SOUTHERN CALIFORNIA GAS CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
------- -------

Exact Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- -------------
1-40 PACIFIC ENTERPRISES California 94-0743670

1-1402 SOUTHERN CALIFORNIA GAS COMPANY California 95-1240705

555 WEST FIFTH STREET, LOS ANGELES, CALIFORNIA 90013
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (213)244-1200
--------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Pacific Enterprises Preferred Stock: American and Pacific
$4.75 dividend; $4.50 dividend;
$4.40 dividend; $4.36 dividend

Southern California Gas Co. Preferred Stock Pacific

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Pacific Enterprises None
Southern California Gas Company None

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

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

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

Exhibit Index on page 94. Glossary on page 99.

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2005:
Pacific Enterprises $68.8 Million
Southern California Gas Company $20.1 Million

Common Stock outstanding without par value as of January 31, 2005:
Pacific Enterprises Wholly owned by Sempra Energy
Southern California Gas Company Wholly owned by Pacific Enterprises

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Information Statement prepared for the May 2005 annual meeting
of shareholders are incorporated by reference into Part III.

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TABLE OF CONTENTS

PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. . 12

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . 26
Item 8. Financial Statements and Supplementary Data. . . . . . 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 82
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . 82
Item 9B. Other Information . . . . . . . . . . . . . . . . . . 83

PART III
Item 10. Directors and Executive Officers of the Registrant . . 85
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 86
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters. . . 86
Item 13. Certain Relationships and Related Transactions . . . . 86
Item 14 Principal Accountant Fees and Services . . . . . . . . 86

PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 87

Consents of Independent Registered Public Accounting Firm and
Report on Schedule. . . . . . . . . . . . . . . . . 89

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 94

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional and national economic,
competitive, political, legislative and regulatory conditions and
developments; actions by the California Public Utilities Commission,
the California State Legislature, and the Federal Energy Regulatory
Commission and other regulatory bodies in the United States; capital
markets conditions, inflation rates, interest rates and exchange rates;
energy and trading markets, including the timing and extent of changes
in commodity prices; the availability of natural gas; weather
conditions and conservation efforts; war and terrorist attacks;
business, regulatory, environmental and legal decisions and
requirements; the status of deregulation of retail natural gas and
electricity delivery; the timing and success of business development
efforts; and other uncertainties, all of which are difficult to predict
and many of which are beyond the control of the companies. Readers are
cautioned not to rely unduly on any forward-looking statements and are
urged to review and consider carefully the risks, uncertainties and
other factors which affect the companies' business described in this
report and other reports filed by the companies from time to time with
the Securities and Exchange Commission.

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PART I
ITEM 1. BUSINESS

Description of Business

Pacific Enterprises (PE or the company) is an energy services company
whose only significant subsidiary is Southern California Gas Company
(SoCalGas), the nation's largest natural gas distribution utility. PE's
common stock is wholly owned by Sempra Energy, a California-based
Fortune 500 holding company, and PE owns all of the common stock of
SoCalGas. The financial statements herein are, in one case, the
Consolidated Financial Statements of PE and its subsidiary, SoCalGas,
and, in the second case, the Consolidated Financial Statements of
SoCalGas and its subsidiaries, which comprise less than one percent of
SoCalGas' consolidated financial position and results of operations.
Sempra Energy also indirectly owns all of the common stock of San Diego
Gas & Electric (SDG&E). SoCalGas and SDG&E are collectively referred to
herein as "the California Utilities." A description of SoCalGas is
given in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" herein.

As PE itself has no operations, PE's financial position and operations
consist of those of SoCalGas and some additional items attributable to
PE's position as a holding company (e.g. cash, intercompany accounts,
debt and equity).

Company Website

The company's website address is http://www.socalgas.com/ and Sempra
Energy's website address is http://www.sempra.com/investor.htm. The
company makes available free of charge via a hyperlink on its website
its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports as soon as
reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission.

RISK FACTORS

The following risk factors and all other information contained in this
report should be considered carefully when evaluating the company.
These risk factors could affect the actual results of the company and
cause such results to differ materially from those expressed in any
forward-looking statements of, or made by or on behalf of, the company.
Other risks and uncertainties, in addition to those that are described
below, may also impair its business operations. If any of the following
risks occurs, the company's business, cash flows, results of operations
and financial condition could be seriously harmed. These risk factors
should be read in conjunction with the other detailed information
concerning the company set forth in the notes to Consolidated Financial
Statements and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein.

SoCalGas is subject to extensive regulation by state, federal and local
legislation and regulatory authorities, which may adversely affect the
operations, performance and growth of its business.

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

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

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

SoCalGas may be impacted by new regulations, decisions, orders or
interpretations of the CPUC or other regulatory bodies. New
legislation, regulations, decisions, orders or interpretations could
change how SoCalGas operates, could affect its ability to recover their
various costs through rates or adjustment mechanisms, or could require
SoCalGas to incur additional expenses.

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

The California energy crisis of 2000 and 2001 has generated numerous
lawsuits, governmental investigations and regulatory proceedings
involving many energy companies, including Sempra Energy and the
California Utilities. They are the remaining defendants in class action
and individual antitrust and unfair competition lawsuits scheduled for
a jury trial to begin in September 2005 in which the plaintiffs have
asserted that they are entitled to recover $24 billion in damages.

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Additional lawsuits have been filed by the Attorney General of Nevada
and by others. They are also responding to an ongoing investigation
being conducted by the California Attorney General and an ongoing CPUC
proceeding related to the increase in natural gas prices at the
California-Arizona border in 2000-2001. The California Utilities have
expended and continue to expend substantial amounts defending these
lawsuits and in connection with related investigations and regulatory
proceedings. If these matters are ultimately resolved unfavorably to
the California Utilities, their results of operations and financial
condition and those of Sempra Energy may be materially adversely
affected.

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

SoCalGas' cash flows, ability to pay dividends and ability to meet its
debt obligations largely depend on the performance of its utility
operations.

SoCalGas' utility operations are its major source of liquidity.
SoCalGas' cash flows, ability to meet its obligations to creditors and
its ability to pay dividends on its common stock are largely dependent
upon the sufficiency of utility earnings and cash flows in excess of
utility needs.

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

Like other major industrial facilities, SoCalGas' natural gas pipelines
and storage facilities may be damaged by natural disasters,
catastrophic accidents or acts of terrorism. Any such incidents could
result in severe business disruptions, significant decreases in
revenues or significant additional costs to the company, which could
have a material adverse effect on SoCalGas' earnings and cash flows.
Given the nature and location of these facilities, any such incidents
also could cause fires, leaks, explosions, spills or other significant
damage to natural resources or property belonging to third parties, or
personal injuries, which could lead to significant claims against the
company and its subsidiaries. Insurance coverage may become unavailable
for certain of these risks and the insurance proceeds received for any
loss of or damage to any of its facilities, or for any loss of or
damage to natural resources or property or personal injuries caused by
its operations, may be insufficient to cover the company's losses or
liabilities without materially adversely affecting the company's
financial condition, earnings and cash flows.

GOVERNMENT REGULATION

California Utility Regulation

The CPUC, which consists of five commissioners appointed by the
Governor of California for staggered six-year terms, regulates
SoCalGas' rates and conditions of service, sales of securities, rate of
return, rates of depreciation, uniform systems of accounts, examination

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of records, and long-term resource procurement. The CPUC conducts
various reviews of utility performance and conducts investigations into
various matters, such as deregulation, competition and the environment,
to determine its future policies. The CPUC also regulates the
relationship of utilities with their holding companies and is currently
conducting an investigation into this relationship. This investigation
is discussed further in Note 9 of the notes to Consolidated Financial
Statements herein.

United States Utility Regulation

The Federal Energy Regulatory Commission (FERC) regulates the
interstate sale and transportation of natural gas, the uniform systems
of accounts and rates of depreciation. Both the FERC and the CPUC are
currently investigating prices charged to the California investor-owned
utilities (IOUs) by various suppliers of natural gas and electricity.
Further discussion is provided in Note 9 of the notes to Consolidated
Financial Statements herein.

Local Regulation

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

Licenses and Permits

SoCalGas obtains numerous permits, authorizations and licenses in
connection with the transmission and distribution of natural gas. They
require periodic renewal, which results in continuing regulation by the
granting agency.

Other regulatory matters are described in Note 9 of the notes to
Consolidated Financial Statements herein.

NATURAL GAS UTILITY OPERATIONS

Resource Planning and Natural Gas Procurement and Transportation

SoCalGas is engaged in the purchase, sale, distribution, storage and
transportation of natural gas. The company's resource planning, power
procurement, contractual commitments and related regulatory matters are
discussed below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Notes 9 and 10 of
the notes to Consolidated Financial Statements herein.

Customers

For regulatory purposes, customers are separated into core and noncore
customers. Core customers are primarily residential and small
commercial and industrial customers, without alternative fuel

8

capability. Noncore customers consist primarily of electric generation,
wholesale, large commercial, industrial and enhanced oil recovery
customers.

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

Natural Gas Procurement and Transportation

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

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

According to "Btu's Daily Gas Wire", the annual average spot price of
natural gas at the California/Arizona border was $5.53 per million
British thermal unit (mmbtu) in 2004 ($6.35 in December 2004), compared
with $5.10 per mmbtu in 2003 and $3.14 per mmbtu in 2002. Prices for
natural gas increased toward the end of 2002, 2003 and in 2004.
SoCalGas's weighted average cost (including transportation charges) per
mmbtu of natural gas was $5.92 in 2004, $5.05 in 2003 and $3.03 in 2002.

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

Natural Gas Storage

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

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Demand for Natural Gas

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

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

Growth in the natural gas markets is largely dependent upon the health
and expansion of the Southern California economy and prices of other
energy products. External factors such as weather, the price of
electricity, electric deregulation, the use of hydroelectric power,
competing pipelines and general economic conditions can result in
significant shifts in demand and market price. SoCalGas added 75,000
new customer meters in 2004 and 72,000 in 2003, representing growth
rates of 1.4 percent and 1.3 percent, respectively. SoCalGas expects
that its growth rate for 2005 will approximate that for 2004.

In the interruptible industrial market, customers are capable of
burning a fuel other than natural gas. Fuel oil is the most significant
competing energy alternative. The company's ability to maintain its
industrial market share is largely dependent on price. The relationship
between natural gas supply and demand has the greatest impact on the
price of the company's product. With the reduction of natural gas
production from domestic sources, the cost of natural gas from non-
domestic sources may play a greater role in the company's competitive
position in the future. The price of oil depends upon a number of
factors, including the relationship between world-wide supply and
demand, and the policies of foreign and domestic governments.

The natural gas distribution business is seasonal in nature as
variations in weather conditions generally result in greater revenues
during the winter months when temperatures are colder. As is prevalent

10

in the industry, the company injects natural gas into storage during
the summer months (usually April through October) for withdrawal
storage during the winter months (usually November through March) when
customer demand is higher.

RATES AND REGULATION

Information concerning rates and regulations applicable to SoCalGas is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Notes 1 and 9 of the notes
to Consolidated Financial Statements herein.

ENVIRONMENTAL MATTERS

Discussions about environmental issues affecting the company are
included in Note 10 of the notes to Consolidated Financial Statements
herein. The following additional information should be read in
conjunction with those discussions.

Hazardous Substances

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

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

SoCalGas lawfully disposes of wastes at permitted facilities owned and
operated by other entities. Operations at these facilities may result
in actual or threatened risks to the environment or public health.
Under California law, businesses that arrange for legal disposal of
wastes at a permitted facility from which wastes are later released, or
threaten to be released, can be held financially responsible for
corrective actions at the facility.

SoCalGas has been named as a potentially responsible party (PRP) for
one landfill site and one industrial waste disposal site, from which
releases have occurred.

Remedial actions and negotiations with other PRPs and the United States
Environmental Protection Agency have been in progress since 1993 for

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the Casmalia landfill site. The company's share of costs to remediate
this site is estimated to be $1.3, of which $0.9 million has been
spent.

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

At December 31, 2004, the company's estimated remaining investigation
and remediation liability related to hazardous waste sites, including
the MGPs, was $41.9 million, of which 90 percent is authorized to be
recovered through the Hazardous Waste Collaborative mechanism. The
company believes that any costs not ultimately recovered through rates,
insurance or other means will not have a material adverse effect on the
company's consolidated results of operations or financial position.

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

Air and Water Quality

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

OTHER MATTERS

Research, Development and Demonstration (RD&D)

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

Employees of Registrant

As of December 31, 2004, SoCalGas had 6,448 employees, compared to
6,570 at December 31, 2003.

Labor Relations

Field, technical and most clerical employees at SoCalGas are
represented by the Utility Workers' Union of America (UWUA) or the
International Chemical Workers' Union Council (ICWUC). The collective
bargaining agreement for field, technical and most clerical employees
at SoCalGas covering wages, hours, working conditions, medical and

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various benefit plans was in effect through December 31, 2004. SoCalGas
has signed with UWUA and ICWUC, a new collective bargaining agreement
that will be in effect from January 1, 2005 through September 30, 2008.

ITEM 2. PROPERTIES

Natural Gas Properties

At December 31, 2004, SoCalGas' natural gas facilities included 2,830
miles of transmission and storage pipeline, 47,307 miles of
distribution pipeline and 45,954 miles of service piping. They also
included 11 transmission compressor stations and 4 underground storage
reservoirs, with a combined working capacity of 122 billion cubic feet.

Other Properties

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

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

ITEM 3. LEGAL PROCEEDINGS

Except for the matters described in Note 10 of the notes to
Consolidated Financial Statements or referred to elsewhere in this
Annual Report, neither the companies nor their subsidiaries are party
to, nor is their property the subject of, any material pending legal
proceedings other than routine litigation incidental to their
businesses.

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

PART II

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

All of the issued and outstanding common stock of PE is owned by Sempra
Energy. The information required by Item 5 concerning dividends
declared is included in the "Statements of Consolidated Changes in
Shareholders' Equity" set forth in Item 8 of this Annual Report herein.

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ITEM 6. SELECTED FINANCIAL DATA

Since Pacific Enterprises is a wholly owned subsidiary of Sempra Energy
and SoCalGas is a wholly owned subsidiary of Pacific Enterprises, per
share data is not provided.

