PACIFIC ENTERPRISES INC, 10-K, 2000-03-29

PACIFIC ENTERPRISES INC
10-K, 2000-03-29
NATURAL GAS DISTRIBUTION

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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, 1999
--------------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
to
- ------ -------
PACIFIC ENTERPRISES
- -------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

CALIFORNIA 1-40 94-0743670
- -------------------------------------------------------------------
(State of incorporation (Commission (I.R.S. Employer
or organization) File Number) Identification No.

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
- ------------------- ---------------------
Preferred Stock: American and Pacific
$4.75 dividend; $4.50 dividend;
$4.40 dividend; $4.36 dividend

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

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

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

Exhibit Index on page 65. Glossary on page 68.

Aggregate market value of the voting preferred stock held by non-
affiliates of the registrant as of February 29, 2000 was
$52.3 million.

Registrant's common stock outstanding as of February 29, 2000 was
wholly owned by Sempra Energy.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Information Statement prepared for the May 2000
annual meeting of shareholders are incorporated by reference into
Part III.

TABLE OF CONTENTS

PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . 11

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 12
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 . . . . . . . . 58

PART III
Item 10. Directors and Executive Officers of the Registrant . . 58
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . 59
Item 13. Certain Relationships and Related Transactions . . . . 59

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 60

Independent Auditors' Consent and Report on Schedule. . . . . . 61

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 65

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

This 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" and "should" or similar expressions, or discussions of strategy
or of plans are intended to identify forward-looking statements that
involve risks, uncertainties and assumptions. Future results may
differ materially from those expressed in these forward-looking
statements.

These statements are necessarily based upon various assumptions
involving judgments with respect to the future and other risks,
including, among others, local, regional, national and international
economic, competitive, political and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; exchange rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions; business and regulatory or legal decisions; the
pace of deregulation of retail natural gas and electricity delivery;
and other uncertainties -- all of which are difficult to predict and
many of which are beyond the control of the Company. Readers are
cautioned not to rely unduly on any forward-looking statements and
are urged to review and consider carefully the risks, uncertainties
and other factors which affect the Company's business described in
this annual report and other reports filed by the Company from time
to time with the Securities and Exchange Commission.

PART I

ITEM 1. BUSINESS

Description of Business
A description of Pacific Enterprises (PE or the Company) is given in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.

GOVERNMENT REGULATION

SoCalGas is regulated by local, state and federal agencies, as
described below.

Local Regulation
SoCalGas has gas franchises with the 236 legal jurisdictions in its
service territory. These franchises allow SoCalGas to locate
facilities for the transmission and distribution of natural gas in
the streets and other public places. Some franchises have fixed
terms, such as that for the city of Los Angeles, which expires in
2012. Most of the franchises do not have fixed terms and continue
indefinitely. The range of expiration dates for the franchises with
definite terms is 2003 to 2041.

State Regulation
The California Public Utilities Commission (CPUC) regulates SoCalGas'
rates and conditions of service, sales of securities, rate of return,
rates of depreciation, uniform systems of accounts, examination of
records, and long-term resource procurement. The CPUC also conducts
various reviews of utility performance and conducts investigations
into various matters, such as deregulation, competition and the
environment, to determine its future policies.

Federal 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.

Licenses and Permits
SoCalGas obtains a number of 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 throughout this report.

SOURCES OF REVENUE

Industry segment information is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in
Note 13 of the notes to Consolidated Financial Statements herein.

NATURAL GAS OPERATIONS

Utility Services
SoCalGas distributes natural gas throughout a 23,000 square-mile
service territory with a population of approximately 18.1 million
people. Its service territory includes most of southern California
and part of central California.

SoCalGas offers two basic services, sale of natural gas and
transportation of natural gas, through its two business units. One
business unit focuses on core distribution customers (primarily
residential customers) and the other on large-volume gas
transportation customers. Natural gas service is also provided on a
wholesale basis to the distribution systems of the City of Long
Beach, affiliated company SDG&E and Southwest Gas Corporation.

Supplies of Natural Gas
SoCalGas buys natural gas under several short-term and long-term
contracts. Short-term purchases are based on monthly-spot-market
prices. SoCalGas has firm pipeline capacity contracts with pipeline
companies that expire at various dates through 2006.

Most of the natural gas purchased and delivered by SoCalGas is
produced outside of California. These supplies are delivered to
SoCalGas' intrastate transmission system by interstate pipeline
companies, primarily El Paso Natural Gas Company and Transwestern
Natural Gas Company. These interstate companies provide
transportation services for supplies purchased from other sources by
SoCalGas or its transportation customers. The rates that interstate
pipeline companies may charge for natural gas and transportation
services are regulated by the FERC. Existing pipeline capacity into
California exceeds current demand by over 1 billion cubic feet (bcf)
per day. The implications of this excess are described in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein.

The following table shows the sources of natural gas deliveries from
1995 through 1999.

<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gas Purchases (billions of cubic feet)
Spot market 315 270 229 226 206
Long-term 74 101 95 96 99
California producers 2 3 5 12 29
------- ------- ------- ------- -------
Total Purchases 391 374 329 334 334

Customer-Owned and Exchange Receipts 637 637 614 518 620

Storage Withdrawal
(Injection) - net (6) (28) (3) 42 (13)

Company Use and
Unaccounted For (16) (21) (10) (10) (4)
------- ------- ------- ------- -------
Net Deliveries 1,006 962 930 884 937
======= ======= ======= ======= =======
Cost of Gas Purchased (millions of dollars)
Commodity Costs $ 916 $ 774 $ 849 $ 627 $ 478

Fixed Charges* 147 174 250 276 264
------- ------- ------- ------- -------
Total Purchases $1,063 $ 948 $1,099 $ 903 $ 742
======= ======= ======= ======= =======
Average Cost of Purchases
(dollars per thousand cubic feet)** $2.34 $2.07 $ 2.58 $1.88 $1.42
======= ======= ======= ======= =======

* Fixed charges primarily include pipeline demand charges, take-or-pay settlement costs and other direct
billed amounts allocated over the quantities delivered by the interstate pipelines.

** The average commodity cost of natural gas purchased excludes fixed charges.
</TABLE>

Market sensitive natural gas supplies (supplies purchased on the
spot market as well as under long-term contracts, ranging from one
month to ten years, but based on spot prices) accounted for 81
percent of total natural gas volumes purchased by SoCalGas during
1999, as compared with 72 percent and 70 percent during 1998 and
1997, respectively. These supplies were generally purchased at
prices significantly below those of long-term fixed-price sources
of supply.

During 1999, SoCalGas delivered 1,006 bcf of natural gas through
its system. Approximately 63 percent of these deliveries were
customer-owned natural gas for which SoCalGas provided
transportation services. The balance of natural gas deliveries was
gas purchased by SoCalGas and resold to customers. SoCalGas
estimates that sufficient natural gas supplies will be available to
meet the requirements of its customers for the next several years.

Customers
For regulatory purposes customers are separated into core and
noncore customers. Core customers are primarily residential and
small commercial and industrial customers without alternative
fuel capability. There are approximately 5.0 million core
customers (4.8 million residential and 0.2 million small
commercial and industrial). Noncore customers consist primarily
of utility electric generation (UEG), wholesale, large
commercial' industrial and off-system (outside the Company's
normal service territory) customers, and total approximately
1,500.

Most core customers purchase natural gas directly from SoCalGas.
Core aggregate transportation customers are permitted to aggregate
their natural gas requirement and, up to a CPUC-imposed limit of 10
percent of SoCalGas' core market, to purchase natural gas directly
from brokers or producers. SoCalGas continues to be obligated to
purchase reliable supplies of natural gas to serve the requirements
of its core customers.

Noncore customers have the option of purchasing natural gas either
from SoCalGas or from other sources, such as brokers or producers,
for delivery through SoCalGas' transmission and distribution
system. The only natural gas supplies that SoCalGas may offer for
sale to noncore customers are the same supplies that it purchases
for its core customers. Most noncore customers procure their own
natural gas supply.

For 1999, approximately 87 percent of the CPUC-authorized
natural gas margin was allocated to the core customers, with 13
percent allocated to the noncore customers.

Although revenue from transportation throughput is less than for
natural gas sales, SoCalGas generally earns the same margin whether
the company buys the gas and sells it to the customer or transports
natural gas already owned by the customer.

SoCalGas also provides natural gas storage services for noncore and
off-system customers on a bid and negotiated contract basis. The
storage service program provides opportunities for customers to
store natural gas on an "as available" basis, usually during the
summer to reduce winter purchases when natural gas costs are
generally higher. As of December 31, 1999, SoCalGas was storing
approximately 22 bcf of customer-owned gas.

Demand for Natural Gas
Natural gas is a principal energy source for residential,
commercial, industrial and UEG customers. Natural gas competes with
electricity for residential and commercial cooking, water heating,
space heating and clothes drying, and competes with other fuels for
large industrial, commercial and UEG uses. Growth in the natural
gas markets is largely dependent upon the health and expansion of
the southern California economy. SoCalGas added approximately
74,000 and 46,000 new meters in 1999 and 1998, respectively,
representing growth rates of approximately 1.5 percent and 0.9
percent, respectively. SoCalGas expects its growth rate for 2000
will continue at about the 1999 level.

During 1999, 99 percent of residential energy customers in
SoCalGas' service area used natural gas for water heating, 96
percent for space heating, 76 percent for cooking and 55 percent
for clothes drying.

Demand for natural gas by noncore customers is very sensitive to
the price of competing fuels. Although the number of noncore
customers in 1999 was only 1,500, it accounted for 13 percent of
the authorized natural gas revenues and 57 percent of total natural
gas volumes. External factors such as weather, electric
deregulation, the use of hydro-electric power, competing pipeline
bypass and general economic conditions can result in significant
shifts in this market. The demand for natural gas by large UEG
customers is also greatly affected by the price and availability of
electric power generated in other areas and purchased by SoCalGas'
UEG customers. Natural gas demand in 1999 for UEG customer use
increased, primarily due to higher electric energy usage in the
summer, as a result of warmer weather. UEG customer demand
decreased in 1998 as a result of decreased demand for electricity.

Effective March 31, 1998, electric industry restructuring gave
California consumers the option of selecting their electric
energy provider from a variety of local and out-of-state
producers. 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 UEG customers may be adversely affected to the
extent that regulatory changes divert electricity from the
company's service area.

Other
Additional information concerning customer demand and other aspects
of natural gas operations is provided under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and in Notes 11 and 12 of the notes to Consolidated
Financial Statements herein.

RATES AND REGULATION

SoCalGas is regulated by the CPUC, which consists of five
commissioners appointed by the Governor of California for staggered
six-year terms. It is the responsibility of the CPUC to determine
that utilities operate within the best interests of their
customers. The regulatory structure is complex and has a
substantial impact on SoCalGas' profitability. The natural gas
industry is currently undergoing a transition to increased
competition.

Natural Gas Industry Restructuring
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. In January 1998, the CPUC released a staff
report initiating a project to assess the current market and the
regulatory framework for California's natural gas industry.
Additional information on natural gas industry restructuring is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 12 of the notes to
Consolidated Financial Statements herein.

Balancing Accounts
In general, earnings fluctuations from changes in the costs of
natural gas and consumption levels for the majority of natural gas
are eliminated by balancing accounts authorized by the CPUC.
Additional information on balancing accounts is provided in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Note 2 of the notes to Consolidated
Financial Statements herein.

Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to
move away from reasonableness reviews and disallowances, the CPUC
has been directing utilities to use PBR. PBR has replaced the
general rate case and certain other regulatory proceedings for
SoCalGas. Additional information on PBR is provided in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Note 12 of the notes to Consolidated
Financial Statements herein.

Biennial Cost Allocation Proceeding (BCAP)
Rates to recover the changes in the cost of natural gas
transportation services are determined in the BCAP. The BCAP
adjusts rates to reflect variances in customer demand from
estimates previously used in establishing customer natural gas
transportation rates. The mechanism substantially eliminates the
effect on income of variances in market demand and natural gas
transportation costs subject to the limitations of the Gas Cost
Incentive Mechanism (GCIM) discussed below. The BCAP will continue
under PBR. Additional information on the BCAP is provided in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Note 12 of the notes to Consolidated
Financial Statements herein.

Gas Cost Incentive Mechanism (GCIM)
The GCIM is a process SoCalGas uses to evaluate its natural gas
purchases, substantially replacing the previous process of
reasonableness reviews. Additional information on the GCIM is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 12 of the notes to
Consolidated Financial Statements herein.

