

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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The security ownership information required by Item 12 is incorporated by reference from "Share Ownership" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.

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

The information required by Item 13 is incorporated by reference from "Corporate Governance" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services, as required by Item 14, is incorporated by reference from "Proposals To Be Voted On - Proposal 2: Ratification of Independent Registered Public Accounting Firm" in the Proxy Statement prepared for the May 2010 annual meeting of shareholders for Sempra Energy and from the Information Statement prepared for the June 2010 annual meetings of shareholders for SDG&E, PE and SoCalGas.



    




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(1)

 

 

 

 

 

 

Sempra Energy

San Diego
Gas & Electric Company

Pacific Enterprises

Southern California Gas Company

 

 

 

 

 

Management's Report On Internal Control Over Financial Reporting

60

60

60

60

 

 

 

 

 

Reports of Independent Registered Public Accounting Firm

61

63

65

67

 

 

 

 

 

Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007  

69

76

82

88

 

 

 

 

 

Consolidated Balance Sheets at December 31, 2009 and 2008

70

77

83

89

 

 

 

 

 

Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007

72

79

85

91

 

 

 

 

 

Statements of Consolidated Comprehensive Income and Changes in Equity for the years ended December 31, 2009, 2008 and 2007

74

81

87

93

 

 

 

 

 

Notes to Consolidated Financial Statements

94

94

94

94

(1) Incorporated by reference from the indicated pages of the 2009 Annual Report to Shareholders, filed as Exhibit 13.1.

2. FINANCIAL STATEMENT SCHEDULES

Sempra Energy

Schedule I--Sempra Energy Condensed Financial Information of Parent may be found on page 35.

Pacific Enterprises

Schedule I--Pacific Enterprises Condensed Financial Information of Parent may be found on page 39.

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 47 of this report.

(c) RBS Sempra Commodities LLP and Subsidiaries – Consolidated Financial Statements as of December 31, 2009 and 2008, and for the Year Ended December 31, 2009, and the Period From April 1, 2008 (Date of Commencement) to December 31, 2008, and Report of Independent Registered Public Accounting Firm are provided in Exhibit 99.1.



    




CONSENTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON SCHEDULE

SEMPRA ENERGY

To the Board of Directors and Shareholders of Sempra Energy:

We consent to the incorporation by reference in Registration Statement No. 333-153425 on Form S-3 and 333-56161, 333-50806, 333-49732, 333-121073, 333-128441, 333-151184, 333-155191, 333-129774 and 333-157567 on Form S-8 of our reports dated February 25, 2010, relating to the consolidated financial statements of Sempra Energy and subsidiaries (the "Company") and the effectiveness of the Company’s internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of Sempra Energy for the year ended December 31, 2009.

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

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 25, 2010



    




SAN DIEGO GAS & ELECTRIC COMPANY

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

We consent to the incorporation by reference in Registration Statement No. 333-133541 and 333-159046 on Form S-3 of our reports dated February 25, 2010, relating to the consolidated financial statements of San Diego Gas & Electric Company and subsidiary (the "Company") and the effectiveness of the Company's internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of San Diego Gas & Electric Company for the year ended December 31, 2009.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 25, 2010



    




SOUTHERN CALIFORNIA GAS COMPANY

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

We consent to the incorporation by reference in Registration Statement No. 333-134289 and 333-159041 on Form S-3 of our reports dated February 25, 2010, relating to the consolidated financial statements of Southern California Gas Company and subsidiaries (the "Company") and the effectiveness of the Company's internal control over financial reporting, incorporated by reference in this Annual Report on Form 10-K of Southern California Gas Company for the year ended December 31, 2009.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 25, 2010



    




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PACIFIC ENTERPRISES

To the Board of Directors and Shareholders of Pacific Enterprises:

We have audited the consolidated financial statements of Pacific Enterprises and subsidiaries (the "Company") as of December 31, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, and the Company’s internal control over financial reporting as of December 31, 2009, and have issued our reports thereon dated February 25, 2010; such consolidated financial statements and reports are included in your 2009 Annual Report to Shareholders and are incorporated by reference herein. Our audits also included the financial statement schedule of the Company listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 25, 2010



    




SCHEDULE I – SEMPRA ENERGY CONDENSED FINANCIAL INFORMATION OF PARENT


SEMPRA ENERGY

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts)

 

Years ended December 31,

 

2009 

2008 

2007 

 

 

 

 

 

 

 

Interest income

$

 140 

$

 104 

$

 166 

Interest expense

 

 (244)

 

 (130)

 

 (178)

Operation and maintenance

 

 (81)

 

 (64)

 

 (105)

Other income (expense), net

 

 50 

 

 (63)

 

 58 

Income tax benefits

 

 89 

 

 93 

 

 38 

    Loss before equity in earnings of subsidiaries

 

 (46)

 

 (60)

 

 (21)

Equity in earnings of subsidiaries

 

 1,165 

 

 1,173 

 

 1,120 

    Net income/earnings

$

 1,119 

$

 1,113 

$

 1,099 

 

 

 

 

 

 

 

Basic net income/earnings per common share

$

 4.60 

$

 4.50 

$

 4.24 

    Weighted-average number of shares outstanding (thousands)

 

 243,339 

 

 247,387 

 

 259,269 

 

 

 

 

 

 

 

Diluted net income/earnings per common share

$

 4.52 

$

 4.43 

$

 4.16 

    Weighted-average number of shares outstanding (thousands)

 

 247,384 

 

 251,159 

 

 264,004 

See Notes to Condensed Financial Information of Parent (Sempra Energy).



























    





SEMPRA ENERGY

CONDENSED BALANCE SHEETS

(Dollars in millions)

 

December 31,

December 31,

 

2009 

2008 

Assets:

 

 

 

 

Cash and cash equivalents

$

 7 

$

 12 

Short-term investments

 

 - 

 

 152 

Due from affiliates

 

 133 

 

 28 

Income taxes receivable

 

 242 

 

 299 

Other current assets

 

 18 

 

 9 

    Total current assets

 

 400 

 

 500 

 

 

 

 

 

Investments in subsidiaries

 

 10,790 

 

 9,644 

Due from affiliates

 

 2,972 

 

 2,365 

Other assets

 

 820 

 

 811 

    Total assets

$

 14,982 

$

 13,320 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

Current portion of long-term debt

$

 507 

$

 300 

Due to affiliates

 

 1,350 

 

 1,876 

Other current liabilities

 

 379 

 

 307 

    Total current liabilities

 

 2,236 

 

 2,483 

 

 

 

 

 

Long-term debt

 

 3,196 

 

 2,233 

Other long-term liabilities

 

 543 

 

 635 

Sempra Energy shareholders' equity

 

 9,007 

 

 7,969 

Total liabilities and shareholders' equity

$

 14,982 

$

 13,320 

See Notes to Condensed Financial Information of Parent (Sempra Energy).



























    





SEMPRA ENERGY

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in millions)

 

Years ended December 31,

 

2009 

2008 

2007 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

 97 

$

 173 

$

 240 

 

 

 

 

 

 

 

Dividends received from subsidiaries

 

 150 

 

 350 

 

 150 

Expenditures for property, plant and equipment

 

 (1)

 

 (4)

 

 (13)

Expenditures for short-term investments

 

 - 

 

 (640)

 

 - 

Proceeds from sale of short-term investments

 

 152 

 

 488 

 

 - 

Purchase of trust assets

 

 (30)

 

 (17)

 

 (59)

Proceeds from sales by trust

 

 - 

 

 2 

 

 21 

Decrease (increase) in loans to affiliates, net

 

 (1,285)

 

 (149)

 

 532 

Other

 

 - 

 

 - 

 

 (4)

    Cash (used in) provided by investing activities

 

 (1,014)

 

 30 

 

 627 

 

 

 

 

 

 

 

Common stock dividends paid

 

 (341)

 

 (339)

 

 (316)

Issuances of common stock

 

 73 

 

 18 

 

 40 

Repurchases of common stock

 

 (22)

 

 (1,018)

 

 (185)

Issuances of long-term debt

 

 1,492 

 

 1,247 

 

 82 

Payments on long-term debt

 

 (314)

 

 (11)

 

 (990)

Increase (decrease) in loans from affiliates, net

 

 4 

 

 (102)

 

 59 

Other

 

 20 

 

 8 

 

 22 

    Cash provided by (used in) financing activities

 

 912 

 

 (197)

 

 (1,288)

 

 

 

 

 

 

 

(Decrease) increase  in cash and cash equivalents

 

 (5)

 

 6 

 

 (421)

Cash and cash equivalents, January 1

 

 12 

 

 6 

 

 427 

Cash and cash equivalents, December 31

$

 7 

$

 12 

$

 6 

See Notes to Condensed Financial Information of Parent (Sempra Energy).



























    





SEMPRA ENERGY

NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT

Note 1. Basis of Presentation

Sempra Energy accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.

Other Income (Expense), Net, on the Condensed Statements of Operations includes $55 million of gains in 2009, $53 million of losses in 2008, and $27 million of gains in 2007 associated with investment earnings or losses on dedicated assets in support of our executive retirement and deferred compensation plans. It also includes $57 million from Mexican peso exchange losses in 2008.

Equity in Earnings of Subsidiaries on the Condensed Statements of Operations includes a loss of $26 million in 2007 related to discontinued operations.

Because of its nature as a holding company, Sempra Energy classifies dividends received from subsidiaries as an investing cash flow.

Note 2. Long-Term Debt


 

December 31,

December 31,

(Dollars in millions)

2009 

2008 

 

 

 

 

 

6.5% Notes June 1, 2016

$

 750 

$

 - 

6% Notes October 15, 2039

 

 750 

 

 - 

9.8% Notes February 15, 2019

 

 500 

 

 500 

6.15% Notes June 15, 2018

 

 500 

 

 500 

6% Notes February 1, 2013

 

 400 

 

 400 

Notes at variable rates after fixed-to-floating swap (3.71% at December 31, 2009)

 

 

 

 

    March 1, 2010

 

 300 

 

 300 

8.9% Notes November 15, 2013

 

 250 

 

 250 

7.95% Notes March 1, 2010

 

 200 

 

 200 

Employee Stock Ownership Plan

 

 

 

 

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

 

 50 

 

 50 

    Bonds at variable rates (1.4% at December 31, 2009) November 1, 2014

 

 7 

 

 22 

4.75% Notes May 15, 2009

 

 - 

 

 300 

Market value adjustments for interest-rate swap, net (expiring March 1, 2010)

 

 7 

 

 15 

 

 

 3,714 

 

 2,537 

Current portion of long-term debt

 

 (507)

 

 (300)

Unamortized discount on long-term debt

 

 (11)

 

 (4)

Total long-term debt

$

 3,196 

$

 2,233 


Maturities of long-term debt, excluding market value adjustments for the interest-rate swap, are $500 million in 2010, $650 million in 2013, $57 million in 2014 and $2.5 billion thereafter.

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

Note 3. Commitments and Contingencies

For contingencies and guarantees related to Sempra Energy, refer to Notes 6 and 17 of the Notes to Consolidated Financial Statements in the Annual Report.



    




SCHEDULE I – PACIFIC ENTERPRISES CONDENSED FINANCIAL INFORMATION OF PARENT


PACIFIC ENTERPRISES

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in millions)

 

Years ended December 31,

 

2009 

2008 

2007 

 

 

 

 

 

 

 

Interest and other income

$

 1 

$

 11 

$

 23 

Expenses, interest and income taxes

 

 (9)

 

 (7)

 

 (15)

    Income (loss) before equity in earnings of subsidiaries

 

 (8)

 

 4 

 

 8 

Equity in earnings of subsidiaries

 

 273 

 

 244 

 

 230 

    Net income/earnings attributable to common shares

$

 265 

$

 248 

$

 238 

See Notes to Condensed Financial Information of Parent (Pacific Enterprises).



























    





PACIFIC ENTERPRISES

CONDENSED BALANCE SHEETS

(Dollars in millions)

 

December 31,

December 31,

 

2009 

2008 

Assets:

 

 

 

 

Current assets

$

 7 

$

 72 

Investment in subsidiary

 

 1,745 

 

 1,470 

Due from affiliates, long-term

 

 513 

 

 457 

Deferred charges and other assets

 

 35 

 

 37 

    Total assets

$

 2,300 

$

 2,036 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

Due to affiliates

$

 84 

$

 84 

Other current liabilities

 

 4 

 

 1 

    Total current liabilities

 

 88 

 

 85 

Long-term liabilities

 

 4 

 

 11 

 

 

 

 

 

Equity:

 

 

 

 

Preferred stock

 

 80 

 

 80 

Common equity

 

 2,128 

 

 1,860 

    Total Pacific Enterprises shareholders' equity

 

 2,208 

 

 1,940 

Total liabilities and shareholders' equity

$

 2,300 

$

 2,036 

See Notes to Condensed Financial Information of Parent (Pacific Enterprises).



























    





PACIFIC ENTERPRISES

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in millions)

 

Years ended December 31,

 

2009 

2008 

2007 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

 (7)

$

 5 

$

 14 

 

 

 

 

 

 

 

Dividends received from subsidiaries

 

 - 

 

 350 

 

 150 

Decrease (increase) in loans to affiliates, net

 

 12 

 

 (1)

 

 (9)

Other

 

 (1)

 

 - 

 

 (1)

    Cash provided by investing activities

 

 11 

 

 349 

 

 140 

 

 

 

 

 

 

 

Common stock dividends paid

 

 - 

 

 (350)

 

 (150)

Preferred dividends paid

 

 (4)

 

 (4)

 

 (4)

    Cash used in financing activities

 

 (4)

 

 (354)

 

 (154)

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 - 

 

 - 

 

 - 

Cash and cash equivalents, January 1

 

 - 

 

 - 

 

 - 

Cash and cash equivalents, December 31

$

 - 

$

 - 

$

 - 

See Notes to Condensed Financial Information of Parent (Pacific Enterprises).



























    





PACIFIC ENTERPRISES

NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT

Note 1. Basis of Presentation

Pacific Enterprises accounts for the earnings of its subsidiaries under the equity method in this unconsolidated financial information.

Because of its nature as a holding company, Pacific Enterprises classifies dividends received from subsidiaries as an investing cash flow.

Note 2. Commitments and Contingencies

For contingencies related to Pacific Enterprises, refer to Note 17 of the Notes to Consolidated Financial Statements in the Annual Report.



    







Sempra Energy:

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

 

 

 

Date: February 25, 2010










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 25, 2010

 

 

 

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




/s/ Mark A. Snell




February 25, 2010

 

 

 

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




/s/ Joseph A. Householder




February 25, 2010

 

 

 

Directors:

 

 

Donald E. Felsinger, Chairman

/s/ Donald E. Felsinger

February 25, 2010

 

 

 

 

 

 

James G. Brocksmith, Jr., Director

/s/ James G. Brocksmith, Jr.

February 25, 2010

 

 

 

 

 

 

Richard A. Collato, Director

/s/ Richard A. Collato

February 25, 2010

 

 

 

 

 

 

Wilford D. Godbold, Jr., Director

/s/ Wilford D. Godbold, Jr.

February 25, 2010

 

 

 

 

 

 

William D. Jones, Director

/s/ William D. Jones

February 25, 2010

 

 

 

 

 

 

Richard G. Newman, Director

/s/ Richard G. Newman

February 25, 2010

 

 

 

 

 

 

William G. Ouchi, Ph.D., Director

/s/ William G. Ouchi

February 25, 2010

 

 

 

 

 

 

Carlos Ruiz, Director

/s/ Carlos Ruiz

February 25, 2010

 

 

 

 

 

 

William C. Rusnack, Director

/s/ William C. Rusnack

February 25, 2010

 

 

 

 

 

 

William P. Rutledge, Director

/s/ William P. Rutledge

February 25, 2010

 

 

 

Lynn Schenk, Director

/s/ Lynn Schenk

February 25, 2010

 

 

 

Neal E. Schmale, Director

/s/ Neal E. Schmale

February 25, 2010

 

 

 




    






San Diego Gas & Electric Company:

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.

 

 

SAN DIEGO GAS & ELECTRIC COMPANY,
(Registrant)

 

 

 

By:  /s/ Debra L. Reed

 

Debra L. Reed
Chairperson, President and Chief Executive Officer

 

 

 

Date: February 25, 2010











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:
Debra L. Reed
Chairperson, President and Chief Executive Officer




/s/ Debra L. Reed




February 25, 2010

 

 

 

Principal Financial and Accounting Officer:
Robert M. Schlax
Vice President, Controller, Chief Financial Officer and Chief Accounting Officer




/s/ Robert M. Schlax




February 25, 2010

 

 

 

Directors:

 

 

Debra L. Reed, Chairperson

/s/ Debra L. Reed

February 25, 2010

 

 

 

 

 

 

Michael R. Niggli, Director

/s/ Michael R. Niggli

February 25, 2010

 

 

 





    





Pacific Enterprises:

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.

 

 

PACIFIC ENTERPRISES,
(Registrant)

 

 

 

By:  /s/ Debra L. Reed

 

Debra L. Reed
Chairperson, President and Chief Executive Officer

 

 

 

Date: February 25, 2010











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:
Debra L. Reed
Chairperson, President and Chief Executive Officer




/s/ Debra L. Reed




February 25, 2010

 

 

 

Principal Financial and Accounting Officer:
Robert M. Schlax
Vice President, Controller, Chief Financial Officer and Chief Accounting Officer





/s/ Robert M. Schlax





February 25, 2010

 

 

 

Directors:

 

 

Debra L. Reed, Chairperson

/s/ Debra L. Reed

February 25, 2010

 

 

 

 

 

 

Michael R. Niggli, Director

/s/ Michael R. Niggli

February 25, 2010

 

 

 






    





Southern California Gas Company:

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.

 

 

SOUTHERN CALIFORNIA GAS COMPANY,
(Registrant)

 

 

 

By:  /s/ Debra L. Reed

 

Debra L. Reed
Chairperson, President and Chief Executive Officer

 

 

 

Date: February 25, 2010












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:
Debra L. Reed
Chairperson, President and Chief Executive Officer




/s/ Debra L. Reed




February 25, 2010

 

 

 

Principal Financial and Accounting Officer:
Robert M. Schlax
Vice President, Controller, Chief Financial Officer and Chief Accounting Officer




/s/ Robert M. Schlax




February 25, 2010

 

 

 

Directors:

 

 

Debra L. Reed, Chairperson

/s/ Debra L. Reed

February 25, 2010

 

 

 

 

 

 

Michael R. Niggli, Director

/s/ Michael R. Niggli

February 25, 2010

 

 

 



    






EXHIBIT INDEX

 

The Registration Statements and Forms S-8, 8-K, 10-K and 10-Q incorporated herein by reference 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) and/or Commission File Number 1-1402 (Southern California Gas Company).

 

The following exhibits relate to each registrant as indicated.

EXHIBIT 3 -- BYLAWS AND ARTICLES OF INCORPORATION

Sempra Energy

3.1  

Amended and Restated Articles of Incorporation of Sempra Energy effective May 23, 2008 (Appendix B to the 2008 Sempra Energy Definitive Proxy Statement, filed on April 15, 2008).

 

 

3.2  

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

 

 

3.3  

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

San Diego Gas & Electric Company

3.4  

Amended Bylaws of San Diego Gas & Electric effective August 4, 2003 (2007 SDG&E Form 10-K, Exhibit 3.01).

 

 

3.5  

Amended and Restated Bylaws of San Diego Gas & Electric effective May 14, 2002 (2007 SDG&E Form 10-K, Exhibit 3.02).

 

 

3.6  

Amended and Restated Articles of Incorporation of San Diego Gas & Electric Company effective November 10, 2006 (2006 SDG&E Form 10-K, Exhibit 3.02).

Pacific Enterprises / Southern California Gas Company

3.7  

Amended and Restated Bylaws of Pacific Enterprises effective May 12, 2002 (2007 PE Form 10-K, Exhibit 3.01).

 

 

3.8  

Amended Bylaws of Southern California Gas Company effective August 3, 2003 (2007 SoCalGas Form 10-K, Exhibit 3.02).

 

 

3.9  

Amended and Restated Bylaws of Southern California Gas Company effective May 14, 2002 (2007 SoCalGas Form 10-K, Exhibit 3.03).

 

 

3.10  

Restated Articles of Incorporation of Pacific Enterprises (1996 PE Form 10-K, Exhibit 3.01).

 

 

3.11  

Restated Articles of Incorporation of Southern California Gas Company (1996 SoCalGas Form 10-K, Exhibit 3.01).



    





EXHIBIT 4 -- INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES

The companies agree to furnish a copy of each such instrument to the Commission upon request.

Sempra Energy

4.1  

Description of rights of Sempra Energy Common Stock (Amended and Restated Articles of Incorporation of Sempra Energy effective May 23, 2008, Exhibit 3.1 above).

San Diego Gas & Electric Company

4.2  

Description of preferences of Cumulative Preferred Stock, Preference Stock (Cumulative) and Series Preference Stock (SDG&E Amended and Restated Articles of Incorporation as of November 10, 2006, Exhibit 3.6 above).

Pacific Enterprises / Southern California Gas Company

4.3  

Description of preferences of Preferred Stock, Preference Stock and Series Preferred Stock (Southern California Gas Company Restated Articles of Incorporation, Exhibit 3.11 above).

Sempra Energy / San Diego Gas & Electric Company

4.4  

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

 

 

4.5  

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

 

 

4.6  

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

 

 

4.7  

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

Sempra Energy / Pacific Enterprises / Southern California Gas Company

4.8  

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

 

 

4.9  

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).

 

 

4.10  

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).

 

 

4.11  

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

 

 

4.12  

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

 

 

4.13  

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).

 

 



    







4.14  

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).

 

 

4.15  

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

EXHIBIT 10 -- MATERIAL CONTRACTS

Sempra Energy / San Diego Gas & Electric Company / Pacific Enterprises / Southern California Gas Company

10.1  

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).  

 

 

10.2  

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

Sempra Energy / Pacific Enterprises

10.3  

Indemnity Agreement, dated as of April 1, 2008, between Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.2).

 

 

10.4  

First Amendment to Indemnity Agreement, dated as of March 30, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc. (Sempra Energy March 31, 2009 Form 10-Q, Exhibit 10.3).

 

 

10.5  

Second Amendment to Indemnity Agreement, dated as of June 30, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc. (Sempra Energy June 30, 2009 Form 10-Q, Exhibit 10.1).

 

 

10.6  

Third Amendment to Indemnity Agreement, dated as of December 3, 2009, by and among Sempra Energy, Pacific Enterprises, Enova Corporation and The Royal Bank of Scotland plc.

Sempra Energy

10.7  

Purchase and Sale Agreement, dated as of February 16, 2010, entered into by and among J.P. Morgan Ventures Energy Corporation, Sempra Energy Trading LLC, RBS Sempra Commodities LLP, Sempra Energy and The Royal Bank of Scotland plc. (Sempra Energy Form 8-K filed on February 19, 2010, Exhibit 10.1)

 

 

10.8  

Letter Agreement, dated as of February 16, 2010, entered into by and between Sempra Energy and The Royal Bank of Scotland plc. (Sempra Energy Form 8-K filed on February 19, 2010, Exhibit 10.2)

 

 

10.9  

Limited Liability Partnership Agreement, dated as of April 1, 2008, between Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings, VII B.V., RBS Sempra Commodities LLP and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.1).

 

 

10.10  

First Amendment to Limited Liability Partnership Agreement, dated as of April 6, 2009 and effective as of November 14, 2008, by and among The Royal Bank of Scotland plc, Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings VII B.V. and RBS Sempra Commodities LLP. (Sempra Energy March 31, 2009 Form 10-Q, Exhibit 10.4).

 

 



    







10.11  

Second Amendment to Limited Liability Partnership Agreement, dated as of April 6, 2009 and effective as of December 23, 2009, by and among The Royal Bank of Scotland plc, Sempra Energy, Sempra Commodities, Inc., Sempra Energy Holdings VII B.V. and RBS Sempra Commodities LLP.

 

 

10.12  

Master Confirmation for Share Purchase Agreement, dated as of April 1, 2008, between Sempra Energy and Merrill Lynch International (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.4).

 

 

10.13  

First amendment to the Master Formation and Equity Interest Purchase Agreement, dated as of April 1, 2008, by and among Sempra Energy, Sempra Global, Sempra Energy Trading International, B.V. and The Royal Bank of Scotland plc (Sempra Energy March 31, 2008 Form 10-Q, Exhibit 10.3).

 

 

10.14  

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

 

 

10.15  

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

Sempra Energy / San Diego Gas & Electric Company

10.16  

Amended and Restated Operating Agreement between San Diego Gas & Electric and the California Department of Water Resources dated November 12, 2004.

 

 

10.17  

Amended and Restated Servicing Agreement between San Diego Gas & Electric and the California Department of Water Resources effective March 15, 2007.

Compensation

Sempra Energy / San Diego Gas & Electric Company / Pacific Enterprises / Southern California Gas Company

10.18  

Form of 2009 Sempra Energy Severance Pay Agreement.

 

 

10.19  

Form of Sempra Energy 2008 Long Term Incentive Plan, 2009 Performance-Based Restricted Stock Unit Award (March 31, 2009 Sempra Energy Form 10-Q, Exhibit 10.1).

 

 

10.20  

Form of Sempra Energy 2008 Long Term Incentive Plan, 2009 Nonqualified Stock Option Agreement (March 31, 2009 Sempra Energy Form 10-Q, Exhibit 10.2).

 

 

10.21  

Sempra Energy 2008 Long Term Incentive Plan (Appendix A to the 2008 Sempra Energy Definitive Proxy Statement, filed on April 15, 2008).

 

 

10.22  

Form of Indemnification Agreement with Directors and Executive Officers (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.2).

 

 

10.23  

Form of Sempra Energy 2008 Long Term Incentive Plan, 2008 Performance-Based Restricted Stock Unit Award (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.3).

 

 

10.24  

Form of Sempra Energy 2008 Long Term Incentive Plan, 2008 Nonqualified Stock Option Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.4).

 

 

10.25  

Sempra Energy Amended and Restated Executive Life Insurance Plan (2008 Sempra Energy Form 10-K, Exhibit 10.15).

 

 

10.26  

Amendment and Restatement of the Sempra Energy Cash Balance Restoration Plan (2008 Sempra Energy Form 10-K, Exhibit 10.16).

 

 



    







10.27  

Form of Amended and Restated Sempra Energy Severance Pay Agreement (2008 Sempra Energy Form 10-K, Exhibit 10.17).