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

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

INTRODUCTION

This section of the 2004 Annual Report includes management's discussion
and analysis of operating results from 2002 through 2004, and provides
information about the capital resources, liquidity and financial
performance of Pacific Enterprises (PE) and Southern California Gas
Company (SoCalGas). SoCalGas, PE or the two together are referred to as
"the company" herein, the distinction being indicated by the context.
This section also focuses on the major factors expected to influence
future operating results and discusses investment and financing

14

activities and plans. It should be read in conjunction with the
Consolidated Financial Statements included in this Annual Report.

PE is the holding company for SoCalGas, the nation's largest natural
gas distribution utility. SoCalGas owns and operates a natural gas
distribution, transmission and storage system supplying natural gas
throughout approximately 20,000 square miles of service territory. Its
service territory extends from San Luis Obispo on the north to the
Mexican border in the south, excluding San Diego County, the City of
Long Beach and the desert area of San Bernardino County. SoCalGas
provides natural gas service to residential, commercial, industrial,
utility electric generation and wholesale customers, through 5.5
million meters in a service area with a population of 19.5 million.
SoCalGas and its sister utility, San Diego Gas & Electric (SDG&E), are
collectively referred to herein as "the California Utilities."

RESULTS OF OPERATIONS

The following table shows net income for each of the last five years.

(Dollars in millions)
- -----------------------------------------
PE SoCalGas
---------- ----------
2004 $ 236 $ 233
2003 $ 221 $ 210
2002 $ 213 $ 213
2001 $ 206 $ 208
2000 $ 211 $ 207

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

To understand the operations and financial results of the company, it
is important to understand the ratemaking procedures to which the
company is subject.

SoCalGas is subject to various regulatory bodies and rules at national,
state and local levels. The primary regulatory body is the California
Public Utilities Commission (CPUC), which regulates utility rates and
operations. The Federal Energy Regulatory Commission (FERC) regulates
interstate transportation of natural gas and various related matters.
Municipalities and other local authorities regulate the location of
utility assets, including natural gas pipelines.

The natural gas industry experienced an initial phase of restructuring
during the 1980s by deregulating natural gas sales to noncore
customers. Further restructuring continues to be considered, as
discussed in Note 9 of the notes to Consolidated Financial Statements.

Natural Gas Revenue and Cost of Natural Gas. Natural gas revenues
increased to $4.0 billion in 2004 from $3.5 billion in 2003, and the
cost of natural gas increased to $2.3 billion in 2004 from $1.8 billion
in 2003. The increases were primarily attributable to natural gas cost
increases, which are passed on to customers. For natural gas revenues,
this increase was offset by $48 million of Gas Cost Incentive Mechanism
(GCIM) awards and $1 million of Performance-Based Regulation (PBR)
awards recognized during 2003. Performance awards are discussed in Note

15

9 of the notes to Consolidated Financial Statements. SoCalGas' weighted
average cost per million British thermal units (mmbtu) of natural gas
was $5.92 in 2004, $5.05 in 2003 and $3.03 in 2002.

Under the current regulatory framework, the cost of natural gas
purchased for customers and the variations in that cost are passed
through to the customers on a substantially concurrent basis. However,
SoCalGas' GCIM allows SoCalGas to share in the savings or costs from
buying natural gas for customers below or above market-based monthly
benchmarks. The mechanism permits full recovery of all costs within a
tolerance band above the benchmark price and refunds all savings within
a tolerance band below the benchmark price. The costs or savings
outside the tolerance band are shared between customers and
shareholders. Further discussion is provided in Notes 1 and 9 of the
notes to Consolidated Financial Statements.

Natural gas revenues increased to $3.5 billion in 2003 from $2.9
billion in 2002, and the cost of natural gas increased to $1.8 billion
in 2003 from $1.2 billion in 2002. The change was primarily
attributable to natural gas price increases, partially offset by
reduced volumes. Revenues also increased due to the performance awards
recognized during 2003.

16

The table below summarizes SoCalGas' natural gas volumes and revenues
by customer class for the years ended December 31, 2004, 2003 and 2002.

NATURAL GAS SALES, TRANSPORTATION AND EXCHANGE
(Dollars in millions, volumes in billion cubic feet)

Other Operating Expenses. Other operating expenses at SoCalGas were
$950 million, $954 million and $872 million in 2004, 2003 and 2002,
respectively. The decrease in 2004 was due primarily to the favorable
resolution of regulatory issues offset by litigation costs.
Additionally, operating expenses in 2003 include charges for litigation
costs and for losses associated with a sublease of portions of the
SoCalGas headquarters building. The increase in 2003 compared to 2002
was primarily the result of these charges, as well as higher labor and
employee benefits costs. During 2002, the company recorded $13 million
in litigation costs related to the California energy crisis.

Other Income. Other income and deductions consist primarily of interest
income from short-term investments, interest income/expense from
regulatory balancing accounts and allowance for equity funds used
during construction. Excluding the impact of income taxes on non-
operating income, other income at SoCalGas was $31 million, $40
million, and $10 million in 2004, 2003 and 2002, respectively. The

17

decrease in 2004 was due to higher interest income in 2003 resulting
from the favorable $30 million before-tax resolution of income-tax
issues with the Internal Revenue Service (IRS), offset by the $15
million before-tax gain from the sale of partnership property in 2004.
The increase in 2003 compared to 2002 was due to higher interest income
as discussed above.

Income Taxes. Income tax expense at SoCalGas was $154 million, $150
million and $178 million in 2004, 2003 and 2002, respectively. The
corresponding effective income tax rates were 39.8 percent, 41.7
percent and 45.5 percent. The decreases in 2003 compared to 2002 were
due to the $12 million favorable resolution of income-tax issues in the
fourth quarter of 2003. In addition, income before taxes in 2003
included $30 million in interest income arising from the income tax
settlement, resulting in an offsetting $13 million income tax expense.

Net Income. SoCalGas recorded net income of $233 million, $210 million
and $213 million in 2004, 2003 and 2002, respectively. The increase in
2004 was due to higher margins, the resolution of the 2004 cost of
service proceedings, which favorably impacted net income by $34
million, and the $9 million after-tax gain on the sale of partnership
property, offset by $24 million of litigation costs. Additionally, 2003
net income was affected by the $32 million after-tax charge for
litigation costs and for losses associated with a long-term sublease of
portions of its headquarters building, offset by the favorable
resolution of income tax issues and by higher GCIM awards.

The decrease for 2003 compared to 2002 was due primarily to the
litigation charges and sublease losses in 2003 and the end of sharing
of merger savings (which favorably impacted earnings by $17 million for
the year ended December 31, 2002), offset by the resolution of income
tax issues and higher GCIM awards in 2003.

CAPITAL RESOURCES AND LIQUIDITY

SoCalGas' operations are the major source of liquidity. In addition,
working capital requirements can be met through the issuance of short-
term and long-term debt. Cash requirements primarily consist of capital
expenditures for utility plant.

At December 31, 2004, the company had $34 million in unrestricted cash
and $770 million in available unused, committed lines of credit, of
which PE had $500 million for the sole purpose of providing loans to
Sempra Global, another subsidiary of Sempra Energy, and SoCalGas had
$270 million.

Management believes that these amounts and cash flows from operations
and debt issuances will be adequate to finance capital expenditures and
meet liquidity requirements and other commitments. Forecasted capital
expenditures for the next five years are discussed in "Future Capital
Expenditures for Utility Plant". Management continues to regularly
monitor SoCalGas' ability to finance the needs of its operating,
financing and investing activities in a manner consistent with its
intention to maintain strong, investment-quality credit ratings. Rating
agencies and others that evaluate a company's liquidity generally
consider a company's capital expenditures and working capital

18

requirements in comparison to cash from operations, available credit
lines and other sources available to meet liquidity requirements.

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by PE's consolidated operating activities totaled
$544 million, $375 million and $521 million for 2004, 2003 and 2002,
respectively. Net cash provided by SoCalGas' operating activities
totaled $501 million, $385 million and $527 million for 2004, 2003 and
2002, respectively.

The increase in net cash provided by operating activities was due to
changes in regulatory balancing accounts in 2004, offset by a higher
increase in accounts receivable in 2004.

The decrease in 2003 compared to 2002 was primarily attributable to
SoCalGas' decrease in overcollected regulatory balancing accounts in
2003 resulting from higher natural gas prices and lower usage and the
refunding of customer deposits, offset by lower tax payments in 2003.

During 2004, the company contributed $42 million to other postretirement
benefit plans but made no contribution to the pension plan.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in PE's consolidated investing activities totaled $293
million, $216 million and $508 million for 2004, 2003 and 2002,
respectively. Net cash used in SoCalGas' investing activities totaled
$253 million, $279 million and $417 million for 2004, 2003 and 2002,
respectively. The increase in cash used in investing activities was due
to lower affiliate loan repayments received in 2004. For SoCalGas, the
decrease in cash used in investing activities was due to higher
repayments received from Sempra Energy in 2004.

PE's decrease in 2003 compared to 2002 was primarily due to the $97
million repayment from Sempra Energy in 2003 compared to $177 million
of advances to Sempra Energy in 2002. For SoCalGas, the change in 2003
compared to 2002 was the same as PE except that SoCalGas received $34
million of the $97 million repayment in 2003 and made $86 million of
the $177 million in advances to Sempra Energy in 2002. Advances to
Sempra Energy are payable on demand.

Future Capital Expenditures for Utility Plant

Significant capital expenditures in 2005 are expected to include $350
million for improvements to the distribution and transmission systems.
These expenditures are expected to be financed by cash flows from
operations and debt issuances.

Over the next five years, the company expects to make capital
expenditures of $1.8 billion, including $350 million in each of the
next five years.

Construction programs are periodically reviewed and revised by the
company in response to changes in economic conditions, competition,

19

customer growth, inflation, customer rates, the cost of capital, and
environmental and regulatory requirements.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used in PE's consolidated financing activities totaled $249
million, $149 million and $4 million for 2004, 2003 and 2002,
respectively. Net cash used in SoCalGas' financing activities totaled
$246 million, $96 million and $101 million for 2004, 2003 and 2002,
respectively.

The cash used in financing activities for 2004 increased due to lower
issuances of long-term debt, offset by lower payments on long-term
debt. The increase in PE's cash used in financing activities in 2003
was attributable to higher repayments on long-term debt and an increase
of $150 million in dividends paid to Sempra Energy in 2003, offset by
an increase in the issuances of long-term debt. The change in SoCalGas'
net cash used in financing activities is the same as PE, except for
dividends paid to PE, which are unchanged from 2002 to 2003.

Long-Term and Short-Term Debt

In December 2004, SoCalGas issued $100 million of floating-rate first
mortgage bonds maturing in December 2009. The interest rate is based on
the 3-month LIBOR rate plus 0.17%.

Repayments on long-term debt in 2004 included $175 million of SoCalGas'
first mortgage bonds.

In 2003, SoCalGas issued $500 million of first mortgage bonds.

Repayments on long-term debt in 2003 included $325 million of SoCalGas'
first mortgage bonds. In addition, $70 million of SoCalGas' $75
million medium-term notes were put back to the company.

In October 2002, SoCalGas publicly offered and sold $250 million of
4.80% first mortgage bonds, maturing in October 2012.

Repayments on long-term debt in 2002 included $100 million of first
mortgage bonds.

In May 2004, the California Utilities obtained a combined $500 million
three-year syndicated revolving credit facility to replace their
expiring 364-day facility of a like amount. No amounts were outstanding
under this facility at December 31, 2004. SoCalGas had $30 million of
commercial paper outstanding at December 31, 2004.

In September 2004, PE extended the termination date of its revolving
credit agreement to September 30, 2005 and increased the revolving
credit commitment from $250 million to $500 million. No amounts were
outstanding under this facility at December 31, 2004.

Notes 2 and 3 of the notes to Consolidated Financial Statements provide
further discussion of debt activity and lines of credit.

20

Dividends

Common dividends paid to Sempra Energy were $200 million in 2004,
compared to $250 million in 2003 and $100 million in 2002. Dividends
paid by SoCalGas to PE amounted to $200 million in each of 2004, 2003
and 2002.

The payment and amount of future dividends are within the discretion of
the companies' boards of directors. The CPUC's regulation of SoCalGas'
capital structure limits the amounts that are available for loans and
dividends to Sempra Energy from SoCalGas. At December 31, 2004, the
company could have provided a total (combined loans and dividends) of
$200 million to Sempra Energy.

Capitalization

Total capitalization, including short-term debt and the current portion
of long-term debt, at December 31, 2004 was $2.7 billion, of which $2.3
billion applied to SoCalGas. The debt-to-capitalization ratios were 33
percent and 39 percent at December 31, 2004 for PE and SoCalGas,
respectively.

Commitments

The following is a summary of the company's principal contractual
commitments at December 31, 2004. Liabilities related to fixed-price
contracts and other derivatives are excluded as they are primarily
offset against regulatory assets and will be recovered from customers
through the ratemaking process. Additional information concerning
commitments is provided above and in Notes 3, 5 and 10 of the notes to
Consolidated Financial Statements.

21

Credit Ratings

Credit ratings of the company remained at investment grade levels in
2004. As of January 31, 2005, company credit ratings were as follows:

Standard Moody's Investor
& Poor's Services, Inc. Fitch
- ----------------------------------------------------------------
SOCALGAS
Secured debt A+ A1 AA
Unsecured debt A- A2 AA-
Preferred stock BBB+ Baa1 A+
Commercial paper A-1 P-1 F1+
------------------------------------
PE - preferred stock BBB+ - A
- ----------------------------------------------------------------

As of January 31, 2005, SoCalGas has a stable outlook rating from all
three credit rating agencies.

FACTORS INFLUENCING FUTURE PERFORMANCE

Performance of the companies will depend primarily on the ratemaking
and regulatory process, natural gas industry restructuring, and the
changing energy marketplace. These factors are discussed in Note 9 of
the notes to Consolidated Financial Statements.