Affiliate Transactions
In December 1997, the CPUC adopted rules establishing uniform
standards of conduct governing the manner in which California
investor-owned utilities (IOUs) conduct business with their
affiliates. Information on affiliate transactions is provided in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Note 12 of the notes to Consolidated
Financial Statements herein.

Cost of Capital
Under PBR, annual Cost of Capital proceedings have been replaced by
an automatic adjustment mechanism if changes in certain indices
exceed established tolerances. Additional information on the
utilities' cost of capital is provided in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
in Note 12 of the notes to Consolidated Financial Statements
herein.

ENVIRONMENTAL MATTERS

Discussions about environmental issues affecting the Company,
including hazardous substances, are included in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" herein. The following additional information should be
read in conjunction with those discussions.

Hazardous Substances
SoCalGas lawfully disposed 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 potential responsible party (PRP) for
two landfill sites and three industrial waste disposal sites, from
which releases have occurred as described below.

In December 1999, SoCalGas was notified that it is a PRP at the
Gibson Oil 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. It is too
early to determine the existence or extent of any prior releases or
SoCalGas' potential total liability.

In addition, SoCalGas has identified and reported to California
environmental authorities 42 former manufactured-gas plant sites
for which it (together with other users as to 21 of these sites)
may have cleanup obligations. As of December 31, 1999, 13 of these
sites have been remediated, of which 10 have received certification
from the California Environmental Protection Agency. Preliminary
investigations, at a minimum, have been completed on 39 of the gas
plant sites.

At December 31, 1999, SoCalGas' estimated remaining investigation
and remediation liability related to hazardous waste sites,
including the manufactured-gas plant sites detailed above, was $64
million, of which 90 percent is authorized to be recovered through
the Hazardous Cost Substance Recovery Account. SoCalGas believes
that any costs not ultimately recovered through rates, insurance or
other means will not have a material adverse effect on SoCalGas'
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.

OTHER MATTERS

Year 2000
Sempra Energy established an overall company-wide Year 2000
readiness effort that included SoCalGas. There were only a few,
very minor year 2000 interruptions to the Company's automated
systems and applications with suppliers and customers. Sempra
Energy incurred expenses of $48 million (including $7.6 million in
1999) for its Year 2000 readiness effort and expects to incur no
additional costs.

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 environmental mitigation and other utility operating costs.
The CPUC has authorized SoCalGas to recover its operating cost
associated with RD&D. An annual average of $9 million has been
spent for the last three years.

Employees of Registrant
As of December 31, 1999 SoCalGas had 6,079 employees, compared to
6,148 at December 31, 1998. Subsequent to the PE/Enova business
combination, PE employees were transferred to Sempra Energy and to
other operating affiliates, and PE itself no longer has any
employees.

Wages
Field, technical and most clerical employees of SoCalGas are
represented by the Utility Workers' Union of America or the
International Chemical Workers' Council. The collective bargaining
agreement on wages, hours and working conditions are in effect
through March 31, 2000. Negotiations for a new agreement are
ongoing.

ITEM 2. PROPERTIES

Natural Gas Properties
At December 31, 1999, SoCalGas owned 2,854 miles of transmission
and storage pipeline, 44,595 miles of distribution pipeline and
44,211 miles of service piping. It also owned 10 transmission
compressor stations and 6 underground storage reservoirs (with a
combined working capacity of approximately 117.8 Bcf).

Other Properties
SoCalGas has a 15-percent limited partnership interest in a 52-
story office building in downtown Los Angeles. SoCalGas leases
approximately half of the building through the year 2011. The lease
has six separate five-year renewal options.

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

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor its affiliates 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

As a result of the formation of Sempra Energy as described in Note
1 of notes to Consolidated Financial Statements, 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.

Dividend Restrictions
At December 31, 1999, PE had no retained earnings available for
future dividends, due to the CPUC's regulation of SoCalGas' capital
structure.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
(Dollars in millions)
<CAPTION>
At December 31, or for the years then ended
------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues and Other Income $2,569 $2,472 $2,738 $2,563 $2,343
Operating Income $ 271 $ 218 $ 259 $ 286 $ 271
Earnings Applicable to
Common Shares $ 180 $ 143 $ 180 $ 196 $ 175

Balance Sheet Data:
Total Assets $3,929 $4,571 $4,977 $5,186 $5,259
Long-Term Debt $ 939 $ 985 $1,118 $1,225 $1,371
Short-Term Debt (a) $ 30 $ 249 $ 502 $ 411 $ 334
Shareholders' Equity $1,426 $1,547 $1,469 $1,440 $1,483

(a) Includes long-term debt due within one year.

Since Pacific Enterprises is a wholly owned subsidiary of Sempra Energy,
per share data has been omitted.

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

</TABLE>

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

Introduction
This section includes management's discussion and analysis of
operating results from 1997 through 1999, and provides information
about the capital resources, liquidity and financial performance of
Pacific Enterprises (PE or the Company). This section also focuses
on the major factors expected to influence future operating results
and discusses investment and financing plans. It should be read in
conjunction with the consolidated financial statements included in
this Annual Report.

Pacific Enterprises (PE or the Company) is an energy services
company whose only direct subsidiary is Southern California
Gas Company (SoCalGas), the nation's largest natural gas
distribution utility, serving 5.0 million meters throughout
most of southern California and part of central California.

Business Combinations
Sempra Energy was formed to serve as a holding company for PE and
Enova Corporation (Enova), the parent corporation of San Diego Gas
& Electric Company (SDG&E), in connection with a business
combination that became effective on June 26, 1998 (the PE/Enova
business combination). In connection with the PE/Enova business
combination, the holders of common stock of PE and Enova became the
holders of Sempra Energy's common stock. The preferred stock of PE
remained outstanding. The combination was a tax-free transaction.
In January 1998, PE and Enova jointly acquired CES/Way
International Inc., which was subsequently renamed Sempra Energy
Services, as described under "Investments" herein.
Expenses incurred by PE in connection with these events were
$35 million, aftertax, for the year ended December 31, 1998. These
costs consist primarily of employee-related costs, and investment
banking, legal, regulatory and consulting fees. See Note 1 of the
notes to the Consolidated Financial Statements for additional
information. There were no business-combination expenses in 1999.
As a result of the business combination, PE dividended its
nonutility subsidiaries to Sempra Energy during 1998 and early
1999. SoCalGas is now the sole direct subsidiary of PE.

Capital Resources And Liquidity
The Company's utility operations continue to be a major source of
liquidity. In addition, working capital requirements are met
primarily through the issuance of short-term and long-term debt.
Cash requirements primarily include capital investments in the
utility plant.
Additional information on sources and uses of cash during the
last three years is summarized in the following condensed
statements of consolidated cash flows:

- ------------------------------------------------------------
SOURCES AND (USES) OF CASH
Year Ended December 31
(Dollars in millions) 1999 1998 1997
- ------------------------------------------------------------
Operating Activities $ 344 $ 598 $ 350
-------------------------
Investing Activities:
Capital expenditures (146) (150) (187)
Acquisitions of subsidiaries -- -- (112)
Other 8 (39) 36
-------------------------
Total Investing Activities (138) (189) (263)
-------------------------
Financing Activities:
Dividends paid (104) (101) (126)
Long-term debt - net (75) (75) (125)
Short-term debt - net (43) (311) 92
Sale of common stock -- 27 17
Repurchase of common stock -- -- (48)
Redemption of preferred stock -- (75) --
-------------------------
Total Financing Activities (222) (535) (190)
-------------------------
Decrease in cash and
cash equivalents $ (16) $(126) $(103)
- ------------------------------------------------------------

Cash Flows From Operating Activities
The decrease in cash flows from operating activities in 1999 was
primarily due to a return to ratepayers of the previously
overcollected regulatory balancing accounts. This decrease was
partially offset by lower expenses incurred in connection with the
business combination and lower income tax payments in 1999.
The increase in cash flows from operating activities in 1998
was primarily due to lower working-capital requirements for natural
gas operations in 1998. This was caused by higher throughput
compared to 1997, combined with natural gas prices that were lower
than amounts being collected in rates, which resulted in
overcollected regulatory balancing accounts at year-end 1998. This
increase was partially offset by expenses incurred in connection
with the business combinations.

Cash Flows From Investing Activities
Cash flows from investing activities primarily represent investment
in plant assets at SoCalGas.

Capital Expenditures

Capital expenditures were $146 million in 1999 consistent with the
$150 million spent in 1998.
Capital expenditures were $37 million lower in 1998 than in
1997 primarily due to shifting of certain functions to Sempra
Energy following the PE/Enova business combination.
Capital expenditures at the Company are estimated to be $220
million in 2000. They will be financed primarily by internally
generated funds and will largely represent investment in utility
plant.

Investments

In December 1997, PE and Enova jointly acquired Sempra Energy
Trading for $225 million. In July 1998, Sempra Energy Trading
purchased a subsidiary of Consolidated Natural Gas, a wholesale
trading and commercial marketing operation, for $36 million to
expand its operation in the eastern United States.
Sempra Energy Solutions, at the time a subsidiary of PE,
acquired CES/Way International, Inc. (CES/Way) in 1998. CES/Way
provides energy-efficiency services, including energy audits,
engineering design, project management, construction, financing and
contract maintenance. In the latter half of 1999, CES/Way's name
was changed to Sempra Energy Services.
Sempra Energy Trading and Sempra Energy Solutions were
transferred to Sempra Energy Holdings, a wholly owned subsidiary of
Sempra Energy, in early 1999.

Cash Flows From Financing Activities
Net cash used in financing activities decreased in 1999 primarily
due to lower short-term debt repayments and the repurchase of
preferred stock in 1998.
Net cash used in financing activities increased in 1998 due to
greater short-term debt repayments and the redemption of preferred
stock in 1998, partially offset by lower long-term debt issuances.

Long-Term and Short-Term Debt

In 1999, cash was used for the repayment of $75 million of
unsecured notes.
In 1998, cash was used for the repayment of $100 million of
first-mortgage bonds and $47 million of Swiss Franc bonds partially
offset by the issuance of $75 million of Medium-term Notes. Short-
term debt repayments included repayment of $94 million of debt
issued to finance the Comprehensive Settlement (see Note 12 of the
notes to Consolidated Financial Statements

Stock Repurchases and Redemptions

The Company repurchased $48 million of PE common stock in 1997.
There were no common stock repurchases in 1998 or 1999.
On February 2, 1998, SoCalGas redeemed all of its 7 3/4%
Series Preferred Stock at a cost of $25.09 per share, or $75.3
million including accrued dividends.

Dividends

Dividends paid to the parent company amounted to $100 million in
1999, compared to $97 million in 1998 and $122 million in 1997.
The payment of future dividends and the amount thereof are
within the discretion of the board of directors, subject to
limitations related to CPUC regulation of SoCalGas. Additional
information is provided under Part II, Item 5, herein.

Capitalization
Total capitalization at December 31, 1999 was $2.4 billion. The
debt to capitalization ratio was 40 percent, 44 percent and 51
percent at December 31, 1999, 1998 and 1997, respectively. The
decrease in 1999 compared to 1998 was primarily due to the transfer
of the long-term debt of the Employee Stock Ownership Plan to
Sempra Energy and an increase in common equity due to the
settlement related to the 1992 quasi-reorganization (QR) of Pacific
Enterprises, partially offset by a decrease in common equity as a
result of the dividending of subsidiaries to Sempra Energy. The
decrease in 1998 compared to 1997 was primarily due to the
repayment of short-term debt.

Cash And Cash Equivalents
Cash and cash equivalents were $11 million at December 31, 1999.
The Company anticipates that operating cash required in 2000 for
capital expenditures, common stock dividends and debt payments will
be provided by cash generated from operating activities.
In addition to cash from ongoing operations, the Company has
multi-year credit agreements that permit term borrowings of up to
$300 million. SoCalGas has an additional $400 million of multi-year
credit agreements. At December 31, 1999 all bank lines of credit
were unused. For further discussion, see Note 4 of the notes to
Consolidated Financial Statements.
Management believes that the sources of funding described
above are sufficient to meet short-term and long-term liquidity
needs.

