Edgar Filing: PACIFIC ENTERPRISES INC

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, 2000
--------------------
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 56. Glossary on page 58.

Aggregate market value of the voting preferred stock held by non-
affiliates of the registrant as of February 28,2001 was
$42 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 2001
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 . . . . . . . . . . . . . . . . . 24
Item 8. Financial Statements and Supplementary Data. . . . . . 25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 50

PART III
Item 10. Directors and Executive Officers of the Registrant . . 50
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . 50
Item 13. Certain Relationships and Related Transactions . . . . 51

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 51

Independent Auditors' Consent and Report on Schedule. . . . . . 52

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 56

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

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," "would" and "should" or similar expressions, or
discussions of strategy or of plans are intended to identify forward-
looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions.
Future results may differ materially from those expressed in these
forward-looking statements.

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions; actions by the California Public Utilities
Commission, the California Legislature and the Federal Energy
Regulatory Commission; the financial condition of other investor-
owned utilities; inflation rates and interest rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions; business, regulatory and legal decisions; the
pace of deregulation of retail natural gas and electricity delivery;
the timing and success of business-development efforts; and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the 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
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. SoCalGas owns and operates a natural gas distribution,
transmission and storage system supplying natural gas throughout a
23,000-square mile service territory comprising most of southern
California and part of central California. SoCalGas provides
natural gas service to residential, commercial, industrial, utility
electric generation and wholesale customers through 5.0 million
meters in a service area with a population of 18.4 million.

GOVERNMENT REGULATION

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

Local Regulation
SoCalGas has gas franchises with the 238 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 2048.

State Regulation
The State of California Legislature, from time to time, passes laws
that regulate SoCalGas' operations. For example, in 1999, the
legislature enacted a law addressing natural gas industry
restructuring.

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 in Note 12 of the notes to
Consolidated Financial Statements, herein.

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 18.4 million
people. Its service territory includes most of southern California
and part of central California.

SoCalGas offers two basic utility services: sale of natural gas and
transportation of natural gas. Natural gas service is also provided
on a wholesale basis to the distribution systems of the City of Long
Beach, Southwest Gas Corporation and SDG&E, an affiliated company.

Supplies of Natural Gas
SoCalGas buys natural gas under short-term and long-term contracts.
Short-term purchases under these contracts are primarily from various
Southwest U.S. and Canadian gas suppliers, and are primarily based on
monthly spot-market prices. SoCalGas transports gas under long-term firm
pipeline capacity agreements that provide for annual reservation charges.
SoCalGas recovers such fixed charges in rates. 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.

The following table shows the sources of natural gas deliveries from
1996 through 2000.

Year Ended December 31
-------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------

Purchases in billions of cubic feet
Spot market 343 315 270 229 226
Long-term contracts 16 74 101 95 96
California producers 1 2 3 5 12
------- ------- ------- ------- -------
Total Purchases 360 391 374 329 334

Customer-Owned and Exchange Receipts 755 637 637 614 518

Storage withdrawal
(injection) - net 39 (6) (28) (3) 42

Company use and
unaccounted for (21) (16) (21) (10) (10)
------- ------- ------- ------- -------
Net Deliveries 1,133 1,006 962 930 884
======= ======= ======= ======= =======
Purchases in millions of dollars
Commodity costs $1,243 $ 916 $ 774 $ 849 $ 627

Fixed charges* 128 147 174 250 276
------- ------- ------- ------- -------
Total Purchases $1,371 $1,063 $ 948 $1,099 $ 903
======= ======= ======= ======= =======
Average Commodity Cost of Purchases
(dollars per thousand cubic feet)** $3.45 $2.34 $ 2.07 $2.58 $1.88
======= ======= ======= ======= =======

* 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
serving SoCalGas.