Market Risk

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

Sempra Energy has adopted corporate-wide policies governing its market
risk management activities. Assisted by Sempra Energy's Energy Risk

22

Management Group (ERMG), Sempra Energy's Energy Risk Management
Oversight Committee (ERMOC), consisting of senior officers, oversees
company-wide energy risk management activities and monitors the results
of activities to ensure compliance with the company's stated energy
risk management policies. Utility management receives daily information
on positions and the ERMG receives information detailing positions
creating market and credit risk for the company, consistent with
affiliate rules. The ERMG independently measures and reports the market
and credit risk associated with these positions. In addition, the ERMOC
monitors energy price risk management activities independently from the
groups responsible for creating or actively managing these risks.

Along with other tools, the company uses Value at Risk (VaR) to measure
its exposure to market risk. VaR is an estimate of the potential loss
on a position or portfolio of positions over a specified holding
period, based on normal market conditions and within a given
statistical confidence interval. The company has adopted the
variance/covariance methodology in its calculation of VaR, and uses
both the 95-percent and 99-percent confidence intervals. VaR is
calculated independently by the ERMG for the company. Historical
volatilities and correlations between instruments and positions are
used in the calculation. As of December 31, 2004, the total VaR of the
company's natural gas positions was not material.

The company uses energy and natural gas derivatives to manage natural
gas price risk associated with servicing its load requirements. The use
of derivative financial instruments is subject to certain limitations
imposed by company policy and regulatory requirements.

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

The following discussion of the company's primary market risk exposures
as of December 31, 2004 includes a discussion of how these exposures
are managed.

Commodity Price Risk

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

The company's market risk exposure is limited due to CPUC-authorized
rate recovery of natural gas purchase, sale, intrastate transportation
and storage activity. However, the company may, at times, be exposed to
market risk as a result of SoCalGas' GCIM, which is discussed in Note 9
of the notes to Consolidated Financial Statements. If commodity prices
were to rise too rapidly, it is likely that volumes would decline. This
would increase the per-unit fixed costs, which could lead to further
volume declines. The company manages its risk within the parameters of

23

the company's market risk management framework. As of December 31,
2004, the company's exposure to market risk was not material.

Interest Rate Risk

The company is exposed to fluctuations in interest rates primarily as a
result of its long-term debt. The company historically has funded
operations through long-term debt issues with fixed interest rates and
these interest rates are recovered in utility rates. Some recent debt
offerings have used a combination of fixed-rate and floating-rate debt.
Subject to regulatory constraints, interest-rate swaps may be used to
adjust interest-rate exposures.

At December 31, 2004, the company had $613 million of fixed-rate debt
and $252 million of variable-rate debt. Interest on fixed-rate utility
debt is fully recovered in rates on a historical cost basis and
interest on variable-rate debt is provided for in rates on a forecasted
basis. At December 31, 2004, SoCalGas' fixed-rate debt had a one-year
VaR of $76 million and its variable-rate debt had a one-year VaR of $11
million.

At December 31, 2004, the notional amount of interest-rate swap
transactions totaled $150 million. Note 3 of the notes to Consolidated
Financial Statements provides further information regarding interest
rate swap transactions.

In addition, the company is ultimately subject to the effect of
interest-rate fluctuation on the assets of its pension plan and other
postretirement plans.

Credit Risk

Credit risk is the risk of loss that would be incurred as a result of
nonperformance by counterparties of their contractual obligations. As
with market risk, the company has adopted corporate-wide policies
governing the management of credit risk. Credit risk management is
performed by the ERMG and the company's credit department and overseen
by the ERMOC. Using rigorous models, the ERMG and the company calculate
current and potential credit risk to counterparties on a daily basis
and monitor actual balances in comparison to approved limits. The
company avoids concentration of counterparties whenever possible, and
management believes its credit policies associated with counterparties
significantly reduce overall credit risk. These policies include an
evaluation of prospective counterparties' financial condition
(including credit ratings), collateral requirements under certain
circumstances, the use of standardized agreements that allow for the
netting of positive and negative exposures associated with a single
counterparty and other security such as lock-box liens and downgrade
triggers.

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

The company periodically enters into interest-rate swap agreements to
moderate exposure to interest-rate changes and to lower the overall

24

cost of borrowing. The company would be exposed to interest-rate
fluctuations on the underlying debt should counterparties to the
agreement not perform. Additional information regarding the company's
use of interest-rate swap agreements is provided under "Interest Rate
Risk".

CRITICAL ACCOUNTING POLICIES AND KEY NON-CASH PERFORMANCE INDICATORS

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

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

Statement of Financial Accounting Standards (SFAS) 5, "Accounting
for Contingencies," establishes the amounts and timing of when
the company provides for contingent losses. Details of the
company's issues in this area are discussed in Note 10 of the
notes to Consolidated Financial Statements.

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

SFAS 109, "Accounting for Income Taxes," governs the way the
company provides for income taxes. Details of the company's
issues in this area are discussed in Note 4 of the notes to
Consolidated Financial Statements.

SFAS 123, "Accounting for Stock-Based Compensation" and SFAS 148
"Accounting for Stock-Based Compensation - Transition and
Disclosure," give companies the choice of recognizing a cost at
the time of issuance of stock options or merely disclosing what
that cost would have been and not recognizing it in its financial
statements. Sempra Energy has elected the disclosure option for
all options that are so eligible. The effect of this is discussed
in Note 1 of the notes to Consolidated Financial Statements.

SFAS 123R, "Share-Based Payment" requires public companies to
measure and record the cost of employee services received in
exchange for an award of equity instruments based on the grant-
date fair value of the awards and gives companies three methods
to do so. This statement is effective for Sempra Energy on July
1, 2005. Further discussion is provided in Note 1 of the notes to
Consolidated Financial Statements.

SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and SFAS 149

25

"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," have a significant effect on the balance sheets of
the company but have no significant effect on its income
statements because of the principles contained in SFAS 71.

In connection with the application of these and other accounting
policies, the company makes estimates and judgments about various
matters. The most significant of these involve:

The calculation of fair or realizable values.

The collectibility of receivables, regulatory assets, deferred
tax assets and other assets.

The resolution of various income-tax issues between the company
and the various taxing authorities.

The various assumptions used in actuarial calculations for
pension and other postretirement benefit plans.

The probable costs to be incurred in the resolution of litigation.

Differences between estimates and actual amounts have had significant
impacts in the past and are likely to have significant impacts in the
future.

As discussed elsewhere herein, the company uses exchange quotations or
other third-party pricing to estimate fair values. The assumed
collectibility of receivables considers the aging of the receivables,
the creditworthiness of customers and the enforceability of contracts,
where applicable. The assumed collectibility of regulatory assets
considers legal and regulatory decisions involving the specific items
or similar items. The assumed collectibility of other assets considers
the nature of the item, the enforceability of contracts where
applicable, the creditworthiness of the other parties and other
factors. The anticipated resolution of income-tax issues considers past
resolution of the same or similar issue, the status of any income-tax
examination in progress and positions taken by taxing authorities with
other taxpayers with similar issues. Actuarial assumptions are based on
the advice of the company's independent actuaries. The likelihood of
deferred tax recovery is based on analyses of the deferred tax assets
and the company's expectation of future financial and/or taxable
income, based on its strategic planning.

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

Key non-cash performance indicators for the company include numbers of
customers and quantities of natural gas sold. The information is
provided in "Introduction" and "Results of Operations."

26

NEW ACCOUNTING STANDARDS

Relevant pronouncements that have recently become effective and have
had a significant effect on the company's financial statements are SFAS
132 (revised 2003) and 143. They are described in Note 1 of the notes
to Consolidated Financial Statements. Pronouncements of particular
importance to the company's financial statements are described below.

SFAS 143, "Accounting for Asset Retirement Obligations": SFAS 143
requires entities to record the fair value of liabilities for legal
obligations related to asset retirements in the period in which they
are incurred. It also requires the company to reclassify amounts
recovered in rates for future removal costs not covered by a legal
obligation from accumulated depreciation to a regulatory liability.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -
Pacific Enterprises

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pacific Enterprises:

We have audited the accompanying consolidated balance sheets of Pacific
Enterprises and subsidiaries (the "Company") as of December 31, 2004
and 2003, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in
the United States of America.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness
of the Company's internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February
22, 2005 expressed an unqualified opinion on management's assessment of
the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 22, 2005

28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pacific Enterprises:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Pacific Enterprises and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

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

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

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or
fraud may not be prevented or detected on a timely basis. Also,

29

projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria
established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended December 31, 2004 of
the Company and our report dated February 22, 2005 expressed an
unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

San Diego, California
February 22, 2005

30

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions)

31

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

32

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

33

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)

34

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
(Dollars in millions)

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Pacific
Enterprises (PE or the company) and its subsidiary, Southern California
Gas Company (SoCalGas or the company). The financial statements herein
are, in one case, the Consolidated Financial Statements of PE and its
subsidiary, SoCalGas, and, in the second case, the Consolidated
Financial Statements of SoCalGas and its subsidiaries, which comprise
less than one percent of SoCalGas' consolidated financial position and
results of operations. All material intercompany accounts and
transactions have been eliminated.

As a subsidiary of Sempra Energy, the company receives certain services
therefrom, for which it is charged its allocable share of the cost of
such services. Management believes that cost is reasonable, but
probably less than if the company had to provide those services itself.

Quasi-Reorganization

In 1993, PE effected a quasi-reorganization for financial reporting
purposes as of December 31, 1992. Certain of the liabilities
established in connection with the quasi-reorganization were favorably
resolved in 2003 and 2004, resulting in adjustments to common stock in
these years. The remaining liabilities will be resolved in future years
and management believes the provisions established for these matters
are adequate.

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and
expenses during the reporting period, and the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. Actual amounts can
differ significantly from those estimates.

Basis of Presentation

Certain prior-year amounts have been reclassified to conform to the
current year's presentation.

Regulatory Matters

Effects of Regulation

The accounting policies of the company conform with generally accepted
accounting principles for regulated enterprises and reflect the
policies of the California Public Utilities Commission (CPUC) and the
Federal Energy Regulatory Commission (FERC). SoCalGas and its
affiliate, San Diego Gas & Electric (SDG&E), are collectively referred
to herein as "the California Utilities."

36

The company prepares its financial statements in accordance with the
provisions of SFAS 71, Accounting for the Effects of Certain Types of
Regulation, under which a regulated utility records a regulatory asset
if it is probable that, through the ratemaking process, the utility
will recover that asset from customers. To the extent that recovery is
no longer probable as a result of changes in regulation or the
utility's competitive position, the related regulatory assets would be
written off. In addition, SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires that a loss be recognized
whenever a regulator excludes all or part of utility plant or
regulatory assets from ratebase. Regulatory liabilities represent
reductions in future rates for amounts due to customers. Information
concerning regulatory assets and liabilities is provided below in
"Revenues," "Regulatory Balancing Accounts" and "Regulatory Assets and
Liabilities."

Regulatory Balancing Accounts

The amounts included in regulatory balancing accounts at December 31,
2004, represent net payables (payables net of receivables) that are
returned by reducing future rates.

Except for certain costs subject to balancing account treatment,
fluctuations in most operating and maintenance accounts affect utility
earnings. Balancing accounts provide a mechanism for charging utility
customers the amount actually incurred for certain costs, primarily
commodity costs. The CPUC has also approved balancing account treatment
for variances between forecast and actual for SoCalGas' commodity costs
and volumes, eliminating the impact on earnings from any throughput and
revenue variances from adopted forecast levels. Additional information
on regulatory matters is included in Note 9.

Regulatory Assets and Liabilities

In accordance with the accounting principles of SFAS 71, the company
records regulatory assets and regulatory liabilities as discussed
above.

37

Regulatory assets (liabilities) as of December 31 relate to the
following matters:

(Dollars in millions) 2004 2003
- ---------------------------------------------------------------------
SoCalGas
- ---------
Fixed-price contracts and other derivatives $ 148 $ 233
Environmental remediation 42 44
Unamortized loss on retirement of debt, net 44 45
Cost of removal obligation** (1,446) (1,392)
Deferred taxes refundable in rates (199) (194)
Employee benefit costs 65 (77)
Other 7 9
---------------------
Total (1,339) (1,332)

PE - Employee benefit costs (transferred to
SoCalGas in 2004) -- 72
---------------------
Total PE consolidated $(1,339) $(1,260)
- ---------------------------------------------------------------------

** This is related to SFAS 143, Accounting for Asset Retirement
Obligations, which is discussed below in "New Accounting Standards."

Net regulatory assets (liabilities) are recorded on the Consolidated
Balance Sheets at December 31 as follows:

(Dollars in millions) 2004 2003
- ---------------------------------------------------------------------
SoCalGas
- --------
Current regulatory assets $ 123 $ 93
Noncurrent regulatory assets 52 148
Current regulatory liabilities* (1) --
Noncurrent regulatory liabilities (1,513) (1,573)
---------------------
Total (1,339) (1,332)

PE - Noncurrent regulatory liabilities -- 72
---------------------
Total PE consolidated $(1,339) $(1,260)
- ---------------------------------------------------------------------

* Included in Other Current Liabilities.

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

Cash and Cash Equivalents

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

38

Collection Allowances

The allowance for doubtful accounts was $5 million, $4 million and $4
million at December 31, 2004, 2003 and 2002, respectively. The company
recorded a provision (reduction thereof) for doubtful accounts of $9
million, $3 million and $(5) million in 2004, 2003 and 2002,
respectively.

Inventories

At December 31, 2004, inventory shown on the Consolidated Balance
Sheets included natural gas of $61 million and materials and supplies
of $11 million. The corresponding balances at December 31, 2003 were
$63 million and $11 million, respectively. Natural gas is valued by the
last-in first-out (LIFO) method. When the inventory is consumed,
differences between the LIFO valuation and replacement cost are
reflected in customer rates. Materials and supplies at SoCalGas are
generally valued at the lower of average cost or market.

Income Taxes

Income tax expense includes current and deferred income taxes from
operations during the year. In accordance with SFAS 109, Accounting for
Income Taxes, the company records deferred income taxes for temporary
differences between the book and tax bases of assets and liabilities.
Investment tax credits from prior years are being amortized to income
over the estimated service lives of the properties. Other credits are
recognized in income as earned. The company follows certain provisions
of SFAS 109 that permit regulated enterprises to recognize deferred
taxes as regulatory assets or liabilities if it is probable that such
amounts will be recovered from, or returned to, customers.