Ratemaking Procedures

To understand the operations and financial results of the Company
it is important to understand the ratemaking procedures that
SoCalGas follows.
SoCalGas is regulated by the California Public Utility
Commission (CPUC). It is the responsibility of the CPUC to
determine that utilities operate in the best interests of their
customers and have the opportunity to earn a reasonable return on
investment. In response to utility-industry restructuring, SoCalGas
has received approval from the CPUC for Performance-Based
Regulation (PBR).
Under PBR, regulators allow income potential to be tied to
achieving or exceeding specific performance and productivity
measures, rather than relying solely on expanding utility plant in
a market where a utility already has a highly developed
infrastructure. See additional discussion of PBR in Note 12 of the
notes to Consolidated Financial Statements.
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. In August 1998, California enacted a law
prohibiting the CPUC from enacting any natural gas-industry
restructuring decision for core (residential and small commercial)
customers prior to January 2000. During the implementation
moratorium, the CPUC held hearings throughout the state and intends
to give the legislature a draft ruling before adopting a final
market-structure policy.
See additional discussion of natural gas-industry
restructuring below in "Industry Restructuring" and in Note 12 of
the notes to Consolidated Financial Statements.

Results Of Operations

1999 Compared to 1998

Net income for 1999 increased to $184 million compared to net
income of $147 in 1998. The increase is primarily due to the
business-combination expenses of $35 million, after-tax, in 1998
(none in 1999).
Utility natural gas revenues increased 6 percent in 1999
primarily due to lower overcollections in 1999 and higher utility
electric generation (UEG) revenues, partially offset by a decrease
in residential and commercial and industrial revenues. The increase
in UEG revenues was primarily due to higher electric energy usage
in the summer as a result of warmer weather. The decrease in
residential and commercial and industrial revenues is due to lower
gas prices.
The Company's cost of natural gas distributed increased 23
percent in 1999, largely due to an increase in UEG volumes sold.
Operating expenses decreased 20 percent in 1999, primarily due
to the lower business-combination costs (none in 1999 compared to
$60 million pretax in 1998).
Net income for the fourth quarter of 1999 was consistent with
the fourth quarter of 1998.

1998 Compared to 1997

Net income for 1998 decreased to $147 million, compared to net
income of $184 million in 1997. The decrease in net income is
primarily due to the costs associated with the PE/Enova business
combination and lower base margin established at SoCalGas in its
PBR decision which became effective on August 1, 1997 (see Note 12
of the notes to Consolidated Financial Statements).
Utility natural gas revenues decreased 8 percent in 1998
primarily due to the lower natural gas margin established in
SoCalGas' PBR Decision, a decrease in the average price of natural
gas and a decrease in sales to utility electric-generation
customers. This was partially offset by increased sales to
residential customers due to colder weather in 1998.
The Company's cost of natural gas distributed decreased 21
percent in 1998, largely due to a decrease in the average price of
natural gas purchased, partially offset by increases in sales
volume.
Operating expenses increased 1 percent in 1998, primarily due
to the higher business-combination costs ($60 million pretax in
1998, compared to $15 million pretax in 1997).
Net income for the fourth quarter of 1998 increased $10
million compared to 1997, due to the favorable resolution of tax
related issues.

Operating Results

The table below summarizes the components of utility natural gas
and electric volumes and revenues by customer class for 1999, 1998
and 1997.

<TABLE>
GAS SALES, TRANSPORTATION & EXCHANGE
(Dollars in millions, volumes in billion cubic feet)
<CAPTION>

Gas Sales Transportation & Exchange Total
-----------------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999:
Residential 275 $1,821 3 $ 10 278 $1,831
Commercial and Industrial 84 452 306 229 390 681
Utility Electric Generation -- -- 188 77 188 77
Wholesale -- -- 150 57 150 57
-----------------------------------------------------------------------
359 $2,273 647 $373 1,006 2,646
Balancing accounts and other (77)
---------
Total $2,569
- ---------------------------------------------------------------------------------------------
1998:
Residential 269 $1,976 3 $ 11 272 $1,987
Commercial and Industrial 81 466 315 261 396 727
Utility Electric Generation -- -- 139 66 139 66
Wholesale -- -- 155 66 155 66
-----------------------------------------------------------------------
350 $2,442 612 $404 962 2,846
Balancing accounts and other (419)
---------
Total $2,427
- ---------------------------------------------------------------------------------------------
1997:
Residential 237 $1,726 3 $ 10 240 $1,736
Commercial and Industrial 80 502 314 255 394 757
Utility Electric Generation -- -- 158 76 158 76
Wholesale -- -- 138 67 138 67
-----------------------------------------------------------------------
317 $2,228 613 $408 930 2,636
Balancing accounts and other 5
---------
Total $2,641
- ---------------------------------------------------------------------------------------------
</TABLE>

Other Income (Deductions), Interest Expense And Income Taxes

Other Income (Deductions)

Other income (deductions), which primarily consists of interest
income from short-term investments and regulatory-balancing
accounts, was a net deduction of $15 million in 1999 compared to a
net deduction of $1 million in 1998. The change is primarily due to
an increase in interest expense on regulatory balancing accounts.
Other income was $31 million in 1997. The decrease in 1998 to a net
deduction of $1 million was primarily due to greater losses of
unconsolidated joint ventures and partnerships in 1998.

Interest Expense

Interest expense for 1999 increased slightly to $72 million in 1999
from $70 million in 1998. Interest expense was $106 million for
1997. The decrease in interest expense in 1998 compared to 1997 is
primarily due the repayment of short-term debt in 1998.

Income Taxes

Income tax expense was $166 million, $127 million and $151 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
The effective income tax rates were 47 percent, 46 percent and 45
percent for the same periods. The increase in income tax expense
for 1999 compared to 1998 is due to the increase in income before
taxes as a result of lower business combination costs. See Note 5
of the notes to the Consolidated Financial Statements for
additional information.

Factors Influencing Future Performance
Performance of the Company in the near future will depend on the
results of SoCalGas. Because of the ratemaking and regulatory
process, electric and natural gas industry restructuring, and the
changing energy marketplace, there are several factors that will
influence future financial performance. These and other factors are
summarized below.

Industry Restructuring

The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a proceeding to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework, emphasizing market-oriented policies
benefiting California's natural gas consumers.
In August 1998, California enacted a law prohibiting the CPUC
from enacting any natural gas industry restructuring decision for
core customers prior to January 1, 2000. During the implementation
moratorium, the CPUC held hearings throughout the state and intends
to give the legislature a draft ruling before adopting a final
market-structure policy. SoCalGas has been actively participating
in this effort and has argued in support of competition intended to
maximize benefits to customers rather than to protect competitors.
In October 1999, the State of California enacted a law (AB
1421) which requires that gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution,
purchasing, revenue-cycle services and after-meter services) to all
core customers, unless the customer chooses to purchase gas from a
non-utility provider. The law prohibits the CPUC from unbundling
distribution-related gas services (including meter reading and
billing) and after-meter services (including leak investigation,
inspecting customer piping and appliances, pilot relighting and
carbon monoxide investigation) for most customers. The objective is
to preserve both customer safety and customer choice.
As a result of electric industry restructuring, natural
gas demand for electric generation within southern California
competes with electric power generated throughout the western
United States. Effective March 31, 1998, California consumers
were given the option of selecting their electric energy
provider from a variety of local and out-of-state producers.
Although the electric industry restructuring has no direct
impact on the Company's natural gas operations, future volumes
of natural gas transported for UEG customers may be adversely
affected to the extent that regulatory changes divert
electricity from the Company's service area.

Performance-Based Regulation (PBR)

Accounting Standards

SoCalGas accounts for the economic effects of regulation on all its
utility operations in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." Under SFAS No. 71, a regulated entity
records a regulatory asset if it is probable that, through the
ratemaking process, the utility will recover the asset from
customers. Regulatory liabilities represent future reductions in
revenues for amounts due to customers. See Notes 2 and 12 of the
notes to Consolidated Financial Statements for additional
information.

Affiliate Transactions

On December 16, 1997, the CPUC adopted rules establishing uniform
standards of conduct governing the manner in which California IOUs
conduct business with their affiliates. The objective of these
rules, which became effective January 1, 1998, is to ensure that
the utilities' energy affiliates do not gain an unfair advantage
over other competitors in the marketplace and that utility
customers do not subsidize affiliate activities.
The CPUC excluded utility-to-utility transactions between
SoCalGas and SDG&E from the affiliate-transaction rules in its
March 1998 decision approving the PE/Enova business combination.
See Notes 1 and 12 of the notes to Consolidated Financial
Statements for additional information.

Allowed Rate of Return

For 2000, SoCalGas is authorized to earn a rate of return on rate
base of 9.49 percent and a rate of return on common equity of 11.6
percent, unchanged from 1999. SoCalGas can earn more than the
authorized rate by controlling costs below approved levels, by
experiencing increased volumes of sales not subject to balancing
accounts (both of which are subject to revenue sharing, as
described in Note 12 of the notes to Consolidated Financial
Statements) or by achieving favorable results in certain areas,
such as incentive mechanisms that are not subject to revenue
sharing. See additional discussion in Note 12 of the notes to
Consolidated Financial Statements.

Management Control of Expenses and Investment

In the past, management has been able to control operating expenses
and investment within the amounts authorized to be collected in
rates. It is the intent of management to control operating expenses
and investments within the amounts authorized to be collected in
rates in the PBR decision. SoCalGas intends to make the efficiency
improvements, changes in operations and cost reductions necessary
to achieve this objective and earn at least their authorized rates
of return. However, in view of the earnings-sharing mechanism and
other elements of the PBR, it is more difficult to exceed
authorized returns to the degree experienced prior to the inception
of PBR. See additional discussion of PBR above and in Note 12 of
the notes to Consolidated Financial Statements.

Noncore Bypass

SoCalGas is fully at risk for reductions in noncore volumes due to
bypass. However, significant bypass would require construction of
additional facilities by competing pipelines. SoCalGas has not had
a material reduction in earnings from bypass and it is continuing
to reduce its costs to remain competitive and to retain its
transportation customers.

Noncore Pricing

To respond to bypass, SoCalGas has received authorization from the
CPUC for expedited review of long-term natural gas transportation
service contracts with some noncore customers at lower-than-tariff
rates. In addition, the CPUC approved changes in the methodology
that eliminates subsidization of core-customer rates by noncore
customers. This allocation flexibility, together with negotiating
authority, has enabled SoCalGas to better compete with new
interstate pipelines for noncore customers.

Noncore Throughput

SoCalGas' earnings will be impacted if natural gas throughput to
its noncore customers varies from estimates adopted by the CPUC in
establishing rates. There is a continuing risk that an unfavorable
variance in noncore volumes may result from external factors such
as weather, electric deregulation, the increased use of
hydroelectric power, competing pipeline bypass of SoCalGas' system
or a downturn in general economic conditions. In addition, many
noncore customers are especially sensitive to the price
relationship between natural gas and alternate fuels, as they are
capable of readily switching from one fuel to another, subject to
air-quality regulations. SoCalGas is at risk for the lost revenue.
Through July 31, 1999, any favorable earnings effect of higher
revenues resulting from higher throughput to noncore customers has
been limited as a result of the Comprehensive Settlement. The
settlement addressed a number of regulatory issues and was
approved by the CPUC in July 1994. This treatment will be replaced
by the PBR mechanism as adopted in the 1999 BCAP whereby revenue
fluctuations will impact earnings (positively or negatively). See
Note 12 of the notes to Consolidated Financial Statements for
further discussion.

Excess Interstate Pipeline Capacity

Existing interstate pipeline capacity into California exceeds
current demand by over one billion cubic feet (Bcf) per day. This
situation has reduced the market value of the capacity well below
the Federal Energy Regulatory Commission's (FERC) tariffs. SoCalGas
has exercised its step-down option on both the El Paso and
Transwestern systems, thereby reducing its firm interstate capacity
obligation from 2.25 Bcf per day to 1.45 Bcf per day.
FERC-approved settlements have resulted in a reduction in the
costs that SoCalGas possibly may have been required to pay for the
capacity released back to El Paso and Transwestern that cannot be
remarketed. Of the remaining 1.45 Bcf per day of capacity,
SoCalGas' core customers use 1.05 Bcf per day at the full FERC
tariff rate. The remaining 0.4 Bcf per day of capacity is marketed
at significant discounts. Under existing California regulation,
unsubscribed capacity costs associated with the remaining 0.4 Bcf
per day are recoverable in customer rates. While including the
unsubscribed pipeline cost in rates may impact SoCalGas' ability to
compete in competitive markets, SoCalGas does not believe its
inclusion will have a significant impact on volumes transported or
sold.