 

 

10.28  

Amendment and Restatement of the Sempra Energy 2005 Deferred Compensation Plan (2008 Sempra Energy Form 10-K, Exhibit 10.18).

 

 

10.29  

Amendment and Restatement of the Sempra Energy Supplemental Executive Retirement Plan (2008 Sempra Energy Form 10-K, Exhibit 10.19).

 

 

10.30  

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

 

 

10.31  

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

 

 

10.32  

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

 

 

10.33  

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

 

 

10.34  

Sempra Energy Employee Stock Ownership Plan and Trust Agreement effective January 1, 2001 (September 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.1).

 

 

10.35  

Amendment to the Amended and Restated Sempra Energy Deferred Compensation and Excess Savings Plan (2008 Sempra Energy Form 10-K, Exhibit 10.25).

 

 

10.36  

Sempra Energy Amended and Restated Executive Medical Plan. (2008 Sempra Energy Form 10-K, Exhibit 10.26).

 

 

10.37  

Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Performance-Based Restricted Stock Unit Award (2007 Sempra Energy Form 10-K, Exhibit 10.09).

 

 

10.38  

Form of Sempra Energy 1998 Long Term Incentive Plan, 2008 Non-Qualified Stock Option Agreement (2007 Sempra Energy Form 10-K, Exhibit 10.10).

 

 

10.39  

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

Sempra Energy

10.40  

Sempra Energy 2008 Long Term Incentive Plan for EnergySouth, Inc. Employees and Other Eligible Individuals (Registration Statement on Form S-8 Sempra Energy Registration Statement No. 333-155191 dated November 7, 2008, Exhibit 10.1).

 

 

10.41  

Form of Sempra Energy 2008 Non-Employee Directors' Stock Plan, Nonqualified Stock Option Agreement (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.5).

 

 

10.42  

Sempra Energy Amended and Restated Sempra Energy Retirement Plan for Directors (June 30, 2008 Sempra Energy Form 10-Q, Exhibit 10.7).

 

 

10.43  

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

 

 

10.44  

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

 

 

10.45  

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



    





Nuclear

Sempra Energy / San Diego Gas & Electric Company

10.46  

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).

 

 

10.47  

Amendment No. 1 to the Qualified CPUC Decommissioning Master Trust Agreement dated September 22, 1994 (see Exhibit 10.46 above)(1994 SDG&E Form 10-K, Exhibit 10.56).

 

 

10.48  

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

 

 

10.49  

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

 

 

10.50  

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

 

 

10.51  

Fifth Amendment to the San Diego Gas & Electric Company Nuclear Facilities Qualified CPUC Decommissioning Master Trust Agreement for San Onofre Nuclear Generating Station (see Exhibit 10.46 above)(1999 SDG&E Form 10-K, Exhibit 10.26).

 

 

10.52  

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

 

 

10.53  

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

 

 

10.54  

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).

 

 

10.55  

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

 

 

10.56  

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

 

 

10.57  

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

 

 

10.58  

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

 

 



    







10.59  

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

 

 

10.60  

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).

 

 

10.61  

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).

 

 

10.62  

San Onofre Unit No. 1 Decommissioning Agreement between Southern California Edison Company and San Diego Gas & Electric Company dated March 23, 2000.

 

 

10.63  

First Amendment to the San Onofre Unit No. 1 Decommissioning Agreement between Southern California Edison Company and San Diego Gas & Electric Company dated January 22, 2010.

EXHIBIT 12 -- STATEMENTS RE: COMPUTATION OF RATIOS

Sempra Energy

12.1  

Sempra Energy Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005.

San Diego Gas & Electric Company

12.2  

San Diego Gas & Electric Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005.

Pacific Enterprises

12.3  

Pacific Enterprises Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005.

Southern California Gas Company

12.4  

Southern California Gas Company Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 2009, 2008, 2007, 2006 and 2005.

EXHIBIT 13 -- ANNUAL REPORT TO SECURITY HOLDERS

Sempra Energy / San Diego Gas & Electric Company / Pacific Enterprises / Southern California Gas Company

13.1  

Sempra Energy 2009 Annual Report to Shareholders. (Such report, except for the portions thereof which are expressly incorporated by reference in this Annual Report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this Annual Report).



    





EXHIBIT 14 -- CODE OF ETHICS

San Diego Gas & Electric Company / Southern California Gas Company

14.1  

Sempra Energy Code of Business Conduct and Ethics for Board of Directors and Senior Officers (also applies to directors and officers of San Diego Gas & Electric Company and Southern California Gas Company) (2006 SDG&E and SoCalGas Forms 10-K, Exhibit 14.01).

EXHIBIT 21 -- SUBSIDIARIES

Sempra Energy

21.1  

Sempra Energy Schedule of Significant Subsidiaries at December 31, 2009.

Pacific Enterprises

21.2  

Pacific Enterprises Schedule of Significant Subsidiaries at December 31, 2009.

EXHIBIT 23 -- CONSENTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON SCHEDULE, PAGES 31 THROUGH 34.

EXHIBIT 31 -- SECTION 302 CERTIFICATIONS

Sempra Energy

31.1  

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

 

 

31.2  

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

San Diego Gas & Electric Company

31.3  

Statement of San Diego Gas & Electric's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

 

31.4  

Statement of San Diego Gas & Electric's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

Pacific Enterprises

31.5  

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

 

 

31.6  

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

Southern California Gas Company

31.7  

Statement of Southern California Gas Company's Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

 

31.8  

Statement of Southern California Gas Company's Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.



    







EXHIBIT 32 -- SECTION 906 CERTIFICATIONS

Sempra Energy

32.1  

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

 

 

32.2  

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

San Diego Gas & Electric Company

32.3  

Statement of San Diego Gas & Electric's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350.

 

 

32.4  

Statement of San Diego Gas & Electric's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350.

Pacific Enterprises

32.5  

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

 

 

32.6  

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

Southern California Gas Company

32.7  

Statement of Southern California Gas Company's Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350.

 

 

32.8  

Statement of Southern California Gas Company's Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350.

EXHIBIT 99 -- ADDITIONAL EXHIBITS

Sempra Energy

99.1  

RBS Sempra Commodities LLP and Subsidiaries – Consolidated Financial Statements as of December 31, 2009 and 2008, and for the Year Ended December 31, 2009, and the Period From April 1, 2008 (Date of Commencement) to December 31, 2008, and Report of Independent Registered Public Accounting Firm.

EXHIBIT 101 -- INTERACTIVE DATA FILE

101.INS  

XBRL Instance Document

 

 

101.SCH  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF  

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 



    







GLOSSARY

 

 

 

 

 

 

 

 

 

 

Annual Report

2009 Annual Report to Shareholders

 

LNG

Liquefied Natural Gas

 

 

 

 

 

APSC

Alabama Public Service Commission

 

Mobile Gas

Mobile Gas Service Corporation

 

 

 

 

 

Bay Gas

Bay Gas Storage Company

 

MW

Megawatt

 

 

 

 

 

Bcf

Billion Cubic Feet (of natural gas)

 

NRC

Nuclear Regulatory Commission

 

 

 

 

 

CARB

California Air Resources Board

 

PE

Pacific Enterprises

 

 

 

 

 

CEC

California Energy Commission

 

PGE

Portland General Electric Company

 

 

 

 

 

CPUC

California Public Utilities Commission

 

QFs

Qualifying Facilities

 

 

 

 

 

DOE

Department of Energy

 

RBS

The Royal Bank of Scotland plc

 

 

 

 

 

DWR

Department of Water Resources  

 

RBS Sempra Commodities

RBS Sempra Commodities LLP

 

 

 

 

 

Edison

Southern California Edison Company

 

Rockies Express

Rockies Express Pipeline LLC

 

 

 

 

 

ERR

Eligible Renewable Energy Resource

 

RPS

Renewables Portfolio Standard

 

 

 

 

 

FERC

Federal Energy Regulatory Commission

 

SDG&E

San Diego Gas & Electric Company

 

 

 

 

 

GHG

Greenhouse Gas

 

Sempra Utilities

San Diego Gas & Electric Company and Southern California Gas Company

 

 

 

 

 

IOUs

Investor-Owned Utilities

 

SoCalGas

Southern California Gas Company

 

 

 

 

 

ISFSI

Independent Spent Fuel Storage Installation

 

SONGS

San Onofre Nuclear Generating Station

 

 

 

 

 

ISO

Independent System Operator

 

The Board

Sempra Energy’s board of directors

 

 

 

 

 

J.P. Morgan Ventures

J.P. Morgan Ventures Energy Corporation

 

 

 











    


Exhibit 10.6



EXHIBIT 10.6


THIRD AMENDMENT

TO

INDEMNITY AGREEMENT

THIRD AMENDMENT TO INDEMNITY AGREEMENT, dated as of December 3, 2009 (Third Amendment) by and among Sempra Energy, a California corporation, Pacific Enterprises, a California corporation, Enova Corporation, a California corporation (collectively with Sempra Energy and Pacific Enterprises, the “Sempra Indemnitees”), and The Royal Bank of Scotland plc, a Scottish company limited by shares (the “Indemnitor”).  Capitalized terms used herein without definition have the meanings provided in the Indemnity Agreement (as defined below).

RECITALS:

WHEREAS, the Sempra Indemnitees and the Indemnitor have entered into an Indemnity Agreement dated as of April 1, 2008 (the “Original Indemnity Agreement”), as amended as of March 30, 2009 (the “First Amendment”) and as of June 30, 2009 (the “Second Amendment” and, together with the First Amendment and the Original Indemnity Agreement, the “Indemnity Agreement”).

WHEREAS, pursuant to Section 7.12(b)(iii) of the Formation Agreement, the parties thereto have committed to use their commercially reasonable efforts to cause the novation (substituting the Indemnitor for the relevant Indemnified Party) or termination, to the greatest extent possible, of the outstanding Financial Assurances;

WHEREAS, as a result of certain delays in the novation process, the parties acknowledge that certain Financial Assurances, including certain of the Post-Closing Financial Assurances, continue to be outstanding as of the date of this Third Amendment; and

WHEREAS, the Indemnitor has requested, and the Sempra Indemnitees have agreed, subject to the terms hereof, to extend the Novation Deadline set forth in section 2.03 of the Indemnity Agreement;

NOW THEREFORE, the parties hereby agree as follows:

1.  The first sentence of Section 2.03 of the Second Amendment shall be amended by deleting the following words: “Until December 31, 2009 (such date, the “Novation Deadline”)” and replacing them with the following: “Until June 30, 2010 (such date, the “Novation Deadline”).”

2.  Except as expressly modified herein, the terms and provisions of the Indemnity Agreement shall remain in full force and effect and be enforceable against the parties thereto.  Nothing expressed or referred to in this Third Amendment will be construed to give any person other than the Sempra Indemnitees and the Indemnitor any legal or equitable right, remedy or claim under or with respect to this Third Amendment except such rights as shall inure to a successor or permitted assignee pursuant to the Indemnity Agreement.  The Sempra Indemnitees reserve all of their respective rights under the Financial Assurances and do not, by executing and delivering this Third  Amendment, waive, impair or limit any of their respective rights or remedies, or the rights or remedies of any other Indemnified Parties, under the Financial Assurances.  This Third Amendment may be executed in any number of co unterparts, each of which, when so executed, shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement.  Delivery of an executed counterpart of a signature page to this Third Amendment by fax or email shall be as effective as delivery of an original executed counterpart of this Third Amendment.  This Third Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

[Remainder of page intentionally left blank.]






IN WITNESS WHEREOF, the parties have caused this Third Amendment to be executed as of the day and year first above written.


SEMPRA ENERGY



By:  

        Joseph A. Householder

        Senior Vice President, Chief Accounting Officer and Controller


PACIFIC ENTERPRISES



By:

       Randall Clark

       Assistant Secretary


ENOVA CORPORATION



By:

       Randall Clark

       Assistant Secretary


THE ROYAL BANK OF SCOTLAND PLC



By:

       Carol Mathis

       Managing Director and Chief Financial Officer, GBM Americas





Exhibit 10.11

EXHIBIT 10.11


SECOND AMENDMENT TO
LIMITED LIABILITY PARTNERSHIP AGREEMENT

OF

RBS SEMPRA COMMODITIES LLP

This SECOND AMENDMENT (this “Second Amendment”) to the Limited Liability Partnership Agreement dated 1 April 2008 and made between The Royal Bank of Scotland plc, Sempra Commodities, Inc., Sempra Energy Holdings VII B.V., RBS Sempra Commodities LLP and Sempra Energy (the “Agreement”), as amended by the First Amendment to the Agreement, dated as of 6 April 2009, is made on 23 December 2009 by each of the parties to the Agreement.  

Whereas, each of the parties to the Agreement desires to amend and supplement the Agreement in certain respects as described in this Second Amendment

It is agreed as follows:

1.

Definitions.  Except as otherwise indicated herein, terms not defined herein bear the meaning ascribed to them in the Agreement.

2.

Amendment of Clause 1.1 of the Agreement.  The definition of “US Business” in Clause 1.1 of the Agreement is hereby deleted and replaced in its entirety to read as follows:

US Business” means that part of the Business conducted (i) directly or indirectly, by any member of the SET Group that is an entity organized under the laws of the United States, any state thereof or the District of Columbia (a “US Entity”), and including, in the case of a business conducted on a global trading book basis, only that amount allocated to such entity and (ii) by any member of the SET Group that is not a US Entity and holds United States property as defined in Section 956(c) of the Code, but only to the extent the Business activities relate to such United States property.

3.

Amendment of Clause 7.7.4 of the Agreement.  Clause 7.7.4 of the Agreement is hereby amended by deleting the first instance of the phrase “such Financial Quarter” and inserting in its place the phrase “the month in which such distribution was required to have been made under Clause 7.7.1”.

4.

Amendment of Clause 10 of the Agreement.  Clause 10 of the Agreement is hereby amended and supplemented by:

a.

inserting the following paragraph as new Clause 10.2.2 therein:

10.2.2  RBS and any member of the same group as RBS for the purposes of Chapter IV of the Income and Corporation Taxes Act 1988 shall be permitted to surrender losses and other amounts (eligible for surrender pursuant to Section 402 Income and Corporation Taxes Act 1988) to any subsidiary of the Partnership pursuant to the said Chapter IV for a consideration in accordance with Clause 10.2.3 below.

b.

re-designating the existing Clause 10.2.2 as Clause 10.2.3 and inserting after the words “Clause 10.2.1” therein the words “and Clause 10.2.2”;

c.

changing the reference to “Clause 10.2.2 below” in Clause 10.2.1 to “Clause 10.2.3 below”;

d.

inserting the following paragraph as a new Clause 10.5 therein:

10.5

SC shall report its allocable share of any US Net Income derived from the activities of Sempra Metals Limited, a limited company incorporated in the United Kingdom, as sourced to the United Kingdom and subject to taxation in the United Kingdom on its Tax Returns and all other Tax filings, unless (1) a competent authority decision pursuant to the income tax treaty between the United States and the United Kingdom holds that SC's allocable share of such US Net Income is United States source income, (2) the United States Internal Revenue Service determines in an audit that SC's allocable share of such US Net Income is United States source income, or (3) SC obtains a more likely than not opinion from a law firm nationally recognized in the United States that SC's allocable share of such US Net Income is United States source income.

e.

inserting the following paragraph as new Clause 10.6 therein:

10.6

Any reference to or to any provision of the Income and Corporation Taxes Act 1988 shall be to that provision or statute as amended or re-enacted from time to time.

5.

Effect of Amendment.  Except as expressly modified hereby, the Agreement remains in full force and effect.  Upon the execution and delivery hereof, the Agreement shall thereupon be deemed to be amended and supplemented as hereinabove set forth as fully and with the same effect as if the amendments and supplements made hereby were originally set forth in the Agreement on April 1, 2008, together with the First Amendment and this Second Amendment, and the Agreement shall henceforth be read, taken and construed as one and the same instrument, but such amendments and supplements shall not operate so as to render invalid or improper any action heretofore taken under the Agreement.

6.

Counterparts. This Second Amendment may be entered into in any number of counterparts, all of which taken together shall constitute one and the same instrument. Either party may enter into this Second Amendment by executing any such counterpart.  The exchange of copies of this Second Amendment and of signature pages by facsimile or email transmission shall constitute effective execution and delivery of this Second Amendment as to the parties and may be used in lieu of the original Second Amendment for all purposes.  Signatures of the parties transmitted by facsimile or email shall be deemed to be their original signatures for all purposes.

7.

Governing Law.  This Second Amendment shall be governed and construed in accordance with the Laws of England.



In witness whereof this Second Amendment has been duly executed.

 

 

 

SIGNED BY THE ROYAL BANK OF SCOTLAND PLC in the presence of:


 

 


 

 

 

SIGNED by SEMPRA COMMODITIES, INC. in the presence of:


 

 


 

 

 

SIGNED by SEMPRA ENERGY HOLDINGS VII B.V. in the presence of:


 

 


 

 

 

SIGNED by RBS Sempra COMMODITIES LLP in the presence of:

 

 


 

 

 

SIGNED by SEMPRA ENERGY in the presence of:


 

 





Exhibit 10.16

EXHIBIT 10.16


SDG&E OPERATING AGREEMENT

Between


STATE OF CALIFORNIA


DEPARTMENT OF WATER RESOURCES


And


SAN DIEGO GAS & ELECTRIC COMPANY


THIS AGREEMENT HAS BEEN FILED WITH AND APPROVED BY THE CALIFORNIA PUBLIC UTILITIES COMMISSION (“COMMISSION”) FOR USE BETWEEN THE STATE OF CALIFORNIA DEPARTMENT OF WATER RESOURCES (“DWR”) AND SAN DIEGO GAS & ELECTRIC COMPANY (“UTILITY”).


Original Execution Date:  April 17, 2003


Amended Execution Date:  November 12, 20041


Date of Commission Approval:


Effective Date:






















1 Pursuant to D.04-10-020.




OPERATING AGREEMENT


This OPERATING AGREEMENT (this “Agreement”) is between the State of California Department of Water Resources (“DWR”), acting solely under the authority and powers granted by AB1X, codified as Sections 80000 through 80270 of the Water Code, and not under its powers and responsibilities with respect to the State Water Resources Development System, and San Diego Gas & Electric Company, a California corporation (“Utility”).  DWR and Utility are sometimes collectively referred to herein as the “Parties” and individually referred to as a “Party.”  Unless otherwise noted, all capitalized terms shall have the meanings set forth in Article I of this Agreement.


R E C I T A L S


WHEREAS, under the Act, DWR has entered into a number of long-term power purchase agreements for the purpose of providing the net short requirements to the retail ratepayers of the State's electrical corporations, including Utility; and

WHEREAS, the Contract Allocation Order of the Commission provides that such longterm power purchase agreements are to be operationally allocated among the State's electrical corporations, including Utility; solely for the purpose of causing the State’s electrical corporations to perform certain specified functions on behalf of DWR, as DWR’s limited agent, including dispatching, scheduling, billing and settlements functions, and to sell surplus energy, all as such functions relate to those certain power purchase agreements that are operationally allocated to each electrical corporation under the Contract Allocation Order; and

WHEREAS, DWR wishes to provide for the performance of such functions under the Allocated Contracts by Utility on behalf of DWR in accordance with such long-term power purchase agreements as provided in this Agreement; and


WHEREAS, consistent with the Contract Allocation Order, DWR will retain legal and financial obligations, together with ongoing responsibility for any other functions not explicitly provided in this Agreement to be performed by Utility, with respect to each of the Allocated Contracts and it is the intent of DWR and the Utility that the provisions of this Agreement will not constitute an “assignment” of the Allocated Contracts to Utility.


NOW, THEREFORE, in consideration of the mutual obligations of the Parties, the Parties agree as follows:











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ARTICLE I

DEFINITIONS


Section 1.01.  Definitions.  The following terms shall have the respective meanings in this Agreement:


The following terms, when used herein (and in the attachments hereto) with initial capitalization, shall have the meaning specified in this Section 1.01.  Certain additional terms are defined in the attachments hereto.  The singular shall include the plural and the masculine shall include the feminine and neuter, and vice versa.   “Includes” or “including” shall mean “including without limitation.”  References to a section or attachment shall mean a section or attachment of this Agreement, as the case may be, unless the context requires otherwise, and reference to a given agreement or instrument shall be a reference to that agreement or instrument as modified, amended, supplemented or restated through the date as of which such reference is made (except as otherwise specifically provided herein).  Unless the context otherw ise requires, references to Applicable Laws or Applicable Tariffs shall be deemed references to such laws or tariffs as they may be amended, replaced or restated from time to time.  References to the time of day shall be deemed references to such time as measured by prevailing Pacific time.


“Act” means Chapter  4 of Statutes of  2001  (Assembly Bill  1 of the First  2001-02 Extraordinary Session) of the State of California, as amended.


“Agreement”, means this Operating Agreement, together with all attached Schedules, Exhibits and Attachments, as such may be amended from time to time as evidenced by a written amendment executed by the Parties.


“Allocated Contracts” means the long-term power purchase agreements operationally allocated to Utility under the Contract Allocation Order, without legal and financial assignment of such agreements to Utility, as provided in Schedule 1 attached hereto.


“Allocated Power” means all power and energy, including the use of such power or energy as ancillary services, delivered or to be delivered under the Contracts.


“Applicable Commission Orders” means such rules, regulations, decisions, opinions or orders as the Commission may lawfully issue or promulgate from time to time, which relate to the subject matter of this Agreement.


“Applicable Law” means the Act, Applicable Commission Orders and any other applicable statute, constitutional provision, rule, regulation, ordinance, order, decision or code of a Governmental Authority.





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“Applicable Tariffs” means Utility’s tariffs, including all rules, rates, schedules and preliminary statements, governing electric energy service to Utility’s customers in its service territory, as filed with and approved by the Commission and, if applicable, the Federal Energy Regulatory Commission.


“Assign(s)” shall have the meaning set forth in Section 14.01.

“Bonds” shall have the meaning set forth in the Rate Agreement.

“Bond Charges” shall have the meaning set forth in the Rate Agreement.

“Business  Day”  means  the  regular  Monday  through  Friday  weekdays  which  are customary working days, excluding holidays, as established by Applicable Tariffs.

“Commission” means the California Public Utilities Commission.

“Confidential Information” shall have the meaning set forth in Section 11.01(c).

“Contracts” means the Allocated Contracts.

“Contract Allocation Order” means Decision 02-09-053 of the Commission, issued on September 19, 2002, as such Decision may be modified, revised, amended, supplemented or superseded from time to time by the Commission.

“DWR Power” shall have the same meaning set forth in the Servicing Arrangement with such amendments to incorporate the Settlement Principles for Remittances and Surplus Revenues as provided in Exhibit C of this Agreement.

“DWR Revenues” means those amounts required to be remitted to DWR by Utility in accordance with this Agreement and as further provided in the Servicing Arrangement.

“Effective Date” means the effective date in accordance with Section 14.13, as such date is set forth on the cover page hereof.

“Fund” means the Department of Water Resources Electric Power Fund established by Section 80200 of the California Water Code.

“Good Utility Practice” means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition.  Good Utility Practice does not require the optimum practice, method, or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the Western Electric Coordinating Council region.

“Governmental Authority” means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to a government, including the Commission.

“Governmental Program” means any program or directive established by Applicable Law which directly or indirectly affects the rights or obligations of the Parties under this Agreement and which obligates or authorizes DWR to make payments or give credits to customers or other third parties under such programs or directives.

“ISO” means the California Independent System Operator Corporation.




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“Order” means Decision 02-12-069 of the Commission, issued on December 19, 2002 as such decision may be amended or supplemented from time to time by the Commission.

“Power Charges” shall have the meaning set forth in the Rate Agreement.

“Priority Long Term Power Contract” shall have the meaning set forth in the Rate Agreement.

“Rate Agreement” means the Rate Agreement between DWR and the Commission adopted by the Commission on February 21, 2002 in Decision 02-02-051.

“Remittance” means a payment by Utility to DWR or its Assign(s) in accordance with the Servicing Arrangement.

“Servicing  Arrangement”  means  the  Servicing  Order  as  specified  in  Commission Decision 02-12-070, dated December 19, 2002, as may be modified from time to time.

“Supplier” means those certain third parties who are supplying power pursuant to the Contracts.

“Term” means term provided in Section 2.05 hereof.

“URG” means utility-retained generation, including without limitation Utility’s portfolio of generation resources and power purchase agreements prior to or after the Effective Date by Utility.


Section 1.02.  Undefined Terms.  Capitalized terms not otherwise defined in Section 1.01 herein shall have the meanings set forth in the Act or the Servicing Arrangement.

























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ARTICLE II


OPERATIONAL ALLOCATION OF POWER PURCHASE AGREEMENTS;

MANAGEMENT OF THE CONTRACTS; ALLOCATED POWER; TERM


Section 2.01.  Operational Allocation and Management of Power Purchase Agreements. On behalf of DWR, as its limited agent, Utility will perform certain day-to-day scheduling and dispatch functions, billing and settlements and surplus energy sales and certain other tasks with respect to the Allocated Contracts, as more fully set forth in this Agreement.

As further provided in Contract Administration and Performance Test Monitoring Protocols set forth in Exhibit E, DWR will continue to monitor and audit the Supplier performance under the Contracts.  Upon development of a mutually agreeable plan, Utility will monitor the performance of Suppliers, as further provided in Exhibit E, subject, however, to DWR's right but not the obligation to audit and monitor all functions contemplated to be performed by Utility, all as further provided in this Agreement.


Section 2.02. Standard of Contract Management.

(a)   Utility agrees to perform the functions specified in this Agreement relating to the Allocated Contracts in a commercially reasonable manner, exercising Good Utility Practice, and in a fashion reasonably designed to serve the overall best interests of retail electric customers. Utility shall provide to DWR such information specifically provided in Exhibit F hereto to facilitate DWR’s verification of Utility’s compliance with this Section 2.02.

(b)  To the extent requested by Utility, DWR shall provide evidence in Commission proceedings describing Utility’s and DWR’s performance, rights and obligations under this Agreement.

(c)  DWR acknowledges the Commission’s exclusive authority over whether the Utility has managed Allocated Power available under the Contracts in a just and reasonable manner and DWR and Utility agree that none of the provisions of this Agreement shall be interpreted to reduce, diminish, or otherwise limit the scope of any Commission authority or to give DWR any authority over such matters.  In addition, the Parties acknowledge that DWR is not subject to the Commission's jurisdiction, and the Parties agree that none of the provisions of this Agreement, including Section 13.04 herein, shall be interpreted to subject DWR to the Commission's jurisdiction or authority.

(d)  The Utility acknowledges DWR’s separate and independent right to evaluate and enforce Utility’s commercial performance under this Agreement.