Property, Plant and Equipment

Utility plant primarily represents the buildings, equipment and other
facilities used by SoCalGas to provide natural gas services.

The cost of plant includes labor, materials, contract services and
certain expenditures, including refurbishments, replacement of major
component parts and labor and overheads incurred to install the parts,
incurred during a major maintenance outage of a generating plant.
Maintenance costs are expensed as incurred. In addition, the cost of
plant includes an allowance for funds used during construction (AFUDC).
The cost of most retired depreciable utility plant minus salvage value
is charged to accumulated depreciation.

Accumulated depreciation for natural gas utility plant at SoCalGas was
$2.9 billion and $2.7 billion at December 31, 2004 and 2003,
respectively. A discussion of SFAS 143 is provided below under "New
Accounting Standards." Depreciation expense is based on the straight-
line method over the useful lives of the assets, an average of 23 years
in each of 2004, 2003 and 2002, or a shorter period prescribed by the
CPUC. The provision for depreciation as a percentage of average
depreciable utility plant was 3.68, 4.36 and 4.34 in 2004, 2003 and
2002, respectively. Note 9 includes a discussion of industry
restructuring, which affected recorded depreciation.

39

AFUDC, which represents the cost of debt and equity funds used to
finance the construction of utility plant, is added to the cost of
utility plant. Although it is not a current source of cash, AFUDC
increases income and is recorded partly as an offset to interest
charges and partly as a component of Other Income and Deductions in the
Statements of Consolidated Income. AFUDC amounted to $6 million, $12
million and $13 million for 2004, 2003 and 2002, respectively.

Legal Fees

Legal fees that are associated with a past event and not expected to be
recovered in the future are accrued when it is probable that they will
be incurred.

Comprehensive Income

Comprehensive income includes all changes, except those resulting from
investments by owners and distributions to owners, in the equity of a
business enterprise from transactions and other events, including
foreign-currency translation adjustments minimum pension liability
adjustments, and certain hedging activities. The components of Other
Comprehensive Income, which consists of all these changes other than
net income as shown on the Statement of Consolidated Income, are shown
in the Statements of Consolidated Changes in Shareholders' Equity. At
December 31, 2004, Accumulated Other Comprehensive Income consisted
entirely of minimum pension liability adjustments, net of income tax.

Revenues

Revenues of SoCalGas are primarily derived from deliveries of natural
gas to customers and changes in related regulatory balancing accounts.
Revenues from natural gas sales and services are generally recorded
under the accrual method and recognized upon delivery. Natural gas
storage contract revenues are accrued on a monthly basis and reflect
reservation, storage and injection charges in accordance with
negotiated agreements, which have terms of up to three years. Operating
revenue includes amounts for services rendered but unbilled
(approximately one-half month's deliveries) at the end of each year.

Additional information concerning utility revenue recognition is
discussed above under "Regulatory Matters."

Transactions with Affiliates

On a daily basis, SoCalGas and SDG&E share numerous functions with each
other and they also receive various services from and provide various
services to Sempra Energy.

At December 31, 2004, PE has intercompany receivables from Sempra
Energy and other affiliates of $4 million and $3 million, respectively.
The corresponding amounts at December 31, 2003 were $73 million and $3
million, respectively. Of the total balances, $22 million was recorded
at SoCalGas at December 31, 2003 but no balance was recorded at
SoCalGas at December 31, 2004. Such amounts are included in current
assets as Due from Unconsolidated Affiliates. PE has a promissory note
due from Sempra Energy which bears a variable interest rate based on

40

short-term commercial paper rates. The balances of the note were $394
million and $354 million at December 31, 2004 and 2003, respectively,
and are included in noncurrent assets as Due from Unconsolidated
Affiliates. PE also had $2 million due from other affiliates at both
December 31, 2004 and 2003.

In addition, PE had intercompany payables due to various affiliates of
$127 million and $121 million at December 31, 2004 and 2003,
respectively, which are reported as a current liability. These balances
are due on demand. Of the total balances, $55 million was recorded at
SoCalGas at both December 31, 2004 and 2003.

New Accounting Standards

SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123R): In December
2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R,
a revision of SFAS 123, Accounting for Stock-Based Compensation (SFAS
123), which establishes the accounting for transactions in which an
entity exchanges its equity instruments for goods or services received.
This statement requires companies to measure and record the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and gives
companies three alternative transition methods. The modified
prospective method requires companies to recognize compensation cost
for unvested awards that are outstanding on the effective date based on
the fair value that the company had originally estimated for purposes
of preparing its SFAS 123 pro forma disclosures. For all new awards
that are granted or modified after the effective date, a company would
use SFAS 123R's measurement model. The second alternative is a
variation of the modified prospective method, allowing companies to
restate earlier interim periods in the year that SFAS 123R is adopted
using applicable SFAS 123 pro forma amounts. Under the third
alternative, the modified retrospective method, companies would apply
the modified prospective method, but also restate their prior financial
statements to include the amounts that were previously reported in
their pro forma disclosures under the original provisions of SFAS 123.
The company has not determined the transition method it will use. The
effective date of this statement is July 1, 2005 for Sempra Energy.

SFAS 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits": This statement revised employers'
disclosures about pension plans and other postretirement benefit plans.
It requires disclosures beyond those in the original SFAS 132 about the
assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined postretirement plans.
It does not change the measurement or recognition of those plans. Note
5 provides additional information on employee benefit plans.

SFAS 143, "Accounting for Asset Retirement Obligations": Beginning in
2003, SFAS 143 requires entities to record liabilities for future costs
expected to be incurred when assets are retired from service, if the
retirement process is legally required. It requires recording of the
estimated retirement cost over the life of the related asset by
depreciating the present value of the obligation (measured at the time
of the asset's acquisition) and by accreting the present value of the
estimated future obligation over the asset's estimated useful life. The
adoption of SFAS 143 on January 1, 2003 resulted in the recording of

41

asset retirement obligations of $10 million associated with the future
retirement of three storage facilities. It also requires the
reclassification of estimated removal costs, which had historically
been recorded in accumulated depreciation, to a regulatory liability.
At both December 31, 2004 and 2003, these costs were $1.4 billion.
Implementation of SFAS 143 has had no effect on results of operations
and is not expected to have a significant effect in the future.

The changes in the asset retirement obligations for the years ended
December 31, 2004 and 2003 are as follows (dollars in millions):

2004 2003
- ------------------------------------------------------------------
Balance as of January 1 $ 11* $ --
Adoption of SFAS 143 -- 10
Accretion expense 1 1
Revision of estimated cash flows (3) --
------ ------
Balance as of December 31 $ 9* $ 11*
- ------------------------------------------------------------------

* The current portion of the obligation is included in Other Current
Liabilities on the Consolidated Balance Sheets.

In June 2004, the FASB issued a proposed interpretation, Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143. The interpretation would clarify that a legal
obligation to perform an asset retirement activity that is conditional
on a future event is within the scope of SFAS 143. Accordingly, the
interpretation would require an entity to recognize a liability for a
conditional asset retirement obligation if the liability's fair value
can be reasonably estimated. A final interpretation is expected to be
issued by the FASB in the first quarter of 2005 and would be effective
for the company on December 31, 2005. The company has not determined
the effect the proposed interpretation would have on its financial
statements if the proposed interpretation is adopted.

SFAS 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities": Effective July 1, 2003, SFAS 149 amended and
clarified accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. Under SFAS 149, natural gas forward
contracts that are subject to unplanned netting generally do not
qualify for the normal purchases and normal sales exception. ("Unplanned
netting" refers to situations whereby contracts are settled by paying or
receiving money for the difference between the contract price and the
market price at the date on which physical delivery would have
occurred. The "normal purchases and normal sales exception" provides
for not marking to market contracts that are very rarely settled by
means other than physical delivery of the commodity involved in the
transaction.) In addition, effective January 1, 2004, power contracts
that are subject to unplanned netting and that do not meet the normal
purchases and normal sales exception under SFAS 149 will continue to be
marked to market. Implementation of SFAS 149 did not have a material
impact on reported net income.

42

SFAS 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4":
This statement amends the guidance in Accounting Research Bulletin
(ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling cost
and wasted material. This statement requires that those items be
recognized as current-period charges regardless of whether they meet
the criteria of "abnormal". The statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The
company does not expect that this statement will have a material impact
on the company's financial statements.

FASB Staff Position (FSP) 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003": The Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the "Act") was enacted in December of
2003. The Act establishes a prescription drug benefit under Medicare,
known as "Medicare Part D," and a tax-exempt federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit
that actuarially is at least equivalent to Medicare Part D. At December
31, 2003, the company elected a one-time deferral of the accounting for
the Act, as permitted by FSP 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003.

In May 2004, the FASB issued FSP 106-2, which supersedes FSP 106-1 and
provides guidance on the accounting, disclosure, effective date and
transition requirements related to the Medicare Prescription Drug Act.
During 2004, the company adopted FSP 106-2 retroactive to the beginning
of the year.

The company and its actuarial advisors determined that benefits
provided to certain participants will actuarially be at least
equivalent to Medicare Part D, and, accordingly, the company will be
entitled to an expected tax-exempt subsidy that reduces the company's
accumulated postretirement benefit obligation under the plan at January
1, 2004 by $94 million and the net postretirement benefit cost for 2004
by $12 million. Employee benefit plans are discussed further in Note 5.

NOTE 2. SHORT-TERM BORROWINGS

Committed Lines of Credit

SoCalGas and its affiliate, SDG&E, have a combined $500 million three-year
syndicated revolving credit facility under which each utility individually
may borrow up to $300 million, subject to a combined borrowing limit for
both utilities of $500 million. Borrowings under the agreement bear
interest at rates varying with market rates and SoCalGas' credit rating.
The agreement requires SoCalGas to maintain, at the end of each quarter, a
ratio of total indebtedness to total capitalization (as defined in the
agreement) of no more than 60 percent. Borrowings under the agreement are
individual obligations of the borrowing utility and a default by one
utility would not constitute a default, or preclude borrowings by, the
other. At December 31, 2004, SoCalGas had no amounts outstanding under this
facility. SoCalGas had $30 million of commercial paper outstanding at
December 31, 2004.

43

PE has a revolving credit commitment of $500 million that expires in
September 2005. Borrowings under the credit agreement are available to
provide loans to Sempra Global and would bear interest at rates varying
with market rates, PE's credit ratings and amounts borrowed. Borrowings are
guaranteed by Sempra Energy and would be subject to mandatory repayment if
Sempra Energy's or SoCalGas' ratio of debt to total capitalization (as
defined in the agreement) were to exceed 65 percent, or should there be a
change in law materially and adversely affecting the ability of SoCalGas to
pay dividends or make other distributions to PE. No amounts were
outstanding under this facility at December 31, 2004.

The company's weighted average interest rate on the total short-term debt
outstanding was 2.25% at December 31, 2004.

NOTE 3. LONG-TERM DEBT

- --------------------------------------------------------------
December 31,
(Dollars in millions) 2004 2003
- --------------------------------------------------------------
First mortgage bonds
Variable rate (2.63% at December 31,
2004)December 1, 2009 $ 100 $ --
4.375% January 15, 2011 100 100
Variable rates after fixed-to-
floating rate swaps (2.69% at
December 31, 2004) January 15, 2011 150 150
4.8% October 1, 2012 250 250
5.45% April 15, 2018 250 250
6.875% November 1, 2025 -- 175
----------------------
850 925
----------------------
Other long-term debt
6.375% May 14, 2006 8 8
5.67% January 18, 2028 5 5
Market value adjustments for interest
rate swaps - net (Expires 2011) 2 -
----------------------
15 13
----------------------
865 938
----------------------
Current portion of long-term debt -- (175)
Unamortized discount on long-term debt (1) (1)
----------------------
Total $ 864 $ 762
- --------------------------------------------------------------

Excluding market value adjustments for interest-rate swaps, maturities
of long-term debt are $8 million in 2006, $100 million in 2009 and $755
million thereafter.

First Mortgage Bonds

First mortgage bonds are secured by a lien on SoCalGas' utility plant.
SoCalGas may issue additional first mortgage bonds upon compliance with

44

the provisions of its bond indentures, which require, among other
things, the satisfaction of pro forma earnings-coverage tests on first
mortgage bond interest and the availability of sufficient mortgaged
property to support the additional bonds, after giving effect to prior
bond redemptions. The most restrictive of these tests (the property
test) would permit the issuance, subject to CPUC authorization, of an
additional $598 million of first mortgage bonds at December 31, 2004.

SoCalGas called $175 million of long-term debt in January 2004 and
incurred $2 million in call premium costs. This amount has been
recorded as a regulatory asset and is being amortized over the life of
the original issue.

In December 2004, the company issued $100 million of first mortgage
bonds maturing in 2009. The bonds bear interest at 0.17% above LIBOR.

Unsecured Long-term Debt

Various long-term obligations totaling $13 million are unsecured at
December 31, 2004.

On January 15, 2003, $70 million of SoCalGas' 5.67% $75 million medium-
term notes were put back to the company.

Interest-Rate Swaps

The company periodically enters into interest-rate swap agreements to
moderate its exposure to interest-rate changes and to lower its overall
cost of borrowing. In December 2003, SoCalGas entered into an interest-
rate swap that effectively exchanged the fixed rate on $150 million of
its $250 million 4.375% first mortgage bonds for a floating rate. The
swap expires in 2011.

NOTE 4. INCOME TAXES

The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:

Years ended December 31,
2004 2003 2002
- -----------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.1 6.1 5.2
State income taxes, net of
federal income tax benefit 4.8 5.8 5.4
Tax credits (0.7) (0.8) (0.8)
Settlement of Internal Revenue Service audit -- (3.1) --
Equity AFUDC (3.6) (1.0) (1.0)
Other, net (1.1) (3.2) 0.6
------------------------
Effective income tax rate 39.5% 38.8% 44.4%
- ----------------------------------------------------------------------

45

The components of income tax expense are as follows:

Years ended December 31,
(Dollars in millions) 2004 2003 2002
- ----------------------------------------------------------------------
Current:
Federal $ 125 $ 73 $ 103
State 45 29 29
-----------------------
Total 170 102 132
-----------------------
Deferred:
Federal (1) 37 36
State (11) 4 5
-----------------------
Total (12) 41 41
-----------------------
Deferred investment tax credits (3) (3) (3)
-----------------------
Total income tax expense $ 155 $ 140 $ 170
- ----------------------------------------------------------------------

On the Statements of Consolidated Income, federal and state income
taxes are allocated between operating income and other income. PE is
included in the consolidated income tax return of Sempra Energy and is
allocated income tax expense from Sempra Energy in an amount equal to
that which would result from PE's having always filed a separate
return.