Environmental Matters
The Company's operations are subject to federal, state and local
environmental laws and regulations governing such things as
hazardous wastes, air and water quality, land use, solid waste
disposal, and the protection of wildlife.
Because the potential situations in which the Company is faced
with environmental issues are in connection with SoCalGas' utility
operations, capital costs to comply with environmental requirements
are generally recovered through the depreciation components of
customer rates. California utilities' customers also generally are
responsible for 90 percent of the non-capital costs associated with
hazardous substances and the normal operating costs associated with
safeguarding air and water quality, disposing properly of solid
wastes, and protecting endangered species and other wildlife.
Therefore, the likelihood of the Company's financial position or
results of operations being adversely affected in a significant
amount is remote.
The environmental issues currently facing the Company or
resolved during the latest three-year period include investigation
and remediation of SoCalGas' manufactured-gas sites (13 completed
as of December 31, 1999 and 29 to be completed) and cleanup of
third-party waste disposal sites used by the Company, which has
been identified as a Potentially Responsible Party (investigation
and remediations are continuing).

Derivative Financial Instruments
The Company's policy is to use derivative financial instruments to
reduce its exposure to fluctuations in interest rates, foreign
currency exchange rates and energy prices. Transactions involving
these financial instruments are with reputable firms and major
exchanges. The use of these instruments exposes the Company to
market and credit risks. At times, credit risk may be concentrated
with certain counterparties, although counterparty nonperformance
is not anticipated.
SoCalGas uses energy derivatives to manage natural gas price
risk associated with servicing its load requirements. In addition,
SoCalGas makes limited use of natural gas derivatives for trading
purposes. These instruments include forward contracts, futures,
swaps, options and other contracts, with maturities ranging from 30
days to 12 months. In the case of both price-risk management and
trading activities, the use of derivative financial instruments by
the Company is subject to certain limitations imposed by
established Company policy and regulatory requirements. See Note 12
of the notes to Consolidated Financial Statements and the "Market
Risk Management Activities" section below for further information
regarding the use of energy derivatives by the Company.

Market Risk Management Activities
Market risk is the risk of erosion of the Company's cash flows, net
income and asset values due to adverse changes in interest and
foreign-currency rates, and in prices for equity and energy. Sempra
Energy has adopted corporate-wide policies governing its market-
risk management and trading activities. An Energy Risk Management
Oversight Committee, consisting of senior officers, oversees
company-wide energy-price risk-management and trading activities to
ensure compliance with Sempra Energy's stated energy-risk-
management and trading policies. In addition, all affiliates have
groups that monitor and control energy-price risk management and
trading 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 level. The Company has
adopted the variance/covariance methodology in its calculation of
VaR, and uses a 95 percent confidence level. Holding periods are
specific to the types of positions being measured, and are
determined based on the size of the position or portfolios, market
liquidity, purpose and other factors. Historical volatilities and
correlations between instruments and positions are used in the
calculation.
The following is a discussion of the Company's primary market-
risk exposures as of December 31, 1999, including a discussion of
how these exposures are managed.

Interest-Rate Risk

The Company is exposed to fluctuations in interest rates primarily
as a result of its fixed-rate long-term debt. The Company has
historically funded utility operations through long-term bond
issues with fixed interest rates. With the restructuring of the
regulatory process, greater flexibility has been permitted within
the debt-management process. As a result, recent debt offerings
have been selected with short-term maturities to take advantage of
yield curves or 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 when appropriate, based upon
market conditions.
A portion of the Company's borrowings are denominated in
foreign currencies, which expose the Company to market risk
associated with exchange-rate movements. The Company has hedged
this foreign-currency cash exposure through a swap transaction
entered into with a major international bank.
The VaR on the Company's fixed-rate long-term debt is
estimated at approximately $99 million as of December 31, 1999,
assuming a one-year holding period.

Energy-Price Risk

Market risk related to physical commodities is based upon potential
fluctuations in natural gas and electricity prices and basis. The
Company's market risk is impacted by changes in volatility and
liquidity in the markets in which these instruments are traded. The
Company is exposed, in varying degrees, to price risk in the
natural gas markets. The Company's policy is to manage this risk
within a framework that considers the unique markets, operating and
regulatory environment.

Market Risk

SoCalGas may, at times, be exposed to limited market risk in its
natural gas purchase, sale and storage activities as a result of
activities under the Gas Cost Incentive Mechanism. SoCalGas manages
this risk within the parameters of the Company's market-risk
management and trading framework. As of December 31, 1999, the
total VaR of SoCalGas' natural gas positions was not material.

Credit Risk

Credit risk relates to the risk of loss that would be incurred as a
result of nonperformance by counterparties pursuant to the terms of
their contractual obligations. The Company avoids concentration of
counterparties and maintains credit policies with regard to
counterparties that management believes significantly minimize
overall credit risk. These policies include an evaluation of
potential counterparties' financial condition (including credit
rating), collateral requirements under certain circumstances, and
the use of standardized agreements that allow for the netting of
positive and negative exposures associated with a single
counterparty.
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.

Year 2000 Issues
Sempra Energy established an overall, company-wide Year 2000
readiness effort that included PE & SoCalGas. There were only a
few, very minor year 2000 interruptions to the Company's automated
systems and applications with suppliers and customers. Sempra
Energy incurred expenses of $48 million (including $7.6 million in
1999) for its Year 2000 readiness effort and expects to incur no
additional costs.

New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." In
June 1999, the effective date of this statement was deferred for
one year. As amended, SFAS 133, which is effective for the company
on January 1, 2001, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position, measure those instruments at fair value and
recognize changes in the fair value of derivatives in earnings in
the period of change unless the derivative qualifies as an
effective hedge that offsets certain exposures. The effect of this
standard on the company's Consolidated Financial Statements has not
yet been determined.

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" and "should" or similar expressions or discussions
of strategy or of plans are intended to identify forward-looking
statements that involve risks and uncertainties and assumptions.
Future results may differ materially from those expressed in these
forward-looking statements.
These statements are necessarily based upon various
assumptions involving judgments with respect to the future and
other risks, including, among others, local, regional, national and
international economic, competitive, political and regulatory
conditions and developments; technological developments; capital
market conditions; inflation rates; interest rates; exchange rates;
energy markets, including the timing and extent of changes in
commodity prices; weather conditions; business, regulatory or legal
decisions; the pace of deregulation of retail natural gas and
electricity delivery; and other uncertainties - all of which are
difficult to predict and many of which are beyond the control of
the Company. Readers are cautioned not to rely unduly on any
forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect
the Company's business described in this annual report and other
reports filed by the Company from time to time with the Securities
and Exchange Commission.

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 Management Activities."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Pacific
Enterprises:

We have audited the accompanying consolidated balance sheets
of Pacific Enterprises and subsidiaries as of December 31, 1999 and
1998, and the related statements of consolidated income, changes in
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 generally accepted
auditing standards. 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 Pacific
Enterprises and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

San Diego, California
February 4, 2000

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

For the years ended December 31 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Operating revenues $2,569 $2,472 $2,738
------ ------ ------

Expenses
Cost of natural gas distributed 1,033 840 1,059
Operation & Maintenance 748 930 918
Depreciation 261 259 256
Income taxes 163 125 147
Other taxes and franchise payments 93 100 99
------ ------ ------
Total 2,298 2,254 2,479
------ ------ ------
Operating Income 271 218 259
------ ------ ------
Other Income and (Deductions)
Interest income 24 19 17
Regulatory interest (14) -- 15
Allowance for equity funds used during construction -- 3 2
Taxes on non-operating income (3) (2) (4)
Preferred dividends of subsidiaries (1) (1) (7)
Other - net (21) (20) 8
------ ------ ------
Total (15) (1) 31
------ ------ ------
Income Before Interest Charges 256 217 290
------ ------ ------
Interest Charges
Long-term debt 82 84 91
Other interest (8) (13) 16
Allowance for borrowed funds used during construction (2) (1) (1)
------ ------ ------
Total 72 70 106
------ ------ ------
Net Income 184 147 184
Preferred Dividend Requirements 4 4 4
------ ------ ------
Earnings Applicable to Common Shares 180 143 180
====== ====== ======
See notes to Consolidated Financial Statements.
</TABLE>

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>

Balance at December 31 1999 1998
-------- --------
<S> <C> <C>
ASSETS
Property, plant and equipment $6,190 $6,152
Less accumulated depreciation (3,352) (3,149)
-------- --------
Property, plant and equipment - net 2,838 3,003
-------- --------
Current assets
Cash and cash equivalents 11 27
Accounts receivable - trade (less allowance for doubtful
receivables of $16 in 1999 and $18 in 1998) 286 444
Accounts and notes receivable - other 14 18
Due from affiliates 182 92
Income taxes receivable 34 22
Deferred income taxes -- 130
Natural gas in storage 67 49
Materials and supplies 12 16
Prepaid expenses 19 19
----- -----
Total current assets 625 817
----- -----

Regulatory assets 322 351
Notes receivable - affiliate 55 119
Investments 33 209
Other assets 56 72
------ ------
466 751
------ ------
Total $3,929 $4,571
====== ======

See notes to Consolidated Financial Statements.

</TABLE>

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>

Balance at December 31 1999 1998
-------- --------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stock $1,282 $1,117
Retained earnings 58 395
Deferred compensation relating to
Employee Stock Ownership Plan -- (45)
Accumulated other comprehensive income 6 --
-------- --------
Total common equity 1,346 1,467
Preferred stock 80 80
Long-term debt 939 985
-------- --------
Total capitalization 2,365 2,532
-------- --------
Current Liabilities
Short-term debt -- 43
Accounts payable - trade 160 163
Accounts payable - other 237 245
Regulatory balancing accounts overcollected - net 165 129
Other taxes payable 28 32
Deferred income taxes 8 --
Interest accrued 29 47
Current portion of long-term debt 30 206
Other 85 122
-------- --------
Total current 742 987
-------- --------

Customer advances for construction 27 31
Post-retirement benefits other than pensions 158 210
Deferred income taxes 223 220
Deferred investment tax credits 56 58
Deferred credits and other liabilities 338 513
Preferred stock of subsidiary 20 20
-------- --------
Total deferred credits and other liabilities 822 1,052
-------- --------
Contingencies and commitments (Note 11)
Total $3,929 $4,571
======== ========

See notes to Consolidated Financial Statements.
</TABLE>

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
<CAPTION>

For the years ended December 31 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $184 $ 147 $ 184
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 261 259 256
Deferred income taxes and investment
tax credits 28 (55) (35)
Other 2 (59) (15)
Changes in working capital components
Accounts receivable 158 68 (34)
Due from affiliates (375) (92) --
Income taxes receivable (59) (19) 55
Gas in storage (18) (24) 3
Other current assets (2) 2 4
Accounts payable (19) (29) (139)
Regulatory balancing accounts 36 484 25
Other taxes payable (3) 2 2
Deferred income taxes 138 (137) 26

Other current liabilities 13 51 18
------ ------ ------
Net cash provided by operating activities 344 598 350
------ ------ ------
Cash Flows from Investing Activities
Capital expenditure (146) (150) (187)
Other - net 8 (39) (76)
------ ------ ------
Net cash used in investing activities (138) (189) (263)
------ ------ ------
Cash Flows from Financing Activities
Common dividends paid (100) (97) (122)
Preferred dividends paid (4) (4) (4)
Issuance of long-term debt -- 75 120
Payment of long-term debt (75) (150) (245)
Increase (decrease) in short-term debt (43) (311) 92
Sale of common stock -- 27 17
Repurchase of common stock -- -- (48)
Redemption of preferred stock of a subsidiary -- (75) --
------ ------ ------
Net cash used in financing activities (222) (535) (190)
------ ------ ------
Net decrease in cash and cash equivalents (16) (126) (103)
Cash and Cash Equivalents, January 1 27 153 256
------ ------ ------
Cash and Cash Equivalents, December 31 $ 11 $ 27 $ 153
====== ====== ======
See notes to Consolidated Financial Statements.
</TABLE>

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<CAPTION>
Dollars in millions

For the years ended December 31 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Income tax payments, net of refunds $ 92 $ 263 $ 112
====== ====== ======
Interest payments, net of amount capitalized $ 90 $ 72 $ 92
====== ====== ======
Supplemental Schedule of Noncash Activities:
Dividend of subsidiaries to Sempra Energy $ 417 $ 23
====== ======
Capital contribution from Sempra Energy $ 85 $ 26
====== ======
Sale of assets of small generation plants:
Fair value of the assets sold $ 77
Cash received (20)
Loss on sale (6)
------
Note receivable $ 51
======

See notes to Consolidated Financial Statements.