(e)  Utility agrees to provide any information not otherwise required herein that is reasonably necessary to allow DWR to exercise its rights in subsection (d) above, provided that all such information shall be used solely for the purposes of exercising such rights.

Section 2.03.  Good Faith.  Each Party hereby covenants that it shall perform its actions, obligations and duties in connection with this Agreement in good faith.




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Section 2.04.  DWR Power.  During the term of this Agreement, the electric power and energy, including but not limited to capacity, and output, or any of them from the Contracts delivered to retail end-use customers in Utility’s service area shall constitute DWR Power for all purposes of the Servicing Arrangement.  Utility shall arrange for transmission service to accommodate surplus sales to the extent that transmission service is available and cost effective, all as further provided in Exhibit A.


Section 2.05.  Term.


(a)  The Term of this Agreement shall commence on the Effective Date and shall terminate on the earlier of (a) the termination of the Servicing Arrangement, or (b) the termination of this Agreement by DWR upon ninety days’ written notice to Utility, or (c) upon consultation with the Commission, the termination of the Agreement by DWR upon reasonable written notice to Utility no shorter than 30 days, or (d) pursuant to Article VII hereof, the termination of this Agreement by a non-defaulting Party after an Event of Default.  In addition, this Agreement will terminate as to each Contract that terminates in accordance with its terms.  DWR agrees to notify Utility as to the termination of each Contract as provided in Section 5.01(e) hereof.


(b)  If an event occurs which has the effect of materially altering and materially adversely impacting the economic position of the Parties or either of them under this Agreement, then the affected Party may, by written notice, request that the Commission approve amendments to this Agreement or other arrangements incidental to this Agreement as necessary to preserve or restore the economic position under this Agreement held by the affected Party immediately prior to such event.  Such notice shall describe the event and shall include reasonable particulars as to the manner and extent to which the economic position of the Party giving notice has been adversely affected.



















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ARTICLE III

LIMITED AGENCY / NO ASSIGNMENT


Section 3.01.  Limited Agency.  Utility is hereby appointed as DWR’s agent for the limited purposes set forth in this Agreement.  Utility shall not be deemed to be acting, and shall not hold itself out, as agent for DWR for any purpose other than those described in this Agreement.  Utility’s duties and obligations shall be limited to those duties and obligations that are specified in this Agreement.

Section 3.02.  No Assignment.  DWR shall remain legally and financially responsible for performance under each of the Contracts and shall retain liability to the counterparty for any failure of Utility to perform the functions referred to in this Agreement on behalf of DWR as its limited agent, under such Contracts in accordance with the terms thereof.  It is the intent of DWR and Utility that the provisions of this Agreement shall not constitute or result in an “assignment” of the Allocated Contracts in any respect.

ARTICLE IV

LIMITED DUTIES OF UTILITY


Section 4.01. Limited Duties of Utility as to the Contracts.  During the Term of this Agreement, Utility shall:

(a)  On behalf of DWR, as its limited agent, perform the day-to-day scheduling and dispatch functions, including day-ahead, hour-ahead and real time trading, scheduling transactions with all involved parties,  under the Allocated Contracts, perform billing and settlements functions and obtain relevant information for these functions such as transmission availability and others, with respect to the Allocated Contracts set forth in Schedule 1 hereto, all as more specifically provided in the Operating Protocols attached hereto as Exhibit A;

(b)  On behalf of DWR, as its limited agent, enter into transactions for the purchase (or sale, as the case may be) of gas, gas transmission services, gas storage services and financial hedges, and perform the operational and administrative responsibilities for such purchases under gas tolling provisions under the Allocated Contracts, including the review of fuel plans and consideration of alternative fuel supply, all as more specifically provided in the Fuel Management Protocols attached hereto as Exhibit B;

(c)  On behalf of DWR, as its limited agent, perform all necessary billing and settlement functions under the Allocated Contracts, in accordance with the terms of the applicable Contracts.  In addition, perform all necessary billing and settlement functions related to DWR Revenues and remit DWR Revenues to DWR, consistent with the Settlement Principles for Remittances and Surplus Revenues attached hereto as Exhibit C and the Servicing Arrangement;

(d)  Assume financial responsibility for the ISO charges listed on Exhibit D attached hereto;







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(e)  On behalf of DWR, as its limited agent, upon development of a mutually agreeable plan, monitor the performance of Suppliers under the Allocated Contracts and undertake the administration of the Allocated Contracts, as more specifically provided in the Contract Administration and Performance Monitoring Protocols attached hereto as Exhibit E;


(f)  Provide to DWR the necessary information required by DWR as more specifically provided in the DWR Data Requirements From Utility attached hereto as Exhibit F to facilitate DWR’s continued performance of financial obligations related to Allocated Contracts and to facilitate DWR’s verification, audit and monitoring related to the Allocated Contracts and reporting requirements set forth in Applicable Laws or agreements;

(g)  At all times in performing its obligations under this Agreement (i) comply with the provisions of each of the Allocated Contracts, (ii) follow Good Utility Practice, and (iii) comply with all Applicable Laws and Applicable Commission Orders;


(h)  Appoint a primary and secondary contact person, as set forth in Schedule 2 hereto, to coordinate the responsibilities listed in this Section 4.01; and


(i)  On behalf of DWR, as its limited agent, make surplus energy sales as more specifically provided in this Agreement.


Provided, however, in the event that DWR fails to provide or provides inaccurate information which results in Utility's non-compliance with its obligations under this Agreement, the resulting non-compliance by Utility shall not constitute an Event of Default under Section 7.01 hereof.


Section 4.02.  Dispatch or Sale of Allocated Power.  Subject to any existing or new ISO tariff provisions that may affect the dispatch of such Contracts, Allocated Power from all Contracts shall be dispatched or sold, as the case may be, by Utility pursuant to the Operating Protocols attached hereto as Exhibit A.

















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Section 4.03.  DWR Revenues.  DWR Revenues shall be accounted and remitted to DWR consistent with the principles provided in the Settlement Principles for Remittances and Surplus Revenues attached hereto as Exhibit C and the provisions of the Servicing Arrangement.  Unless otherwise specifically provided in this Agreement, Utility will not be required at any time to advance or pay any of its own funds in the fulfillment of its responsibilities under this Agreement.

Section 4.04.  Ownership of Allocated Power.  Notwithstanding any other provision herein, and in accordance with the Act and Section 80110 of the California Water Code, Utility and DWR agree that DWR shall retain title to all Allocated Power, including DWR Power.  In accordance with the Act and Section 80104 of the California Water Code, upon the delivery of Allocated Power to Utility’s customers, those customers shall be deemed to have purchased that power from DWR, and payment for such sale shall be a direct obligation of such customer to DWR.  In addition, Utility and DWR agree that DWR shall retain title to any surplus Allocated Power sold by Utility as limited agent to DWR as provided in this Agreement.


ARTICLE V

DUTIES OF DWR


Section 5.01. Duties of DWR.  Consistent with the Contract Allocation Order, during the Term of this Agreement, DWR shall:

(a)  Remain legally and financially responsible under each of the Contracts and cooperate with Utility in the transition from DWR to Utility the performance of the functions provided in this Agreement;

(b)  Assume legal and financial responsibilities and enter into or facilitate Utility’s entering into transactions as DWR’s limited agent, for the purchase (or sale, as the case may be) of gas, gas transmission services, gas storage services and financial hedges, and timely consent to or approve the Utility’s performance of the operational and administrative responsibilities for such purchases under gas tolling provisions under the Allocated Contracts, including the review of fuel plans and consideration of alternative fuel supply, all as more specifically provided in the Fuel Management Protocols attached hereto as Exhibit B;

(c)  Pay invoices to the Suppliers and perform all necessary verification, audit and monitoring of the billing and settlement functions to be performed on DWR’s behalf, as its limited agent, by Utility relating to the Contracts.  In addition, perform all necessary verification, audit and monitoring of the billing and settlement functions to be performed on DWR’s behalf, as its limited agent, by Utility related to DWR Revenues, consistent with the principles set forth in the Settlement Principles for Remittances and Surplus Revenues attached hereto as Exhibit C;

(d)  Until such time as a mutually agreed upon plan may be entered into with Utility and approved by the Commission, and no earlier than January 1, 2004, continue to monitor the performance of Suppliers and conduct certain






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contract administration duties under the Allocated Contracts, all as more specifically provided in the Contract Administration and Performance Monitoring Protocols attached hereto as Exhibit E.  In addition, continue to perform all other administrative functions related to Contracts not explicitly provided in this Agreement to be performed by Utility on behalf of DWR, as its limited agent;

(e)  Upon the termination of any Contract, submit in writing to Utility appropriate Schedules and Attachments to Exhibit A amended to reflect the termination of any Contract.  Such amended Schedules and Attachments shall become effective only upon the effective date of the termination of such Contract. Provided, however, rights or obligations of the Parties that arise or relate to Utility’s performance of its duties under this Agreement in respect of any terminated Contract shall survive until the expiration of any such right or obligation; and

(f)  Appoint a primary and secondary contact person, as set forth in Schedule 2 hereto, to coordinate the responsibilities listed in this Section 5.01.


ARTICLE VI

[RESERVED]


Section 6.01.   [Intentionally left blank.]


ARTICLE VII`

EVENTS OF DEFAULT


Section 7.01. Events of Default. The following events shall constitute “Events of Default” under this Agreement:


(a) any material failure by a Party to pay any amount due and payable under this Agreement that continues unremedied for five (5) Business Days after the earlier of the day the defaulting Party receives written notice thereof from the non-defaulting Party; or


(b)  any material failure by Utility to schedule and dispatch Contracts, consistent with the principles set forth in Exhibit A; or


(c)  any failure (except as provided in (a) or (b)) by a Party to duly observe or perform in any material respect any other covenant or agreement of such Party set forth in this Agreement, which failure continues unremedied for a period of 15 calendar days after written notice of such failure has been given to such Party by the non-defaulting Party; or

(d) any material representation or warranty made by a Party shall prove to be false, misleading or incorrect in any material respect as of the date made; or

(e) an Event of Default (as defined under the Servicing Arrangement) shall have occurred and is continuing under the Servicing Arrangement.






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Section 7.02.  Consequences of Utility Event of Default.  Upon any Event of Default by Utility, DWR may, in addition to exercising any other remedies available under this Agreement or under Applicable Law, (i) terminate this Agreement in whole or in part; and (ii) apply in an appropriate forum for sequestration and payment to DWR or its Assign(s) of DWR Revenues or for specific performance of the functions related to the Contracts to be performed by Utility on behalf of DWR, as its limited agent, as provided in this Agreement.

Section 7.03.  Consequences of DWR Event of Default.  Upon an Event of Default by DWR (other than an Event of Default under 7.01(a)), Utility shall request that the Commission terminate this Agreement in whole or in part, Section 2.05 notwithstanding.

Section 7.04. Remedies.  Subject to Article XIII of this Agreement, upon any Event of Default, the non-defaulting Party may exercise any other legal or equitable right or remedy that may be available to it under applicable law or under this Agreement.

Section 7.05. Remedies Cumulative.  Except as otherwise provided in this Agreement, all rights of termination, cancellation, or other remedies in this Agreement are cumulative.  Use of any remedy shall not preclude any other remedy available under this Agreement.

Section 7.06. Waivers. None of the provisions of this Agreement shall be considered waived by either Party unless the Party against whom such waiver is claimed gives such waiver in writing.  The failure of either Party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights for the future, but the same shall continue and remain in full force and effect.  Waiver by either Party of any default by the other Party shall not be deemed a waiver of any other default.


ARTICLE VIII

PAYMENT OF FEES AND CHARGES

Section 8.01.  Utility Fees and Charges.  As noted in the Contract Allocation Order, the details of the amount and recovery of administrative costs to Utility associated with the Contracts are expected to be considered in another Commission proceeding.  As such, the Parties agree that the administrative costs to Utility will be recovered pursuant to such Commission proceeding. Utility shall enter the cost of such fees and charges in its Purchased Electric Commodity Account, or its successor or another account designated by the Commission on a current basis, for recovery in retail rates subject to subsequent Commission review.


ARTICLE IX

REPRESENTATIONS AND WARRANTIES

Section 9.01. Representations and Warranties.

(a)  Each person executing this Agreement for the respective Parties expressly represents and warrants that he or she has authority to bind the Party on whose behalf he or she has executed this Agreement.






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(b)  Each Party represents and warrants that it has the full power and authority to execute and deliver this Agreement and to perform its terms, that execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate or other action by such Party, and that this Agreement constitutes such Party’s legal, valid and binding obligation, enforceable against such Party in accordance with its terms.

(c)  DWR represents and warrants that all necessary and appropriate notices, inducements, undertakings, approvals, and consents have been obtained from each Supplier to the Contract allocated to Utility in order for Utility to undertake its duties set forth in this Agreement in a timely and appropriate fashion.

ARTICLE X

LIMITATIONS ON LIABILITY

Section 10.01. Consequential Damages. In no event will either Party be liable to the other Party for any indirect, special, exemplary, incidental, punitive, or consequential damages under any theory.  Nothing in this Section 10.01 shall limit either Party’s rights as provided in Article VII above.

Section 10.02. Limited Obligations of DWR. Any amounts payable by DWR under this Agreement shall be payable solely from moneys on deposit in the Department of Water Resources Electric Power Fund established pursuant to Section 80200 of the California Water Code (the “Fund”).

Section 10.03.  Sources of Payment; No Debt of State.  DWR's obligation to make payments hereunder shall be limited solely to the Fund and shall be payable as an operating expense of the Fund solely from Power Charges subject and subordinate to each Priority Long Term Power Contract in accordance with the priorities and limitations established with respect to the Fund’s operating expenses in any indenture providing for the issuance of Bonds and in the Rate Agreement and in the Priority Long Term Power Contracts.  Any liability of DWR arising in connection with this Agreement or any claim based thereon or with respect thereto, including, but not limited to, any payment arising as the result of any breach or Event of Default under this Agreement, and any other payment obligation or liability of or judgment against DWR hereunder, shall be satisfied solely from the Fund.  NEITHER THE FULL FAITH AND CREDIT NOR THE T AXING POWER OF THE STATE OF CALIFORNIA ARE OR MAY BE PLEDGED FOR ANY PAYMENT UNDER THIS AGREEMENT. Revenues and assets of the State Water Resources Development System, and Bond Charges under the Rate Agreement, shall not be liable for or available to make any payments or satisfy any obligation arising under this Agreement.  If moneys on deposit in the Fund are insufficient to pay all amounts payable by DWR under this Agreement, or if DWR has reason to believe such funds may become insufficient to pay all amounts payable by DWR under this Agreement, DWR shall diligently pursue an increase to its revenue requirements as permitted under the Act from the appropriate Governmental Authority as soon as practicable.  To the extent DWR’s obligations are “administrative costs,” they will require annual appropriation by the legislature.

Section 10.04. Cap on Liability.  In no event will Utility be liable to DWR for damages under this Agreement, including indemnification obligations, whether in contract, warranty, tort (including negligence), strict liability or otherwise (referred to as “Damages” for purposes of this




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Section), in an amount in excess of: 1) on an annual calendar year basis, $5 million plus ten percent of Damages in excess of $5 million and 2) for the entire term of this Agreement, $50 million in total payments of Damages to DWR.  For example, if Damages for an event are $100 million, Utility’s total liability for this event would be $14.5 million ($5 million plus10% of $95 million) and that would be the full extent of Utility’s liability for such Damages.  All Damages associated with an event will apply only to the annual limit in the first year in which Damages for that event were assessed.  For example, if Damages for an event were paid as follows: $15 million in year 1 and $10 million in year 2, the Utility would pay DWR $7 million ($5 million plus10% of $10 million for year 1 and 10% of $10 million for year 2).  In this example, the $1 million paid to DWR in year 2 (10% of $10 million) does not count against the year 2 $5 million calendar year threshold.  DWR hereby releases Utility from any liability for Damages in excess of the limitations on liability set forth in this Section 10.04, provided however, that this limitation on Utility liability shall not apply to the extent the liability is a result of Utility’s gross negligence or willful misconduct.


ARTICLE XI

CONFIDENTIALITY

Section 11.01.  Proprietary Information.

(a) Nothing in this Agreement shall affect Utility’s obligations to observe any Applicable Law prohibiting the disclosure of Confidential Information regarding its customers.

(b) Nothing in this Agreement, and in particular nothing in Sections 11.01 (e)(x) through 11.01(e)(z) of this Agreement, shall affect the rights of the Commission to obtain from Utility, pursuant to Applicable Law, information requested by the Commission, including Confidential Information provided by DWR to Utility. Applicable Law, and not this Agreement, will govern what information the Commission may disclose to third parties, subject to any confidentiality agreement between DWR and the Commission.

(c)  The Parties acknowledge that each Party may acquire information and material that is the other Party’s confidential, proprietary or trade secret information.  As used herein, “Confidential Information” means any and all technical, commercial, financial and customer information disclosed by one Party to the other (or obtained from one Party’s inspection of the other Party’s records or documents), including any patents, patent applications, copyrights, trade secrets and proprietary information, techniques, sketches, drawings, maps, reports, specifications, designs, records, data, models, inventions, know-how, processes, apparati, equipment, algorithms, software programs, software source documents, object code, source code, and information related to the current, future and proposed products and services of each of the Parties, and includes, without limitation, the Parties’ respective informati on concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing, manufacturing, business forecasts, sales and merchandising, and marketing plans and information. In all cases, Confidential Information includes proprietary or confidential information of any third party disclosing such information to either Party in the





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course of such third party’s business or relationship with such Party.  Utility’s Confidential Information also includes any and all lists of customers, and any and all information about customers, both individually and aggregated, including but not limited to customers’ names, street addresses of customer residences and/or facilities, email addresses, identification numbers, Utility account numbers and passwords, payment histories, energy usage, rate schedule history, allocation of energy uses among customer residences and/or facilities, and usage of DWR Power.  All Confidential Information disclosed by the disclosing Party (“Discloser”) will be considered Confidential Information by the receiving Party (“Recipient”) if identified as confidential and received from Discloser.

(d)  Each Party agrees to take all steps reasonably necessary to hold in trust and confidence the other Party’s Confidential Information.  Without limiting the generality of the immediately preceding sentence, each Party agrees (i) to hold the other Party’s Confidential Information in strict confidence, not to disclose it to third parties or to use it in any way, commercially or otherwise, other than as permitted under this Agreement; and (ii) to limit the disclosure of the Confidential Information to those of its employees, agents or directly related subcontractors with a need to know who have been advised of the confidential nature thereof and who have acknowledged their express obligation to maintain such confidentiality. DWR shall not disclose Confidential Information to employees, agents or subcontractors that are in any respect responsible for power marketing or trading activities associated with the State Wat er Resources Development System.

(e)  The foregoing two paragraphs will not apply to any item of Confidential Information if:   (i) it has been published or is otherwise readily available to the public other than by a breach of this Agreement; (ii) it has been rightfully received by Recipient from a third party without breach of confidentiality obligations of such third party and outside the context of the provision of services under this Agreement; (iii) it has been independently developed by Recipient personnel having no access to the Confidential Information; (iv) it was known to Recipient prior to its first receipt from Discloser, or (v) it has been summarized, processed and incorporated for incorporation into reports, discussions, statements or any other further work product.  In addition, Recipient may disclose Confidential Information if and to the extent required by law or a Governmental Authority, provided that (x) Recipient shall give Dis closer a reasonable opportunity to review and object to the disclosure of such Confidential Information, (y) Discloser may seek a protective order or confidential treatment of such Confidential Information, and (z) Recipient shall make commercially reasonable efforts to cooperate with Discloser in seeking such protective order or confidential treatment.  Discloser shall pay Recipient its reasonable costs of cooperating.

Section 11.02.  No License.  Nothing contained in this Agreement shall be construed as granting to a Party a license, either express or implied, under any patent, copyright, trademark, service mark, trade dress or other intellectual property right, or to any Confidential Information now or hereafter owned, obtained, controlled by, or which is or may be licensable by, the other Party.





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Section 11.03.  Survival of Provisions.  The provisions of this Article XI shall survive the termination of this Agreement.

ARTICLE XII

RECORDS AND AUDIT RIGHTS

Section 12.01.  Records.  Utility shall maintain accurate records and accounts relating to the Contracts in sufficient detail to permit DWR to audit and monitor the functions to be performed by Utility on behalf of DWR, as its limited agent, under this Agreement.  In addition, Utility shall maintain accurate records and accounts relating to DWR Revenues to be remitted by Utility to DWR, consistent with the Settlement Principles for Remittances and Surplus Revenues set forth in Exhibit C hereto.  Utility shall provide to DWR and its Assign(s) access to such records.  Access shall be afforded without charge, upon reasonable request made pursuant to Section 12.02.  Access shall be afforded only during Business Hours and in such a manner so as not to interfere unreasonably with Utility’s normal operations.  Utility shall not treat DWR Revenues as income or assets of Utility or any affiliate for any t ax, financial reporting or regulatory purposes, and the financial books or records of Utility and affiliates shall be maintained in a manner consistent with the absolute ownership of DWR Revenues by DWR and Utility’s holding of DWR Revenues in trust for DWR (whether or not held together with other monies).

Section 12.02.  Audit Rights.

(a) Upon 30 calendar days’ prior written notice, DWR may request an audit, conducted by DWR or its agents (at DWR’s expense), of Utility’s records and procedures, which shall be limited to records and procedures containing information bearing upon Utility’s performance of its obligations under this Agreement.  The audit shall be conducted during Business Hours without interference with Utility’s normal operations, and in compliance with Utility’s security procedures.

(b)  As provided in the Act, the State of California Bureau of State Audits (the “Bureau”) shall conduct a financial and performance audit of DWR’s implementation of Division 27 (commencing with Section 80000) of the California Water Code, and the Bureau shall issue a final report on or before March 31, 2003.  In addition, as provided in Section 8546.7 of the California Government Code, Utility agrees that, pursuant to this Section 12.02, DWR or the State of California Department of General Services, the Bureau, or their designated representative (“DWR’s Agent”) shall have the right to review and to copy (at DWR’s expense) any non-confidential records and supporting documentation pertaining to the performance of this Agreement and to conduct an on-site review of any Confidential Information pursuant to Section 12.03 hereof. Utility agrees to maintain such records for such possible audit for three years after final Remittance to DWR.  Utility agrees to allow such auditor(s) access to such records during Business Hours and to allow interviews of any employees who might reasonably have information related to such records.  Further, Utility agrees to include a similar right for DWR or DWR’s Agent to audit records and interview staff in any contract between Utility and a subcontractor directly related to performance of this Agreement.






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Section 12.03.  Confidentiality.  Materials reviewed by either Party or its agents in the course of an audit may contain Confidential Information subject to Article XI above.  The use of all materials provided to DWR or Utility or their agents, as the case may be pursuant to this Article XII, shall comply with the provisions in Article XI and shall be limited to use in conjunction with the conduct of the audit and preparation of a report for appropriate distribution of the results of the audit consistent with Applicable Law.

Section 12.04.  Annual Certifications.  At least annually, and in no event later than the tenth Business Day after the end of the calendar year, Utility shall deliver to DWR a certificate of an authorized representative certifying that to the best of such representative’s knowledge, after a review of Utility performance under this Agreement, Utility has fulfilled its obligations under this Agreement in all material respects and is in compliance herewith in all material respects.

Section 12.05.  Additional Applicable Laws.  Each Party shall make an effort to promptly notify the other Party in writing to the extent such Party becomes aware of any new Applicable Laws or changes (or proposed changes) in Applicable Tariffs hereafter enacted, adopted or promulgated that may have a material adverse effect on either Party’s ability to perform its duties under this Agreement.  A Party’s failure to so notify the other Party pursuant to this Section 12.05 will not constitute a material breach of this Agreement, and will not give rise to any right to terminate this Agreement or cause either Party to incur any liability to the other Party or any third party.

Section 12.06.  Other Information.  Upon the reasonable request of DWR or its Assign(s), Utility shall provide to DWR or its Assign(s) any public financial information in respect of Utility applicable to services provided by Utility under this Agreement, to the extent such information is reasonably available to Utility, which (i) is reasonably necessary and permitted by Applicable Law to monitor the performance by Utility hereunder, or (ii) otherwise relates to the exercise of DWR’s rights or the discharge of DWR’s duties under this Agreement or any Applicable Law.  In particular, but without limiting the foregoing, Utility shall provide to DWR any such information that is necessary or useful to calculate DWR’s revenue requirements (as described in Sections 80110 and 80134 of the California Water Code).

Section 12.07.  Data and Information Retention.  All data and information associated with the provision and receipt of services pursuant to this Agreement shall be maintained for the greater of (a) the retention time required by Applicable Law or Applicable Tariffs for maintaining such information, or (b) three (3) years.

ARTICLE XIII

DISPUTE RESOLUTION

Section 13.01.  Dispute Resolution.  Should any dispute arise between the Parties or should any dispute between the Parties arise from the exercise of either Party’s audit rights contained in Section 12.02 hereof, the Parties shall remit any undisputed amounts and agree to enter into good faith negotiations as soon as practicable to resolve such disputes within (10) Business Days so as to resolve such disputes, as appropriate, within the timeframes provided under this Agreement, or as soon as possible thereafter.  For any disputed Remittances, if such resolution cannot be made before the remittance date, Utility shall remit the undisputed portion to DWR.  In addition, the disputed portion of the Remittances shall be deposited into an escrow account held by a qualified, independent escrow holder.  Upon resolution of such disputes, the


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Party that escrowed the disputed amount shall reimburse the other Party from the escrow account as necessary.

Section 13.02.  ISO Settlements Disputes.  Utility shall review, validate and verify all ISO charges/credits contained on all ISO settlement statements, including any charges/credits resulting from functions related to the Contracts to be performed by Utility as provided in this Agreement.  Utility shall inform DWR of any discrepancies and shall dispute any such discrepancies with the ISO in accordance with the ISO’s tariff and protocols.  Except as provided in Section 13.03, if any ISO charge type settlement amount appearing on a Preliminary or Final Settlement Statement (as defined in the ISO tariff) resulting or relating to the Utility’s performance of functions related to the Contracts under this Agreement is in dispute, it shall be the responsibility of Utility, on behalf of DWR, as its limited agent, to seek resolution of said dispute through the ISO dispute resolution process as provided in the ISO& #146;s tariff.