46

Accumulated deferred income taxes at December 31 relate to the
following:

(Dollars in millions) 2004 2003
- ----------------------------------------------------------------------
Deferred tax liabilities:
Differences in financial and
tax bases of utility plant and other assets $ 266 $ 269
Regulatory balancing accounts 50 76
Regulatory assets -- 32
Global settlement -- (1)
Loss on reacquired debt 18 17
Other 1 30
--------------------
Total deferred tax liabilities 335 423
--------------------
Deferred tax assets:
Investment tax credits 29 31
Postretirement benefits 40 77
Deferred compensation 14 19
State income taxes 15 11
Workers compensation 21 20
Lease 15 18
Other accruals not yet deductible 79 95
Other 8 7
--------------------
Total deferred tax assets 221 278
--------------------
Net deferred income tax liability $ 114 $ 145
- ----------------------------------------------------------------------

The net deferred income tax liability is recorded on the Consolidated
Balance Sheets at December 31 as follows:

(Dollars in millions) 2004 2003
- ----------------------------------------------------------------------
Current (asset) liability $ (9) $ 24
Noncurrent liability 123 121
--------------------
Total $ 114 $ 145
- ----------------------------------------------------------------------

Pacific Enterprises' Quasi-Reorganization

Effective December 31, 1992, PE effected a quasi-reorganization for
financial reporting purposes. The reorganization resulted in a
restatement of the company's assets and liabilities to their estimated
fair value at December 31, 1992 and the elimination of PE's retained
earnings deficit. Since the reorganization was for financial purposes
and not a taxable transaction, the company established deferred taxes
relative to the book and tax bases differences.

During 2004, the company completed an extensive analysis of PE's
deferred tax accounts. The analysis resulted in a $72 million reduction
of the deferred tax liabilities and an offsetting credit to equity.
The credit was recorded to equity because the balances related to tax

47

effects of transactions prior to the quasi-reorganization. In 2004,
the company also concluded its outstanding IRS examinations and appeals
related to PE and its subsidiaries. As of December 31, 2004, the
company's balance sheet includes a net deferred tax asset of $15
million related to remaining reserves arising from the quasi-
reorganization.

NOTE 5. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefits

The company has funded and unfunded noncontributory defined benefit
plans that together cover substantially all of its employees. The
plans provide defined benefits based on years of service and either
final average or career salary.

The company also has other postretirement benefit plans covering
substantially all of its employees. The life insurance plans are both
contributory and noncontributory, and the health care plans are
contributory, with participants' contributions adjusted annually. Other
postretirement benefits include retiree life insurance, medical
benefits for retirees and their spouses, and Medicare Part B
reimbursement for certain retirees.

There were no amendments to the company's pension and other
postretirement benefit plans in 2003 or 2004. During 2002, the company
had amendments reflecting retiree cost of living adjustments, which
resulted in an increase in the pension plan benefit obligation of $48
million.

December 31 is the measurement date for the pension and other
postretirement benefit plans. The following table provides a
reconciliation of the changes in the plans' projected benefit
obligations during the latest two years, the fair value of assets and a
statement of the funded status as of the latest two year ends:

48

The net asset (liability) is recorded on the Consolidated Balance
Sheets at December 31 as follows:

At December 31, 2004 and 2003, the company had an unfunded and a funded
pension plan. The funded plan had projected benefit obligations in
excess of its plan assets. The following table provides information for
the funded plan at December 31:

(Dollars in millions) 2004 2003
- -------------------------------------------------------------
Projected benefit obligation $ 1,596 $ 1,526
Accumulated benefit obligation $ 1,384 $ 1,333
Fair value of plan assets $ 1,516 $ 1,473

49

The following table provides the components of net periodic benefit
costs (income) for the years ended December 31:

As described in Note 1, the company adopted FSP 106-2 in 2004
retroactive to the beginning of the year. The company and its actuarial
advisors determined that benefits provided to certain participants will
actuarially be at least equivalent to Medicare Part D, and,
accordingly, the company will be entitled to an expected tax-exempt
subsidy that reduces the company's accumulated postretirement benefit
obligation under the plan at January 1, 2004 by $94 million and the net
postretirement benefit cost for 2004 by $12 million.

The significant assumptions related to the company's pension and other
postretirement benefit plans are as follows:

50

The expected long-term rate of return on plan assets is derived from
historical returns for broad asset classes consistent with
expectations from a variety of sources, including pension consultants
and investment advisors.

Assumed health-care cost trend rates have a significant effect on the
amounts reported for the health-care plan costs. A one-percent change
in assumed health-care cost trend rates would have the following
effects:

Pension Plan Investment Strategy

The asset allocation for Sempra Energy's pension trust (which includes
SoCalGas' pension plan) at December 31, 2004 and 2003 and the target
allocation for 2005 by asset categories are as follows:

51

The company's investment strategy is to stay fully invested at all
times and maintain its strategic asset allocation, keeping the
investment structure relatively simple. The equity portfolio is
balanced to maintain risk characteristics similar to the Standard &
Poor's 1500 with respect to market capitalization, and industry and
sector exposures. The foreign equity portfolios are managed to track
the MSCI Europe, Pacific Rim and Emerging Markets indexes. Bond
portfolios are managed with respect to the Lehman Aggregate Index. The
plan does not invest in Sempra Energy securities.

Investment Strategy for Other Postretirement Benefit Plans

The asset allocation for the company's other postretirement benefit
plans at December 31, 2004 and 2003 and the target allocation for 2005
by asset categories are as follows:

The company's other postretirement benefit plans, which are distinct
from other postretirement benefit plans included in Sempra Energy's
pension trust (shown above), are funded by cash contributions from the
company and the retirees. The asset allocation is designed to match the
long-term growth of the plan's liability. These plans are managed using
index funds.

Future Payments

The company expects to contribute $2 million to its pension plan and
$45 million to its other postretirement benefit plans in 2005.

The following table reflects the total benefits expected to be paid for
the next 10 years to current employees and retirees from the plans or
from the company's assets, including both the company's share of the
benefit cost and, where applicable, the participants' share of the
costs, which is funded by participant contributions to the plans.

52

Savings Plan

The company offers a trusteed savings plan to all eligible employees.
Eligibility to participate in the plan is immediate for salary
deferrals. Employees may contribute, subject to plan provisions, from
one percent to 25 percent of their regular earnings. After one year of
completed service, the company begins to make matching contributions.
Employer contributions are equal to 50 percent of the first 6 percent
of eligible base salary contributed by employees and, if certain
company goals are met, an additional amount related to incentive
compensation payments.

Employer contributions are invested in Sempra Energy common stock and
had been required to remain so invested until termination of employment
or until the employee's attainment of age 55, when they could be
transitioned into other investments. Effective January 1, 2005, all
employees have the ability to transfer employer contributions into
other investments. The employees' contributions are invested in Sempra
Energy stock, mutual funds, or institutional trusts (the same
investments in which employees may now direct the employer
contributions). Employer contributions for the SoCalGas plans are
partially funded by the Sempra Energy Employee Stock
Ownership Plan and Trust. Company contributions to the savings plan
were $10 million in 2004, $9 million in 2003 and $8 million in 2002.

NOTE 6. STOCK-BASED COMPENSATION

Sempra Energy has stock-based compensation plans intended to align
employee and shareholder objectives related to the long-term growth of
the company. The plans permit a wide variety of stock-based awards,

53

including nonqualified stock options, incentive stock options,
restricted stock, stock appreciation rights, performance awards, stock
payments and dividend equivalents.

In 1995, SFAS 123, Accounting for Stock-Based Compensation, was issued.
It encourages a fair-value-based method of accounting for stock-based
compensation. As permitted by SFAS 123, Sempra Energy and its
subsidiaries adopted only its disclosure requirements and continue to
account for stock-based compensation in accordance with the provisions
of Accounting Principles Board Opinion 25. Discussion of SFAS 123R (a
revision of SFAS 123) is provided in Note 1. The subsidiaries record an
expense for the plans to the extent that subsidiary employees
participate in the plans or that subsidiaries are allocated a portion
of Sempra Energy's costs of the plans. PE recorded expenses of $9
million, $9 million and $1 million in 2004, 2003 and 2002,
respectively.

NOTE 7. FINANCIAL INSTRUMENTS

Fair Value

The fair values of certain of the company's financial instruments
(cash, temporary investments, notes receivable, short-term debt and
customer deposits) approximate their carrying amounts. The following
table provides the carrying amounts and fair values of the remaining
financial instruments at December 31:

The fair values of long-term debt and preferred stock are based on
their quoted market prices or quoted market prices for similar
securities.

Accounting for Derivative Instruments and Hedging Activities

The company follows the guidance of SFAS 133 and related amendments
SFAS 138 and 149 (collectively SFAS 133) to account for its derivative

54

instruments and hedging activities. Derivative instruments and related
hedges are recognized as either assets or liabilities on the balance
sheet, measured at fair value. Changes in the fair value of derivatives
are recognized in earnings in the period of change unless the
derivative qualifies as an effective hedge that offsets certain
exposure.

SFAS 133 provides for hedge accounting treatment when certain criteria
are met. For derivative instruments designated as fair value hedges,
the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item
attributable to the risk being hedged; therefore, there is no effect on
net income. For derivative instruments designated as cash flow hedges,
the effective portion of the derivative gain or loss is included in
other comprehensive income, but not reflected in the Statements of
Consolidated Income until the corresponding hedged transaction is
similarly reflected. The ineffective portion is reported in earnings
immediately. There was no effect on other comprehensive income for the
years ended December 31, 2004 and 2003. In instances where derivatives
do not qualify for hedge accounting, gains and losses are recorded in
earnings immediately.

The company utilizes natural gas derivatives to manage commodity price
risk associated with servicing its load requirements. These contracts
allow the company to predict with greater certainty the effective
prices to be received by the company and the prices to be charged to
its customers. The use of derivative financial instruments is subject
to certain limitations imposed by company policy and regulatory
requirements. The company classifies its forward contracts as follows:

Contracts that meet the definition of normal purchase and sales, i.e.,
those that rarely settle by means other than physical delivery of the
commodities involved in the transaction, are eligible for the normal
purchases and sales exception of SFAS 133, whereby they are accounted
for under accrual accounting and recorded in Revenues or Cost of
Natural Gas on the Statements of Consolidated Income at the time of
delivery. Due to the adoption of SFAS 149, the company has determined
that its natural gas contracts entered into after June 30, 2003
generally do not qualify for the normal purchases and sales exception.

Natural Gas Purchases and Sales: The unrealized gains and losses
related to these forward contracts are offset by regulatory assets and
liabilities on the Consolidated Balance Sheets to the extent derivative
gains and losses will be recoverable or payable in future rates. If
gains and losses are not recoverable or payable through future rates,
the company applies hedge accounting if certain criteria are met. When
a contract no longer meets the requirements of SFAS 133, the unrealized
gains and losses and the related regulatory asset or liability will be
amortized over the remaining contract life.

55

The following were recorded in the Consolidated Balance Sheets at
December 31 related to derivatives:

Regulatory assets and liabilities related to derivatives held by SoCalGas
at December 31 were:

As of December 31, 2004, the difference between net liabilities and net
regulatory assets was primarily due to market value adjustments of $2
million related to fixed-to-floating interest rate swaps. The above had
no impact on net income during 2004 and 2003.

Market Risk

The company's policy is to use derivative physical and financial
instruments to reduce its exposure to fluctuations in interest rates
and commodity prices. Transactions involving these instruments are with
major exchanges and other firms believed to be credit-worthy. The use
of these instruments exposes the company to market and credit risk,

56

which may at times be concentrated with certain counterparties,
although counterparty nonperformance is not anticipated.

Interest-Rate Risk Management

The company periodically enters into interest-rate swap agreements to
moderate its exposure to interest-rate changes and to lower the overall
cost of borrowing. This is described in Note 3.

Energy Contracts

SoCalGas records transactions for natural gas contracts in Cost of
Natural Gas in the Statements of Consolidated Income. For open
contracts not expected to result in physical delivery, changes in
market value of the contracts are recorded in these accounts during the
period the contracts are open, with an offsetting entry to a regulatory
asset or liability. The majority of the company's contracts result in
physical delivery.

NOTE 8. PREFERRED STOCK

Preferred Stock of Southern California Gas Company
- -----------------------------------------------------------------
December 31,
2004 2003
- -----------------------------------------------------------------
(in millions)
$25 par value, authorized 1,000,000 shares
6% Series, 28,041 shares outstanding $ 1 $ 1
6% Series A, 783,032 shares outstanding 19 19
Without par value, authorized 10,000,000 shares -- --
--------------
$ 20 $ 20
- -----------------------------------------------------------------

None of SoCalGas' preferred stock is callable. All series have one
vote per share and cumulative preferences as to dividends, and have a
liquidation value of $25 per share plus any unpaid dividends.

57

Preferred Stock of Pacific Enterprises

PE is authorized to issue 15,000,000 shares of preferred stock without
par value. The preferred stock is subject to redemption at PE's option
at any time upon not less than 30 days' notice, at the applicable
redemption price for each series, plus any unpaid dividends. All
series have one vote per share and cumulative preferences as to
dividends, and have a liquidation value of $100 per share plus any
unpaid dividends.