</TABLE>

<TABLE>
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998, 1997
(Dollars in millions)

| Deferred Accumulated
| Compensation Other Total
Comprehensive | Preferred Common Retained Relating Comprehensive Shareholders'
Income | Stock Stock Earnings to ESOP Income Equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> |<C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 | $ 80 $ 1,095 $ 314 $ (49) $ 1,440
Net income/comprehensive income $184 | 184 184
Preferred stock dividends |
declared | (4) (4)
Common stock dividends |
declared | (122) (122)
Sale of common stock | 17 17
Repurchase of common stock | (48) (48)
Common stock released |
from ESOP | 2 2
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 | 80 1,064 372 (47) 1,469
Net income/comprehensive income 147 | 147 147
Preferred stock dividends |
declared | (4) (4)
Common stock dividends |
declared | (120) (120)
Capital contribution | 26 26
Sale of common stock | 27 27
Common stock released |
from ESOP | 2 2
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 | 80 1,117 395 (45) 1,547
Net income 184 | 184 184
Other comprehensive income |
Available-for-sale |
Securities 12 | $ 12 12
Pension (6)| (6) (6)
------ |
Comprehensive income $190 |
Preferred stock dividends |
declared | (4) (4)
Common stock dividends |
declared | (100) (100)
Capital contribution | 85 85
Quasi-reorganization |
Adjustment (Note 2) | 80 80
Dividend of subsidiaries to |
Sempra Energy | (417) (417)
Transfer of ESOP to |
Sempra Energy | 45 45
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 80 $1,282 $ 58 $ -- $ 6 $1,426
=================================================================================================================

See notes to Consolidated Financial Statements.

</TABLE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS COMBINATION

On June 26, 1998, Enova Corporation (Enova), the parent company of
San Diego Gas & Electric (SDG&E), and Pacific Enterprises (PE or
the Company), parent company of Southern California Gas Company
(SoCalGas), combined into a new company named Sempra Energy
(Parent). As a result of the combination, (i) each outstanding
share of common stock of Enova was converted into one share of
common stock of Sempra Energy, (ii) each outstanding share of
common stock of PE was converted into 1.5038 shares of common stock
of Sempra Energy and (iii) the preferred stock and preference stock
of the combining companies and their subsidiaries remained
outstanding.

As a result of the business combination, PE dividended its
nonutility subsidiaries to Sempra Energy during 1998 and early
1999. SoCalGas is now the sole direct subsidiary of PE.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of PE
and its wholly owned subsidiaries. The Company's policy is to
consolidate all subsidiaries that are more than 50 percent owned
and controlled. All material intercompany accounts and transactions
have been eliminated.

Effects of Regulation

The accounting policies of SoCalGas 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 has been preparing its financial statements in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation," under which a regulated utility may record a
regulatory asset if it is probable that, through the ratemaking
process, the utility will recover that asset from customers.
Regulatory liabilities represent future reductions in rates for
amounts due to customers. To the extent that portions of the
utility operations were to be no longer subject to SFAS No. 71, or
recovery was to be no longer probable as a result of changes in
regulation or the utility's competitive position, the related
regulatory assets and liabilities would be written off. In
addition, SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," affects
utility plant and regulatory assets such that a loss must be
recognized whenever a regulator excludes all or part of an asset's
cost from rate base.

Revenues and Regulatory Balancing Accounts

Revenues from utility customers consist of deliveries to customers
and the changes in regulatory balancing accounts. Balancing
accounts eliminate from earnings most of the fluctuations in prices
and volumes of natural gas by adjusting future rates to recover
shortfalls from customers or return excess collections to
customers.

Regulatory Assets

Regulatory assets include unrecovered premium on early retirement
of debt, post-retirement benefit costs, deferred income taxes
recoverable in rates and other regulatory-related expenditures that
SoCalGas expects to recover in future rates. See Note 12 for
additional information.

Inventories

Included in inventories at December 31, 1999, are $12 million of
utility materials and supplies ($16 million in 1998) and $67
million of natural gas ($49 million in 1998). Materials and
supplies are generally valued at the lower of average cost or
market; natural gas is valued by the last-in first-out method.

Property, Plant and Equipment

This primarily represents the buildings, equipment and other
facilities used by SoCalGas to provide natural gas utility service.
The cost of utility plant includes labor, materials, contract
services and related items, and an allowance for funds used during
construction. The cost of retired depreciable utility plant, plus
removal costs minus salvage value, is charged to accumulated
depreciation. Depreciation expense is based on the straight-line
method over the useful lives of the assets or a shorter period
prescribed by the CPUC. The provisions for depreciation as a
percentage of average depreciable utility plant was 4.39, 4.36 and
4.35 in 1999, 1998 and 1997, respectively.

Allowance for Funds Used During Construction (AFUDC)

The allowance represents the cost of funds used to finance the
construction of utility plant and is added to the cost of utility
plant. AFUDC also increases income, partly as an offset to interest
charges shown in the Statements of Consolidated Income, although it
is not a current source of cash.

Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income," requires reporting of
comprehensive income and its components (revenues, expenses, gains and
losses) in any complete presentation of general-purpose financial
statements. Comprehensive income describes 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, as applicable, minimum pension liability adjustments and
unrealized gains and losses on marketable securities that are classified
as available-for-sale. Securities are so classified if the company uses
the securities in its cash/asset management program whereby the
securities may be sold in connection with interest rate changes and cash
requirements. At December 31, 1999, the company had one such investment,
which increased in value during 1999. That increase is recognized in the
"Statement of Consolidated Changes in Shareholders' Equity."

Quasi-Reorganization

In 1993, PE divested its merchandising operations and most of its
oil and gas exploration and production business. In connection with
the divestitures, PE effected a quasi-reorganization for financial
reporting purposes, effective December 31, 1992.
Certain of the liabilities established in connection with
quasi-reorganization were favorably resolved in November 1999,
including unitary tax issues. Excess reserves of $80 million
resulting from the favorable resolution of these issues have been
added to shareholders' equity.
Other liabilities established in connection with discontinued
operations and the quasi-reorganization will be resolved in future
years. Management believes the provisions previously established
for these matters are adequate.

Use of Estimates in the Preparation of the Financial Statements

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

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with original
maturities of three months or less at the date of purchase, or
investments that are readily convertible to cash.

Basis of Presentation

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

New Accounting Standard

In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the Company on January 1, 2001.
The statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position, measure those instruments at fair value and recognize
changes in the fair value of derivatives in earnings in the period
of change unless the derivative qualifies as an effective hedge
that offsets certain exposures. The effect of this standard on the
Company's Consolidated Financial Statements has not yet been
determined.

NOTE 3: SHORT-TERM BORROWINGS

PE has a $300 million multi-year credit agreement. SoCalGas has an
additional $400 million multi-year credit agreement. These
agreements expire in 2001 and bear interest at various rates based
on market rates and the companies' credit ratings. SoCalGas' lines
of credit are available to support commercial paper. At December
31, 1999 both bank lines of credit were unused. At December 31,
1998, SoCalGas' bank line of credit was unused and PE had $43
million of bank loans under the credit agreement outstanding, due
and paid in January 1999.

NOTE 4: LONG-TERM DEBT

- --------------------------------------------------------------
December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------
First-Mortgage Bonds
6.875% August 15, 2002 100 100
5.750% November 15, 2003 100 100
8.750% October 1, 2021 150 150
7.375% March 1, 2023 100 100
7.500% June 15, 2023 125 125
6.875% November 1, 2025 175 175
-----------------------
750 750
-----------------------
Unsecured Long-Term Debt
6.375% Notes, October 29, 2001 120 120
8.750% Notes, July 6, 2000 30 30
5.670% Notes, January 15, 2003 75 75
SFr. 15,695,000 6.375% Foreign
Interest Payment Securities,
May 14, 2006 8 8
6.210% Notes, November 7, 1999 -- 75
Other, 8% - 9.5%, 1999-2002 -- 19
-----------------------
233 327
-----------------------
Employee Stock Ownership Plan,
November 30, 1999 -- 130
-----------------------
Total 983 1,207

Less:
Current portion of long-term debt 30 206
Unamortized discount on
long-term debt 14 16
-----------------------
44 222
-----------------------
Total $ 939 $ 985
- --------------------------------------------------------------

Maturities of long-term debt are $30 million in 2000, $120 million
in 2001, $100 million in 2002, $175 million in 2003, $0 in 2004 and
$558 million thereafter. SoCalGas has CPUC authorization to issue
an additional $600 million in long-term debt.

First-Mortgage Bonds

First-mortgage bonds are secured by a lien on substantially all
utility plant. SoCalGas may issue additional first-mortgage bonds
upon compliance with the provisions of its bond indenture, which
permit, among other things, the issuance of an additional $750
million of first-mortgage bonds as of December 31, 1999.

Callable Bonds

At SoCalGas' option certain bonds may be called at a premium. $150
million of the bonds are callable in 2001, $400 million in 2003 and
$8 million in 2006.

Other Long-Term Debt

During 1998, SoCalGas issued $75 million of unsecured debt in
medium-term notes used to finance working capital requirements.
There were no new issues during 1999.

Currency Rate Swaps

In May 1996, SoCalGas issued SFr. 15,695,000 of 6.375% Foreign
Interest Payment Securities maturing on May 14, 2006. SoCalGas
hedged the currency exposure by entering into a swap transaction
with a major international bank. As a result, the bond issue,
interest payments and other ongoing costs were swapped for fixed
annual payments. The securities are renewable at ten-year intervals
at reset interest rates. The next put date for the securities is in
the year 2006.

Debt of Employee Stock Ownership Plan (ESOP) and Trust

The Trust was assumed by Sempra Energy on October 1, 1999. The
trust covers substantially all of Southern California Gas
Company's employees and is used to fund part of their
retirement savings plan. Participation in the ESOP is being
expanded to include employees of the other affiliates. Interest
on ESOP debt amounted to $6 million in each of 1999, 1998 and
1997. Dividends used for debt service amounted to $5 million in
1999 and 1998, and $3 million in 1997.

NOTE 5: INCOME TAXES

The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
- ----------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 7.4 9.9 6.9
State income taxes - net of
federal income tax benefit 7.3 4.7 6.9
Tax credits (0.9) (1.0) (0.9)
Other - net (1.4) (2.2) (2.8)
-----------------------------
Effective income tax rate 47.4% 46.4% 45.1%
- ----------------------------------------------------------------------

The components of income tax expense are as follows:
- ----------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $ 22 $242 $143
State 9 65 25
-----------------------------
Total current taxes 31 307 168
-----------------------------
Deferred:
Federal 113 (139) (19)
State 25 (38) 5
-----------------------------
Total deferred taxes 138 (177) (14)
-----------------------------
Deferred investment tax credits - net (3) (3) (3)
-----------------------------
Total income tax expense $166 $127 $151
- ----------------------------------------------------------------------

Accumulated deferred income taxes at December 31 result from the
following:
- ---------------------------------------------------------------
(Dollars in millions) 1999 1998
- ---------------------------------------------------------------
Deferred Tax Liabilities:
Differences in financial and
tax bases of utility plant $ 455 $ 449
Regulatory balancing accounts 16 -
Regulatory assets 69 76
Other 18 51
--------------------
Total deferred tax liabilities 558 576
--------------------
Deferred Tax Assets:
Investment tax credits 23 25
Regulatory balancing accounts - 51
Comprehensive settlement (see Note 12) 42 95
Postretirement benefits 69 76
Other deferred liabilities 98 153
Restructuring costs 43 51
Other 52 35
--------------------
Total deferred tax assets 327 486
--------------------
Net deferred liability $ 231 $ 90
- -------------------------------------------------------------

The net liability is recorded on the consolidated balance sheet as
follows:
Dollars in millions 1999 1998
- -------------------------------------------------------------
Current liability (asset) $ 8 $(130)
Non-current liability 223 220
--------------------
Total $ 231 $ 90
- -------------------------------------------------------------

NOTE 6: EMPLOYEE BENEFIT PLANS

The information presented below describes the plans of the Company.
In connection with the PE/Enova business combination described in
Note 1, numerous participants were transferred from the Company's
plans to plans of related entities. In connection therewith, the
company recorded a $51 million special termination benefit in 1998.