For disputes affecting Utility’s Remittances to DWR, including disputes on ISO charges to non-DWR parties that would affect Remittances to DWR, Utility shall provide to DWR: a) notification of submission of the dispute through the ISO dispute resolution process, identifying, among other items, the dispute type, quantity, price and allocation; b) a copy of the submitted dispute and all supporting data; and c) a copy of all ensuing documentation resulting from the ongoing dispute resolution process.  Utility shall track and validate all disputed ISO charges involving any financial responsibility of DWR.

Section 13.03.  Supplier Invoice Disputes.  DWR shall continue to be responsible for all dispute resolution relating to Supplier invoices.  In addition, except as specifically provided in Exhibit E of this Agreement, all other contract administration functions shall remain DWR’s responsibility.

Section 13.04.  Good-Faith Negotiations.  Should any dispute arise between the Parties relating to this Agreement, the Parties shall undertake good-faith negotiations to resolve such dispute.  If the Parties are unable to resolve such dispute through good-faith negotiations, either Party may submit a detailed written summary of the dispute to the other Party.  Upon such written presentation, each Party shall designate an executive with authority to resolve the matter in dispute.  If the Parties are unable to resolve such dispute within 30 days from the date that a detailed summary of such dispute is presented in writing to the other Party, and the dispute relates solely to Utility’s conduct, performance, acts and/or omissions (and not to DWR’s conduct, performance, acts and/or omissions), then DWR may at its sole discretion, present the dispute to the Commission for resolution, in accordance with Appl icable Law.  All other disputes shall be brought in a court of competent jurisdiction or a forum mutually acceptable to the Parties in accordance with Applicable Law.  Nothing herein shall preclude either Party from challenging the decision or action which such Party deems may adversely affect its interests in any appropriate forum of the Party’s choosing.

Section 13.05.  Costs.  Each Party shall bear its own respective costs and attorney fees in connection with respect to any dispute resolution process undertaken by it pursuant to this Article.  Provided, however, DWR shall reimburse Utility all reasonably incurred costs, including, but not limited to, in-house and retained attorneys, consultants, witnesses, and arbitration costs, arising from or pertaining to all disputes relating to ISO charges/credits contained on all ISO settlement statements resulting from the operational, dispatch and administrative functions related to the Contracts performed by Utility on behalf of DWR, as its


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limited agent, pursuant to the standards set forth in Section 2.02 herein and consistent with the provisions of the ISO tariff, as may be amended from time to time, including disputes on ISO charges to non-DWR parties that would affect Remittances to DWR.  These costs shall be recorded and invoiced in the manner set forth in Section 8.01 hereof.


ARTICLE XIV

MISCELLANEOUS


Section 14.01.  Assignment

(a) Except as provided in paragraphs (b) and (c) below, neither Party shall assign or otherwise dispose of this Agreement, its right, title or interest herein or any part hereof to any entity, without the prior written consent of the other Party.  No assignment of this Agreement shall relieve the assigning Party of any of its obligations under this Agreement until such obligations have been assumed by the assignee. When duly assigned in accordance with this Section 14.01 (a) and when accepted by the assignee, this Agreement shall be binding upon and shall inure to the benefit of the assignee.  Any assignment in violation of this Section 14.01(a) shall be void.

(b) Utility acknowledges and agrees that DWR may assign or pledge its rights to receive performance hereunder to a trustee or another party (“Assign(s)”) in order to secure DWR’s obligations under its bonds (as that term is defined in the Act), and any such Assign shall be a third party beneficiary of this Agreement; provided, however, that this authority to assign or pledge rights to receive performance hereunder shall in no event extend to any person or entity that sells power or other goods or services to DWR.

(c) Any person (i) into which Utility may be merged or consolidated, (ii) which may result from any merger or consolidation to which Utility shall be a party or (iii) which may succeed to the properties and assets of Utility substantially as a whole, which person in any of the foregoing cases executes an agreement of assumption to perform every obligation of Utility hereunder, shall be the successor to Utility under this Agreement without further act on the part of any of the Parties to this Agreement; provided, however, that Utility shall have delivered to DWR and its Assign(s) an opinion of counsel reasonably acceptable to DWR stating that such consolidation, merger or succession and such agreement of assumption complies with this Section 13.01(c) and that all of Utility’s obligations hereunder have been validly assumed and are binding on any such successor or assign.

(d) Notwithstanding anything to the contrary herein, DWR’s rights and obligations hereunder shall be transferred, without any action or consent of either Party hereto, to any entity created by the State legislature which is required under Applicable Law to assume the rights and obligations of DWR under Division 27 of the California Water Code.

Section 14.02.  Force Majeure.  Neither Party shall be liable for any delay or failure in performance of any part of this Agreement (including the obligation to remit money at the times specified herein) from any cause beyond its reasonable control, including but not limited to,






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unusually severe weather, flood, fire, lightning, epidemic, quarantine restriction, war, sabotage, act of a public enemy, earthquake, insurrection, riot, civil disturbance, strike, restraint by court order or Government Authority, or any combination of these causes, which by the exercise of due diligence and foresight such Party could not reasonably have been expected to avoid and which by the exercise of due diligence is unable to overcome.

Section 14.03.  Severability.  In the event that any one or more of the provisions of this Agreement shall for any reason be held to be unenforceable in any respect under applicable law, such unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such unenforceable provision or provisions had never been contained herein.

Section 14.04.  Survival of Payment Obligations.  Upon termination of this Agreement, each Party shall remain liable to the other Party for all amounts owing under this Agreement. Utility shall continue to collect and remit, pursuant to the terms of the Servicing Arrangement and the principles provided in the Settlement Principles for Remittances and Surplus Revenues provided in Exhibit C hereto and any DWR Charges billed to customers or any DWR Surplus Energy Sales Revenues attributable to sales entered into before the effective date of termination of the Servicing Arrangement.

Section 14.05.  Third-Party Beneficiaries.  The provisions of this Agreement are exclusively for the benefit of the Parties and any permitted assignee of either Party and there are no third party beneficiaries under this Agreement.

Section 14.06.  Governing Law.  This Agreement shall be interpreted, governed and construed under the laws of the State of California without regard to choice of law provisions.

Section 14.07.  Multiple Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be an original.

Section 14.08.  Section Headings.  Section and paragraph headings appearing in this Agreement are inserted for convenience only and shall not be construed as interpretations of text.

Section 14.09.  Amendments.  No amendment, modification, or supplement to this Agreement shall be effective unless it is in writing and signed by the authorized representatives of both Parties and approved as required, and by reference incorporates this Agreement and identifies the specific portions that are amended, modified, or supplemented or indicates that the material is new.  No oral understanding or agreement not incorporated in this Agreement is binding on either of the Parties.

Section 14.10.  Amendment Upon Changed Circumstances.  The Parties acknowledge that compliance with any Commission decision, legislative action or other governmental action (whether issued before or after the Effective Date of this Agreement) affecting the operation of this Agreement, including but not limited to (i) dissolution of the ISO, (ii) changes in the ISO market structure, (iii) a decision regarding direct access currently pending before the Commission, (iv) the establishment of other Governmental Programs, or (v) a modification to the Contract Allocation Agreement may require that amendment(s) be made to this Agreement.  The Parties therefore agree that if either Party reasonably determines that such a decision or action would materially affect the services to be provided hereunder or the reasonable costs thereof, then upon the issuance of such decision or the approval of such action (unless and until it is sta yed), the Parties will negotiate the amendment(s) to this Agreement that is (or are) appropriate in order to effectuate the required changes in services to be provided or the reimbursement


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thereof.  If the Parties are unable to reach agreement on such amendments within 60 days after the issuance of such decision or approval of such action, either Party may, in the exercise of its sole discretion, submit the disagreement to the Commission for proposed resolution.  Nothing herein shall preclude either Party from challenging the decision or action which such Party deems may adversely affect its interests in any appropriate forum of the Party’s choosing.

The Parties agree that, if the rating agencies request changes to this Agreement which the Parties reasonably determine are necessary and appropriate, the Parties will negotiate in good faith, but will be under no obligation to reach agreement or to ask the Commission to amend this Agreement to accommodate the rating agency requests and will cooperate in obtaining any required approvals of the Commission or other entities for such amendments.


Section 14.11  Indemnification.

(a) Indemnification of DWR.  Utility (the “Indemnitor”) shall at all times protect, indemnify, defend and hold harmless DWR, and its elected officials, appointed officers, employees, representatives, agents and contractors (each, an “Indemnified Party” or an “Indemnitee”) from and against (and pay the full amount of) any and all claims (whether in tort, contract or otherwise), demands, expenses (including, without limitation, in-house and retained attorneys’ fees) and liabilities for losses, damage, injury and liability of every kind and nature and however caused, and taxes (of any kind and by whomsoever imposed), to third parties arising from or in connection with (or alleged to arise from in connection with):   (1) any failure by Utility to perform its material obligations under this Agreement; (2) any material representation or warranty made by Utility shall prove to be false, mislea ding or incorrect in any material respect as of the date made; (3) the gross negligence or willful misconduct of Utility or any of its officers, directors, employees, agents, representatives, subcontractors or assignees in connection with this Agreement; and (4) any violation of or failure by Utility or Indemnitor to comply with any Applicable Commission Orders or Applicable Law; provided, however, that the foregoing indemnifications and protections shall not extend to any losses arising from gross negligence or willful misconduct of any Indemnified Party.

(b) Obligation of Utility. Consistent with the Contract Allocation Order, Utility shall not, in acting as limited agent of DWR hereunder be required to perform any obligations of any Supplier under any Allocated Contract or to make any payments on behalf of such Supplier or as the result of the failure of such Supplier to perform under any Allocated Contract.

(c) Indemnification of Utility. To the extent permitted by law, DWR (“Indemnitor”) shall at all times protect, indemnify, defend and hold harmless Utility, and its officers, employees, representatives, agents and contractors (each, an “Indemnified Party” or “Indemnitee”), from and against (and pay the full amount of) any and all claims (whether in tort, contract or otherwise), demands, expenses (including, without limitation, in-house and retained attorneys' fees) and liabilities for losses, damage, injury and liability of every kind and nature and however caused, and taxes (of any kind and by whomsoever imposed), to third parties arising from or in connection with (or alleged to arise from on in connection with):   (1)  any failure by DWR to perform its material obligations





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under this Agreement or any Allocated Contract; (2) any material representation or warranty made by DWR shall prove to be false, misleading or incorrect in any material respect as of the date made; (3) the gross negligence or willful misconduct of the DWR or any of its officers, directors or employees, agents, representatives, subcontractors or assignees in connection with this Agreement; (4) any action claiming Utility failed to perform any Supplier's obligations under an Allocated Contract; and (5) any violation of or failure by DWR or Indemnitor to comply with any Applicable Law; and provided, however, that the foregoing indemnifications and protections shall not extend to any losses arising from the gross negligence or willful misconduct of any Indemnified Party.

(d) Indemnification Procedures.  Indemnitee shall promptly give notice to Indemnitor of any claim or action to which it seeks indemnification from Indemnitor.  Indemnitor shall defend any such claim or action brought against it, and may also defend such claim or action on behalf of the Indemnitee (with counsel reasonably satisfactory to Indemnitor) unless there is any actual or potential conflict between Indemnitor and Indemnitee with respect to such claim or action.  If there is any actual or potential conflict between Indemnitor and Indemnitee with respect to such claim or action, Indemnitee shall have the opportunity to assume (at Indemnitor’s expense) defense of any claim or action brought against Indemnitee by a third party; however, failure by Indemnitee to request defense of such claim or action by the Indemnitor shall not affect Indemnitee’s right to indemnity under this Section 14.11.  In any acti on or claim involving Indemnitee, Indemnitor shall not settle or compromise any claim without the prior written consent of Indemnitee.

Section 14.12.  Notices and Demands.   (a) Except as otherwise provided under this Agreement, all notices, demands, or requests pertaining to this Agreement shall be in writing and shall be deemed to have been given (i) on the date delivered in person, (ii) on the date when sent by facsimile (with receipt confirmed by telephone by the intended recipient or his or her authorized representative) or electronic transmission (with receipt confirmed telephonically or electronically by the intended recipient or his or her authorized representative) or by special messenger, or (iii) 72 hours following delivery to a United States post office when sent by certified or registered United States mail postage prepaid, and addressed as set forth below:


Utility:  San Diego Gas & Electric Company

8315 Century Park Court, CP21D

San Diego, California 92123


Attn: Terry Farrelly

Vice President, Electric and Gas Procurement

Telephone: (858) 650-6150

Facsimile: (858) 650-6191

Email: tfarrelly@semprautilities.com







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DWR:   State of California

The Resources Agency

Department of Water Resources

California Energy Resources Scheduling Division

3310 El Camino Avenue, Suite 120

Sacramento, California   95821


Attn: Peter S. Garris

Deputy Director

Telephone:   (916) 574-2733

Facsimile:   (916) 574-0301

Email:  pgarris@water.ca.gov


(b)  Each Party  shall be entitled to specify as its proper address any other address in the United States, or specify any change to the above information, upon written notice to the other Party complying with this Section 14.12.

(c)  Each Party shall designate on Schedule 2 the person(s) to be contacted with respect to specific operational matters.  Each Party shall be entitled to specify any change to such person(s) upon written notice to the other Party complying with this Section 14.12.

Section 14.13.  Approval.  This Agreement shall be effective upon the execution by both Parties and approval of such executed agreement by the Commission.  Except as expressly provided otherwise herein, neither Party may commence performance hereunder until such date. Any delay in the commencement of performance hereunder as a consequence of waiting for such approval(s) shall not be a breach or default under this Agreement.

Section 14.14.  Government Code and Public Contract Code Inapplicable.  DWR has determined, pursuant to Section 80014(b) of the California Water Code, that application of certain provisions of the Government Code and Public Contract Code applicable to State contracts, including but not limited to advertising and competitive bidding requirements and prompt payment requirements, would be detrimental to accomplishing the purposes of Division 27 (commencing with Section 80000) of the California Water Code and that such provisions and requirements are therefore not applicable to or incorporated in this Agreement.

Section 14.15. Annual Review.  The provisions of the Exhibits are subject to annual review by DWR and Utility to ensure their relevance and usefulness.  In the event that the Parties mutually agree that certain provisions of the Exhibits should be amended or supplemented, an amendment to the Exhibit should be executed and Utility shall submit to the Commission for approval.









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Section 14.16 Other Operating Agreement. It is DWR's intent to have a consistent operating agreement with all three investor-owned utilities (IOUs). Should DWR reach an operating agreement with another IOU relating to the subject matter of this Agreement, that in

Utility's judgment is more favorable on the whole than this Agreement, Utility shall have the right to receive the same terms and conditions as such other IOU. This provision specifically

does not allow Utility to select particular portions or provisions of such other IOU's operating agreement. In addition, if Utility elects to be subject to such other IOU's operating agreement's terms and conditions, Utility shall be subject to such other IOU's operating agreement with only such modifications agreed to by DWR as necessary to address operating differences between that other IOU and Utility. Utility shall exercise the foregoing right within 60 days following Commission approval of such other operating agreement.


IN WITNESS WHEREOF, the Parties have executed this Agreement on the date or dates indicated below, to be effective as of the Effective Date.



CALIFORNIA STATE DEPARTMENT OF WATER RESOURCES, acting solely under the authority and powers granted by ABIX, codified as Sections 80000 through 80270 of the Water Code, and not under its powers and Responsibilities with respect to the State Water Resources Development System

SAN DIEGO GAS & ELECTRIC COMPANY, a California corporation

 

 

By: /s/ Peter S. Garris

By:  /s/ James P. Avery

Name: Peter S. Garris

Name:  James P. Avery

Title:   Deputy Director

Title:    Sr. Vice President – Electric

Date:   11/12/04

Date:    11/12/2004





















Approved as to Legal Form





Schedule 1


ALLOCATED CONTRACTS


DWR Contract Allocation for SDG&E


Long-Term Contract

Contract Category

Morgan Stanley

Must-Take

Primary Power   (expired)

Must-Take

Whitewater Cabazon

Must-Take

Whitewater Hill

Must-Take

Williams

Must-Take/Dispatchable

Calpeak (3 contracts)

Border, El Cajon, and Escondido

Dispatchable

Sunrise

Dispatchable































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Schedule 2


REPRESENTATIVES AND CONTACTS


TERRY FARRELLY

SAN DIEGO GAS & ELECTRIC COMPANY

ELECTRIC & GAS PROCUREMENT VP

8315 CENTURY PARK CT CP21D

SAN DIEGO CA 92123


MIKE McCLENAHAN

SAN DIEGO GAS & ELECTRIC COMPANY

ELECTRIC PROCUREMENT MANAGER

8315 CENTURY PARK CT CP21D

SAN DIEGO CA 92123






























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SDG&E EXHIBIT A


OPERATING PROTOCOLS




EXHIBIT A


OPERATING PROTOCOLS


Pursuant to Section 4.01 of this Agreement, on behalf of DWR as its limited agent, Utility shall perform the day-to-day scheduling and dispatch functions, including dayahead, hour-ahead and real-time trading, scheduling of transactions with all involved parties, making surplus energy sales and obtaining relevant information for these functions such as transmission availability and others, with respect to the Allocated Contracts set forth in Schedule 1 to the Agreement, all as more specifically provided below and in compliance with the provisions of each of the Contracts:


I.

Resource Commitment and Dispatch.  Utility agrees to use good faith efforts to dispatch Allocated Contracts, based on the principle of “least cost dispatch” to retail customers, consistent with the Contract Allocation Order and other Applicable Commission Orders. Utility shall undertake these least cost dispatch functions both of Allocated Contracts and its URG so as to minimize the cost of service to retail customers based on circumstances known or that reasonably could have been known by Utility at the time dispatch decisions are made.  DWR shall have no role in enforcement or review of Utility least cost dispatch under this Agreement and all issues of Utility compliance with least cost dispatch shall be within the sole review of the Commission.


A.

Annual, Quarterly and Weekly Load and Resource Assessment Studies. Utility shall provide to DWR copies of its annual and quarterly load and resource assessment studies.  Provided that Utility submits substantially the same information to the Commission, copies of the Commission submission will be simultaneously sent to DWR to satisfy requirements of this section.  In addition, Utility will provide a weekly commitment and dispatch plan for informational purposes to DWR in the same form that such plan is used internally.


B.  Scheduling Protocols.


1.

DWR is responsible for notifying the counter-party to each of the Allocated Contracts that scheduling under the Allocated Contracts will be performed by Utility before the first day that schedules are due to be submitted by Utility.  DWR is responsible for notifying Utility of any changes to the Allocated Contracts that it has negotiated, including changes to the scheduling terms.  DWR agrees to provide such notice as soon as possible following the negotiation of any changed provisions and in any case prior to the time that any changed provisions become effective.


2.

Utility agrees to schedule Contracts in accordance with their terms and in accordance with the requirements of the Control Area operator or operators with whom the Contract must be scheduled to provide for power delivery.





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II.

ISO Ancillary Service (AS) Market.  Among the Contracts are resources that are or may be qualified to be bid into the ISO’s Ancillary Services (“AS”) market or that Utility may use in its self-provision of AS.  Utility is authorized to develop protocols and procedures for the use of DWR resources for AS.  Utility shall, upon DWR’s request, provide to DWR such information concerning Utility’s intended use of DWR resources for AS as DWR may reasonably request for planning and revenue requirement purposes.


III.

Surplus Energy Sales and Energy Exchanges


A.

Over-generation.  If the ISO announces an over-generation situation Utility will back down resources in accordance with the ISO tariff and Good Utility Practice. In order to reduce the need for physical curtailment in overgeneration situations, DWR and Utility shall develop pay for curtailment protocols and procedures that will enable Utility to instruct a must-take resource not to deliver energy under specified conditions. The costs and charges associated with mitigation of an over-generation situation shall be allocated among the Parties on a pro-rata basis consistent with the surplus sales allocation principles set forth in Exhibit C.


B.

Energy Exchange Arrangements.  Existing non-DWR/CERS exchanges and those that might be transacted post-2002, will be considered URG exchanges. The accounting of energy necessary to support energy exchanges is addressed in Exhibit C.


C.

Surplus Energy Sales Arrangement.  Utility shall on a monthly basis prepare a sales plan addressing all surplus sales, including without limitation sales to manage over-generation, contemplated by the Utility for review by DWR. Such plan shall address sales of power from the combined portfolio of URG resources and Allocated Contracts, which will be administered by Utility on its own behalf and acting as DWR’s limited agent. As specified in Section 2.02 of the Agreement, Utility shall pursue surplus sales in a fashion reasonably designed to serve the overall best interests of retail electric customers based on information known or could have been known by Utility at the time.  Utility agrees to include sufficient details in the sales plans to allow DWR to satisfy its financial management and reporting requirements. To the extent there is surplus power uncommitted to a forward energy surplus sales transaction, Utility s hall be required to bid such surplus energy in the day-ahead, hour-ahead or real-time market.  Utility shall arrange for transmission service to accommodate surplus sales to the extent that transmission service is available and cost effective.  The costs of transmission service, ISO charges and the costs of firm transmission rights associated with such surplus energy sales transactions shall be treated in accordance with the Settlement Principles for Remittances and Surplus Revenues attached hereto as Exhibit C.








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IV.

Outage Coordination and Determination of Resource Availability of Contracts. Utility shall communicate with the Scheduling Coordinator of each Contract to coordinate, approve, document and report planned Contract outages.  For those Contracts where resource availability affects capacity payments, Utility will use good faith efforts to verify supplier actual resource availability, and keep records of resource availability as reported by Supplier.  In addition, Utility shall document all outages (forced and planned) and notices of outages of DWR contract resources and provide such documents to DWR within five (5) business days after the end of each calendar month.





































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SDG&E EXHIBIT B


FUEL MANAGEMENT PROTOCOLS




EXHIBIT B

FUEL MANAGEMENT PROTOCOLS


Certain of the Contracts listed on Schedule 1 of this Agreement provide DWR the option of either (i) letting the Supplier provide the necessary natural gas for its generating units at an index-based price or agreed upon fixed price or (ii) DWR procuring the gas supply and causing such supply to be delivered to the Supplier under a tolling arrangement (“Fuel Option”).  Certain of the Contracts with Fuel Option provide that DWR can decide on a monthly basis whether to procure the gas and others provide that the decision be made annually or semi-annually when DWR reviews the Supplier’s proposed fuel plan.


The purpose of this Exhibit B is to describe the relationship which will exist between DWR and Utility and the specific responsibilities of each as they all relate to managing the natural gas provisions of the Contracts which include Fuel Options.  Specifically, this Exhibit B will address responsibilities for the following activities: (i) determining types and lengths of gas contracts, (ii) nominating deliveries, (iii) contracting for gas transportation and storage, (iv) managing imbalances, (v) reviewing, authorizing and making payment of gas invoices and (vi) determining and implementing hedge strategies, as appropriate.


I.  Operating Relationship Between DWR and Utility

While DWR will retain legal and financial responsibility for gas and related services, Utility shall, as a limited agent acting for DWR, perform the administrative and operational activities, as further specified below, required to ensure adequate gas is supplied to Suppliers’ generating units, consistent with the tolling provisions included in the Contracts.  The intent of this relationship is to provide Utility sufficient flexibility and authority to execute normal day-to-day activities associated with managing the fuel provisions of tolling Contracts and procurement of natural gas and related services, as a limited agent acting on behalf of DWR without direct involvement by DWR but in a manner consistent with Utility Gas Supply Plans which have been reviewed and approved by DWR and the Commission.


II.  Fuel Activities

Consistent with the terms of the Contracts with Fuel Options, Utility shall have administrative and operational authority to act, as a limited agent, for fuel supply related activities, consistent with the following goals and guidelines whenever Utility has recommended, and DWR has reviewed and approved such recommendation that gas for a Contract with Fuel Option be caused to be supplied by Utility from a list of approved providers.


1.  Utility shall use reasonable commercial efforts to secure delivery of gas in a reliable manner and consistent with gas requirements for producing scheduled energy.


2.  Utility shall develop a portfolio of gas supply for the Contracts that contain Fuel Options and where Utility is to supply gas, acting as limited agent on behalf of DWR, consistent with the approved Utility Gas Supply Plans.  Such portfolio


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should be diversified in terms of price mechanism, period of performance, and gas suppliers.


3.  Utility shall develop a portfolio of supply, which is reasonably priced relative to the market and in accordance with an approved Utility Gas Supply Plan.


III.  Review of Supplier Fuel Plans

In accordance with the terms of each of the Contracts with Fuel Options, Utility, acting as a limited agent on behalf of DWR, shall review each fuel plan prepared and submitted by the Supplier, and forwarded to the Utility by DWR, and determine whether to recommend (i) approval of the Supplier Fuel Plan and authorization for the Supplier to provide gas to its generating unit(s), or (ii) procurement and management of gas supplies to the generating unit(s) by Utility.  Utility, acting as a limited agent on behalf of DWR, shall advise DWR and the Commission on a timely basis of its recommendation regarding responsibility for supplying natural gas.  DWR shall, on a timely basis, review Utility’s recommendation and either approve or identify requested changes.  Once approved, Utility shall advise the Supplier in accordance with the time requirements included in the appropriate Contract with Fuel Option.  In addition, for any Supplier Fuel Plans which have been implemented and are operative as of the Effective Date, and where DWR has previously elected to be responsible for gas supply, Utility may advise DWR that it would rather have Supplier provide the gas as of the Effective Date.  DWR shall coordinate with Utility and Supplier to revise such Supplier Fuel Plans, to the extent possible, prior to the Effective Date.


IV.  Fuel Procurement Strategies

Under the Contracts with Fuel Option, upon Utility’s recommendation, and DWR’s review and approval of such recommendation, Utility will be responsible for procuring the natural gas fuel from a list of approved gas providers. Utility shall, acting as the limited agent of DWR, have administrative and operational responsibility for determining its gas procurement strategies, including but not limited to (i) types of contracts, (ii) length of contracts, (iii) pricing terms, (iv) use of storage, (v) types of gas transportation, (vi) delivery point(s), (vii) whether and how to obtain gas price forecasts, (viii) if and what risk management tools are to be used, and (ix) how to maintain current market intelligence.


Utility shall consolidate these strategies and submit them to DWR and the Commission as a “Utility Gas Supply Plan” by April 17, 2003 and, thereafter on a semi-annual basis during the Term.  Utility may also provide a copy of such Gas Supply Plan to DWR in advance of the filing with the Commission so as to be able to indicate DWR’s approval of such plan.  Utility shall indicate in its Advice letter filing to the Commission whether DWR has approved such plan as appropriate. DWR shall also formally notify the Commission when it has approved such plan.