NOTE 9. REGULATORY MATTERS

Natural Gas Industry Restructuring (GIR)

In December 2001, the CPUC issued a decision related to GIR, with
implementation anticipated during 2002. On April 1, 2004, after many
delays and changes, the CPUC issued a decision that adopts tariffs to
implement the 2001 decision. However, by that same decision, the CPUC
stayed implementation of the GIR tariffs until it issues a decision in
Phase I of the Natural Gas Market Order Instituting Ratemaking (OIR)
discussed below. At that time, the CPUC will reconcile the GIR market
structure with whatever structure results from the Phase I decision of
the Natural Gas Market OIR. If implemented, the stayed decision would
unbundle the costs of SoCalGas' backbone transmission system from rates
and result in revising noncore balancing account treatment to exclude
the balancing of SoCalGas' backbone transmission costs and place
SoCalGas at risk for recovery of $80 million for transmission and $81
million for storage (current dollars). The decision would create firm
tradable rights for the transmission system. Other noncore
costs/revenues would continue to be fully balanced until the decision
in the next Biennial Cost Allocation Proceeding (BCAP) discussed below.

Natural Gas Market OIR

The CPUC's Natural Gas Market OIR was instituted in January 2004, and
will be addressed in two phases. A decision on Phase I was issued in

58

September 2004 and Phase II is awaiting CPUC direction on further
proceedings. In Phase I, the CPUC's objective was to develop a process
enabling the CPUC to review and pre-approve new interstate capacity
contracts before they are executed. In addition, the California
Utilities must submit proposals on any liquefied natural gas (LNG)
project to which interconnection is planned, providing costs and terms,
including access to the pipelines in Mexico being developed by an
affiliated company, Sempra Pipelines and Storage. Phase II will
primarily address emergency reserves and ratemaking policies. The
CPUC's objective in the ratemaking policy component of Phase II is to
identify and propose changes to policies that create incentives that
are consistent with the goal of providing adequate and reliable long-
term supplies and that do not conflict with energy efficiency programs.
The focus of the Gas OIR is the period from 2006 to 2016. Since GIR,
discussed above, would end in August 2006 and there is overlap between
GIR and the OIR issues, a number of parties (including SoCalGas) have
requested the CPUC not to implement GIR.

The California Utilities have made comprehensive filings in the OIR
outlining a proposed market structure that is intended to create access
to new natural gas supply sources (such as LNG, which is the business
of an affiliated company, Sempra LNG) for California. In their Phase I
and Phase II filings, SoCalGas and SDG&E proposed a framework to
provide firm tradable access rights for intrastate natural gas
transportation; provide SoCalGas with continued balancing account
protection for intrastate transmission and distribution revenues,
thereby eliminating throughput risk; and integrate the transmission
systems of SoCalGas and SDG&E so as to have common rates and rules. The
California Utilities also proposed that the capital expenditures
necessary to access new sources of supply be included in ratebase and
that the total amount of the expenditures would be $200 million to $300
million.

The California Utilities also proposed a methodology and framework to
be used by the CPUC for granting pre-approval of new interstate
transportation agreements. The Phase I decision approved the California
Utilities' transportation capacity pre-approval procedures with some
modifications. SoCalGas' existing pipeline capacity contracts with
Transwestern Pipeline Company expire in November 2005 and its primary
contracts with El Paso Natural Gas Company expire in August 2006.
SoCalGas recently was granted pre-approval by the CPUC of a contract
for released capacity on the Kern River Gas Transmission Company
system, and four capacity contracts with El Paso. The contracts would
expire between 2007 and 2011. In February 2005, SoCalGas filed for pre-
approval of two new capacity contracts with Transwestern that would
expire in 2009 and 2011. The CPUC's decision on pre-approval of the
Transwestern contracts is expected to be received by March 2005. All
interstate transportation capacity under the pre-approved contracts
will be used to transport natural gas supplies on behalf of the
California Utilities' core residential and small commercial customers,
and all costs of the capacity will be recovered in the customers' rates
through each utility's Purchased Gas Account, a balancing account. In
December 2004, pursuant to the Phase I decision, SoCalGas filed an
application to implement proposals for transmission system integration,
firm access rights, and off-system delivery services. The CPUC has
determined that the ratemaking treatment and cost responsibility for
any access-related infrastructure will be addressed in future

59

applications to be filed when more is known about the particular
projects. Phase II of the Gas Market OIR will review the CPUC's
ratemaking policies on throughput risk to better align these with its
objectives of promoting energy conservation and adequate
infrastructure. Phase II will also investigate the need for emergency
natural gas storage reserves and the role of the utility in
backstopping the noncore market.

Cost of Service

On December 2, 2004, the CPUC issued a decision in the California
Utilities' cost of service proceedings that essentially approved a
settlement recommended by all major parties to the proceedings. The
decision reduces the California Utilities' annual rate revenues,
effective retroactively to January 1, 2004, by an aggregate net amount
of approximately $33 million from the rates in effect during 2003. The
reduced rates will remain in effect through 2007, subject to annual
attrition allowances.

Attrition allowances, performance-based incentive mechanisms (PBR),
which is described in the following section, and related matters will
be addressed by the CPUC in Phase II of the cost of service
proceedings, expected to be decided in the first quarter of 2005. In
addition to recommending changes in the PBR formulas, the CPUC's Office
of Ratepayer Advocates (ORA) also proposed the possibility of
performance penalties for service quality, safety and service
reliability, without the possibility of performance awards. Hearings
took place in June 2004. In July 2004, all of the active parties in
Phase II who dealt with post-test-year ratemaking and performance
incentives filed for adoption by the CPUC of an all-party settlement
agreement for most of the Phase II issues, including annual inflation
adjustments and earnings sharing. The proposed settlement does not
cover performance incentives. For the interim years of 2005-2007, the
Consumer Price Index would be used to adjust the escalatable authorized
base rate revenues within identified floors and ceilings, each of which
limits the adjustment to approximately two to four percent of the prior
year's authorized base rate revenues.

SoCalGas had filed for continuation of existing PBR mechanisms for
service quality and safety that would otherwise expire at the end of
2003. In January 2004, the CPUC issued a decision that extended 2003
service and safety targets through 2004, but did not determine the
extent of rewards or penalties. As part of the proposed Phase II
Settlement Agreement, earnings sharing, under which IOUs return to
customers a percentage of earnings above specified levels, would be
suspended for 2004 and resume for 2005 through 2007. The proposed
earnings sharing mechanism also provides the utility the option to file
for suspension of the earnings sharing mechanism if earnings fall 175
basis points or more below its authorized rate of return; however, if
earnings are more than 300 basis points above the utility's authorized
rate of return, the earnings sharing mechanism would be automatically
suspended and trigger a formal regulatory review by the CPUC to
determine whether modification of the ratemaking mechanism is required.

On February 15, 2005, the Administrative Law Judge (ALJ) and the CPUC
Commissioner assigned to Phase II of the cost of service proceedings
issued differing proposed decisions for consideration by the CPUC. If

60

adopted by the CPUC, the ALJ's decision would not approve the parties'
settlement of the Phase II issues, but would authorize the California
Utilities to adjust their authorized revenues in each of years 2005
through 2007 on a formula basis similar to that proposed by the
California Utilities and also establish performance measures with
reward and penalty potentials of approximately $20 million. In
addition, the ALJ's decision would have the utilities' cost of capital
reviewed on an annual basis. If adopted by the CPUC, the Commissioner's
proposed decision would approve the parties' settlement and also
approve performance measures for customer service, safety and
reliability with the same reward and penalty provisions as the ALJ's
proposed decision. The Commissioner's proposed decision also would
continue the use of the cost of capital adjustment mechanism currently
in place, which adjusts each utility's rate of return automatically
based on market indices. The CPUC may adopt either proposed decision,
as proposed or with modifications, or reject both and adopt a different
result.

The California Utilities had been equally sharing between ratepayers
and shareholders the estimated savings for the 1998 business
combination that created Sempra Energy. Pursuant to an October 2001
CPUC decision, that sharing has ceased and all merger savings go to
ratepayers beginning with 2003.

Performance-Based Regulation

PBR consists of three primary components. The first is a mechanism to
adjust rates in years between general rate cases or cost of service
cases. It annually adjusts base rates from those of the prior year to
provide for inflation, changes in the number of customers and
efficiencies.

The second component is a mechanism whereby any earnings in excess of
those authorized plus a narrow band above that are shared with
customers in varying degrees depending upon the amount of the
additional earnings.

The third component consists of a series of measures of utility
performance. Generally, if performance is outside of a band around the
specified benchmark, the utility is rewarded or penalized certain
dollar amounts.

The three areas that have been eligible for PBR rewards or penalties
are operational incentives based on measurements of safety, reliability
and customer satisfaction; demand-side management (DSM) rewards based
on the effectiveness of the programs; and natural gas procurement
rewards or penalties. However, as noted under "Cost of Service," Phase
II of the California Utilities' current cost of service proceeding is
not complete. As a result, these safety, reliability and customer
satisfaction incentive mechanisms (i.e., those that are reviewed in the
Cost of Service proceeding) were not in effect during 2004. However, it
is not expected that the effect would be other than a one-year
moratorium of the mechanisms.

PBR, DSM and Gas Cost Incentive Mechanism (GCIM) rewards are not
included in the company's earnings before CPUC approval is received.
The only incentive reward approved during 2004 consisted of $6.3

61

million related to SoCalGas' Year 9 GCIM, which was approved in
February 2004. This reward was awarded by the CPUC subject to refund
based on the outcome of the Border Price Investigation discussed below.
The cumulative amount of rewards subject to refund based on the outcome
of the Border Price Investigation is $56.9 million, substantially all
of which has been included in net income in 2004, or previously.

On December 30, 2004, a joint settlement agreement between the
California Utilities and the ORA (collectively, the joint parties) was
filed with the CPUC for approval. The settlement agreement resolves
all outstanding shareholder earnings claims filed with the CPUC
commencing in 2000 and those claims that would have been filed through
2009 associated with DSM, energy efficiency and low-income energy
efficiency programs. The proposed settlement is for $14 million,
respectively, for SDG&E and SoCalGas (including interest, franchise
fees, uncollectible amounts and awards earned in prior years that had
not yet then been requested). The joint parties requested expeditious
approval of the settlement agreement, without modification. A CPUC
decision is expected by the end of the second quarter of 2005.

At December 31, 2004, other performance incentives were pending CPUC
approval and, therefore, were not included in the company's earnings
(dollars in millions):

Program
-----------------------------------
GCIM Year 10 $ 2.4
2003 safety .5
-----------------------------------
Total $ 2.9
-----------------------------------

Cost of Capital

Effective January 1, 2003, SoCalGas' authorized rate of return on
equity (ROE) is 10.82 percent and its return on ratebase (ROR) is 8.68
percent. These rates are subject to automatic adjustment if the 12-
month trailing average of 30-year Treasury bond rates and the Global
Insight forecast of the 30-year Treasury bond rate 12 months ahead vary
by greater than 150 basis points from a benchmark, which is currently
5.38 percent. The 12-month trailing average was 5.03 percent and the
Global Insight forecast was 5.44 percent at December 31, 2004.
Potential changes in this process are described above in "Cost of
Service."

Biennial Cost Allocation Proceeding

The BCAP determines the allocation of authorized costs between
customer classes for natural gas transportation service provided by
the company and adjusts rates to reflect variances in sales volumes as
compared to the forecasts previously used in establishing
transportation rates. SoCalGas filed with the CPUC its 2005 BCAP
application in September 2003, requesting updated transportation rates
effective January 1, 2005. In November 2003, an Assigned Commissioner
Ruling stayed the BCAP application until a decision is issued in the
GIR implementation proceeding. As a result of the April 1, 2004
decision on GIR implementation as described in Natural Gas Industry

62

Restructuring above, in May 2004 the ALJ in the 2005 BCAP issued a
decision dismissing the BCAP application. The company is required to
file a new BCAP application after the stay in the GIR implementation
proceeding is lifted. As a result of the deferrals and the significant
decline forecasted in noncore gas throughput on SoCalGas' system, in
December 2002 the CPUC issued a decision approving balancing account
protection for SoCalGas' risk on local transmission and distribution
revenues from January 1, 2003 until the CPUC issues its next BCAP
decision. SoCalGas is seeking to continue this balancing account
protection in the Natural Gas OIR proceeding.

CPUC Investigation of Energy-Utility Holding Companies

The CPUC has initiated an investigation into the relationship between
California's IOUs and their parent holding companies. The CPUC broadly
determined that it could, in appropriate circumstances, require the
holding company to provide cash to a utility subsidiary to cover its
operating expenses and working capital to the extent they are not
adequately funded through retail rates. This would be in addition to
the requirement of holding companies to provide for their utility
subsidiaries' capital requirements, as the IOUs previously acknowledged
in connection with their holding companies' formations. In January
2002, the CPUC ruled that it had jurisdiction to create the holding
company system and, therefore, retains jurisdiction to enforce
conditions to which the holding companies had agreed.

In a May 2004 opinion, the California Court of Appeal upheld the CPUC's
assertion of limited enforcement jurisdiction, but concluded that the
CPUC's interpretation of the "first priority" condition (that the
holding companies could be required to infuse cash into the utilities
as necessary to meet the utilities' obligation to serve) was not ripe
for review. In September 2004, the California Supreme Court declined to
review the California Court of Appeal's decision.

CPUC Investigation of Compliance With Affiliate Rules

In February 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to determine if they
have complied with statutes and CPUC decisions in the management,
oversight and operations of their companies. In September 2003, the
CPUC suspended the procedural schedule until it completes an
independent audit to evaluate energy-related holding company systems
and affiliate activities undertaken by Sempra Energy within the service
territories of SDG&E and SoCalGas. The audit, covering years 1997
through 2003, is expected to be completed by the third quarter of 2005.
The scope of the audit will be broader than the annual affiliate audit.
In accordance with existing CPUC requirements, the California
Utilities' transactions with other Sempra Energy affiliates have been
audited by an independent auditing firm each year, with results
reported to the CPUC, and there have been no material adverse findings
in those audits.

63

NOTE 10. COMMITMENTS AND CONTINGENCIES

Natural Gas Contracts

SoCalGas buys natural gas under short-term and long-term contracts.
Purchases are from various suppliers and are primarily based on monthly
spot-market prices. SoCalGas transports natural gas primarily under
long-term firm pipeline capacity agreements that provide for annual
reservation charges, which are recovered in rates. SoCalGas has
commitments with pipeline companies for firm pipeline capacity under
contracts that expire at various dates through 2007.

At December 31, 2004, the future minimum payments under existing
natural gas contracts were:

Total payments under natural gas contracts were $2.3 billion in 2004,
$1.8 billion in 2003 and $1.2 billion in 2002.