Pension and Other Postretirement Benefits

The Company sponsors qualified and nonqualified pension plans and
other postretirement benefit plans for its employees. Effective
March 1, 1999, the Pacific Enterprises Pension Plan merged with the
Sempra Energy Cash Balance Plan. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and
fair value of assets over the two years, and a statement of the
funded status as of each year end:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-----------------------------------------------
(Dollars in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-Average Assumptions
as of December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 8.00% 8.50% 8.00% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Cost trend of covered
health-care charges - - 7.75%(1) 8.00%(1)
Change in Benefit Obligation:
Net benefit obligation at
January 1 $1,156 $1,378 $ 446 $ 463
Service cost 28 33 11 12
Interest cost 77 95 30 31
Plan participants' contributions - - 1 1
Plan amendments - 16 - -
Actuarial gain (120) (10) (62) (5)
Transfer of liability (2) (6) (204) - (43)
Special termination benefits - 48 - 3
Gross benefits paid (78) (200) (18) (16)
-----------------------------------------------
Net benefit obligation at
December 31 1,057 1,156 408 446
-----------------------------------------------
Change in Plan Assets:
Fair value of plan assets
at January 1 1,595 1,834 379 343
Actual return on plan assets 453 286 77 61
Employer contributions 1 1 24 30
Plan participants' contributions - - 1 1
Transfer of assets (2) - (326) - (40)
Gross benefits paid (78) (200) (18) (16)
-----------------------------------------------
Fair value of plan assets
at December 31 1,971 1,595 463 379
-----------------------------------------------
Funded status at December 31 914 439 55 (67)
Unrecognized net actuarial gain (969) (518) (156) (53)
Unrecognized prior service cost 45 50 - (1)
Unrecognized net transition
obligation 3 3 110 119
-----------------------------------------------
Net asset (liability)
at December 31 $ (7) $ (26) $ 9 $ (2)
- ---------------------------------------------------------------------------------
(1) Decreasing to ultimate trend of 6.50% in 2004.
(2) To reflect transfer of plan assets and liability to Sempra Energy
plan for Company employees transferred to Sempra Energy.
</TABLE>

The following table provides the components of net periodic benefit
cost for the plans:

The following table provides the amounts recognized on the
SoCalGas balance sheet at December 31.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
----------------------------------------------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost - - $ 9 -
Accrued benefit cost $ (1) $(20) - $(2)
Additional minimum liability (2) (6) - -
Intangible asset 2 - - -
Accumulated other
comprehensive income (6) - - -
- -------------------------------------------------------------------------------------
Net liability $ (7) $(26) $ 9 $(2)
- -------------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in millions) 1% Increase 1% Decrease
- ------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $8 $ (7)
Effect on the health care component of the
accumulated postretirement benefit obligation $61 $(55)
- ------------------------------------------------------------------------
</TABLE>

Except for one nonqualified retirement plan, all pension plans had
plan assets in excess of accumulated benefit obligations. For that
one plan, the projected benefit obligation and accumulated benefit
obligation were $12 million and $9 million, respectively, as of
December 31, 1999, and $15 million and $12 million, respectively,
as of December 31, 1998.
Other postretirement benefits include medical benefits for
retirees and their spouses (and Medicare Part B reimbursement for
certain retirees) and retiree life insurance.

Savings Plans

SoCalGas offers a savings plan, administered by plan trustees, 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 15 percent of their regular
earnings. The employee's contributions, at the direction of the
employees, are primarily invested in Sempra Energy stock, mutual
funds or guaranteed investment contracts. Employer contributions,
after one year of completed service, are made in shares of Sempra
Energy common stock. Employer contributions are equal to 50 percent
of the first 6 percent of eligible base salary contributed by
employees. Employer contributions for the SoCalGas plan are
partially funded by the Sempra Energy Employee Stock Ownership Plan
and Trust (formerly Pacific Enterprises Employee Stock Ownership
Plan and Trust). Annual expense for the savings plans was $6
million in 1999, $7 million in 1998 and $7 million in 1997.

Employee Stock Ownership Plan

The Pacific Enterprises Employee Stock Ownership Plan and Trust was
assumed by Sempra Energy on October 1, 1999. The trust covered
substantially all of Southern California Gas Company's employees
and was used to fund part of their retirement savings plan. All
contributions to the Trust are made by the Company and there are no
contributions made by the participants. As the Company makes
contributions to the Trust, the Trust debt service is paid and
shares are released in proportion to the total expected debt
service. See Note 4 for additional information.

NOTE 7: STOCK-BASED COMPENSATION

Sempra Energy has stock-based compensation plans that align
employee and shareholder objectives related to Sempra Energy's
long-term growth. The long-term incentive stock compensation plan
provides for aggregate awards of Sempra Energy non-qualified stock
options, incentive stock options, restricted stock, stock
appreciation rights, performance awards, stock payments or dividend
equivalents.
In 1995, Statement of Financial Accounting Standards (SFAS)
No. 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 No. 123, Sempra Energy and its
subsidiaries adopted its disclosure-only requirements and continue
to account for stock-based compensation in accordance with the
provisions of accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
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, the subsidiaries record an expense for
the plans. PE recorded expenses of $8 million in 1998 and $17
million in 1997. In 1999 PE's share of the plans' income was $4 million.

NOTE 8: FINANCIAL INSTRUMENTS

Fair Value

The fair values of the Company's financial instruments are not
materially different from the carrying amounts, except for long-
term debt and preferred stock. The carrying amounts and fair values
of long-term debt are $1.0 billion and $0.9 billion, respectively,
at December 31, 1999, and $1.2 billion each at December 31, 1998.
The carrying amounts and fair values of the combined preferred
stock and preferred stock of subsidiaries are $100 million and $71
million, respectively, at December 31, 1999, and $100 million and
$77 million, respectively, at December 31, 1998. The fair values of
the first-mortgage bonds and preferred stock are estimated based on
quoted market prices for them. The fair values of long-term notes
payable are based on the present value of the future cash flows,
discounted at rates available for similar notes with comparable
maturities.

Off-Balance-Sheet Financial Instruments

The Company's policy is to use derivative financial instruments to
manage its exposure to fluctuations in interest rates, foreign-
currency exchange rates and energy prices. Transactions involving
these financial instruments expose the Company to market and credit
risks which may at times be concentrated with certain
counterparties, although counterparty nonperformance is not
anticipated.

Energy Derivatives

The Company's regulated operations use energy derivatives for price
risk management purposes within certain limitations imposed by
Company policies and regulatory requirements.
SoCalGas is subject to price risk on its natural gas purchases
if its cost exceeds a 2 percent tolerance band above the benchmark
price. This is discussed further in Note 12. SoCalGas becomes
subject to price risk when positions are incurred during the
buying, selling and storing of natural gas. As a result of the Gas
Cost Incentive Mechanism (GCIM), (see Note 12), SoCalGas enters
into a certain amount of natural gas futures contracts in the open
market with the intent of reducing natural gas costs within the
GCIM tolerance band. The Company's policy is to use natural gas
futures contracts to mitigate risk and better manage natural gas
costs. The CPUC has approved the use of natural gas futures for
managing risk associated with the GCIM. For the years ended
December 31, 1999, 1998 and 1997, gains and losses from natural gas
futures contracts are not material to the Company's financial
statements.

NOTE 9: PREFERRED STOCK OF SUBSIDIARY

- -----------------------------------------------------------------
December 31,
(Dollars in millions) 1999 1998
- -----------------------------------------------------------------
Not subject to mandatory redemption:
$25 par value, authorized 1,000,000 shares
6% Series, 28,134 and 28,664 shares
outstanding at December 31, 1999 and 1998 $ 1 $ 1
6% Series A, 783,032 shares outstanding
at December 31, 1999 and 1998 19 19
--------------
$20 $20
- -----------------------------------------------------------------

None of SoCalGas' preferred stock is callable. All series have one
vote per share and cumulative preferences as to dividends. On
February 2, 1998, SoCalGas redeemed all outstanding shares of 7.75%
Series Preferred Stock at a price per share of $25 plus $0.09 of
dividends accruing to the date of redemption. The total cost to
SoCalGas was approximately $75.3 million.

NOTE 10: SHAREHOLDERS' EQUITY

The Company is authorized to issue 600,000,000 shares of common
stock, 10,000,000 shares of Preferred Stock and 5,000,000 shares of
Class A Preferred Stock. All shares of PE common stock are owned by
Sempra Energy. No shares of Unclassified or Class A preferred stock
are outstanding.

- -------------------------------------------------------------------
December 31,
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------
COMMON EQUITY:
Common $ 1,282 $ 1,117
Retained earnings 58 395
Accumulated other comprehensive income 6 --
Deferred compensation relating to
Employee Stock Ownership Plan -- (45)
--------------------------
Total common equity $ 1,346 $ 1,467
- -------------------------------------------------------------------

- -------------------------------------------------------------------
Call December 31,
(Dollars in millions except call price) Price 1999 1998
- -------------------------------------------------------------------
PREFERRED STOCK:
Cumulative preferred
without par value:
$4.75 Dividend, 200,000 shares
authorized and outstanding $100.00 $ 20 $ 20
$4.50 Dividend, 300,000 shares
authorized and outstanding $100.00 30 30
$4.40 Dividend, 100,000 shares
authorized and outstanding $101.50 10 10
$4.36 Dividend, 200,000 shares
authorized and outstanding $101.00 20 20
$4.75 Dividend, 253 shares
authorized and outstanding $101.00 - -

----------------------
Total $ 80 $ 80
- -------------------------------------------------------------------

All or any part of every series of presently outstanding PE
preferred stock is subject to redemption at PE's option at any time
upon not less than 30 days notice, at the applicable redemption
prices for each series, together with the accrued and accumulated
dividends to the date of redemption. All shares have one vote and
cumulative preferences as to dividends.

Dividend Restrictions
At December 31, 1999, PE had no retained earnings available for
future dividends, due to the CPUC's regulation of SoCalGas' capital
structure.

NOTE 11: CONTINGENCIES AND COMMITMENTS

Natural Gas Contracts

SoCalGas buys natural gas under several short-term and long-term
contracts. Short-term purchases are from various Southwest U.S.
suppliers and are based on monthly spot-market prices. In 1998,
SoCalGas restructured its long-term commodity purchase contracts
with suppliers of California offshore and Canadian gas. These new
purchase contracts expire at the end of 2003. SoCalGas has
commitments for firm pipeline capacity under contracts with
pipeline companies that expire at various dates through the year
2006. These agreements provide for payments of an annual
reservation charge. SoCalGas recovers such fixed charges in rates.

At December 31, 1999, the future minimum payments under
natural gas contracts were:

- -----------------------------------------------------------------
Storage and
(Dollars in millions) Transportation Natural Gas
- -----------------------------------------------------------------
2000 $ 182 $ 399
2001 184 165
2002 186 170
2003 186 158
2004 183 -
Thereafter 315 -
----------------------------------
Total minimum payments $1,236 $ 892
- -----------------------------------------------------------------

Total payments under the contracts were $1.1 billion in 1999,
$0.9 billion in 1998, and $1.1 billion in 1997.

Leases

PE and SoCalGas have operating leases on real and personal
property expiring at various dates from 2000 to 2029. The
rentals payable under these leases are determined on both fixed
and percentage bases, and most leases contain options to
extend, which are exercisable by PE or SoCalGas.

The minimum rental commitments payable in future years under
all noncancellable leases are:

- -----------------------------------------------------------------
Operating
(Dollars in millions) Leases
- -----------------------------------------------------------------
2000 $ 42
2001 42
2002 44
2003 40
2004 40
Thereafter 291
- -----------------------------------------------------------------
Total future rental commitment $ 499
- -----------------------------------------------------------------

Rent expense totaled $52 million in 1999, $55 million in 1998
and $56 million in 1997.
In connection with the quasi-reorganization described in
Note 2, PE established reserves of $102 million to fair value
operating leases related to its headquarters and other leases
at December 31, 1992. The remaining amount of these reserves
was $70 million at December 31, 1999. These leases are
reflected in the above table.

Other Commitments and Contingencies

At December 31, 1999, commitments for capital expenditures were
approximately $8 million.