DWR and the Commission will review and approve the Utility Gas Supply Plans.  In the event of conflicting guidance between the Commission and DWR regarding





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various aspects of the Gas Supply Plan they respectively approve or reject, where DWR only approves a subset of what the Commission approves, then Utility shall operate within the sphere of DWR’s approval.  If, however, the Commission explicitly rejects portions of the Gas Supply Plan that DWR would authorize, then Utility must operate within the limitations of the Commission’s decision.  After a reasonable period of time operating within the framework of the Gas Supply Plans and the Commission’s and DWR’s respective approval and/or rejection of various pieces of the Gas Supply Plan, the Parties agree to meet and confer to determine whether the approval process may need to be revised in some manner, and Utility shall submit to Commission any such proposed revisions. Once approved, Utility may act within such Utility Gas Supply Plan without further DWR involvement, except as provided below.


V.  Gas Purchasing

Utility and DWR shall jointly determine a list of approved gas providers who can be used to supply gas under the Contracts with Fuel Options.  Master agreements intended to cover normal day-to-day volumes will then be executed with such approved providers.  While DWR will be the executing party under all DWR gas contracts, such agreements shall specifically authorize Utility to act for and on behalf of DWR, as a limited agent, in negotiating specific prices, quantities and delivery periods for specific purchases under such master agreements; provided however, on the earliest practicable date after the execution of this Agreement, DWR agrees to provide to Utility in writing and in advance of such negotiations any limits, including without limitation any terms, that may be required by DWR.  If Utility determines it would be beneficial to enter into any DWR gas contract which exceeds 3 months or have a total value exceeding $10 million, it s hall negotiate such agreement(s) and submit them to DWR for advance approval and execution.


VI.  Gas Transportation

Utility shall have responsibility for recommending to DWR which pipelines should transport gas if Utility, acting as limited agent on behalf of DWR is to supply gas under a Contract with Fuel Option.  Following approval of or revision of Utility Gas Supply Plan, Utility shall negotiate firm and/or interruptible agreements with such pipelines, consistent with the Utility Gas Supply Plan and submit them to DWR for execution.  While DWR will be the executing party, such agreements with pipelines shall specifically authorize Utility to act for and on behalf of DWR in nominating gas deliveries, making imbalance trades and managing gas volumes transported under such agreements; provided, however, on the earliest practicable date after the execution of this Agreement, DWR agrees to provide to Utility in writing and in advance of such negotiations any limits, including without limitation any terms, that may be required by DWR.


VII.  Gas Scheduling

If permitted under the Allocated Contracts, the Utility shall have full administrative and operational responsibility for scheduling gas deliveries, whether to a specific generating plant or to storage for all gas contracts entered into by DWR or by Utility




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on DWR’s behalf pursuant to this Exhibit B.  This function includes use of interstate and intrastate gas pipeline provider websites, confirming via telephone, and all other activities required to move gas from the designated delivery point, as determined by the Utility, to its destination, as determined by the Utility.


VIII.  Storage Capacity, Injections and Withdrawals

Utility shall have responsibility for devising plans for gas storage, if Utility, acting as limited agent on behalf of DWR, is to supply gas under Contracts with Fuel Option from a list of approved providers.  Following approval of the Utility Gas Supply Plans, Utility shall negotiate firm and/or interruptible agreements with such storage service providers and submit them to DWR for execution.  While DWR will be the executing party with DWR remaining the principal under such contracts, such agreements with storage service providers shall specifically authorize Utility to act for and on behalf of DWR in nominating gas injections and withdrawals under such agreements; provided, however, on the earliest practicable date after the execution of this Agreement, DWR agrees to provide to Utility in writing and in advance of such negotiations any limits, including without limitation any terms, that may be required by DWR.


IX.  Managing Gas Delivery/Usage Imbalances

For gas that it purchases and transports on behalf of DWR, Utility shall have full administrative and operational responsibility for monitoring and managing the daily status of gas usage vs. gas deliveries (i.e. gas imbalances).  In addition, to the extent that gas transportation providers issue operational flow orders or require adjustments in scheduled gas deliveries due to system constraints, Utility, acting as limited agent on behalf of DWR, shall be responsible for compliance with such orders.  Utility shall also be responsible for any penalties imposed by gas transportation providers for imbalances caused by Utility, due to its failure to exercise prudent gas management practices.


X.  Invoice Review, Approval and Payment

For natural gas, pipeline transportation and storage services it purchases in accordance with this Exhibit B, Utility, acting as limited agent on behalf of DWR, shall have responsibility for receiving invoices from gas, transportation and storage suppliers, reviewing them for accuracy, approving/rejecting invoices for payment and forwarding to DWR for payment; provided, however, on the earliest practicable date after the execution of this Agreement, DWR agrees to cause Utility to be authorized to receive such information from Suppliers.  Utility shall provide DWR sufficient documentation to verify payment of the invoices.


XI.  Forecasting

Utility shall be responsible for all gas price, demand and supply forecasts which Utility believes are consistent with any accepted gas supply responsibilities.


XII.  Risk Management

Utility shall develop and include in its Gas Supply Plans, plans for the hedging of DWR Fuel Supply costs.  Final decisions relating to the use or non-use of financial


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tools such as futures, options and swaps to hedge future gas price exposure on any gas volumes not hedged by Utility under the Utility Gas Supply Plans shall be made and implemented by DWR.  Any such contracts executed by DWR on a “portfolio basis” should be utility-specific.


XIII.  Market Intelligence

Any and all efforts to obtain, analyze and utilize market intelligence for decision-making purposes shall be the responsibility of Utility.


XIV.  Payment of Gas Costs

For natural gas, pipeline transportation, financial hedges and storage services that are purchased and provided by a Supplier under an approved Fuel Supply Plan, DWR shall pay such gas related costs as part of the invoice for commodity, product, or services submitted by the Supplier.  For natural gas, pipeline transportation and storage services provided under DWR contracts and administered by Utility on behalf of DWR, DWR shall pay invoices after they have been reviewed and approved for payment by Utility.


XV.  Allocation of Existing DWR Gas Contracts

DWR has entered into gas supply, transportation and storage contracts as provided in Attachment 1 to this Exhibit B that have expiration dates after the Effective Date of this Agreement.  The administrative and operational control of the contracts listed on Attachment 1 to this Exhibit B will become the responsibility of Utility.  This shall include (i) scheduling gas transportation, (ii) confirming gas deliveries, (iii) nominating gas withdrawals from and injections into storage, if applicable, (iv) and reviewing and approving invoices for payment.  When approved, invoices shall be transmitted to DWR for payment within 10 days of receipt of invoice from the gas supplier, gas storage or gas transportation provider.


XVI.  Pre-existing Financial Hedge Instruments

If DWR has entered into any financial hedge transactions that will remain operable after the Effective Date of this Agreement, DWR shall retain full administrative and operational control over such transactions.
















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EXHIBIT B


Attachment 1


Existing DWR Gas Purchase, Storage and Transportation Contracts

San Diego Gas & Electric Company



[ex1016001.gif]


























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SDG&E EXHIBIT C


SETTLEMENT PRINCIPLES

FOR REMITTANCES AND

SURPLUS REVENUES




EXHIBIT C


SETTLEMENT PRINCIPLES FOR REMITTANCES AND SURPLUS REVENUES


This Exhibit C outlines the principles by which Utility will calculate revenues associated with surplus energy sales and DWR energy delivered to retail customers.    This Exhibit C also addresses the information that Utility will provide to DWR to support DWR payment of Contract invoices, and invoices from natural gas supplier(s) for fuel provided to service DWR Contracts where tolling options have been implemented.


This Exhibit C works in conjunction with the applicable Servicing Arrangement with Utility for purposes of determining the remittance amounts by Utility, which will serve as DWR’s billing and collection agent.


In accordance with the Contract Allocation Order2, this Exhibit C provides that:

Revenues will be allocated for both surplus sales and retail customer deliveries

Revenues will be allocated pro rata, based on dispatched quantities of energy

The principle of balancing least cost economic dispatch while maintaining reliability is reinforced through these revenue allocation protocols.

Surplus sales quantities will be calculated as the difference between Utility’s Energy Delivery Obligations (EDO) and the combination of energy from URG and energy dispatched from Contracts.


Where Utility’s Energy Delivery Obligations is defined as: (1) Utility’s retail load which includes distribution losses, (2) all pumping load, (3) all energy exchange transactions between Utility and counter parties, (4) wholesale obligations existing as of January 1, 2003, and (5) transmission losses.


The principles herein, together with the applicable methods and calculations contained in the Servicing Arrangement, form a substantive component of the accounting protocols required to implement the Contract Allocation Order. This Exhibit should also be read in conjunction with Exhibit F (“Data Requirements”).













2 Contract Allocation Order is CPUC Decision (D.) 02-09-053.




Utility Remittance to DWR

Utility shall remit to DWR an Energy Payment for the delivery of Contract energy to Utility retail customers and a separate payment for DWR’s share of Surplus Energy Sales Revenues. The principles for the remittances to DWR of Surplus Energy Sales Revenue and Energy Payment are contained in Sections A and B of this Exhibit C, respectively.  The details for determination of the remittances to DWR by Utility are contained in the Servicing Arrangement between the Utility and DWR.


A. Utility Remittance to DWR of Revenue from Surplus Energy Sales

Surplus Energy and Revenues

Surplus energy exists when dispatched supply from Utility portfolio and DWR Contracts exceeds Utility’s Energy Delivery Obligations.  When such a condition exists, the revenues from the sale of surplus energy shall be shared between Utility and DWR. Surplus sale revenues can occur either through a forward market sale or a delivery of the excess energy into the ISO real time market.  In addition to the sharing of surplus energy revenues, the quantity of any surplus energy shall likewise be shared between Utility and DWR, and used in the determination of the Hourly Percentage Factor described in Section I(B).


Surplus energy sales revenues shall be placed by Utility into a separate account (Surplus Sales Fund) to be held in trust and shall be disbursed by Utility to DWR in accordance with the pro-rata allocation principles in Exhibit C and consistent with the provisions of Attachment J of the Servicing Arrangement.  For surplus energy sales to third parties, Utility shall apply reasonable credit risk management criteria that is consistent with industry accepted credit standards.


Surplus Energy Quantity

The Surplus Energy quantity shall be determined by subtracting Utility’s Energy Delivery Obligations from the sum of dispatched URG energy and dispatched DWR Supply.  URG energy shall include dispatched energy from URG, new Utility contracts and Utility market purchases plus adjustments for Ancillary Services and ISO Instructed Energy as described under “Definitions and Adjustments.”  DWR Supply shall include dispatched energy from DWR must take and dispatchable contracts net of adjustments described below.


DWR Surplus Energy quantity shall be the product of Surplus Energy quantity multiplied by the DWR Surplus Energy Percentage.  Utility Surplus Energy quantity shall be the remaining portion of Surplus Energy.  Both Utility and DWR Surplus Energy quantities shall be applied to the respective Party’s energy supply quantities for determination of the Hourly Percentage Factor described in Section (B).


Surplus Energy Sales Revenues

Surplus Energy Sales Revenues shall be shared between Utility and DWR in the same manner as Surplus Energy.





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Forward Market Sale

DWR share of revenues from a forward market sale of surplus energy shall be the product of the net revenue multiplied by the DWR Surplus Energy Percentage.  Utility share of these revenues shall be net revenue less DWR share of net revenues.    Revenues from a forward market sale shall not be distributed to the Parties until after Utility receives the revenues from the sales and pays sale-related charges.  Shared revenues from forward market sales shall be net of transmission costs and broker fees.

ISO Real Time Market Sales

Revenues from delivery of surplus energy to the ISO real time market shall be determined from the product of positive load or supply deviation multiplied by the ISO real time market price.  These revenues will be netted against any ISO charges related to the load deviation, including a negative ISO price.  Load deviation is determined by subtracting the Utility metered load from the Final Hour Ahead Load Schedule, however only positive quantities, where schedule exceeds meter, reflect surplus conditions for revenue sharing.  Supply deviation is determined by subtracting the Final Hour Ahead Supply Schedule (adjusted by real time instructions) from metered supply, however, only positive quantities, where meter exceeds the adjusted schedule, reflect surplus conditions for revenue sharing.


DWR share of revenues from delivery of surplus energy to ISO real time market shall be the product of the net revenues multiplied by the DWR Surplus Energy Percentage. Utility share of these net revenues shall be the net revenue less DWR share of net revenues.  Revenues from delivery of surplus energy to the ISO real-time market shall not be distributed to the Parties until after the Utility received payment for final monthly invoice from the ISO for the month in which the surplus energy was delivered.

Over-generation Periods

During periods of over-generation condition as announced by the ISO, surplus sales may be made at very low, zero or even negative prices.  In such conditions, the surplus sale revenue calculations as described above still hold.  However it is recognized that the sales may result in little or no revenue.  Sales could even be done at a cost to the seller.  That seller could be Utility or the ISO selling in an “out-of-market” condition.  During these conditions, ISO-related charges assigned to Utility for such sales (e.g. - ISO selling out-of-market) are included in the surplus sales revenue as a cost.  During overgeneration conditions there may be no market in which to sell surplus energy.  In that event, or in expectation of that event, Utility shall declare that no valid market exists for surplus energy and shall begin curtailing must-take resources in accordance with Utility’s procedures for mitigating over-generation conditions.  Such mitigation measures shall be consistent with good utility practice, specifically hydroelectric facilities at spill or nearspill conditions and nuclear facilities scheduled by Utility are the last resources to be reduced in power output.


Over-generation for purposes of this Exhibit C is defined as the condition in which total supply exceeds total loads in the ISO control area.


Revenues or costs from delivery of surplus energy to the ISO real time market under an over-generation condition shall not be distributed to the Parties until after Utility receives


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payment for final monthly invoice from the ISO for the month in which the surplus energy was delivered.

Calculation of Surplus Energy Percentage

DWR Surplus Energy Percentage shall be equal to the pro rata share of DWR Supply to the sum of Utility Supply and DWR Supply, expressed as follows:


DWR Surplus Energy Percentage = DWR Supply / (Utility Supply + DWR Supply)


Where:

DWR Supply is total energy dispatched from DWR Contracts with adjustments for transmission losses.  Ancillary Services and ISO Instructed Energy transactions described below.


Utility Supply is total energy dispatched from URG, new Utility contracts and Utility market purchases with adjustments for transmission losses, existing wholesale obligations, Ancillary Services and ISO Instructed Energy, exchange transactions, all pumping loads, and ISO Uninstructed Energy as described below.


B.

Definitions and Adjustments


Certain energy and capacity transactions, which may be conducted by Utility in its normal course of business, may affect the Utility and DWR Supply quantities used in pro rata calculations.


Exchanges are transactions where energy is delivered to a third party in one period and a similar, but not necessarily equal, amount of energy is returned by third party in a different period.  For the purposes of pro rata share calculation, exchanges use energy from the Utility’s URG.


Forward Sales are transactions where energy is sold in a forward market to balance supply with demand.  In general, for the purposes of remittance determination, forward sales are made using energy from the joint Utility/DWR portfolio.


Ancillary Services are transactions where capacity from certain qualifying resources is sold to ISO for ancillary services rather than being used as energy to serve retail load.    Resources from both Utility portfolio and DWR Contracts may qualify for use as ancillary services.  Since the capacity used for ancillary services does not serve retail energy load, ancillary service capacity is not considered as a joint Utility/DWR portfolio transaction for the purpose of remittance determination.  If Utility or DWR Contract resource capacity is used for ancillary services, the capacity quantity will not be included in the supply quantity of the owning party for the purpose of pro rata share calculations, and owning party will retain all the revenues from the ancillary services as well as all associated transaction costs and ISO charges.


ISO Instructed Energy is a transaction where certain qualifying resources are able to sell energy from unused capacity to the ISO in the real time market.  The



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energy delivered from these resources is directed by the ISO in real time to balance supply and load imbalances on the grid.  Either Utility portfolio or DWR Contracts may contain resources that have ability to provide instructed energy to ISO.  Since instructed energy is resource specific and does not directly serve the retail load of any utility, instructed energy is not considered as a joint Utility/DWR portfolio transaction for the purpose of remittance determination.  If Utility or DWR Contract resources are dispatched as instructed energy, the energy quantity will not be included in the supply quantity of the owning party for the purpose of pro rata share calculations, and owning party will retain all the revenues from the instructed energy as well as all associated transaction costs and ISO charges.


ISO Uninstructed Energy is a transaction where energy is delivered or received from the ISO grid in the real time based on the actual consumption of retail load and actual deliveries of supply resources.


Uninstructed Retail Load Deviations

Uninstructed retail Load Deviations are the difference between scheduled load and metered load.  If retail load deviations are positive (schedule exceeds meter), it is considered that any excess supply (less any positive uninstructed supply deviation) was dispatched from the joint Utility/DWR portfolio in excess of quantity needed to serve retail load, and that the ISO credit for the excess supply should be shared pro rata as described above.  If retail load deviations are negative (meter exceed schedule), to the extent deviations are not compensated by a positive uninstructed supply deviation, it is considered that Utility had to procure additional supply from ISO real time market.  The negative load deviation quantity procured from ISO real time market is considered a Utility market purchase and the quantity will be included in Utility Supply for pro rata share calculation purposes.


Uninstructed Supply Deviations

Uninstructed Supply Deviations are the difference between scheduled supply and metered supply plus an ISO allocation for transmission losses.  If Utility’s net supply deviations3 are positive (meter exceeds schedule), to the extent not needed to compensate a negative uninstructed retail load deviation, it is considered that excess supply was a Utility market sale and will not be included in Utility Supply for pro rate calculation purposes.  If Utility’s net supply deviations are negative (schedule exceeds meter), to the extent not balanced by a positive uninstructed retail load deviation, it is considered that Utility had to procure additional supply from the ISO real time market.  The negative supply deviation quantity procured from the ISO real time market is considered a Utility market purchase and the quantity  will be included in Utility Supply for pro rata share calculation purpose s.







3 Net positive and negative deviations of all supply resources.


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C.

Utility Remittance to DWR for Sales of DWR Energy to Utility Retail Customers – Energy Payment

Utility shall remit to DWR its Energy Payments according to the terms of each Utility’s respective Servicing Arrangement.


The DWR Energy Payment is billed by each utility to customers in accordance with the terms of each applicable Utility Servicing Arrangement.  The DWR Energy Payment is billed kWhs served by Net DWR Supply at the applicable CPUC approved DWR rate. Net DWR Supply is total DWR Supply less DWR share of surplus energy.  The DWR Energy Payment is allocated based on the percentage of energy supplied by DWR to Utility, which is the “Hourly Percentage Factor” multiplied by the retail load of each customer.  The Hourly Percentage Factor is determined by calculating the percentage of net energy supplied by DWR to Utility to serve retail load, as expressed below:


Hourly Percentage Factor = Net DWR Supply / (Net Utility Supply + Net DWR Supply)

Where:

Net DWR Supply is DWR Supply quantity used for the determination of DWR Surplus Energy Percentage less DWR share of surplus energy quantity, which is determined by the product of surplus energy multiplied by DWR Surplus Energy Percentage.


Net Utility Supply is Utility Supply quantity used for the determination of DWR Surplus Energy Percentage less Utility share of surplus energy quantity, which is total surplus energy less the DWR share of surplus energy quantity.


In the Event of any conflict between the formulas and procedures in this Exhibit C and the formulas and procedures in Utility’s Servicing Arrangement, those contained in Utility’s Servicing Arrangement shall govern.


II.

Bilateral Settlement

Under the Contract Allocation Order DWR remains financially obligated for the Contracts. DWR will continue to pay suppliers and this requires DWR to apply appropriate procedures and controls to ensure that payments are made accurately and in a timely manner. Information supporting Contract settlements will be provided by Utility, and additional information may also be required to address contract performance issues (such as availability and other items as discussed in Exhibit E) and to allow DWR to settle disputes in an appropriate manner.


DWR requires sufficient information to support payment requests so that it can meet the accountability requirements of the State Controller’s Office and the State Auditor, and simultaneously comply with the applicable statutes concerning disbursement of public monies. The Utility shall reconcile schedules with suppliers invoice.  DWR shall make the associated payments to suppliers after performing its verification, and Utility will provide the data as required in Exhibit F to allow it to perform these duties in a timely manner as set forth herein.


DWR shall continue to perform validation of settlement data and invoices and pay Contract costs directly to the suppliers upon validation of invoices.

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III.

Fuel Cost Verification and Settlement


Exhibit B provides a detailed discussion concerning Utility’s responsibility for fuel management. DWR will continue to pay fuel suppliers and others involved in providing fuel management services for the delivery of fuel for those DWR Contracts where the Fuel Option has been elected.    Consistent with the above, Utility will perform settlements activities to reconcile quantities and associated charges, and DWR will perform verification, audit and monitoring to support its disbursement of funds.  Utility will comply with the requirements contained in Exhibit F to provide DWR with the necessary information to apply appropriate procedures and controls to ensure that fuel payments and payments for fuel management services are made accurately and in a timely manner and to allow DWR to settle disputes in an appropriate manner.



































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SDG&E EXHIBIT D


ISO SCHEDULING COORDINATOR CHARGES




EXHIBIT D


ISO SCHEDULING COORDINATOR CHARGES


The financial obligation for ISO charges incurred after the Effective Date will be allocated to the Utility, unless otherwise extended under the existing letter agreement with DWR related to the ISO charges and any future Applicable Commission Orders. Unless specifically provided in Exhibit C hereto, all ISO charges incurred after the Effective Date attributable to load and resources shall be the responsibility of Utility.

Utility agrees that any refunds, reruns or credits through the ISO attributable to costs incurred by DWR for trade dates beginning February 7, 2001  up to the Effective Date shall belong to DWR and Utility shall take all necessary action to remit such refunds or credits to DWR within reasonable time.  In addition, DWR shall be responsible for any ISO charges incurred during this period pursuant to the existing letter agreement between the Parties.  Utility shall invoice DWR for such ISO charges within a reasonable period of time and DWR shall pay Utility for such ISO charges within 10 days of receipt of such invoice.  Without making any assurances as to Commission action, DWR agrees to take appropriate action to ensure that such refunds or credits are applied consistent with DWR’s Revenue Requirement cost allocation method for the same trade dates.


























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SDG&E EXHIBIT E


CONTRACT MANAGEMENT AND

ADMINISTRATION PROTOCOLS




EXHIBIT E


CONTRACT MANAGEMENT AND ADMINISTRATION PROTOCOLS


DWR will retain all contract management, administration and monitoring responsibilities for the Contracts, including due diligence, performance testing, contract performance assessment, formal correspondence and notifications with Suppliers, exercise of contract options, contract interpretation and dispute resolution, and financial reporting.  Upon development by Utility and DWR in the future to a transition plan that transfers the Due Diligence and Performance Test Monitoring functions set forth in this Exhibit E from DWR to the Utility, , including a transition schedule, and a transition plan , Utility agrees to submit such transition plan to the  Commission as an amendment to this Exhibit E for approval by the Commission. Upon agreement of the Parties to an acceptable transition plan and the Commission approval of Utility submitted transition plan, the agreed upon functions will transfer from DWR to the Utility (“the Transition Date 48;).


I.  Due-Diligence


The Due Diligence function assesses the progress of permitting, construction and performance capability of new generating facilities under to the Contracts.  Due Diligence includes (i) monitoring activities associated with the development, construction, and performance of new generating facilities; (ii) identification and tracking of key projects milestones including permitting, equipment procurement, construction, commissioning, and performance testing; (iii) coordination with permitting agencies and the Suppliers, review of project documents, physical inspections, and witnessing of acceptance tests, (iv) verification that the new facilities can perform in a manner that is consistent with the obligations under the appropriate Contract and (v) review and approval of commercial operation dates and documentation.


II.

Performance Test Monitoring


A. Annual Performance Tests


Annual Performance Tests verify ongoing compliance with the Contracts and establish plants capacities and efficiencies that are used to calculate contract payments, either for capacity or energy.  Annual Performance Test responsibilities generally consist of (i) verification of testing procedures, (ii) witness of performance tests, (iii) review of test results and test reports for compliance with Contract terms and conditions, and (iv) identification of contract non-compliance for dispute resolution with the Supplier.  Prior to the Transition Date, the Utility will cooperate and assist DWR with scheduling of upcoming Annual Performance Tests, and the Utility may have its staff witness such testing.





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B. Scheduled Performance Tests


Prior to the Transition Date, on occasion, DWR may request that Utility schedule a peaking or dispatchable generating facility for testing (to assure that such generation facility is available according to the terms of the contract between such generation facility and DWR). The utility will cooperate and shall coordinate with the DWR on a mutually acceptable date for performance of the test.  On the date agreed upon, the Utility shall schedule the specified facility or unit for operation to test the availability, reliability, and performance of the scheduled unit.


C. Test Procedures and Protocols


Prior to January 1, 2003, Utility shall meet with DWR staff to review, discuss, and verify test procedures and protocols developed by DWR.


III.

Contract Performance Assessments


DWR shall continue to perform an after-the-fact review (“Performance Assessment”) of each Contract on a periodic basis.  The purpose of the Performance Assessment is to assess, analyze, and document the overall performance of each Supplier, assure that the Supplier is satisfying the terms and conditions of their respective contract(s), and identify potential issues, disputes, and other matters that may require corrective action by either Utility or DWR as part of contract administration.


IV.

Other Administrative Matters


A. Correspondence with Suppliers


Utility and DWR agree to copy each other on all written correspondence and written notifications sent to or received from a Supplier of an Allocated Contract or Interim Contract related to the activities described in this Exhibit E. The Parties agree to provide additional information as requested related to verification and support of the activities described in this Exhibit E.


B. Reports


Results of the activities described in this Exhibit E will be documented by DWR in written reports (“Reports”) and shall be discussed periodically between DWR and the Utility.  Such Reports may include, but are not limited to, summary of test results, status of projects, recommendations for operational changes, procedural changes, dispute resolution, and results of Performance Assessments. Such Reports, documentation, or other material developed by either Party shall be shared and reviewed with the other Party on a timely basis.




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SDG&E EXHIBIT F


DWR DATA REQUIREMENTS FROM UTILITY




EXHIBIT F

DWR DATA REQUIREMENTS FROM UTILITY

To effectively fulfill its legal and financial responsibilities, DWR requires access to standard and reliable information on a timely basis.


Post transition, DWR remains statutorily and contractually obligated to collect, account for, and remit funds for the power it provides to the IOU’s retail customers.  More specifically, post transition, DWR must have readily available access to information that is currently available in-house due to DWR’s operational responsibilities.  The primary source of this information post transition will be the three utilities.