Leases

PE and SoCalGas have operating leases on real and personal property
expiring at various dates from 2005 to 2030. Certain leases on office
facilities contain escalation clauses requiring annual increases in
rent ranging from 4 percent to 5 percent. The rentals payable under
these leases are determined on both fixed and percentage bases, and
most leases contain extension options which are exercisable by the
companies.

64

At December 31, 2004, the minimum rental commitments payable in future
years under all noncancellable leases were as follows:

- -----------------------------------------------------------------
(Dollars in millions) PE SoCalGas
- -----------------------------------------------------------------
2005 $ 56 $ 43
2006 56 43
2007 59 46
2008 60 46
2009 60 46
Thereafter 98 91
---------------------
Total future rental commitments $ 389 $ 315
- -----------------------------------------------------------------

In connection with the quasi-reorganization described in Note 1, PE
recorded liabilities of $102 million to adjust to fair value the
operating leases related to its headquarters and other facilities at
December 31, 1992. The remaining amount of these liabilities was $30
million at December 31, 2004. These leases are included in the above
table at the amounts provided in the lease.

Rent expense for operating leases totaled $57 million in 2004, $56
million in 2003 and $54 million in 2002, which included rent expense
for SoCalGas of $44 million, $43 million and $42 million, respectively.

Guarantees

As of December 31, 2004, SoCalGas did not have any outstanding
guarantees.

Environmental Issues

The company's operations are subject to federal, state and local
environmental laws and regulations governing hazardous wastes, air and
water quality, land use, solid waste disposal and the protection of
wildlife. As applicable, appropriate and relevant, these laws and
regulations require that the company investigate and remediate the
effects of the release or disposal of materials at sites associated
with past and present operations, including sites at which the company
has been identified as a Potentially Responsible Party (PRP) under the
federal Superfund laws and comparable state laws. The company is
required to obtain numerous governmental permits, licenses and other
approvals to construct facilities and operate its businesses.
Additionally, to comply with these legal requirements, it must spend
significant sums on environmental monitoring, pollution control
equipment and emissions fees. In addition, existing environmental
regulations could be revised or reinterpreted and other new laws and
regulations could be adopted or become applicable to the company and
its facilities. Costs incurred to operate the facilities in compliance
with these laws and regulations generally have been recovered in
customer rates.

Significant costs incurred to mitigate or prevent future environmental

65

contamination or extend the life, increase the capacity or improve the
safety or efficiency of property utilized in current operations are
capitalized. The company's capital expenditures to comply with
environmental laws and regulations were $2 million in 2004, $6 million
in 2003 and $4 million in 2002. The cost of compliance with these
regulations over the next five years is not expected to be significant.

Costs that relate to current operations or an existing condition caused
by past operations are generally recorded as a regulatory asset due to
the assurance that these costs will be recovered in rates.

The environmental issues currently facing the company or resolved
during the last three years include investigation and remediation of
its manufactured-gas sites (27 completed as of December 31, 2004 and 15
to be completed), and cleanup of third-party waste-disposal sites used
by the company, which has been identified as a PRP (investigations and
remediations are continuing).

Environmental liabilities are recorded when the company's liability is
probable and the costs are reasonably estimable. In many cases,
however, investigations are not yet at a stage where the company has
been able to determine whether it is liable or, if the liability is
probable, to reasonably estimate the amount or range of amounts of the
cost or certain components thereof. Estimates of the company's
liability are further subject to other uncertainties, such as the
nature and extent of site contamination, evolving remediation standards
and imprecise engineering evaluations. The accruals are reviewed
periodically and, as investigations and remediation proceed,
adjustments are made as necessary. Costs of future expenditures for
environmental remediation obligations are not discounted to their
present value. At December 31, 2004, the company's accrued liability
for environmental matters was $41.9 million, of which $40.5 million is
related to manufactured-gas sites, $0.9 million to waste-disposal sites
used by the company (which has been identified as a PRP) and $0.5
million to other hazardous waste sites. These accruals are expected to
be paid ratably over the next three years.

Legal Proceedings

Except for the matters referred to below, neither the company nor its
subsidiaries are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses. At December 31, 2004, the company had
accrued approximately $89 million to provide for the costs of legal
proceedings, of which $77 million related to cases arising from the
2000-2001 California energy crisis. Management believes that none of
these matters will have further material adverse effect on the
company's financial condition or results of operations.

California Energy Crisis

In 2000 and 2001, California experienced a severe energy crisis
characterized by dramatic increases in the prices of natural gas. The
energy crisis has generated many, often duplicative, governmental
investigations, regulatory proceedings and lawsuits involving numerous
energy companies seeking recovery of tens of billions of dollars for
allegedly unlawful activities asserted to have caused or contributed to

66

the energy crisis. The material proceedings arising out of the energy
crisis that involve the company are summarized below.

Class-action and individual antitrust and unfair competition lawsuits
filed in 2000 and thereafter, and currently consolidated in San Diego
Superior Court, seek damages, alleging that Sempra Energy, SoCalGas and
SDG&E, along with El Paso Natural Gas Company (El Paso) and several of
its affiliates, unlawfully sought to control natural gas and
electricity markets. In December 2003, the Court approved a settlement
whereby the applicable El Paso entities will pay approximately $1.6
billion to resolve these claims (including cases involving unrelated
claims not applicable to Sempra Energy, SoCalGas or SDG&E). The
proceeding against Sempra Energy and the California Utilities has not
been settled and continues to be litigated. In October 2004, certain of
the plaintiffs issued a news release asserting that they could recover
as much as $24 billion from Sempra Energy and the California Utilities
if their allegations were upheld at trial. During the third quarter of
2004, the court denied motions for summary judgment in favor of Sempra
Energy and the California Utilities. The Court of Appeal has declined
to review the summary judgment denial and the companies have petitioned
for review by the California Supreme Court. Interim review pending a
final decision on the merits of the case is entirely at the discretion
of the California Supreme Court. On January 18, 2005, the judge stated
that pre-trial motions will be heard on June 3, 2005, and set a trial
date of September 2, 2005.

Similar lawsuits have been filed by the Attorneys General of Arizona
and Nevada, alleging that El Paso and certain Sempra Energy
subsidiaries unlawfully sought to control the natural gas market in
their respective states. The claims against the Sempra Energy
defendants in the Arizona lawsuit were settled in September 2004 for
$150,000 and have been dismissed with prejudice. The Nevada Attorney
General's lawsuit remains pending.

The company is cooperating with an investigation being conducted by the
California Attorney General into possible anti-competitive behavior in
the natural gas and electricity markets during the 2000-2001 energy
crisis. In December 2004, several of the company's senior officers
testified at investigational hearings conducted by the California
Attorney General's Office. The company expects additional hearings to
take place in early 2005.

In April 2003, Sierra Pacific Resources and its utility subsidiary
Nevada Power filed a lawsuit in U.S. District Court in Las Vegas
against major natural gas suppliers, and included Sempra Energy, the
California Utilities and other company subsidiaries, seeking recovery
of damages alleged to aggregate in excess of $150 million (before
trebling) from an alleged conspiracy to drive up or control natural gas
prices, eliminate competition and increase market volatility, breach of
contract and wire fraud. On January 27, 2004, the U.S. District Court
dismissed the Sierra Pacific Resources case against all of the
defendants, determining that this is a matter for the FERC to resolve.
However, the court granted plaintiffs' request to amend their
complaint. Sempra Energy filed another motion to dismiss on plaintiffs'
amended complaint. After argument on November 29, 2004, the federal
court dismissed the Sierra Pacific case with prejudice. Plaintiffs have
filed a notice of appeal with the Ninth Circuit Court of Appeals.

67

In July 2004, the City and County of San Francisco, the County of Santa
Clara and the County of San Diego brought actions, alleging that energy
prices were unlawfully manipulated by defendants' reporting
artificially inflated natural gas prices to trade publications and by
entering into wash trades and by engaging in "churning" transactions
with Reliant Energy, in San Diego Superior Court against various
entities, including Sempra Energy, Sempra Commodities, SoCalGas and
SDG&E.

CPUC Border Price Investigation

In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California - Arizona border between March 2000 and May
2001. The California Utilities are the parties to the first phase of
the investigation. If the investigation were to determine that the
conduct of either of the California Utilities contributed to the
natural gas price spikes that occurred during the investigation period,
the CPUC may modify the party's natural gas procurement incentive
mechanism, reduce the amount of any shareholder award for the period
involved, and/or order the party to issue a refund to ratepayers. At
December 31, 2004, the cumulative amount of shareholder awards,
substantially all of which has been included in net income, was $56.9
million.

On November 16, 2004, the CPUC Administrative Law Judge assigned to the
investigation issued a proposed decision for consideration by the full
CPUC in the first phase of the investigation that was highly critical
of SoCalGas' natural gas purchase, sales, hedging and storage
activities and would find that SoCalGas exercised market power and
manipulated the natural gas market, significantly contributing to
natural gas price spikes that also increased electricity prices. The
proposed decision did not include any adverse findings or make any
adverse recommendations regarding SDG&E.

On December 16, 2004, the CPUC rejected the proposed decision by a 3-2
vote. The two commissioners who voted in favor of the proposed decision
were Commissioners Lynch and Wood, whose terms on the CPUC expired at
year end. It is now up to the remaining commissioners plus any new
appointees to determine whether to issue an alternate proposed
decision, hold additional hearings, or issue an order terminating the
investigation.

The CPUC may hold additional rounds of hearings to consider whether
other companies, including other California utilities, contributed to
the natural gas price spikes. No hearings have yet been scheduled.

Concentration of Credit Risk

The company maintains credit policies and systems to manage overall
credit risk. These policies include an evaluation of potential
counterparties' financial condition and an assignment of credit limits.
These credit limits are established based on risk and return
considerations under terms customarily available in the industry.
SoCalGas grants credit to customers and counterparties, substantially

68

all of whom are located in its service territories, which cover most of
Southern California and a portion of central California.

NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED)

73

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

74

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

75

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)

76

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
(Dollars in millions)

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN CALIFORNIA GAS COMPANY

The following notes to Consolidated Financial Statements of
Pacific Enterprises are incorporated herein by reference insofar
as they relate to Southern California Gas Company:

Note 1 - Significant Accounting Policies
Note 2 - Short-term Borrowings
Note 3 - Long-term debt
Note 5 - Employee Benefit Plans
Note 6 - Stock-based Compensation
Note 7 - Financial Instruments
Note 9 - Regulatory Matters
Note 10 - Commitments and Contingencies

The following additional notes apply only to Southern California Gas
Company:

NOTE 4. INCOME TAXES

The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
Years ended December 31,
2004 2003 2002
- -----------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.2 6.1 5.1
State income taxes - net of
federal income tax benefit 5.8 5.9 7.0
Tax credits (0.7) (0.8) (0.8)
Settlement of Internal Revenue Service audit -- (3.1) --
Equity AFUDC (3.7) (1.0) (1.0)
Other, net (1.8) (0.4) 0.2
----------------------------
Effective income tax rate 39.8% 41.7% 45.5%
- -----------------------------------------------------------------------

78

The components of income tax expense are as follows:

Years ended December 31,
(Dollars in millions) 2004 2003 2002
- ---------------------------------------------------------------------
Current:
Federal $ 127 $ 76 $ 117
State 44 30 38
------------------------
Total 171 106 155
------------------------
Deferred:
Federal (3) 42 24
State (11) 5 2
------------------------
Total (14) 47 26
------------------------
Deferred investment tax credits (3) (3) (3)
------------------------
Total income tax expense $ 154 $ 150 $ 178
- ---------------------------------------------------------------------

On the Statements of Consolidated Income, federal and state income
taxes are allocated between operating income and other income. SoCalGas
is included in the consolidated income tax return of Sempra Energy and
is allocated income tax expense from Sempra Energy in an amount equal
to that which would result from SoCalGas' having always filed a
separate return.

79

Accumulated deferred income taxes at December 31 relate to the
following:

(Dollars in millions) 2004 2003
- ----------------------------------------------------------------------
Deferred tax liabilities:
Differences in financial and
tax bases of utility plant $ 268 $ 273
Regulatory balancing accounts 50 76
Global settlement -- (1)
Loss on reacquired debt 18 17
Other 4 1
--------------------
Total deferred tax liabilities 340 366
--------------------
Deferred tax assets:
Investment tax credits 29 31
Postretirement benefits 40 45
Deferred compensation 15 14
State income taxes 23 19
Workers compensation 21 20
Contingent liabilities 79 82
Other 3 4
--------------------
Total deferred tax assets 210 215
--------------------
Net deferred income tax liability $ 130 $ 151
- ----------------------------------------------------------------------

The net deferred income tax liability is recorded on the Consolidated
Balance Sheets at December 31 as follows:

(Dollars in millions) 2004 2003
- ----------------------------------------------------------------------
Current (asset) liability $ (17) $ 15
Noncurrent liability 147 136
--------------------
Total $ 130 $ 151
- ----------------------------------------------------------------------

NOTE 5. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefits

The following tables present separate data for SoCalGas related to
employee benefit plan information in PE's Note 5.

December 31 is the measurement date for the pension and other
postretirement benefit plans. The following table provides a
reconciliation of the changes in the plans' projected benefit obligations
during the latest two years, the fair value of assets and a statement of
the funded status as of the latest two year ends:

80

* Prior to 2004, the company's net transition obligation was recorded
at the company's parent, Pacific Enterprises.

The following table provides the amounts recognized on the Consolidated
Balance Sheets at December 31:

81

NOTE 8. PREFERRED STOCK

December 31,
2004 2003
- ------------------------------------------------------------------
(in millions)
$25 par value, authorized 1,000,000 shares
6% Series, 79,011 shares outstanding $ 3 $ 3
6% Series A, 783,032 shares outstanding 19 19
Without par value, authorized 10,000,000 shares -- --
---------------
Total preferred stock $ 22 $ 22
- -----------------------------------------------------------------

None of SoCalGas' preferred stock is callable. All series have one vote
per share and cumulative preferences as to dividends, and have a
liquidation value of $25 per share plus any unpaid dividends.

NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED)

Operating revenues and expenses in the fourth quarter of 2004 included
the favorable impact of the final cost of service decision and
operating expenses included litigation costs recorded in the fourth
quarter.