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. SoCalGas incurs significant costs to
operate its facilities in compliance with these laws and
regulations and these costs generally have been recovered in
customer rates.
In 1994, the CPUC approved the Hazardous Waste Collaborative
Memorandum account allowing utilities to recover their hazardous-
waste costs, including those related to Superfund sites or similar
sites requiring cleanup. Recovery of 90 percent of 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. Environmental liabilities that may arise are
recorded when remedial efforts are probable and the costs can be
estimated.
The Company's capital expenditures to comply with
environmental laws and regulations were $1 million in each of 1999,
1998 and 1997, and are not expected to be significant over the next
five years.
The Company has been associated with various other sites which
may require remediation under federal, state or local environmental
laws. PE is unable to determine fully the extent of its
responsibility for remediation of these sites until assessments are
completed. Furthermore, the number of others that also may be
responsible, and their ability to share in the cost of the cleanup,
are not known.

Litigation

The Company is involved in various legal matters, including those
arising out of the ordinary course of business. Management believes
that these matters will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.

Concentration of Credit Risk

PE maintains credit policies and systems to minimize overall
credit risk. These policies include, when applicable, 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 its utility customers,
substantially all of whom are located in its service territory,
which covers most of Southern California and a portion of central
California.

NOTE 12: REGULATORY MATTERS

Gas Industry Restructuring

The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating gas sales to noncore
customers. On January 21, 1998, the CPUC released a staff report
initiating a proceeding to assess the current market and regulatory
framework for California's natural gas industry. The general goals
of the plan are to consider reforms to the current regulatory
framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
In August 1998, California enacted a law prohibiting the CPUC
from enacting any natural gas industry restructuring decision for
core (residential and small commercial) customers prior to January
1, 2000. During the implementation moratorium, the CPUC held
hearings throughout the state and intends to give the legislature a
draft ruling before adopting a final market-structure policy.
SoCalGas has been actively participating in this effort and has
argued in support of competition intended to maximize benefits to
customers rather than to protect competitors.
In October 1999, the State of California enacted a law (AB
1421) which requires that gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution,
purchasing, revenue-cycle services and after-meter services) to all
core customers, unless the customer chooses to purchase gas from a
non-utility provider. The law prohibits the CPUC from further
unbundling of distribution-related gas services (including meter
reading and billing) and after-meter services (including leak
investigation, inspecting customer piping and appliances, pilot
relighting and carbon monoxide investigation) for most customers.
The objective is to preserve both customer safety and customer
choice.

Performance-Based Regulation (PBR)

To promote efficient operations and improved productivity and to
move away from reasonableness reviews and disallowances, the CPUC
has been directing utilities to use PBR. PBR has replaced the
general rate case and certain other regulatory proceedings for
SoCalGas. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity measures, as well as cost reductions, rather than
relying solely on expanding utility plant in a market where a
utility already has a highly developed infrastructure.
SoCalGas' PBR mechanism is in effect through December 31,
2002; however, the CPUC decision allows for the possibility that
changes to its mechanism could be adopted in its 1999 Biennial Cost
Allocation Proceeding decision, which is anticipated during the
second quarter of 2000. SoCalGas' PBR mechanism is scheduled to be
updated at December 31, 2002, at which time it will be updated for,
among other things, changes in costs and volumes. Key elements of
the mechanism include an initial reduction in base rates, an
indexing mechanism that limits future rate increases to the
inflation rate less a productivity factor, a sharing mechanism with
customers if earnings exceed the authorized rate of return on rate
base, and rate refunds to customers if service quality
deteriorates. Specifically, the key elements of the mechanism
include the following:

- -- Earnings up to 25 basis points in excess of the authorized rate
of return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to
0 percent as earned returns approach 300 basis points above
authorized amounts. There is no sharing if actual earnings fall
below the authorized rate of return. In 1999, SoCalGas was
authorized to earn a 9.49 percent return on its rate base. For
2000, the authorized return is 9.49 percent for SoCalGas.

- -- Base rates are indexed based on inflation less an estimated
productivity factor.

- -- Performance indicators, including employee safety, customer
satisfaction, and call-center responsiveness, affect the Company's
future income potential. The SoCalGas mechanism authorizes
penalties up to $4 million annually, or more in certain, limited
situations.

- -- The SoCalGas mechanism allows for pricing flexibility for
residential and small commercial customers, with any shortfalls in
revenue being borne by shareholders and with any increase in
revenue shared between shareholders and customers.

- -- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism if changes in certain indices exceed
established tolerances. The SoCalGas mechanism is triggered if the
12-month trailing average of actual market interest rates increases
or decreases by more than 150 basis points and is forecasted to
continue to vary by at least 150 basis points for the next year. If
this occurs, there would be an automatic adjustment of rates for
the change in the cost of capital according to a formula which
applies a percentage of the change to various capital components.

Comprehensive Settlement Of Natural Gas Regulatory Issues
In July 1994, the CPUC approved a comprehensive settlement for
SoCalGas (Comprehensive Settlement) of a number of regulatory
issues, including rate recovery of a significant portion of the
restructuring costs associated with certain long-term contracts
with suppliers of California-offshore and Canadian natural gas. In
the past, the cost of these supplies had been substantially in
excess of SoCalGas' average delivered cost for all natural gas
supplies. The restructured contracts substantially reduced the
ongoing delivered costs of these supplies. The Comprehensive
Settlement permitted SoCalGas to recover in utility rates
approximately 80 percent of the contract-restructuring costs of
$391 million and accelerated amortization of related pipeline
assets of approximately $140 million, together with interest,
incurred prior to January 1, 1999. In addition to the supply
issues, the Comprehensive Settlement addressed the following other
regulatory issues:

- -- Noncore revenues were governed by the Comprehensive Settlement
through July 31, 1999. This treatment is being replaced by the PBR
mechanism as adopted in the 1999 Biennial Cost Allocation
Proceeding (BCAP). The CPUC's proposed decision on the 1999 BCAP
would allow balancing account treatment for 75 percent of noncore
revenues.

- --The Gas Cost Incentive Mechanism (GCIM) for evaluating SoCalGas'
natural gas purchases substantially replaced the previous process
of reasonableness reviews. In December 1998 the CPUC extended the
GCIM program indefinitely.

GCIM compares SoCalGas' cost of natural gas with a benchmark level,
which is the average price of 30-day firm spot supplies in the
basins in which SoCalGas purchases natural gas. 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 equally between customers and
shareholders.
The CPUC approved the use of natural gas futures for managing
risk associated with the GCIM. SoCalGas enters into natural gas
futures contracts in the open market on a limited basis to mitigate
risk and better manage natural gas costs.
In 1998 the CPUC approved GCIM-related shareholder awards to
SoCalGas totaling $13 million. In June 1999, SoCalGas filed its
annual GCIM application with the CPUC requesting an award of $8
million for the annual period ended March 31, 1999. A CPUC decision
is expected during the second quarter of 2000.
PE and SoCalGas recorded the impact of the Comprehensive
Settlement in 1993. Upon giving effect to liabilities previously
recognized by the companies, the costs of the Comprehensive
Settlement, including the restructuring of natural gas supply
contracts, did not result in any further charges to PE's earnings.

Biennial Cost Allocation Proceeding (BCAP)

In the second quarter of 1997, the CPUC issued a decision on
SoCalGas' 1996 BCAP filing. In this decision, the CPUC considered
SoCalGas' relinquishments of interstate pipeline capacity on the El
Paso and Transwestern pipelines. This resulted in a reduction in
the pipeline demand charges allocated to SoCalGas' customers and
surcharges allocated to firm capacity holders through pipeline
rate-case settlements adopted at the FERC. However FERC is
reviewing the decision.
On November 4, 1999, the CPUC issued a decision on the 1996
BCAP, shifting $88 million of pipeline surcharges from the pipeline
capacity relinquishments to noncore customers. The noncore customer
rate impact of the decision is mitigated by overcollections in the
regulatory accounts and will be reflected in the rates adopted in
the final 1999 BCAP decision.
In October 1998, SoCalGas filed its 1999 BCAP application
requesting that new rates become effective August 1, 1999 and
remain in effect through December 31, 2002. The proposed beginning
date follows the conclusion of SoCalGas' Comprehensive Settlement
(discussed above), and the proposed end date aligns with the
expiration of its current PBR. On January 11, 2000, the CPUC issued
a proposed decision adopting an overall decrease in natural gas
revenues of $208 million for SoCalGas. A final CPUC decision is
expected in the second quarter of 2000.

Cost Of Capital

For 2000, SoCalGas is authorized to earn a rate of return on common
equity of 11.6 percent and a 9.49 percent return on rate base, the
same as in 1999, unless interest-rate changes are large enough to
trigger an automatic adjustment as discussed above under
"Performance-Based Regulation."

Transactions Between Utilities And Affiliated Companies

On December 16, 1997, the CPUC adopted rules, effective January 1,
1998, establishing uniform standards of conduct governing the
manner in which California's investor-owned utilities (IOUs)
conduct business with their energy-related affiliates. The
objective of the affiliate-transaction rules is to ensure that
these affiliates do not gain an unfair advantage over other
competitors in the marketplace and that utility customers do not
subsidize affiliate activities. The rules establish standards
relating to non-discrimination, disclosure and information
exchange, and separation of activities. The CPUC excluded utility-
to-utility transactions between SDG&E and SoCalGas from the
affiliate-transaction rules in its March 1998 decision approving
the business combination of Enova and PE, which is described in
Note 1.
During 1999, 1998 and 1997, the Company sold natural gas
transportation and storage services to SDG&E in the amount of $50
million to $60 million per year. These sales were at rates
established by the CPUC.

NOTE 13: SEGMENT INFORMATION

The Company previously had two separately managed reportable
segments: SoCalGas and Sempra Energy Trading (SET). However, PE
dividended its SET holdings to Sempra Energy during the second
quarter of 1999. The Company had a 50 percent ownership interest
in SET, and accounted for this investment on the equity method of
accounting. However, for segment reporting, items of income and
assets for SET were reported at 100 percent. A corresponding
adjustment was made to reconcile the amounts to those that were
reported by the Company under the equity method. The accounting
policies of the segments are the same as those described in Note
2, and segment performance is evaluated by management based on
reported net income. Intersegment transactions generally are
recorded the same as sales or transactions with third parties.
Utility transactions are primarily based on rates set by the CPUC.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
For the years ended December 31,
(Dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Southern California Gas $ 2,569 $ 2,427 $ 2,641
Sempra Energy Trading 90 110 --
Sempra Energy Trading adjustment (90) (110) --
All other -- 45 97
---------------------------------
Total $ 2,569 $ 2,472 $ 2,738
---------------------------------
Interest Revenue:
Southern California Gas $ 16 $ 4 $ 1
Sempra Energy Trading 1 3 --
Sempra Energy Trading adjustment (1) (3) --
All other 8 15 16
---------------------------------
Total $ 24 $ 19 $ 17
---------------------------------
Depreciation and amortization:
Southern California Gas $ 260 $ 254 $ 251
Sempra Energy Trading 6 13 --
Sempra Energy Trading adjustment (6) (13) --
All other 1 5 5
---------------------------------
Total $ 261 $ 259 $ 256
---------------------------------
Interest Expense:
Southern California Gas $ 60 $ 80 $ 87
Sempra Energy Trading 3 5 --
Sempra Energy Trading adjustment (3) (5) --
All other 12 (10) 19
---------------------------------
Total $ 72 $ 70 $ 106
---------------------------------
Income Tax Expense (Benefit):
Southern California Gas $ 182 $ 128 $ 178
Sempra Energy Trading 2 (9) --
Sempra Energy Trading adjustment (2) 9 --
All other (16) (1) (27)
---------------------------------
Total $ 166 $ 127 $ 151
---------------------------------
Net Income:
Southern California Gas $ 200 $ 158 $ 231
Sempra Energy Trading 3 (13) --
Sempra Energy Trading adjustment (3) 7 --
All other (16) (5) (47)
---------------------------------
Total $ 184 $ 147 $ 184
---------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
At December 31, or for
the year then ended
(Dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Southern California Gas $ 3,532 $ 3,834 $ 4,205
Sempra Energy Trading -- 1,225 846
Sempra Energy Trading adjustment -- (1,225) (846)
All other 397 737 772
---------------------------------
Total $ 3,929 $ 4,571 $ 4,977
---------------------------------
Capital Expenditures:
Southern California Gas $ 146 $ 128 $ 159
Sempra Energy Trading 5 -- --
Sempra Energy Trading adjustment (5) -- --
All other -- 22 28
---------------------------------
Total $ 146 $ 150 $ 187
---------------------------------
Geographic Information:
Long-lived assets
United States $ 2,871 $ 3,106 $ 3,287
Latin America -- 106 58
---------------------------------
Total $ 2,871 $ 3,212 $ 3,345
---------------------------------
Operating Revenues:
United States $ 2,569 $ 2,471 $ 2,737
Europe 24 -- --
Sempra Energy Trading adjustment (24) -- --
Latin America -- 1 1
---------------------------------
Total $ 2,569 $ 2,472 $ 2,738
- ---------------------------------------------------------------------
</TABLE>

NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------
Dollars in millions March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Operating Revenues $ 614 $ 621 $ 561 $ 773
Operating expenses 548 556 485 709
-----------------------------------------------------
Operating income $ 66 $ 65 $ 76 $ 64
-----------------------------------------------------

Net income $ 48 $ 40 $ 45 $ 51
Dividends on preferred stock 1 1 1 1
-----------------------------------------------------
Net income applicable
to common shares $ 47 $ 39 $ 44 $ 50
=====================================================
1998
Operating Revenues $ 669 $ 581 $ 531 $ 691
Operating expenses 619 557 454 624
-----------------------------------------------------
Operating income $ 50 $ 24 $ 77 $ 67
-----------------------------------------------------

Net income $ 40 $ 12 $ 45 $ 50
Dividends on preferred stock 1 1 1 1
-----------------------------------------------------
Net income applicable
to common shares $ 39 $ 11 $ 44 $ 49
=====================================================

Operating expenses for March 31, June 30, and September 30 have been restated to
include income tax expense on operations.