The information being requested is required to:

•   Verify, audit, monitor and authorize payment for bilateral invoices for allocated

DWR contracts;

•   Manage disputes between DWR and the bilateral counter parties; •   Verify, audit, monitor and authorize payment for fuel procured by the utilities

relating to DWR allocated contracts;

•   Verify, audit, monitor, collect and IOU remittances relating to repayment of

Energy Supplied and Bond Funds;

•   Forecast, manage and monitor DWR monetary requirements and associated

accounts;

•   Ongoing reporting responsibilities under AB1X, the rate agreement and bond

indenture;

•   Audit and monitor long-term contract performance and associated risks prior to

contract assignment or novation.


The table below contains a brief description of the information to be provided by Utility, the frequency for which Utility shall provide such information to DWR, and the effective date for when Utility shall provide such information to DWR.


The following table outlines DWR data requirements relating to general contract/trade information:


Contract/Trade

Requirement

Description

Freq

Effective

Delivery Method

Surplus Energy

Monthly utility’s surplus energy sales plan updated

Monthly

1/1/2003

Email/Fax -

Sales Plan

weekly.  Sales plan will outline all surplus sales

plan,

 

Standard Form TBD

 

contemplated by the utility, including but not limited to

updated

 

 

 

balance of month, weekly balance of week and other

weekly

 

 

 

short-term sales.

 

 

 

Surplus Energy

Contract/Deal information relating to the forward sale

When

All surplus

Email/Fax -

Sales

of DWR surplus energy.  This would include but is not

executed

forward

Standard Form TBD

 

limited to Counterparty, Term (Start/End Date), Hourly

 

sales

 

 

Contract Volumes, Hourly Price, Location, any fee

 

entered into

 

 

information, etc.

 

after

 

 

 

 

1/1/2003

 




The following table outlines DWR data requirements relating to long-term contract schedule information and associated bilateral invoices:

Schedule/Bilateral Invoice

Requirement

Description

Freq

Effective

Delivery Method

Final Schedule

For all long-term contracts allocated to the utilities and

T+1 (Daily)

1/2/2003

Secure Electronic -

Volumes, Long

any surplus energy sales, the detailed hourly final

 

 

Format TBD

Term Contracts

schedule volumes and pricing information by contract

 

 

 

by counterparty, by day.

 

 

 

 

 

 

 

 

 

 

Final schedule volumes are defined as the final volume

 

 

 

 

for the hour at the completion of the real-time market.

 

 

 

 

These volumes represent the hour ahead scheduled

 

 

 

 

volumes adjusted to include any real-time market

 

 

 

 

adjustments by the ISO.  Absent any real time

 

 

 

 

adjustments, this data will be the same as Final Hour

 

 

 

 

Ahead Schedule.

 

 

 

 

 

 

 

 

 

File should include, but is not limited to; Utility

 

 

 

 

identifier, file type identifier (i.e. final, HA), SC

 

 

 

 

identifier, counterparty identifier, contract identifier,

 

 

 

 

schedule type identifier (i.e. sale), delivery location,

 

 

 

 

date, volume scheduled by hour, price per hour.

 

 

 

 

 

 

 

 

Hour Ahead

For all long-term contracts allocated to the utilities and

T+1 (Daily)

1/2/2003

Secure Electronic

Schedule Volumes,

any surplus energy sales, the detailed hour ahead final

 

 

Format TBD

Long Term

schedule volumes and pricing information by contract,

 

 

 

Contracts

by counterparty, by day.

 

 

 

 

 

 

 

 

 

Format and data elements of the file provided should be

 

 

 

 

identical to what was specified above in Final Schedule

 

 

 

 

volumes.

 

 

 

 

 

 

 

 

 

(Note: This cannot be the ISO Hour Ahead Final

 

 

 

 

Schedule template as this file does not provide

 

 

 

 

transactional level details but consolidates/collapses

 

 

 

 

information based on certain ISO rules.)

 

 

 

 

 

 

 

 

Reconciled

Monthly invoice and supporting documentation for

Monthly -

Feb 03

TBD

Monthly bilateral

bilateral contracts relating to DWR long-term contracts,

5 business

 

 

invoices

reviewed and approved by utility for payment by DWR

days prior

 

 

 

to the counterparty.

to payment

 

 

 

 

due date

 

 


In the event of a bilateral invoice dispute with the counterparty, DWR may also request from the utility the additional schedule information.  This information would be in the same format as outlined in the table above.  As mentioned above, DWR is requesting transactional level information and not the associated ISO template files due to the consolidation/collapsing of schedules with the template files.  Schedule information required would include:




•   Hour Ahead Preferred Schedule Volumes

•   Day Ahead Final Schedule Volumes

•   Day Ahead Adjusted Schedule Volumes

•   Day Ahead Revised Preferred Schedule Volumes

 Day Ahead Preferred Schedule Volumes


The following table outlines DWR data requirements relating to the verification of fuel costs.  It assumes DWR will retain legal and financial responsibility for gas and related services while the utility will perform administrative and operational responsibilities as outlined in Exhibit B.


Fuel Costs

Requirement

Description

Freq

Effective

Delivery Method

Generator fuel plan

Proposal and supporting analysis on whether or

Based on

Jan-03

TBD

proposal

not to accept or reject of generator fuel plan.

individual

 

 

 

 

contracts

 

 

Utility Fuel

Utility will provide a bi-annual fuel

Bi-Annual

Jan-03

TBD

Procurement Plan

procurement plan for utility supplied fuel.

 

 

 

Tolling agreement

Monthly report on each DWR tolling agreement

Monthly

Feb-03

Electronic Format

Settlement Report

that includes but is not limited to: tolling

 

 

TBD

 

contract identifier, who provided the gas

 

 

 

 

(generator/utility) and daily quantity of gas

 

 

 

 

supplied.

 

 

 

Reconciled

Suppliers monthly invoice and supporting

Monthly -

Feb-03

Electronic -

Monthly Gas

documentation for fuel procurement relating to

5-business

 

Format TBD

Invoice

DWR tolling agreements, reviewed and

days prior

 

 

 

approved by Utility for payment by DWR to the

to payment

 

 

 

supplier.

due date

 

 

Gas Transportation

Details relating to the Utility negotiated firm

When

All contracts

E-mail/Fax

Contract

and/or interruptible transportation agreements

executed

effective

Standard Form

Information

for DWR review and authorization.

 

after

TBD

 

 

 

1/1/2003

 

Gas Storage

Details relating to the Utility/negotiated firm

When

All contracts

E-mail/Fax

Contract

and/or interruptible storage agreements for

executed

effective

Standard Form

Information

DWR review and authorization.

 

after 1/1/03

TBD

Reconciled

Suppliers monthly invoice and supporting

Monthly -

Feb-03

Electronic -

Monthly gas

documentation for natural gas transportation

5-business

 

Format TBD

transportation

costs relating to DWR tolling agreements,

days prior

 

 

invoices

reviewed and approved by utility for payment

to payment

 

 

 

by DWR to the supplier.

due date

 

 

Reconciled

Supplier’s monthly invoice and supporting

Monthly -

Feb-03

Electronic -

Monthly gas

documentation for storage relating to DWR

5-business

 

Format TBD

storage invoices

tolling agreements, reviewed and approved by

days prior

 

 

 

utility for payment by DWR to the supplier.

to payment

 

 

 

 

due date

 

 







The following table outlines additional DWR data relating to utility revenue remittance:


Utility Revenue Remittance

Requirement

Description

Freq

Effective

Delivery Method

Utility ISO

The complete Utility preliminary settlement

T + 38

Ongoing

Secure

Preliminary

statement and supporting files in original Utility

business

 

Electronic-ISO

Settlement

template format.  This information also required

days

 

Template Direct

Statement and

for remittance calculation purposes.

 

 

from ISO

Supporting Files

 

 

 

 

Utility Final

The complete Utility final settlement statement

T + 45

Ongoing

Secure

Settlement

and supporting files in the Utility original

business

 

Electronic-ISO

Statement and

template format.  This information also required

days

 

Template Direct

Supporting Files

for remittance calculation purposes.

 

 

from ISO

Scheduled Retail

Utilities scheduled or forecasted retail load

T + 1

1/1/2003

TBD

Load by hour

information by hour, by day.

 

 

 

Hourly aggregate

Utilities total hourly scheduled volumes for the

T+1

1/2/2003

TBD

final schedule of

entire Utilities portfolio.  This is an aggregate

(Daily)

 

 

Utility’s resource

total for the day, by hour and represents the

 

 

 

portfolio

total volume supplied by the utility.

 

 

 

Hourly Distribution

Utility DLF % by hour

When

1/1/2003

TBD

Loss Factor

 

changes

 

 

 

 

required

 

 

Estimated DWR

Utility estimated remittance percentage.

When

1/1/2003

TBD

remittance %

 

changes

 

 

 

 

required

 

 

Energy Sales billed

Daily kWh billed by Utility to end users

Daily

Ongoing

Standard DWR

(kWh)*

 

 

 

Form/File (TBD)

DWR Power

Daily DWR kWh billed by Utility to end users

Daily

Ongoing

Standard DWR

Charge volumes*

 

 

 

Form/File (TBD)

DWR Power

Daily dollar amount of DWR Power Charge

Daily

Ongoing

Standard DWR

Charge billed to

being billed to customer including identification

 

 

Form/File

Customer*

of dates billed.

 

 

(TBD)

DWR Power

Daily dollar amount being remitted by Utility to

Daily

Ongoing

Standard DWR

Charge Remitted to

DWR for the DWR Power Charge collected

 

 

Form/File

DWR*

from customers including identification of dates

 

 

(TBD)

 

billed.

 

 

 



*Note that this data is simply the supporting information that should be provided together with the daily remittance of customer revenues.


As various Commission proceedings are finalized DWR will also require specific data related to Bond Charge remittances and to Direct Access exit fees.  The specific nature and format of this data will be agreed with between the utilities and DWR.


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The following table outlines DWR data requirements relating to resource information:


Resource Information

Requirement

Description

Freq

Effective

Delivery Method

Load and Resource

Copies of Utilities annual and quarter load and

Annually

Jan-03

TBD

Assessment Studies

resource assessment studies as provided to the

and

 

 

 

PUC.

quarterly

 

 

 

 

 

 

 

Update Description

Updated description of resources as set out in

Annually or

Jan 1, 04

TBD

of Resources

Exhibit A.  Utilities will also provide timely

when

 

 

 

updates on significant resource changes as

significant

 

 

 

outline in Exhibit A.

changes

 

 

Unit Commitment

As provided to the PUC.

Weekly

Jan-03

TBD

Studies

 

 

 

 

DWR Non-

Report of Resources that were economic to run,

Weekly

1/1/2003

TBD

Dispatched

but were not dispatched.

 

 

 

Resources Report

 

 

 

 

DWR Resource

Utility notification to DWR for resources

As outlined

1/1/2003

Standard DWR

Unavailability

within an allocated contracts becoming

in operating

 

Form -

Form

unavailable, or scheduled to become

agreement

 

Email/Fax

 

unavailable.

 

 

 

 

 

 

 

 

 

Note: This information could be provided

 

 

 

 

directly from the generator to DWR and would

 

 

 

 

therefore not be required from Utility.

 

 

 



Upon the reasonable request of DWR, Utility will provide to DWR any information in respect of Utility that is applicable to the rights and obligations of the Parties under this Agreement or any material information that is reasonably necessary for DWR to monitor and manage their risks and perform their fiduciary responsibilities.  Upon the reasonable request of Utility, DWR will provide to Utility any information in respect of DWR that is applicable to the rights and obligations of the Parties under this Agreement or any material information that is reasonably necessary for Utility to operationally administer Contracts under this Agreement.


For the information identified above, or any additional information identified through the term of this Agreement, standard submission formats will be used or be developed by DWR for use by each of the investor-owned utilities, including Utility.  In the cases where the information requirements result in a large volume of data (e.g., schedule information), DWR will use or develop standard detailed file definitions for use by all of the investor-owned utilities, including Utility.  Data will be submitted to DWR by Utility




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through a secure electronic communication medium, unless other medium is reasonably requested by DWR.




As a result of the relative short implementation timeframes, it is anticipated an interim delivery protocol (e.g., comma delimited file via email, compact diskettes) will be utilized until the final data transmission media are in place.  DWR shall work jointly with Utility to ensure the required data is available by January 1, 2003.


In the event that DWR incurs additional costs, including but not limited to penalties, interest or other such costs, due to Utility’s failure to timely provide the data set forth in this Exhibit F, any such direct cost increase invoiced or assessed to DWR shall be borne by Utility.


The provisions of this Exhibit are subject to annual review by DWR and Utility to ensure that data reporting remains relevant and useful.































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Exhibit 10.17


EXHIBIT 10.17


2006 SERVICING ORDER


CONCERNING


STATE OF CALIFORNIA

DEPARTMENT OF WATER RESOURCES


And


SAN DIEGO GAS & ELECTRIC COMPANY

THIS ORDER HAS BEEN ISSUED BY THE CALIFORNIA PUBLIC UTILITIES COMMISSION (“COMMISSION”) FOR USE BETWEEN THE STATE OF CALIFORNIA DEPARTMENT OF WATER RESOURCES (“DWR”) AND SAN DIEGO GAS & ELECTRIC COMPANY (“UTILITY”).


Date of Commission Approval: March 15, 2007 


Effective Date:  



2006 SERVICING ORDER

TABLE OF CONTENTS

Section Numbers

Title

    Page

Section 1.

Definitions.

Section 2.

Energy Delivery, Surplus Energy Sales and Ownership.

Section 3.

Billing Services.

Section 4.

DWR Revenues; Remittance of DWR Revenues.

Section 5.

Term and Termination; Events of Default.

Section 6.

Confidentiality.

Section 7.

Payment of Fees and Charges.

Section 8.

Records; Audit Rights; Annual Certification.

Section 9.

Reserved.

Section 10.

Amendment Upon Changed Circumstances.

Section 11.

Data Retention.

Section 12.

Indemnity.

Section 13.

Limitations on Liability.

Section 14.

Miscellaneous.

Attachments, Appendices and Annexes

Service Attachment 1 – Utility Billing Services

SA1-1

Service Attachment 2 – DWR Surplus Energy Sales Revenues Remittance

SA2-1


Attachment A -

Representatives and Contacts

A-1

Attachment B -

Remittances of DWR Charges

B-1

Appendix A-1:

Bill Determination - Bundled Customer Bond Charge

A-1-1

Appendix A-2:

Bill Determination - Bundled Customer - Power Charge

A-2-1

Appendix B-1:

Bill Determination - Direct Access Bond Charge

B-1-1

Appendix B-2:

Bill Determination - Direct Access Power Charge

B-2-1

Appendix C-1:

Bill Determination - Customer Generation Departing Load Bond Charge

C-1-1

Appendix C-2:

Bill Determination - Customer Generation Departing Load

  Power Charge

C-2-1

Appendix D-1:

Bill Determination - Municipal Departing Load Bond Charge

D-1-1

Appendix D-2:

Bill Determination - Municipal Departing Load Power Charge

D-2-1

Appendix E-1:

Bill Determination - Community Choice Aggregation Bond Charge

E-1-1

Appendix E-2:

Bill Determination - Community Choice Aggregation Power Charge

E-2-1

Attachment C -

Sample Daily and Monthly Reports

C-1

Attachment D -

[Reserved]

D-1

Attachment E -

Additional Provisions

E-1

Attachment F -

Calculation Methodology for Reduced Remittances Pursuant 20/20 Program

F-1

Attachment G -

SDG&E Fee Schedule

G-1

Attachment H -

[Not Applicable]

H-1




(i)


2006 SERVICING ORDER

THIS 2006 SERVICING ORDER (this “Servicing Order”) concerns the State of California Department of Water Resources (“DWR”), separate and apart from its powers and responsibilities with respect to the State Water Resources Development System, and San Diego Gas & Electric Company, a California corporation (“Utility” or “SDG&E”).  This Servicing Order amends and restates that certain 2003 Servicing Order adopted pursuant to the Commission Decision 02-12-070 on December 19, 2002 (the “2003 Servicing Order”), further amending and restating that certain First Amended and Restated Servicing Agreement, between DWR and Utility, approved by the Commission on April 22, 2002 pursuant to Decision 02-04-048 SDG&E, as amended by the Amendment No. 1 thereto, approved by the Commission on July 17, 2002.  DWR and Utility are sometimes coll ectively referred to as the “Parties” and individually referred to as a “Party.”

BACKGROUND

A.

Under the Act, DWR is authorized to sell electric power and energy to Customers.  Amounts payable by DWR under this Servicing Order are payable solely from the Department of Water Resources Electric Power Fund established pursuant to Section 80200 of the California Water Code or other appropriated amounts legally available therefor.

B.

Utility is engaged in, among other things, the transmission and distribution of electrical services to certain of the Customers in its service territory, the billing and collection for electrical services and other charges, and the ownership, installation and reading of electrical meters for certain of such Customers.

C.

Under the Act, DWR is authorized to enter into contracts with the Utility to provide transmission and distribution of all power sold or made available for sale by DWR to certain of the Customers, and, upon request of DWR, the Commission has ordered Utility to provide such transmission and distribution services, including the provision of billing, collection and related services, as agent for DWR, on terms and conditions that reasonably compensate Utility for its services.

D.

On June 23, 2001, the Parties entered into a Servicing Agreement, as amended and approved by the Commission pursuant to Decision 01-09-013, to set forth the terms under which Utility will provide for the transmission and distribution of DWR Power as well as billing and related services.

E.

On February 21, 2002, the Commission adopted Decision 02-02-051, approving and adopting a Rate Agreement between the Commission and DWR.

F.

On April 22, 2002, the Commission approved the First Amended and Restated Servicing Agreement, pursuant to Decision 02-04-048, to comply with Commission Decision 01-09-013 to implement certain provisions of the Rate Agreement.  Said First Amended and Restated Servicing Agreement was further amended by Amendment No. 1 approved by the Commission on July 17, 2002, pursuant to Decision 02-07-038 to provide for a separate line item on the Utility Bills for Bond Charges and to implement the 2002 20/20 Program as ordered by the Commission pursuant to Resolution E-3770.  

G.

On September 19, 2002, the Commission adopted Decision 02-09-053 relating to the allocation of DWR’s power contracts, ordering the Parties to modify the previously approved servicing agreement to reflect the new operational arrangements under said contract allocation decision issued by the Commission.

H.

On December 19, 2002, pursuant to Decision 02-12-069, the Commission adopted an Operating Order which established the respective rights and responsibilities with respect to the Utility’s administration of the Allocated Contracts and, on that same date, the Commission further adopted Decision 02-12-070, imposing the 2003 Servicing Order on the Utility.

I.

Through other proceedings, the Commission also determined the cost responsibility of certain Customers, other than Bundled Customers, for Bond Charge and the ongoing DWR power charge component.

J.

Section 10(a) of the 2003 Servicing Order provided that Parties are to negotiate appropriate amendments to effectuate the required changes upon certain events, including the implementation of Bond Charges and the imposition of a DWR Charge upon customers of ESPs or other third-parties.

K.

In Appendices C-2, D-1, D-2, E-1 and E-2 to Attachment B and in reporting templates contained in Attachment C to this 2006 Servicing Order, DWR has identified and included certain Customer Types who do not currently remit DWR Charges.  The Utility and DWR acknowledge that the collection and remittance of DWR Charges from such Customer Types will not begin until Applicable Commission Orders that require the Utility to perform such services are final and effective, to the extent that Utility is involved in the collection of DWR Charges.

L.

DWR desires to amend the 2003 Servicing Order to reflect the remittance methodologies and obligations applicable to DWR Revenues, consisting of DWR Charges collected from Customers and DWR Surplus Energy Sales Revenues, all as previously provided in Applicable Commission Orders and State law.  

NOW, THEREFORE, DWR agrees, and Utility is ordered to do as follows:

Section 1.

Definitions.

The following terms, when used herein (and in the attachments hereto) with initial capitalization, shall have the meaning specified in this Section 1.  Certain additional terms are defined in the attachments hereto.  The singular shall include the plural and the masculine shall include the feminine and neuter, and vice versa.  “Includes” or “including” shall mean “including without limitation.”  References to a section or attachment shall mean a section or attachment of this Servicing Order, as the case may be, unless the context requires otherwise, and reference to a given agreement or instrument shall be a reference to that agreement or instrument as modified, amended, supplemented or restated through the date as of which such reference is made (except as otherwise specifically provided herein).  Unless the context otherwise requires, refere nces to Applicable Laws or Applicable Tariffs shall be deemed references to such laws or tariffs as they may be amended, replaced or restated from time to time.  References to the time of day shall be deemed references to such time as measured by prevailing Pacific Time.

ACH - Automated Clearing House, a nationwide payment and collection system which provides for the electronic distribution and settlement of funds.

Act - Chapter 4 of Statutes of 2001 (Assembly Bill 1 of the First 2001-02 Extraordinary Session) of the State of California, as amended from time to time.

Additional Charges - Additional Charges shall have the meaning set forth in Section 7.2 below.

Aggregate Power - DWR Power, Utility-Provided Electric Power, and, subject to Section 4.3 of the Rate Agreement, ESP Power or other third-party provided Power for customers located within that Utility’s service territory, to the extent DWR Charges are authorized to be imposed on any such Power by Applicable Commission Orders or State or federal law.

Allocated Contracts - The long-term power purchase agreements, listed on Schedule 1 of the Operating Order, allocated to Utility under the Contract Allocation Order.

Applicable Commission Orders - Such rules, regulations, decisions, resolutions, opinions or orders as the Commission may lawfully issue or promulgate from time to time, which further define the rights and obligations of the Parties under or in connection with the Servicing Order, including any advice letters in furtherance thereof that are approved by the Commission.

Applicable Law - The Act, Applicable Commission Orders and any other applicable statute, constitutional provision, rule, regulation, ordinance, order, decision or code of a Governmental Authority.

Applicable Tariffs - Utility’s tariffs, including all rules, rate schedules, contracts, and preliminary statements, governing electric energy service to Customers in Utility’s service territory, as filed with and approved by the Commission and, if applicable, the Federal Energy Regulatory Commission.

Assign(s) - Assign(s) shall have the meaning set forth in Section 14.3(c).

Billing Services - mean Utility Billing Services.

Bond Charges - Bond Charges shall have the meaning set forth in the Rate Agreement and shall include Bond Charges to be remitted by Customers, including Bundled Customers, Direct Access Customers, Customer Generation Departing Load Customers, Municipal Departing Load Customers and Community Choice Aggregation Customers who are required to remit Bond Charges under Applicable Law.

Bundled Customers - Customers who purchase Power from Utility.

Bureau - Bureau shall have the meaning set forth in Section 8.2(b).

Business Days - Regular Monday through Friday weekdays which are customary working days, excluding State government holidays and holidays established by Applicable Tariffs; provided, however, the terms “DWR Business Days” or “Utility Business Days” shall refer to Business Days that are customary working days as related to DWR or Utility, as appropriate.  

Business Hours - The period on a Business Day from 9:00 a.m. until 5:00 p.m.

CERS - California Energy Resources Scheduling, a division of DWR.

Charges - DWR Charges and Utility Charges.

Claims - Claims shall have the meaning set forth in Section 12.

Commission - The California Public Utilities Commission.

Community Choice Aggregation Customers or CCA Customers - Customers whose energy requirements are served by governmental entities formed by cities and counties pursuant to Assembly Bill 117 (2002 Stats., ch. 838), all as further provided in Commission Decision 04-12-046 adopted on December 16, 2004, and Commission Decision 05-12-041 adopted on December 15, 2005, as such decisions may be amended or supplemented from time to time.

Confidential Information - Confidential Information shall have the meaning set forth in Section 6.1(c).

Contract Allocation Order - Decision 02-09-053 of the Commission, adopted on September 19, 2002, as such Decision may be amended or supplemented from time to time by the Commission.

Contracts - The Allocated Contracts.

Cost Responsibility Surcharges or CRS - For purposes of this 2006 Servicing Order, “Cost Responsibility Surcharges” or “CRS” refers to DWR Charges imposed under and pursuant to Applicable Law on Customers for the recovery of costs other than as related to the contemporaneous provisions of electrical products or services, including but not limited to (i) Bond Charge authorized or required to be imposed and (ii) any cost determined to be the ongoing DWR power charge component to be paid by such Customer or any other such similar charge.  The Parties agree that under Applicable Commission Orders relating to Cost Responsibility Surcharges, the Commission has dealt with several other components to be collected by Utility, including such components which are the property of the Utility, and further agree that the use of the term Cost Responsibility Surcharges or CRS in this 2006 Servicing Order is only intended to include the components of CRS that are the property of DWR.

Customer - A retail end-use customer that purchases (or is deemed to purchase) Aggregate Power, as established by Applicable Law.

Customer Generation Departing Load Customers or CGDL Customers - Customers who (a) discontinue or reduce their purchases of Utility or Direct Access services, (b) purchase or consume electricity supplied and delivered by “Customer Generation” to replace the Utility or Direct Access purchases; and (c) remain physically located at the same location or elsewhere within the Utility’s service territory, all as further provided in Commission Decision 03-04-030 adopted on April 3, 2003, as such decision may be amended or supplemented from time to time.

Customer Type - Refers to Customers who may be Bundled Customers, Direct Access Customers, Customer Generation Departing Load Customers, Municipal Departing Load Customers or Community Choice Aggregation Customers.

Daily Remittance - Daily Remittance shall have the meaning set forth in Attachment B hereto.

Daily Remittance Report - Daily Remittance Report shall have the meaning set forth in Attachment B hereto and shall be in the form set forth in Attachment C hereto.

Day-Ahead Market - The daily ISO forward market for which energy and ancillary services are scheduled for delivery on the following calendar day.

Delinquent Payment - Delinquent Payment shall mean the payment of any amount due under this Servicing Order after the time when payment is required to be made hereunder, as further described and/or limited hereunder.

Direct Access Customers or DA Customers - Customers who subscribe to direct access service from Electric Service Providers, all as further provided in Commission Decision 02-03-055 adopted on March 21, 2002, as such decision may be amended or supplemented from time to time.

Discloser - Discloser shall have the meaning set forth in Section 6.1(c).

DWR Charges - Bond Charges, Power Charges and any other amounts authorized to be collected from Customers pursuant to the Rate Agreement, Applicable Commission Orders and Applicable Law in order to meet DWR’s revenue requirements under the Act.

DWR Power - The electric power and energy, including but not limited to capacity and output, supplied by DWR to Bundled Customers pursuant to the Act, Applicable Commission Orders and State and federal law.

DWR Revenues - Those DWR Charges collected from Customers required to be remitted to DWR through Utility Bills or Non-Utility Bills, as the case may be, and DWR Surplus Energy Sales Revenues.