Operating revenues in the third quarter of 2003 included the
recognition of $48 million of natural gas procurement awards. The

82

after-tax impact to net income was $29 million. Additionally, operating
expenses in the third quarter of 2003 were impacted by a $55 million
before-tax charge for litigation and for losses associated with a
sublease of portions of the SoCalGas headquarters building. The after-
tax impact was $32 million.

Net income in the fourth quarter of 2003 included $29 million related
to the favorable resolution of income tax issues.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

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

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

83

ITEM 9B. OTHER INFORMATION

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

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

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

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

84

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

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

85

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required on Identification of Directors is incorporated
by reference from "Election of Directors" in the Information Statement
prepared for the May 2005 annual meeting of shareholders. The
information required on the companies' executive officers is set forth
below.

EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age* Position
- -------------------------------------------------------------------
Pacific Enterprises --
Stephen L. Baum 63 Chairman, Chief Executive
Officer and President

M. Javade Chaudhri 52 Executive Vice President and
General Counsel

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

Frank H. Ault 60 Senior Vice President and
Controller

Charles A. McMonagle 54 Vice President and Treasurer

Thomas C. Sanger 61 Corporate Secretary

Southern California Gas Company --
Edwin A. Guiles 55 Chairman and Chief Executive
Officer

Debra L. Reed 48 President and Chief Operating
Officer

Steven D. Davis 48 Senior Vice President, External
Relations and Chief Financial
Officer

Margot A. Kyd 51 Senior Vice President, Corporate
Business Solutions

William L. Reed 52 Senior Vice President, Regulatory
and Strategic Planning

Anne S. Smith 51 Senior Vice President, Customer
Service

Lee M. Stewart 59 Senior Vice President, Gas
Transmission

Terry M. Fleskes 48 Vice President and Controller

* As of December 31, 2004.

86

Each Executive Officer has been an officer or employee of Sempra Energy
or one of its subsidiaries for more than five years, with the exception
of Mr. Chaudhri. Prior to joining the company in 2003, Mr. Chaudhri was
Senior Vice President and General Counsel of Gateway, Inc. Each
executive officer of Southern California Gas Company holds the same
position at San Diego Gas & Electric Company.

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

87

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

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

1. Financial statements
Page in
This Report
Reports of Independent Registered Public Accounting
Firm for Pacific Enterprises . . . . . . . . . . . . . . . . . . 27

Pacific Enterprises Statements of Consolidated Income
for the years ended December 31, 2004, 2003 and 2002 . . . . . . 30

Pacific Enterprises Consolidated Balance Sheets
at December 31, 2004 and 2003. . . . . . . . . . . . . . . . . . 31

Pacific Enterprises Statements of Consolidated Cash Flows
for the years ended December 31, 2004, 2003 and 2002 . . . . . . 33

Pacific Enterprises Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . 34

Pacific Enterprises Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 35

Reports of Independent Registered Public Accounting
Firm for Southern California Gas Company . . . . . . . . . . . . 69

SoCalGas Statements of Consolidated Income for the years
ended December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . 72

SoCalGas Consolidated Balance Sheets at December 31,
2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . 73

SoCalGas Statements of Consolidated Cash Flows for the
years ended December 31, 2004, 2003 and 2002 . . . . . . . . . . 75

SoCalGas Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . 76

SoCalGas Notes to Consolidated Financial Statements. . . . . . . . 77

2. Financial statement schedules

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

Schedule I--Condensed Financial Information of Parent. . . . . . . 90

88

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

3. Exhibits

See Exhibit Index on page 94 of this report.

(b) Reports on Form 8-K

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

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

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

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

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

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

Current Report on Form 8-K filed December 7, 2004, discussing and
filing as an exhibit the 2005 Deferred Compensation Plan.

Current Report on Form 8-K filed December 10, 2004, reporting the
closing of SoCalGas' public offering and sale of $100,000,000 of bonds
and filing as exhibits the underwriting agreement and pricing agreement
dated December 7, 2004, the supplemental indenture dated December 10,
2004, and the form of the bond.

Current Report on Form 8-K filed December 17, 2004, discussing the
current status of the Border Price Investigation.

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

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

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

89

CONSENTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND REPORT ON
SCHEDULES

To the Board of Directors and Shareholders of Pacific Enterprises:

We consent to the incorporation by reference in Registration Statement
Numbers 2-96782, 33-26357, 2-66833, 2-96781, 33-21908 and 33-54055 on
Form S-8 and Registration Statement Numbers 33-24830, 333-52926 and 33-
44338 on Form S-3 of our reports dated February 22, 2005 relating to
the financial statements of Pacific Enterprises and management's report
on the effectiveness of internal control over financial reporting,
incorporated by reference in this Annual Report on Form 10-K of Pacific
Enterprises for the year ended December 31, 2004.

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

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 22, 2005

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

We consent to the incorporation by reference in Registration Statement
Numbers 333-70654, 333-45537, 33-51322, 33-53258, 33-59404 and 33-52663
on Form S-3 of our reports dated February 22, 2005 relating to the
financial statements of Southern California Gas Company and
management's report on the effectiveness of internal control over
financial reporting, incorporated by reference in this Annual Report on
Form 10-K of Southern California Gas Company for the year ended
December 31, 2004.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 22, 2005

90

Schedule I -- CONDENSED FINANCIAL INFORMATION OF PARENT

PACIFIC ENTERPRISES

Condensed Statements of Income
(Dollars in millions)

For the years ended December 31 2004 2003 2002
------ ------ ------
Interest income $ 13 $ 4 $ 6
Expenses, interest and income taxes 13 (4) 9
------ ------ ------
Income (loss) before subsidiary earnings -- 8 (3)
Subsidiary earnings 232 209 212
------ ------ ------
Earnings applicable to common shares $ 232 $ 217 $ 209
====== ====== ======

Condensed Balance Sheets
(Dollars in millions)

Balance at December 31 2004 2003
-------- --------
Assets:
Current assets $ 103 $ 104
Investment in subsidiary 1,386 1,354
Due from affiliates - long-term 396 356
Deferred charges and other assets 48 111
-------- --------
Total assets $ 1,933 $ 1,925
======== ========
Liabilities and Shareholders' Equity:
Due to affiliates $ 72 $ 66
Other current liabilities 10 10
-------- --------
Total current liabilities 82 76
Other long-term liabilities 37 152
Common equity 1,734 1,617
Preferred stock 80 80
-------- --------
Total liabilities and shareholders' equity $ 1,933 $ 1,925
======== ========

91

Schedule I (continued)

PACIFIC ENTERPRISES
Condensed Financial Information of Parent

Condensed Statements of Cash Flows
(Dollars in millions)

92

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, hereunto duly authorized.

PACIFIC ENTERPRISES

By: /s/ Stephen L. Baum

Stephen L. Baum
Chairman, President
and Chief Executive Officer

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

94

EXHIBIT INDEX

The Forms 8-K, 10-K and 10-Q referred to herein were filed under
Commission File Number 1-14201 (Sempra Energy), Commission File Number
1-40 (Pacific Enterprises) and/or Commission File Number 1-1402
(Southern California Gas Company).

Exhibit 3 -- By-Laws and Articles Of Incorporation

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

3.02 Restated Bylaws of Pacific Enterprises dated November 6, 2001.
(2001 Form 10-K, Exhibit 3.02).

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

3.04 Restated Bylaws of Southern California Gas Company dated November
6, 2001. (2001 Form 10-K, Exhibit 3.04).

Exhibit 4 -- Instruments Defining The Rights Of Security Holders

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

4.01 Specimen Common Stock Certificate of Pacific Enterprises (Pacific
Enterprises 1988 Form 10-K, Exhibit 4.01).

4.02 Specimen Preferred Stock Certificates of Pacific Enterprises
(Pacific Lighting Corporation 1980 Form 10-K, Exhibit 4.02).

4.03 Specimen Preferred Stock Certificates of Southern California Gas
Company (Southern California Gas Company 1980 Form 10-K, Exhibit
4.01).

4.04 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).

4.05 Supplemental Indenture of Southern California Gas Company to
American Trust Company dated as of July 1, 1947 (Registration
Statement No. 2-7072 filed by Southern California Gas Company on
March 15, 1947, Exhibit B-5).

4.06 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).

4.07 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).

95

4.08 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).

4.09 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).

4.10 Supplemental Indenture of Southern California Gas Company to Wells
Fargo Bank, National Association dated as of September 15, 1981
(Pacific Enterprises 1981 Form 10-K, Exhibit 4.25).

4.11 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).

4.12 Supplemental Indenture of Southern California Gas Company to
Bankers Trust Company of California, N.A., successor to Wells
Fargo Bank, National Association dated as of January 15, 1988
(Pacific Enterprises 1987 Form 10-K, Exhibit 4.11).

4.13 Supplemental Indenture of Southern California Gas Company to First
Trust of California, National Association, successor to Bankers
Trust Company of California, N.A. dated as of August 15, 1992
(Registration Statement No. 33-50826 filed by Southern California
Gas Company on August 13, 1992, Exhibit 4.37).

4.14 Supplemental Indenture of Southern California Gas Company to
U.S. Bank, N.A., successor to First Trust of California, N.A.
dated as of October 1, 2002 (2002 Sempra Energy Form 10-K,
Exhibit 4.17).

4.15 Supplemental Indenture of Southern California Gas Company to
U.S. Bank, N.A., successor to First Trust of California, N.A.,
Dated as of October 17, 2003 (2004 Sempra Energy Form 10-K,
Exhibit 4.19).

4.16 Supplemental Indenture of Southern California Gas Company to
U.S. Bank, N.A., successor to First Trust of California, N.A.,
Dated as of December 15, 2003 (2004 Sempra Energy Form 10-K,
Exhibit 4.20).

4.17 Supplemental Indenture of Southern California Gas Company to
U.S. Bank, N.A., successor to First Trust of California, N.A.,
Dated as of October December 10, 2004 (2004 Sempra Energy Form
10-K, Exhibit 4.21).

4.18 Specimen 7 3/4% Series Preferred Stock Certificate (Southern
California Gas Company 1992 Form 10-K, Exhibit 4.15).

96

Exhibit 10 -- Material Contracts

Compensation

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

10.02 Sempra Energy 2005 Deferred Compensation Plan (Pacific
Enterprises Form 8-K filed on December 07, 2004, Exhibit 10.1).

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

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

10.05 Sempra Energy Excess Cash Balance Plan (September 30, 2004
Sempra Energy Form 10-Q, Exhibit 10.3).

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

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

10.08 Form of Sempra Energy 1998 Non-Employee Directors' Stock
Plan Nonqualified Stock Option Agreement (September 30, 2004
Sempra Energy Form 10-Q, Exhibit 10.6).

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

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

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

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

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

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

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

97

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

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

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

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

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

10.21 Form of Sempra Energy Severance Pay Agreement for Executives
(2001 Sempra Energy Form 10-K, Exhibit 10.07).

10.22 Sempra Energy Deferred Compensation and Excess Savings Plan
effective January 1, 2000 (Sempra Energy 2000 Form 10-K,
Exhibit 10.07).

10.23 Sempra Energy 1998 Long Term Incentive Plan (Incorporated by
reference from the Registration Statement on Form S-8 Sempra
Energy Registration No. 333-56161 dated June 5, 1998, Exhibit
4.1).

10.24 Pacific Enterprises Employee Stock Ownership Plan and Trust
Agreement as amended effective October 1, 1992. (Pacific
Enterprises 1992 Form 10-K, Exhibit 10.18).

10.25 Amended and Restated Pacific Enterprises Employee Stock Option
Plan (Southern California Gas Company 1996 Form 10-K, Exhibit
10.10).

Exhibit 12 -- Statement Re: Computation of Ratios

12.01 Pacific Enterprises Computation of Ratio of Earnings to Fixed
Charges for the years ended December 31, 2004, 2003, 2002, 2001
and 2000.

12.02 Southern California Gas Company Computation of Ratio of Earnings
to Fixed Charges for the years ended December 31, 2004, 2003,
2002, 2001 and 2000.

Exhibit 21 -- Subsidiaries

21.01 Pacific Enterprises Schedule of Subsidiaries at December 31, 2004.

21.02 Southern California Gas Company Schedule of Subsidiaries at
December 31, 2004.

98

Exhibit 23 -- Consents of Independent Registered Public
Accounting Firm, page 89.

Exhibit 31 -- Section 302 Certifications

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

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

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

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

Exhibit 32 -- Section 906 Certifications

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

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

32.3 Statement of SoCalGas' Chief Executive Officer pursuant
to 18 U.S.C. Sec. 1350.

32.4 Statement of SoCalGas' Chief Financial Officer pursuant
to 18 U.S.C. Sec. 1350.

99

GLOSSARY

AFUDC Allowance for Funds Used During Construction

ALJ Administrative Law Judge

ARB Accounting Research Bulletin

BCAP Biennial Cost Allocation Proceeding

California
Utilities Southern California Gas Company and San Diego Gas
& Electric

CPUC California Public Utilities Commission

DSM Demand Side Management

El Paso El Paso Natural gas Company

ERMG Energy Risk Management Group

ERMOC Energy Risk Management Oversight Committee

FASB Financial Accounting Standards Board

FERC Federal Energy Regulatory Commission

FSP FASB Staff Position

GCIM Gas Cost Incentive Mechanism

GIR Gas Industry Restructuring

ICWUC International Chemical Workers' Union Counsel

IRS Internal Revenue Service

IOUs Investor-Owned Utilities

LIBOR London Interbank Offered Rate

LIFO Last in first out inventory costing method

LNG Liquefied Natural Gas

MGP Manufactured-Gas Plants

mmbtu Million British Thermal Units (of natural gas)

OIR Order Instituting Ratemaking

ORA Office of Ratepayer Advocates

PBR Performance-Based Ratemaking/Regulation

100

PE Pacific Enterprises

PRP Potentially Responsible Party

RD&D Research Development and Demonstration

ROE Return on Equity

ROR Return on Ratebase

SDG&E San Diego Gas & Electric Company

SFAS Statement of Financial Accounting Standards

SoCalGas Southern California Gas Company

UWUA Utility Workers' Union of America

VaR Value at Risk