</TABLE>

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

None.

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 2000 annual meeting of
shareholders. The information required on the Company's executive
officers is set forth below.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age* Positions
- -------------------------------------------------------------------
Richard D. Farman 64 Chairman and Chief Executive
Officer

Stephen L. Baum 58 President and Chief Operating
Officer

John R. Light 58 Executive Vice President and
General Counsel

Neal E. Schmale 53 Executive Vice President and
Chief Financial Officer

Frank H. Ault 55 Vice President and Controller

Charles A. McMonagle 49 Vice President and Treasurer

Thomas C. Sanger 56 Corporate Secretary

* As of December 31, 1999.

Each Executive Officer has been an officer of Sempra Energy or one
of its subsidiaries for more than five years, with the exception of
Mssrs. Light and Schmale. Prior to joining the Company in 1998, Mr.
Light was a partner in the law firm of Latham & Watkins. Prior to
joining the Company in 1997, Mr. Schmale was Chief Financial
Officer of Unocal Corporation.

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 2000 annual meeting of
shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by Item 12 is incorporated by reference
from "Election of Directors" in the Information Statement prepared
for the May 2000 annual meeting of shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

PART IV

ITEM 14. 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

Independent Auditors' Report . . . . . . . . . . . . . . 27

Statements of Consolidated Income for the years
ended December 31, 1999, 1998 and 1997 . . . . . . . . 28

Consolidated Balance Sheets at December 31,
1999 and 1998. . . . . . . . . . . . . . . . . . . . . 29

Statements of Consolidated Cash Flows for the
years ended December 31, 1999, 1998 and 1997 . . . . . 31

Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . 33

Notes to Consolidated Financial Statements . . . . . . . 34

2. Financial statement schedules

The following documents may be found in this report
at the indicated page numbers:
Page in
This Report

Independent Auditors' Consent and
Report on Schedule. . . . . . . . . . . . . . . . . . 61

Schedule I--Condensed Financial Information of Parent. . 62

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

3. Exhibits
See Exhibit Index on page 65 of this report.

(b) Reports on Form 8-K
There were no reports on Form 8-K filed after September 30, 1999.

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE

To the Board of Directors and Shareholders of Pacific Enterprises:

We consent to the incorporation by reference in Registration
Statement Nos. 2-96782, 33-26357, 2-66833, 2-96781, 33-21908 and
33-54055 of Pacific Enterprises on Forms S-8 and Registration
Statement Nos. 33-24830 and 33-44338 of Pacific Enterprises on
Forms S-3 of our report dated February 4, 2000, appearing in this
Annual Report on Form 10-K of Pacific Enterprises for the year
ended December 31, 1999.

Our audits of the financial statements referred to in our
aforementioned report also included the financial statement
schedule of Pacific Enterprises, listed in Item 14. This financial
statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.

/s/ DELOITTE & TOUCHE LLP

San Diego, California
March 28, 2000

Schedule I -- CONDENSED FINANCIAL INFORMATION OF PARENT

PACIFIC ENTERPRISES
Schedule 1
Condensed Financial Information of Parent

Condensed Statements of Income
(Dollars in millions)

For the years ended December 31 1999 1998 1997
-------- -------- --------
Revenues and other income $ -- $ 11 $ 20
Expenses, interest and income taxes 20 20 59
-------- -------- --------
Loss before subsidiary earnings (20) (9) (39)
Subsidiary earnings 200 152 219
-------- -------- --------
Earnings applicable to common shares $ 180 $ 143 $ 180
======== ======== ========

Condensed Balance Sheets
(Dollars in millions)

Balance at December 31 1999 1998
---------- ----------
Assets:
Cash and cash equivalents $ -- $ 3
Other current assets 353 130
---------- ----------
Total current assets 353 133
Investments in subsidiaries 1,288 1,763
Deferred charges and other assets 193 162
---------- ----------
Total Assets $ 1,834 $ 2,058
========== ==========
Liabilities and Shareholders' Equity:
Dividends payable $ 1 $ 1
Due to affiliates 294 171
Other current liabilities -- 203
---------- ----------
Total current liabilities 295 375
Other long-term liabilities 113 136
Common equity 1,346 1,467
Preferred stock 80 80
---------- ----------
Total Liabilities and Shareholders' Equity $ 1,834 $ 2,058
========== ==========

<TABLE>
PACIFIC ENTERPRISES
Schedule 1 (continued)
Condensed Financial Information of Parent
<CAPTION>

Condensed Statements of Cash Flows
(Dollars in millions)

For the years ended December 31 1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities $ (120) $ (216) $ (15)
-------- ------- -------
Expenditures for property, plant and equipment -- (12) (10)
Dividends received from subsidiaries 278 164 251
Increase in investments and other (14) (53) (152)
-------- ------- -------
Cash flows from investing activities 264 99 89
-------- ------- -------
Sale of common stock -- 27 17
Repurchase of common stock -- -- (48)
Increase (decrease) in short-term debt (43) 43 --
Common dividends paid (100) (97) (122)
Preferred dividends paid (4) (4) (4)
-------- ------- -------
Cash flows from financing activities (147) (31) (157)
-------- ------- -------
Net decrease (3) (148) (83)
Cash and Cash Equivalents, January 1 3 151 234
-------- ------- -------
Cash and Cash Equivalents, December 31 $ -- $ 3 $ 151
======== ======= =======

</TABLE>

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/ Richard D. Farman
.
Richard D. Farman
Chairman and Chief Executive Officer

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

<TABLE>
<CAPTION>
Name/Title Signature Date

<S> <C> <C>
Principal Executive Officers:
Richard D. Farman
Chairman, Chief Executive Officer /s/ Richard D. Farman March 7, 2000

Stephen L. Baum
President,
Chief Operating Officer /s/ Stephen L. Baum March 7, 2000

Principal Financial Officer:
Neal E. Schmale
Executive Vice President,
Chief Financial Officer /s/ Neal E. Schmale March 7, 2000

Principal Accounting Officer:
Frank H. Ault
Vice President, Controller /s/ Frank H. Ault March 7, 2000

Directors:
Richard D. Farman
Chairman /s/ Richard D. Farman March 7, 2000

Stephen L. Baum, Director /s/ Stephen L. Baum March 7, 2000

Hyla H. Bertea, Director /s/ Hyla H. Bertea March 7, 2000

Ann L. Burr, Director /s/ Ann L. Burr March 7, 2000

Herbert L. Carter, Director /s/ Herbert L. Carter March 7, 2000

Richard A. Collato, Director /s/ Richard A. Collato March 7, 2000

Daniel W. Derbes, Director /s/ Daniel W. Derbes March 7, 2000

Wilford D. Godbold, Jr., Director /s/ Wilford D. Godbold, Jr. March 7, 2000

Robert H. Goldsmith, Director /s/ Robert H. Goldsmith March 7, 2000

William D. Jones, Director /s/ William D. Jones March 7, 2000

Ignacio E. Lozano, Jr., Director /s/ Ignacio E. Lozano, Jr. March 7, 2000

Ralph R. Ocampo, Director /s/ Ralph R. Ocampo March 7, 2000

William G. Ouchi, Director /s/ William G. Ouchi March 7, 2000

Richard J. Stegemeier, Director /s/ Richard J. Stegemeier March 7, 2000

Thomas C. Stickel, Director /s/ Thomas C. Stickel March 7, 2000

Diana L. Walker, Director /s/ Diana L. Walker March 7, 2000
</TABLE>

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 March 2, 1999
(Pacific Enterprises 1998 Form 10-K; Exhibit 3.02).

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 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).

4.04 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).

4.05 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).

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

4.07 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).

4.08 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).

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

4.10 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 (Pacific Lighting Corporation 1984 Form
10-K; Exhibit 4.29).

4.11 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).

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

Exhibit 10 -- Material Contracts

Compensation

10.01 Sempra Energy Supplemental Executive Retirement Plan as amended and
restated effective July 1, 1998 (1998 Sempra Energy Form 10-K Exhibit
10.09).

10.02 Sempra Energy Executive Incentive Plan effective June 1, 1998 (1998
Sempra Energy Form 10-K Exhibit 10.11).

10.03 Sempra Energy Executive Deferred Compensation Agreement effective June
1, 1998 (1998 Sempra Energy Form 10-K Exhibit 10.12).

10.04 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).

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

Exhibit 21 -- Subsidiaries

21.01 Schedule of Subsidiaries at December 31, 1999.

Exhibit 23 - Independent Auditors' Consent, page 61.

Exhibit 27 -- Financial Data Schedule

27.01 Financial Data Schedule for the year ended December 31, 1999.

GLOSSARY

AFUDC Allowance for Funds Used During
Construction

BCAP Biennial Cost Allocation Proceeding

Bcf Billion Cubic Feet (of natural gas)

CPUC California Public Utilities Commission

Enova Enova Corporation

ESOP Employee Stock Ownership Plan

FASB Financial Accounting Standards Board

FERC Federal Energy Regulatory Commission

GCIM Gas Cost Incentive Mechanism

IDBs Industrial Development Bonds

IOUs Investor-Owned Utilities

ORA Office of Ratepayer Advocates

PBR Performance-Based Ratemaking/Regulation

PE Pacific Enterprises

PRP Potential Responsible Party

SDG&E San Diego Gas & Electric Company

SFAS Statement of Financial Accounting Standards

SoCalGas Southern California Gas Company

UEG Utility Electric Generation

VaR Value at Risk

EXHIBIT 21.01

PACIFIC ENTERPRISES
Schedule of Subsidiaries at December 31, 1999

Subsidiary State of Incorporation
- ---------- ----------------------

Ecotrans OEM Corporation California

Southern California Gas Company California

Southern California Gas Tower California

<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF CONSOLIDATED INCOME,
BALANCE SHEET AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<CIK> 0000075527
<NAME> PACIFIC ENTERPRISES
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,838
<OTHER-PROPERTY-AND-INVEST> 33
<TOTAL-CURRENT-ASSETS> 625
<TOTAL-DEFERRED-CHARGES> 322
<OTHER-ASSETS> 111
<TOTAL-ASSETS> 3,929
<COMMON> 1,282
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 58
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,346
0
80
<LONG-TERM-DEBT-NET> 939
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 30
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,534
<TOT-CAPITALIZATION-AND-LIAB> 3,929
<GROSS-OPERATING-REVENUE> 2,569
<INCOME-TAX-EXPENSE> 163
<OTHER-OPERATING-EXPENSES> 2,135
<TOTAL-OPERATING-EXPENSES> 2,298
<OPERATING-INCOME-LOSS> 271
<OTHER-INCOME-NET> (15)
<INCOME-BEFORE-INTEREST-EXPEN> 256
<TOTAL-INTEREST-EXPENSE> 72
<NET-INCOME> 184
4
<EARNINGS-AVAILABLE-FOR-COMM> 180
<COMMON-STOCK-DIVIDENDS> 100
<TOTAL-INTEREST-ON-BONDS> 55
<CASH-FLOW-OPERATIONS> 344
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>