DWR Surplus Energy Sales Revenues or Surplus Revenues - Revenues received by Utility for the sale of surplus Power to third parties that Utility is required to remit to DWR, consistent with the Contract Allocation Order and Exhibit C of the Operating Order.

DWR’s Agent - DWR’s Agent shall have the meaning set forth in Section 8.2(b).

Effective Date - The date this Servicing Order is effective in accordance with Section 14.16, as such date is set forth on the cover page hereof.

Electrical Corporation - Electrical Corporation shall have the meaning ascribed thereto in Section 218 of the Public Utilities Code, including any successor and assign thereof.

Electric Service Provider or ESP - Electric Service Provider means an entity that provides electrical service to one or more retail customers located within the Service Areas of Pacific Gas and Electric Company, Southern California Edison Company, or San Diego Gas & Electric Company or any of their respective successors, except that Electric Service Provider excludes:  DWR, any other public agency to the extent that it offers electrical service to customers within its jurisdiction or within the service territory of a local publicly owned electric utility, and Electrical Corporations.  Electric Service Provider includes the unregulated affiliates and subsidiaries of an Electrical Corporation.  

ESP Customers - Customers served by ESP Power.

ESP Power - Power provided by an Electric Service Provider to Customers.

Event of Default - Event of Default shall have the meaning set forth in Section 5.2.

Final Hour-Ahead Schedule - The final schedule of DWR Power submitted by DWR and Utility and published by the ISO for the Hour-Ahead Market.

Fund - Fund shall have the meaning set forth in Section 13.2.

Fund Type - Refers to Bond Charges or Power Charges.

Governmental Authority - Any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to a government, including the Commission.

Governmental Program - Any program or directive established by Applicable Law which directly or indirectly affects the rights or obligations of the Parties under this Servicing Order and which obligates or authorizes DWR to make payments or give credits to Customers or other third parties under such programs or directives.

Hour-Ahead Market - The ISO forward market for which energy and ancillary services are scheduled for subsequent hours for delivery on the current calendar day.

Indemnified Party - Indemnified Party shall have the meaning set forth in Section 12.

Indemnifying Party - Indemnifying Party shall have the meaning set forth in Section 12.

Insolvency Event - With respect to Utility, (a) the filing of a decree or order for relief by a court having jurisdiction in its premises or any substantial part of its property in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for it or for any substantial part of its property, or the ordering of the winding-up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive calendar days; or (b) the commencement by it of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by it to the entry of an order for relief in an involuntary case under any such law, or the consent by it to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for it or for any substantial part of its property, or the making by it of any general assignment for the benefit of creditors, or the taking of action by it in furtherance of any of the foregoing.

ISO - The California Independent System Operator Corporation.

Late Payment Rate - The Prime Rate plus 3%.

Municipal Departing Load Customers or MDL Customers - Customers who departed Utility service on and after February 1, 2001 to take service from a municipal utility, all as further provided in Decision 03-07-028 adopted on July 10, 2003, as such decision may be amended or supplemented from time to time.

Non-Utility - any third-party service provider under Applicable Tariff or servicing arrangement with the Utility to perform any portion of Services contemplated under this Servicing Order, including but not limited to ESPs and other third-party energy providers.

Non-Utility Bill - A bill calculated and prepared by the Utility but either (i) presented to a Non-Utility or (ii) consolidated and presented by a Non-Utility to a Customer, in either case, under and pursuant to a servicing arrangement and/or Applicable Tariff or Applicable Law which facilitates the collection of any component of DWR Charges.

Operating Order - The Operating Order adopted on December 19, 2002, pursuant to Commission Decision 02-12-069, including that certain Operating Agreement executed on April 17, 2003, by and between DWR and Utility, as the same may be amended from time to time and approved by the Commission.

Operating Order Effective Date - The date that the Operating Order is effective in accordance with the provisions thereof.

Power - Electric power and energy, including but not limited to capacity and output.

Power Charges - Power Charges shall have the meaning set forth in the Rate Agreement, and shall include Energy Payments as referred to in Exhibit C of the Operating Order and shall further include the ongoing DWR power charge component of the CRS imposed by the Commission upon certain customers for the above-market costs of DWR Power.

Prime Rate - The rate which Morgan Guaranty Trust Company of New York, or its successor, announces from time to time in New York, New York as its prime lending rate, the Prime Rate to change when and as such prime lending rate changes.  The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer.

Rate Agreement - The Rate Agreement between DWR and the Commission adopted by the Commission on February 21, 2002 pursuant to Commission Decision 02-02-051, as the same may be amended and adopted by subsequent Commission proceedings.

Recipient - Recipient shall have the meaning set forth in Section 6.1(c).

Recurring Fees - Recurring Fees shall have the meaning set forth in Section 7.1.

Remittance - A payment of DWR Charges by Utility to DWR or its Assign(s) and all DWR Surplus Energy Sales Revenues, in accordance with this Servicing Order.

Scheduling Coordinator-to-Scheduling Coordinator Trade - Schedules for energy transferred from one ISO scheduling coordinator to another.  Such schedules are deemed delivered by the ISO upon publication by the ISO of the Final Hour-Ahead Schedules.

Service Area - Service Area means the geographic area in which an Electrical Corporation distributes electricity.

Services - Billing Services, metering services and meter reading services which may be performed by Utility or Non-Utility, as the case may be, and related collection, remittance and other services provided by Utility for DWR pursuant to this Servicing Order.

Servicing Order or 2006 Servicing Order - This 2006 Servicing Order including all attachments hereto.

State - The State of California.

Set-Up Fee - Set-Up Fee shall have the meaning set forth in Section 7.1.

Term - The term of this Servicing Order as set forth in Section 5.1.

20/20 Program - 20/20 Program shall have the meaning set forth in Section 4.3.

Utility Bill - A bill calculated, prepared and presented by Utility to a Customer that includes both the Customer’s Utility Charges and DWR Charges; provided, however, that to the extent appropriate under Applicable Commission Orders, all Utility Bills sent to Customers shall reflect DWR Charges on a consolidated basis.

Utility Billing Service - Billing service through the use of Utility Bills or Non-Utility Bills as described in Service Attachment 1 to this Servicing Order.

Utility Charges - Charges incurred by a Customer for electricity-related services and products provided by Utility to the Customer, as approved by the Commission and, as applicable, the Federal Energy Regulatory Commission or other Governmental Authority (including, but not limited to, any Competition Transition Charges or Fixed Transition Amount Charges owing to Utility or its affiliates, as those terms are defined under the California Public Utilities Code).  Utility Charges shall not include DWR Revenues or charges for retail natural gas sales.

Utility-Provided Electric Power - Utility-Provided Electric Power shall refer to electricity from Utility’s own generation, qualifying facility contracts, other power purchase agreements and bilateral contracts.  Utility-Provided Electric Power shall not include DWR Power, ESP Power or any third-party provided power for Customers.

The terms used in the attachments, but not specifically defined herein or elsewhere in this Servicing Order, should be understood by the Parties to have their ordinary meanings.

Section 2.

Energy Delivery, Surplus Energy Sales and Ownership.

2.1.

Delivery of Power.

Pursuant to the Act and Applicable Commission Orders, Utility is ordered to transmit, or provide for the transmission of, and distribute DWR Power to Bundled Customers over Utility’s transmission and distribution system in accordance with Applicable Law, Applicable Tariffs and any agreements between the Parties.

2.2.

Data and Information Communications Procedures.

(a)

Prior to the Operating Order Effective Date, Utility estimated customer usage and Utility-retained generation for a given trade day and communicated the net of such estimate to DWR by 7:00 a.m. on the preceding Utility Business Day.  In the event that DWR observed a persistent deviation between estimated customer usage and actual customer usage, or between estimated Utility-retained generation and actual Utility-retained generation, DWR requested Utility to review, and Utility promptly commenced the review of, Utility's forecast methodology and reported the results of such review to DWR; provided, however, that Utility had no obligation to correct or minimize such deviation except as provided in Attachment H of the 2003 Servicing Order.  

(b)

Prior to the Operating Order Effective Date, DWR agreed to send to Utility in writing each day the Scheduling Coordinator-to-Scheduling Coordinator Trade between DWR and Utility.  This information was delivered no later than 9:30 a.m. for trades in the Day-Ahead Market for the following day, and no later than two hours and twenty minutes prior to the start of the delivery hour for trades in the Hour-Ahead Market.  Utility was ordered, and DWR agreed to separately provide these schedules to the ISO prior to the close of the respective markets.  The above deadlines for DWR were set because the ISO Day-Ahead Market closed at 10:00 a.m. on the day before delivery and the ISO Hour-Ahead Market closed two hours before the delivery hour.  If these closing times should change, the deadlines for submission of DWR data to Utility were to have changed proportionately, wh ich revised deadlines were to be confirmed in writing by DWR and Utility.  DWR agreed that, upon Utility’s request, DWR would supply information to Utility substantiating to Utility’s reasonable satisfaction (i) the total amount of energy purchased by DWR in the Day-Ahead Market and Hour-Ahead Market; and (ii) other such information that may be required for Utility to verify the DWR Charges, or any component thereof, including information regarding the allocation of such energy among Customers and other third parties to the extent so required.  

Notwithstanding the provisions of paragraphs (a) and (b) of this Section 2.2, upon the Operating Order Effective Date, Utility is to schedule and dispatch Power as provided in the Operating Order and the Utility is directed to comply with the data and information communications procedures set forth in the Operating Order.

(c)

Consistent with Applicable Commission Orders and as provided elsewhere in this Servicing Order, on and after the Effective Date of this 2006 Servicing Order, Utility shall remit each component of DWR Charges from each Customer Type, all as further provided in Attachment B hereto and each of the Appendices appended thereto.  Each component of DWR Charges shall be remitted at the applicable Commission-approved rate.  The basis for remittance of DWR Charges shall be amounts collected from Customers, consistent with Applicable Commission Orders.  If either Party obtains actual knowledge of a material flaw in the procedures or methods set forth in this Servicing Order, and such flaw has a material adverse effect on (i) the delivery of Services (including, without limitation, the timely and accurate remittance of DWR Charges and DWR Surplus Energy Sales Revenues to DWR), or (ii) the timely and accurate payment to Utility of compensation for Services hereunder, the discovering Party shall bring such flaw to the attention of the other Party within a reasonable time.  Upon the delivery of such notice, the Parties shall conduct good faith negotiations to resolve such flaw.  Without limiting any other terms, express or implied, of this Servicing Order or any other agreement between the Parties, the Parties acknowledge that the two preceding sentences do not impose an independent obligation to perform any investigation or monitoring to discover any such flaw.

(d)

On and after the Operating Order Effective Date, Utility shall perform surplus Power sales consistent with the Contract Allocation Order and the Operating Order.  Utility shall also calculate and remit DWR Surplus Energy Sales Revenues consistent with the Contract Allocation Order and the Operating Order.  The basis for remittance of DWR Surplus Energy Sales Revenues shall be amounts collected by Utility from third parties for sales of surplus Power, consistent with the principles set forth in Exhibit C of the Operating Order and in accordance with the Contract Allocation Order, all as further provided in Service Attachment 2 hereto.

(e)

All data and information to be exchanged between the Parties in connection with scheduling and settlement of transactions shall be in the format agreed to by Utility and DWR and shall, except as otherwise provided by this Servicing Order or Applicable Tariffs, or as may be approved by Utility in its reasonable discretion, be submitted electronically.  If a Party receives any information that is unreadable, or contains data that cannot be processed by the receiving Party’s system, or is otherwise damaged, such receiving Party shall inform the sending Party of such problem.  Until any such problem is corrected, the receiving Party shall not be responsible for processing information received in this condition.  The foregoing notwithstanding, a receiving Party shall not be excused from its obligation to process information if the receiving Party cannot read or oth erwise process the information sent by the sending Party as a result of defects, errors, bugs, or viruses in the receiving Party’s systems or software or due to negligence or wrongful act(s) or failure(s) to act on the part of the receiving Party’s employees, agents, independent contractors, subcontractors or assigns.

2.3.

Ownership of DWR Power, Surplus Power, Utility-Provided Electric Power and

DWR Revenues.

Notwithstanding any other provision herein, and in accordance with the Act and Section 80110 of the California Water Code, DWR shall retain title to all DWR Power sold by DWR to Bundled Customers or any surplus Power sold by Utility on DWR’s behalf, in accordance with the terms of the Operating Order and consistent with the Contract Allocation Order.  In accordance with the terms hereof and the Operating Order, as the case may be, Utility is acting solely as the servicing agent for DWR with respect to all components of DWR Charges collected from Customers and with respect to sales of surplus Power to third-party purchasers, and nothing in this Servicing Order should be construed to suggest other than that DWR shall retain title to all DWR Charges and DWR Surplus Energy Sales Revenues.  

In accordance with the Act and Section 80104 of the California Water Code, upon the delivery of DWR Power to Bundled Customers or the sale of surplus Power to third-party power purchasers made by Utility on behalf of DWR, those Bundled Customers and third-party power purchasers, shall be deemed to have purchased that power from DWR, and payment for any such sale shall be a direct obligation of such Customers or third-party purchasers, as the case may be, to DWR.  In accordance with Applicable Law, Cost Responsibility Surcharges are recovered from Direct Access Customers, Customer Generation Departing Load Customers, Municipal Departing Load Customers or Community Choice Aggregation Customers.  Utility shall collect and remit such Cost Responsibility Surcharges, all as further provided in this 2006 Servicing Order.

All DWR Revenues and DWR Charges shall constitute property of DWR.  To the extent any moneys are received by the Utility during the process of collection, and pending their transfer to DWR, including any amounts collected under Non-Utility Bills and remitted to Utility by a Non-Utility, the moneys shall be held by the Utility in trust for the benefit of DWR (whether or not held together with other monies).  Notwithstanding any other provision herein, Utility shall retain title to all Utility-Provided Electric Power supplied by Utility to Customers and all surplus Power provided by Utility.

2.4.

Allocation of DWR Power and DWR Surplus Energy Sales Revenues.

DWR Power will be allocated pursuant to the Act and other Applicable Law and Applicable Tariffs.  On and after the Operating Order Effective Date, DWR Power and DWR Surplus Energy Sales Revenues shall be allocated consistent with the Contract Allocation Order, and as provided in the Operating Order and this Servicing Order.

2.5.

Treatment of ISO Charges.

Prior to the Operating Order Effective Date, the allocation of cost responsibility with respect to certain ISO charges, as between the Parties, have been governed by the Restated Letter Agreement described in Attachment E.  On and after the Operating Order Effective Date, this Section shall be superseded by the provisions relating to such ISO charges provided in the Operating Order, including Exhibit D of the Operating Order.

2.6.

DWR Surplus Energy Sales Revenues.

The treatment of surplus Power shall be governed by the Contract Allocation Order and the Operating Order, and as further provided in Service Attachment 2 hereto.

Section 3.

Billing Services.

3.1.

Provision of Services by Utility.

(a)

Except to the extent that such Services are provided by a third-party, Utility shall provide metering services, meter reading services and Billing Services relating to (i) the Power Charge remittances with respect to each applicable Customer Type provided in the Appendices to Attachment B hereto, and (ii) the Bond Charge remittances with respect to each applicable Customer Type provided in the Appendices to Attachment B hereto.  If Non-Utility Bills are involved in the Utility’s performance of Billing Services, Utility shall calculate the amount of any applicable DWR Charges to be collected through Non-Utility Bills, all as further provided in this Servicing Order.  Utility-provided metering services, meter reading services and Billing Services shall be provided in accordance with Applicable Law, Applicable Commission Orders, Applicable Tariffs and Service Attachme nt 1 hereto, as well as Attachment B and its Appendices.

(b)

In the case where Non-Utility Bills are used by the Utility in the billing and collection of any component of DWR Charges under Applicable Law, Utility shall include such necessary and appropriate provisions in the Applicable Tariffs and any applicable servicing arrangements so that any component of DWR Charges billed and collected by such Non-Utility are remitted to Utility.  Utility is directed to accept payment from such Non-Utility in respect of each applicable component of DWR Charges billed and collected through Non-Utility Bills in such forms and methods and at such times and places as the Utility and each Non-Utility shall mutually agree in accordance with Applicable Commission Orders and Applicable Tariffs.  Upon remittance of any amounts by the Non-Utility to Utility for any applicable component of DWR Charges, Utility is directed to hold such charges in trust for the benefit of DWR (whether or not held together with other monies) and promptly remit and account for such amounts to DWR consistent with Applicable Law.  

(c)

Upon the Operating Order Effective Date, Utility shall sell surplus Power on behalf of DWR, and provide invoicing and collection of amounts owed by third parties for such surplus Power sales made by Utility on DWR’s behalf and the allocation of such revenues to DWR.  Surplus Power sales made by Utility on DWR’s behalf, including the invoicing and collection of amounts owed by third parties and credit risk management, shall be conducted by Utility in accordance with Applicable Commission Orders, including but not limited to, the Contract Allocation Order, Applicable Tariffs, the Operating Order and Service Attachment 2 hereto.

(d)

On behalf of DWR, Utility shall (i) follow its customary standards, policies and procedures in performing its duties hereunder and (ii) perform its duties hereunder using the same degree of care and diligence that Utility exercises for its own account.

(e)

For surplus Power sales to third parties, Utility shall apply prudent credit risk management criteria to ensure that such purchasers meet or exceed DWR credit criteria, or in the absence of such DWR designated criteria, then consistent with industry accepted credit standards.  If Utility sells surplus Power to an entity that requires collateral, the cost and obligation to post such collateral shall be Utility’s responsibility.

(f)

Utility shall be responsible for all transaction fees or other costs associated with the sale of surplus Power imposed by third-party purchasers or any agents of Utility or such purchaser, all as further provided in Exhibit C of the Operating Order.

3.2.

Modification of Billing and Metering Systems.

Utility shall have the right to modify and replace its billing and metering systems, subject to the requirements of Applicable Law, if any.  However, to the extent that such modifications and replacements materially interrupt Services provided by Utility to DWR, Utility shall provide to DWR, as soon as reasonably practicable, prior written notice of any such changes, including, but not limited to, such changes as are required by Applicable Law or Applicable Commission Order(s).  Moreover, to the extent any such modifications would affect the collection of DWR Charges or DWR Surplus Energy Sales Revenues in a manner which is different from the collection of Utility Charges or other Utility revenues, such as revenue from the sale of Power, Utility shall obtain DWR’s prior written consent to such modifications, which consent DWR agrees shall not be unreasonably withheld or delayed.

3.3.

Customer Inquiries.

Utility shall address all Customer inquiries regarding DWR Charges.  DWR agrees to provide all necessary information to Utility in order to permit Utility to respond to all Customer inquiries on a timely basis.  In extraordinary circumstances, Utility will refer Customer inquiries to DWR in a manner to be agreed upon by the Parties.  In the event that either (i) DWR’s failure to provide all such necessary information to Utility, (ii) DWR’s provision of inaccurate information or (iii) DWR’s failure to handle Customer inquiries referred to it by Utility in extraordinary circumstances in the manner agreed upon by the Parties results in Utility’s non-compliance with its obligations under this Section 3.3, such non-compliance will not constitute a material breach of this Servicing Order  and will not give DWR the right to terminate this  Servicing Order. &nb sp;

3.4.

Inquiries from Third Party Power Purchasers.

So long as Utility, as agent to DWR, sells surplus Power to third-party purchasers, Utility shall address all third-party purchasers’ inquiries regarding such surplus Power sales.  If Utility and any third-party purchaser should have a dispute with respect to the sale of surplus Power, Utility shall resolve all such disputes.  Utility shall apply the same practices to the resolution of such disputes as Utility uses to resolve disputes related to any other transaction with such third-party purchaser.

Section 4.

DWR Revenues; Remittance of DWR Revenues.

4.1.

DWR Revenues.

DWR Revenues required to be remitted to DWR under this Servicing Order shall be based upon DWR Charges in effect from time to time pursuant to Applicable Law and Attachment B to this 2006 Servicing Order and the Appendices to such Attachment B.  Upon the Operating Order Effective Date, in addition to the remittance of DWR Charges, DWR Surplus Energy Sales Revenues also shall be remitted based upon the principles set forth in Exhibit C of the Operating Order and as further provided in Service Attachment 2 hereto.

4.2.

Remittance of DWR Revenues.

(a)

Utility shall determine the Daily Remittance amount for each Fund Type and for each applicable Customer Type, consistent with the provisions of the Appendices of Attachment B hereto.  As of the Effective Date of this 2006 Servicing Order, DWR Charge components relating to the following Fund Types for the Customer Types have been identified by DWR and Utility; however, the collection and remittance of DWR Charges from the Customer Types identified below will not begin until Applicable Commission Orders that require the Utility to perform such services are final and effective:

(1)

Bundled Customers - Bond Charge.  Utility is directed to remit Bond Charge for Bundled Customers to DWR, all as further provided in Attachment B and as further provided in Appendix A-1 to Attachment B of this 2006 Servicing Order.  

(2)

Bundled Customers - Power Charge.  Prior to the Operating Order Effective Date, Utility remitted Power Charge for Bundled Customers to DWR based on the amounts collected from Bundled Customers for actual DWR Power supplied, all as further described in Attachment B of the 2003 Servicing Order.  On and after the Operating Order Effective Date, Utility is directed to remit Power Charge for Bundled Customers, consistent with the principles set forth in Exhibit C of the Operating Order and as further provided in Attachment B and in Appendix A-2 to Attachment B of this 2006 Servicing Order.

(3)

Direct Access Customers - Bond Charge.  Utility is directed to remit Bond Charge for Direct Access Customers to DWR, all as further provided in Attachment B and as further provided in Appendix B-1 to Attachment B of this 2006 Servicing Order.

(4)

Direct Access Customers - Power Charge.  Utility is directed to remit Power Charge for Direct Access Customers to DWR, all as further provided in Attachment B and as further provided in Appendix B-2 to Attachment B of this 2006 Servicing Order.

(5)

Customer Generation Departing Load - Bond Charge.  Utility is directed to remit Bond Charge for Customer Generation Departing Load to DWR, all as further provided in Attachment B and as further provided in Appendix C-1 to Attachment B of this 2006 Servicing Order.

(6)

Customer Generation Departing Load - Power Charge.  Upon commencement of billing and collection of Power Charge for Customer Generation Departing Load, the Parties intend to revise and update Appendix C-2 to Attachment B of this 2006 Servicing Order and reflect applicable remittance methods as an event contemplated under Section 10(a)(vi) of this 2006 Servicing Order.  

(7)

Municipal Departing Load - Bond Charge.  Upon commencement of billing and collection of Bond Charge for Municipal Departing Load, to the extent that Utility is involved, the Parties intend to revise and update Appendix D-1 to Attachment B of this 2006 Servicing Order and reflect applicable remittance methods as an event contemplated under Section 10(a)(vi) of this 2006 Servicing Order.

(8)

Municipal Departing Load - Power Charge.  Upon commencement of billing and collection of Power Charge for Municipal Departing Load, to the extent that Utility is involved, the Parties intend to revise and update Appendix D-2 to Attachment B of this 2006 Servicing Order and reflect applicable remittance methods as an event contemplated under Section 10(a)(vi) of this 2006 Servicing Order.

(9)

Community Choice Aggregation - Bond Charge.  Upon commencement of billing and collection of Bond Charge for Community Choice Aggregation, the Parties intend to revise and update Appendix E-1 to Attachment B of this 2006 Servicing Order and reflect applicable remittance methods, as an event contemplated under Section 10(a)(vi) of this 2006 Servicing Order.

(10)

Community Choice Aggregation - Power Charge.  Upon commencement of billing and collection of Power Charge for Community Choice Aggregation, the Parties intend to revise and update Appendix E-2 to Attachment B of this 2006 Servicing Order and reflect applicable remittance methods, as an event contemplated under Section 10(a)(vi) of this 2006 Servicing Order.

If the Utility determines that it has remitted amounts to DWR in error or DWR becomes aware of a material discrepancy in the remitted amounts, then DWR or the Utility, as the case may be, may provide notice of such event to the other Party (accompanied by an explanation of the facts surrounding such erroneous deposit), and the other Party will review such notice and information as soon as practicable and reach agreement as to such amount to be repaid.  Such agreement shall not be unreasonably withheld or delayed by either Party.

(b)

Each Remittance shall be accompanied by a Daily Remittance Report, substantially in the form set forth in Attachment C hereto.  Utility will not be required at any time to advance or pay any of its own funds in the fulfillment of its responsibilities hereunder with respect to DWR Charges, except to the extent provided otherwise in the Attachments hereto.

(c)

Utility, from time to time, will make adjustments regarding amounts remitted as described in Attachment B and Appendices thereto.  In addition, on and after the Effective Date, Monthly Billing Reports and Monthly Late Payment Charge Reports shall be filed with DWR by Utility, all as further provided in Attachments B and C hereto.

(d)

Except as expressly provided in this Servicing Order (including Attachments hereto) or as otherwise expressly agreed to in writing by DWR, Utility shall not deduct from amounts due to DWR hereunder any amounts owing by DWR to Utility which relate to arrangements within or outside the scope of this Servicing Order, or any other amounts, and Utility expressly waives any right to do so.  The foregoing shall not limit Utility’s rights to seek any other remedies permitted under other arrangements with DWR.

(e)

On and after the Operating Order Effective Date, Utility shall calculate and remit DWR Surplus Energy Sales Revenues determined consistent with the Contract Allocation Order and Exhibit C of the Operating Order and as further provided in Service Attachment 2 hereto.  Each monthly Remittance for surplus Power sold on behalf of DWR shall be accompanied by written reports in forms set forth in Attachment C hereto.

4.3.

20/20 Program and Future Similar Programs.

To the extent that the program established in the California Governor’s Executive Order D-30-01, dated March 13, 2001, and Executive Order D-33-01, dated April 26, 2001, as the foregoing orders may be amended, supplemented, extended or otherwise modified (the “20/20 Program”), obligated DWR to make payments or extend credits to Customers or other third parties under such program, Remittances to DWR may have been reduced by such payments to the extent of DWR’s responsibility as required by Applicable Law and Applicable Tariffs.  DWR acknowledges, that Utility’s reasonable initial implementation and recurring administrative costs associated with such program has been paid by DWR in the same manner and at the same times as Utility’s Set-Up Fee and Recurring Fees, respectively, as described in Sections 7.2 and 7.3 below.  Additionally, Utility has invoiced DWR f or any other costs incurred by Utility under such program, and DWR has paid such invoices as Additional Charges, in the manner contemplated in Section 7 below.  The method for calculating reduced Remittances to DWR under this Section 4.3, as well as Utility’s implementation and administration costs, shall be as set forth in Attachment F hereto.

To the extent that, in the future, programs similar to the 20/20 Program are established which expressly obligate DWR under Applicable Law and Applicable Tariffs to make payments or extend credits to Customers or other third parties under such programs, DWR and Utility will implement processes similar to those used for the 20/20 Program as set forth in the immediately preceding paragraph or such other process, as may be mutually agreed upon by the Parties.

Section 5.

Term and Termination; Events of Default.

5.1.

Term.

The term of this Servicing Order (the “Term”) shall commence on the Effective Date and shall terminate on the earlier of (a) 180 calendar days after the last date DWR Charges are imposed on Customers, and 180 calendar days after the last date Utility sells surplus Power on behalf of DWR pursuant to the Operating Order, or (b) the earlier termination of this Servicing Order pursuant to this Section 5.

5.2.

Events of Default by Utility.

The following events shall constitute “Events of Default” by Utility under this Servicing Order:

(a)

any failure by Utility to remit to DWR or its Assign(s) any required Remittance in the manner and at the time specified in this Servicing Order (except to the extent otherwise allowed under Sections 4.3 and 7.2) that continues unremedied for three (3) Utility Business Days after the earlier of the day Utility receives written notice thereof from DWR or the day the responsible manager at Utility first has actual knowledge of such failure; or

(b)

any failure by Utility to duly observe or perform in any material respect any other term or condition of Utility set forth in this Servicing Order, which failure (i) materially and adversely affects the interests or rights of DWR or its Assign(s), and (ii) continues unremedied for a period of sixty (60) calendar days after written notice of such failure has been given to Utility by DWR or its Assign(s).

5.3.

Consequences of Utility Events of Default.

Upon any Event of Default by Utility, DWR may, in addition to exercising any other remedies available under this Servicing Order or under Applicable Law, (i) apply to the Commission for appropriate relief, including but not limited to the termination of this Servicing Order in whole or in part (including Service Attachments); and (ii) apply to the Commission and, if necessary, any court of competent jurisdiction for sequestration and payment to DWR or its Assign(s) of DWR Revenues.  Remittances not made to DWR by Utility on the date due (except to the extent Remittances were not made by operation of Sections 4.3, 7.2, 14.4 or Attachment B hereto) shall bear interest at the Prime Rate from the first day after the due date until the third Utility Business Day after the due date, and at the Late Payment Rate thereafter until paid.

5.4.

Defaults by DWR.

DWR agrees that it shall be in default under this Servicing Order upon:

(a)

subject to subsections (b), (c), (d) and (e) below, DWR’s failure to cure its material breach of any provision of this Servicing Order  within sixty (60) calendar days after receiving written notice thereof from Utility;

(b)

Except for amounts to which DWR has objected in writing pursuant to Section 7.2, DWR’s failure to pay to Utility the Set-Up Fee or Recurring Fees within three (3) DWR Business Days after the date they are due hereunder, as provided in Section 7;

(c)

Except for amounts to which DWR has objected in writing pursuant to Section 7.2, DWR’s failure to pay to Utility the initial implementation and recurring administrative costs associated with Utility’s implementation of the 20/20 Program, as provided in Section 4.3;

(d)

Except for amounts to which DWR has objected in writing pursuant to Section 7.2, DWR’s failure to fulfill any other monetary obligation hereunder within fifteen (15) calendar days after receiving written notice from Utility that such obligation is past due; or

(e)

DWR’s failure to comply with the terms and obligations under Section 2.2 within fifteen (15) calendar days after receiving written notice thereof from Utility.

Upon any default by DWR under this Section 5.4, Utility may exercise any remedies available under this Servicing Order or under Applicable Law, provided that Utility shall have no right to terminate this Servicing Order either in whole or in part (including Service Attachment 1) or any obligation hereunder.  DWR agrees that, except for amounts to which DWR has objected in writing pursuant to Section 7.2 and which are determined not to be owed, any Set-Up Fee or Recurring Fees, or any initial implementation and recurring administrative costs associated with Utility’s implementation of the 20/20 Program, as provided in Section 4.3, which are not paid to Utility on the date due shall bear interest at the Prime Rate from the first day after the due date until the third DWR Business Day after the date they are required to be made hereunder, and at the Late Payment Rate thereafter until paid. DWR further agrees that, except for amounts to which DWR has objected in writing pursuant to Section 7.2 and which are determined not to be owed, any other monetary obligation payable to Utility by DWR shall bear interest at the Prime Rate from the date due until 15 days after receiving written notice from Utility that such amount is overdue, and thereafter at the Late Payment Rate.  DWR further agrees that when and to the extent that any amounts to which DWR has objected in writing pursuant to Section 7.2 are determined to be owing, such amounts shall bear interest from the due date at the rates described above for the applicable category of obligation.

5.5.

Survival of Payment Obligations.

Upon termination of this Servicing Order, DWR agrees that it, and it is ordered that Utility, shall remain liable to the other Party for all amounts owing under this Servicing Order.  Utility shall continue to collect or cause to be collected and, in each case, remit, pursuant to the terms of this Servicing Order, including but not limited to Attachment B and Service Attachments hereto, any DWR Charges billed to Customers before the effective date of termination, and DWR Surplus Energy Sales Revenues attributable to surplus Power sales made prior to the effective date of termination, except as provided in Attachment B hereto.

Section 6.

Confidentiality.

6.1.

Proprietary Information.

(a)

Nothing in this Servicing Order shall affect Utility’s obligations to observe any Applicable Law prohibiting the disclosure of Confidential Information regarding its Customers.

(b)

Nothing in this Servicing Order, and in particular nothing in Sections 6.1(e)(x) through 6.1(e)(z) of this Servicing Order , shall affect the rights of the Commission to obtain from Utility, pursuant to Applicable Law, information requested by the Commission, including Confidential Information provided by DWR to Utility. Applicable Law, and not this Servicing Order, will govern what information the Commission may disclose to third parties, subject to any confidentiality agreement between DWR and the Commission.

(c)

Each Party may acquire information and material that is the other Party’s confidential, proprietary or trade secret information.  As used herein, “Confidential Information” means any and all technical, commercial, financial and customer information disclosed by one Party to the other (or obtained from one Party’s inspection of the other Party’s records or documents), including any patents, patent applications, copyrights, trade secrets and proprietary information, techniques, sketches, drawings, maps, reports, specifications, designs, records, data, models, inventions, know-how, processes, apparati, equipment, algorithms, software programs, software source documents, object code, source code, and information related to the current, future and proposed products and services of each of the Parties, and includes, without limitation, the Parties’ re spective information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing, manufacturing, business forecasts, sales and merchandising, and marketing plans and information.  In all cases, Confidential Information includes proprietary or confidential information of any third party disclosing such information to either Party in the course of such third party’s business or relationship with such Party.  Utility’s Confidential Information also includes any and all lists of Customers, and any and all information about Customers, both individually and aggregated, including but not limited to Customers’ names, street addresses of Customer residences and/or facilities, email addresses, identification numbers, Utility account numbers and passwords, payment histories, energy usage, rate schedule history, allocation of energy uses among Customer residences and/or facilities, and usage of D WR Power.  DWR agrees, and it is ordered with respect to Utility, that all Confidential Information disclosed by the disclosing Party (“Discloser”) will be considered Confidential Information by the receiving Party (“Recipient”) if identified as confidential and received from Discloser.

(d)

DWR agrees, and Utility is ordered to take all steps reasonably necessary to hold in trust and confidence the other Party’s Confidential Information.  Without limiting the generality of the immediately preceding sentence, DWR agrees, and Utility is ordered (i)  to hold the other Party’s Confidential Information in strict confidence, not to disclose it to third parties or to use it in any way, commercially or otherwise, other than as permitted under this Servicing Order; and (ii) to limit the disclosure of the Confidential Information to those of its employees, agents or directly related subcontractors with a need to know who have been advised of the confidential nature thereof and who have acknowledged their express obligation to maintain such confidentiality.

(e)

DWR agrees, and it is ordered with respect to Utility that the foregoing two paragraphs will not apply to any item of Confidential Information if:  (i) it has been published or is otherwise readily available to the public other than by a breach of this Servicing Order ; (ii) it has been rightfully received by Recipient from a third party without breach of confidentiality obligations of such third party and outside the context of the provision of Services under this  Servicing Order; (iii) it has been independently developed by Recipient personnel having no access to the Confidential Information; or (iv) it was known to Recipient prior to its first receipt from Discloser.  DWR agrees, and it is ordered with respect to Utility that, in addition, Recipient may disclose Confidential Information if and to the extent required by law or a Governmental Authority, provided that (x) Recipient shall give Discloser a reasonable opportunity to review and object to the disclosure of such Confidential Information, (y) Discloser may seek a protective order or confidential treatment of such Confidential Information, and (z) Recipient shall make commercially reasonable efforts to cooperate with Discloser in seeking such protective order or confidential treatment.  DWR agrees, and it is ordered with respect to Utility that Discloser shall pay Recipient its reasonable costs of cooperating.

6.2.

No License.

DWR agrees, and it is ordered with respect to Utility that nothing contained in this Servicing Order shall be construed as granting to a Party a license, either express or implied, under any patent, copyright, trademark, service mark, trade dress or other intellectual property right, or to any Confidential Information now or hereafter owned, obtained, controlled by, or which is or may be licensable by, the other Party.

6.3.

Survival of Provisions.

DWR agrees, and it is ordered with respect to Utility that the provisions of this Section 6 shall survive the termination of this Servicing Order.

Section 7.

Payment of Fees and Charges.

7.1.

Utility Fees.

DWR agrees that it will pay to Utility a fee, calculated in accordance with Attachment G hereto (the “Set-Up Fee”), in order to cover Utility’s costs of establishing the procedures, systems, and mechanisms necessary to perform Services.  In addition, DWR  also agrees to pay to Utility an annual fee, calculated in accordance with Attachment G hereto, payable monthly in arrears (unless a different payment schedule is mutually agreed upon by the Parties) as provided in Section 7.2 hereof (the “Recurring Fees”) for Services rendered pursuant to Section 3.1, Section 3.4 and Service Attachments to this Servicing Order.  Additional fees to cover changes in costs or the costs of other services provided hereunder shall be as set forth in Attachment G, which from time to time may be modified by mutual agreement of the Parties or as provided in Applicable Commission Or der.  In the event that additional fees or costs are identified by Utility which have not been identified and included in Attachment G hereto, the Parties hereby agree to negotiate in good faith to determine the amount of such fees or costs.  Except to the extent provided otherwise in subsequent agreements between the Parties, if the Parties are unable to resolve any disputes relating to such additional fees, either Party may, upon giving seven calendar days advance written notice to the other, submit the dispute to the Commission for proposed resolution, in accordance with Applicable Law.  However, in the event such a dispute is submitted to the Commission by either Party, and prior to the Commission’s action, DWR agrees to continue to pay to Utility fees that will permit recovery of the Utility’s incremental cost of establishing procedures, systems and mechanisms necessary to perform Services as set forth in Attachment G.  The Utility shall file these fees with the Commission.  Utility acknowledges that the Commission may adjust, with notice to Utility and an opportunity for Utility to be heard, Utility’s rates to avoid double recovery of any costs paid by DWR hereunder which have already been included in Utility’s rates.

7.2.

Payment of Utility Fees and Charges.

The Set-Up Fee was due and payable on the effective date of the Servicing Agreement approved by the Commission pursuant to Decision 01-09-013, and DWR has paid Utility the Set-Up Fee, in the manner provided in Section 7.3 below.  After receipt of Utility’s invoice thirty (30) days in advance, DWR agrees to pay to Utility its Recurring Fees in monthly installments by the 10th day of each month in the manner provided in Section 7.3 below.  Additionally, with respect to all other fees and charges which are expressly identified as owing by DWR to Utility under this Servicing Order or such other amounts as mutually agreed to by the Parties (the “Additional Charges”), unless a different payment schedule is mutually agreed upon by the Parties, Utility shall (in paper format or, at DWR’s option, electronically) submit to DWR an invoice reflecting such Additional Charges for s uch calendar month.  Any invoiced amount for Recurring Fees or Additional Charges shall be due and payable within three (3) DWR Business Days after presentation, and any invoiced amount and the Set-Up Fee shall be considered past due thirty (30) calendar days after presentation, after which interest shall accrue as provided in Section 7.4.  To the extent that any invoiced amounts described in this Section 7.2 are not fully paid within forty-five (45) days after presentation, and DWR has not objected to Utility in writing by such date, DWR agrees that Utility shall have the right to deduct from any future Remittance(s) the unpaid and overdue amount which is not the subject of any such objection by such date, until such invoice is paid in full or until the dispute over the amount due has been resolved.  In addition, upon written agreement of DWR, any amount payable under this 2006 Servicing Order may be deducted from any future Remittance(s) or be paid in such other periodic basis, all as expres sly directed by DWR.

7.3.

Method of Payment.

(a)

Except as otherwise expressly provided herein or unless a different payment schedule is mutually agreed upon by the Parties, DWR agrees, and with respect to Utility it is ordered, that any payment from either Party to the other Party under this Servicing Order shall be made by ACH or, if ACH is unavailable, then by wire transfer of immediately available funds to the bank account designated by the receiving Party or, if mutually agreed, paid by means of a check or warrant sent to the recipient’s address indicated in accordance with Section 14.14 hereof.  Where the Parties have made arrangements for a bank or other third party to remit funds from one Party to the other Party, DWR agrees, and with respect to Utility it is ordered that proper identification of the bank or third party, including the account number, shall be furnished in writing.  DWR agrees, and with re spect to Utility it is ordered that the remitting Party shall reasonably cooperate in correcting any bank or other third-party errors and shall not be relieved of its payment responsibilities because of such errors.

(b)

Except as expressly provided otherwise herein or under any Applicable Law, Utility shall be required to pay all expenses incurred by it in connection with its activities under this  Servicing Order (including any fees to and disbursements by accountants, counsel, or any other person, any taxes, fees, surcharges or levies imposed on Utility, and any expenses incurred in connection with reports to be provided hereunder) out of the compensation paid to it pursuant to this Section 7, and Utility shall not be entitled to any extra payment or reimbursement therefor.  Notwithstanding anything to the contrary above, if and to the extent any additional taxes (excluding taxes on Utility’s income), fees or charges are imposed on Utility due solely to Utility’s performance of Services hereunder with respect to DWR Charges (such as franchise fees or taxes on DWR Power, the State of California electric energy surcharge, local utility user taxes, or Commission fees), to the extent these taxes, fees, or charges are not already included in Utility’s rates and Utility has not been reimbursed therefor and is not authorized to seek reimbursement from Customers therefor, DWR agrees to reimburse Utility therefor as “Additional Charges” in accordance with Section 7.2.

7.4.

Interest.

DWR agrees, and with respect to Utility it is ordered that except as provided in Sections 5.3, 5.4 or 7.5, any Delinquent Payment under this Servicing Order (whether or not a regularly scheduled payment) shall bear interest at the Late Payment Rate.

7.5.

Reconciliation Amounts.

If a change in Applicable Law (but only if and to the extent such change is expressly intended to be retroactive in effect) or the discovery of a “Material Flaw” results in a discrepancy between any amount paid hereunder and the amount that would have been paid if the changed Applicable Law had been in effect or the Material Flaw had been corrected, such discrepancy (a “Reconciliation Amount”) shall be paid by the party that benefited from the superseded Applicable Law or Material Flaw to the other party.  Reconciliation Amounts shall be paid in full within 30 days after receipt of an invoice therefore unless a different payment schedule is mutually agreed upon between the parties.  Interest on any Reconciliation Amount shall accrue from the original date on which the incorrect payment or remittance produced by the Material Flaw was due until such Reconciliati on Amount is paid.  Interest on any Reconciliation Amount shall be calculated on the basis of a 365- or 366- day year, as applicable, for the actual days elapsed.  For a Reconciliation Amount due from Utility to DWR, interest shall accrue at the rate of interest on Commercial Paper (Financial, three-month maturity) published in the Federal Reserve Statistical Release H.15 as described in Utility’s Preliminary Statement, II. Balancing Accounts, Section L, Energy Resource Recovery Account (ERRA), Subsection 5(q), or such other superseding account then in effect.  Should the publication of the interest rate on Commercial Paper (Financial, three-month maturity) be discontinued, interest shall accrue at the rate of the most recent monthly interest rate on commercial paper that most closely approximates the rate that was discontinued, and which is published in the Federal Reserve Statistical Release H.15, or its successor publication or such other rate as may be mutually agreed by the Parties.  For a Reconciliation Amount due from DWR to Utility, interest shall accrue at the State’s Pooled Money Investment Account Rate in effect from time to time.  If an outstanding Reconciliation Amount is not paid in full as of the date agreed upon by the Parties, any overdue amounts on and after such agreed upon date shall be considered Delinquent Payments and interest shall accrue at the Late Payment Rate from the date such overdue amount was due until paid, in accordance with Section 7.4.

For purposes of this Section, a “Material Flaw” is a procedure or method set forth in this Servicing Order, or an aspect thereof, which results in the payment or remittance of amounts to either Party (or the failure so to remit or pay) in a time, manner or amount that is inconsistent with Applicable Law.  It is expressly agreed and understood that the undercollection or overcollection of amounts required to be collected under Section 80134 of the California Water Code due to incorrect projections of DWR’s revenue requirements or due to incorrect projections in the setting of DWR Charges shall not constitute a Material Flaw and are intended to be trued-up in subsequent revenue requirements.

Section 8.

Records; Audit Rights; Annual Certification.

8.1.

Records.

Utility shall maintain accurate records and accounts relating to DWR Revenues (including separate accounting of Bond Charges and Power Charges) in sufficient detail to permit recordation of Bond Charges and Power Charges billed to or caused to be billed to each Customer Type identified in the Appendices to Attachment B hereto and DWR Revenues from Bond Charges and Power Charges, respectively, remitted by Utility to DWR reflecting separate accounting with respect to each Customer Type.  Utility shall maintain accurate records and accounts relating to DWR Surplus Energy Sales Revenues (including separate accounting of surplus Power sales transactions by counterparty) in sufficient detail to permit recordation of DWR Surplus Energy Sales Revenues separate from other DWR Revenues, remitted by Utility to DWR.  Utility shall provide to DWR and its Assign(s) access to such records.  Access shall be afforded without charge, upon reasonable request made pursuant to Section 8.2.  DWR agrees that access shall be afforded only during Business Hours and in such a manner so as not to interfere unreasonably with Utility’s normal operations.  Utility shall not treat DWR Revenues as income or assets of the Utility or any affiliate for any tax, financial reporting or regulatory purposes, and the financial books or records of Utility and affiliates shall be maintained in a manner consistent with the absolute ownership of DWR Revenues by DWR and Utility’s holding of DWR Revenues in trust for DWR (whether or not held together with other monies).

8.2.

Audit Rights.

(a)

Upon thirty (30) calendar days’ prior written notice, DWR may request an audit, conducted by DWR or its agents (at DWR’s expense), of Utility’s records and procedures, which shall be limited to records and procedures containing information bearing upon:  (i) DWR Charges being billed or caused to be billed to each Customer Type identified in the Appendices to Attachment B hereto by Utility (and payments of DWR Charges separately accounted for each Customer Type); (ii) fees to Utility for Services provided by Utility pursuant to this  Servicing Order; (iii) Utility’s performance of its obligations under this  Servicing Order; (iv) amount of Aggregate Power that is the basis for DWR Charges with respect to each Customer Type pursuant hereto or Applicable Law; (v) projection or calculation of DWR’s revenue requirements as described in Sections 80110 and 80134 of the California Water Code from time to time; (vi) DWR Surplus Energy Sales Revenues collected from third-party purchasers and the collection and allocation of such revenues; and (vii) such other matters as may be permitted by Applicable Commission Orders, Applicable Tariffs or as DWR or its Assign(s) may reasonably request.  The audit shall be conducted during Business Hours without interference with Utility’s normal operations, and in compliance with Utility’s security procedures.

(b)

As provided in the Act, the State of California Bureau of State Audits (the “Bureau”) conducted a financial and performance audit of DWR’s implementation of Division 27 (commencing with Section 80000) of the California Water Code, such audit was to be completed prior to December 31, 2001, and the Bureau issued a final report on or before March 31, 2003.  In addition, as provided in Section 8546.7 of the California Government Code, pursuant to this Section 8.2, Utility is ordered to permit DWR or the State of California Department of General Services, the Bureau, or their designated representative (“DWR’s Agent”) to review and to copy (at DWR’s expense) any non-confidential records and supporting documentation pertaining to the performance of this Servicing Order  and to conduct an on site review of any Confidential Information pursuant to Sections 8.3 and 8.8 hereof.  Utility shall maintain such records for such possible audit for three (3) years after final Remittance to DWR.  Utility shall allow such auditor(s) access to such records during Business Hours and shall allow interviews of any employees who might reasonably have information related to such records.  Further, Utility shall include a similar right for DWR or DWR’s Agent to audit records and interview staff in any contract between Utility and a subcontractor related to performance of this Servicing Order.

8.3.

Confidentiality.

Materials reviewed by either Party or its agents in the course of an audit may contain Confidential Information subject to Section 6 above.  DWR agrees, and with respect to Utility it is ordered that the use of all materials provided to DWR or Utility or their agents, as the case may be pursuant to this Section 8, shall comply with the provisions in Section 6 and shall be limited to use in conjunction with the conduct of the audit and preparation of a report for appropriate distribution of the results of the audit consistent with Applicable Law.

8.4.

DWR Requested Independent Reports.

On or after the Effective Date of this 2006 Servicing Order and at the request and expense of DWR, Utility shall cause a firm of independent certified public accountants (which may provide other services to Utility) to prepare, and Utility will deliver to DWR and its Assign(s), a report addressed to Utility (which may be included as part of Utility’s customary auditing activities), for the information and use of DWR, to the effect that such firm has performed certain procedures (the scope of which shall be agreed upon with DWR) in connection with Utility’s compliance with its obligations under this Servicing Order during the preceding year, identifying the results of such procedures and including any exceptions noted.  Utility will deliver a copy of each report prepared hereunder to the Commission (at the address specified in section 14.14) at the same time it delivers each such rep ort to DWR.  Utility shall not be obligated to complete more than one report per year under this Section.

8.5.

Annual Certifications.

On or after the Effective Date of this 2006 Servicing Order and at least annually, Utility will deliver to DWR, with a copy to the Commission, a certificate of an authorized officer certifying that to the best of such officer’s knowledge, after a review of Utility’s performance under this Servicing Order , Utility has fulfilled its obligations under this Servicing Order  in all material respects and is in compliance herewith in all material respects.

8.6.

Additional Applicable Laws.

DWR agrees, and Utility is ordered to make an effort to promptly notify the other Party in writing to the extent such Party becomes aware of any new Applicable Laws or changes (or proposed changes) in Applicable Tariffs hereafter enacted, adopted or promulgated that may have a material adverse effect on either Party’s ability to perform its duties under this Servicing Order.  DWR agrees, and with respect to Utility it is ordered that a Party’s failure to so notify the other Party pursuant to this Section 8.6 will not constitute a material breach of this Servicing Order, and will not give rise to any right to terminate this Servicing Order or cause either Party to incur any liability to the other Party or any third party.

8.7.

Other Information.

Upon the reasonable request of DWR or its Assign(s), Utility shall provide to the Commission and to DWR or its Assign(s) any public financial information in respect of the Utility applicable to Services provided by Utility under this Servicing Order, or any material information regarding the sale of DWR Power, surplus Power or the collection of DWR Charges to the extent such information is reasonably available to Utility, which (i) is reasonably necessary and permitted by Applicable Law to monitor the performance by Utility hereunder, or (ii) otherwise relates to the exercise of DWR’s rights or the discharge of DWR’s duties under this Servicing Order or any Applicable Law.  In particular, but without limiting the foregoing, Utility shall provide to DWR, with a copy to the Commission, any such information that is necessary or useful to calculate DWR’s revenue requirements (as de scribed in Sections 80110 and 80134 of the California Water Code) or DWR Charges and DWR Surplus Energy Sales Revenues.

8.8.

Customer Confidentiality.

Nothing in this Section 8 shall affect the obligation of Utility to observe any Applicable Law prohibiting disclosure of information regarding Customers, and the failure of Utility to provide access to such information as a result of such obligation shall not constitute a breach of this Section 8 or this Servicing Order.

Section 9.

Reserved.  

Section 10.

Amendment Upon Changed Circumstances.

(a)

The Parties  are informed that compliance with any Commission decision, legislative action or other governmental action (whether issued before or after the Effective Date of this Servicing Order) affecting the operation of this  Servicing Order, including but not limited to (i) dissolution of the ISO, (ii) changes in the ISO market structure, including but not limited to the currently pending Market Redesign and Technology Upgrade, (iii) a decision regarding the “Fixed Department of Water Resources Set-Aside” as such term is defined in Section 360.5 of the California Public Utilities Code, (iv) the establishment of other Governmental Programs, (v) the establishment or implementation of Bond Charge or related charges ordered by the Commission to additional Customer Types than currently reflected in the Appendices to Attachment B and as further contemplated in S ection 2.4 of Service Attachment 1 hereto, (vi) the imposition or modification of a charge or similar DWR Charge upon customers of Electric Service Providers or upon any other third party, (vii) the modification of the Operating Order, or (viii) the modification of provisions related to the sales of surplus Power made on behalf of DWR to third parties by Utility, may require that amendment(s) be made to this Servicing Order .  If either Party reasonably determines that such a decision or action would materially affect the Services to be provided hereunder or the reasonable costs thereof, then upon the issuance of such decision or the approval of such action (unless and until it is stayed), DWR agrees, and Utility is ordered to negotiate the amendment(s) to this Servicing Order that is (or are) appropriate in order to effectuate the required changes in Services to be provided or the reimbursement thereof.  Notwithstanding Section 5.4, if the Parties are unable to reach agreement on such amendments w ithin sixty (60) days after the issuance of such decision or approval of such action, DWR may, and Utility shall, submit the disagreement to the Commission for proposed resolution, in accordance with Applicable Law.  Nothing herein shall preclude either Party from challenging the decision or action which such Party deems may adversely affect its interests in any appropriate forum of the Party’s choosing.

(b)

The Parties are informed that this Servicing Order has not been reviewed by the rating agencies which are rating DWR's bonds.  If the rating agencies request changes to this Servicing Order DWR agrees, and Utility is ordered to negotiate to amend this Servicing Order to accommodate the rating agency requests and will cooperate in obtaining approval of the Commission for such amendments.

(c)