** The average commodity cost of natural gas purchased excludes fixed charges.

Market-sensitive natural gas supplies (supplies purchased on the
spot market as well as under longer-term contracts, ranging from one
month to ten years, based on spot prices) accounted for 95 percent
of total natural gas volumes purchased by SoCalGas during 2000, as
compared with 81 percent and 72 percent during 1999 and 1998,
respectively. Supply/demand imbalances are affecting the price of
natural gas in California more than in the rest of the country

because of California's dependence on natural gas fired electric
generation due to air-quality considerations. The average price of
natural gas at the California/Arizona (CA/AZ) border was $6.25/mmbtu
in 2000, compared with $2.33/mmbtu in 1999. On December 11, 2000,
the average spot cash gas price at the CA/AZ border reached a record
high of $56.91/mmbtu.

During 2000, SoCalGas delivered 1,133 bcf of natural gas through its
system. Approximately 70 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 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 SoCalGas' normal service territory) customers, and total
approximately 1,500.

Most core customers purchase natural gas directly from SoCalGas. Core
customers are permitted to aggregate their natural gas requirement and,
up to a 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. SoCalGas and SDG&E recently filed an
application with the CPUC to combine the two companies' core procurement
portfolios.

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.

In 2000, 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,
2000, SoCalGas was storing approximately 2 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 with other fuels for large industrial, commercial and
UEG uses. Growth in these natural gas markets depends largely on the
health and expansion of the southern California economy. SoCalGas added
approximately 69,000 new customer meters in 2000 and 74,000 in 1999,
representing growth rates of approximately 1.4 percent and 1.5 percent,
respectively. SoCalGas expects its growth rate for 2001 to be at the
2000 level.

During 2000, 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
2000 was only 1,500, it accounted for 12 percent of the authorized
natural gas revenues and 69 percent of total natural gas volumes.
External factors such as weather, the price of electricity, electric
deregulation, the use of hydroelectric power, competing pipelines and
general economic conditions can result in significant shifts in demand
and market price. 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. The increase in UEG demand in 2000 was due to
higher demand for electricity and increased use of natural gas for
electric generation, a colder 2000 - 2001 winter and population growth
in California. 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.

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
production from SoCalGas' service area and as noted in the following
paragraph.

On January 18, 2001, Pacific Gas & Electric Company (PG&E) filed an
emergency application with the CPUC requesting that SoCalGas be ordered
to purchase natural gas or supply available natural gas to meet PG&E's
core procurement needs. Some of PG&E's suppliers are declining to sell
natural gas to PG&E due to its poor credit rating. Although SoCalGas has
agreed to supply a limited amount of natural gas to PG&E through March
31, 2001 (secured by PG&E customer receivables), it is still urging
rejection of the request which, if approved, could severely jeopardize
SoCalGas' ability to serve its own customers because of cash flow
considerations.

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 the profitability of the Company.
Both the electric and natural gas industries are currently undergoing
transitions to competition and are being impacted by abnormally high
commodity prices resulting from supply/demand imbalances.

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.
The CPUC is currently assessing the current market and regulatory
framework for California's natural gas industry. As a result of
California's dependence on natural gas fired electric generation due to
air-quality considerations, supply/demand imbalances are affecting the
price of natural gas in California more than in the rest of the country.
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 through 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)
In recent years, the CPUC has directed utilities to use PBR. To promote
efficient operations and improved productivity and to move away from
reasonableness reviews and disallowances, 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 and is subject to the
limitations of the Gas Cost Incentive Mechanism (GCIM) described 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.

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 SoCalGas' 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 SoCalGas 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
In 1994, the CPUC approved the Hazardous Waste Collaborative Memorandum
account, a mechanism that allows SoCalGas to recover in rates the costs
associated with the cleanup of sites contaminated with hazardous waste.

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 potentially responsible party (PRP) for two
landfill sites and five industrial waste disposal sites, from which
releases have occurred as described below.

Remedial actions and negotiations with other PRPs and the United States
Environmental Protection Agency (EPA) have been in progress since 1986
and 1993 for the two landfill sites. The Company's share of costs to
remediate these sites is estimated to be $3.7 million, of which $410,000
was incurred during 2000.

In the early 1990s, the Company was notified of hazards at two industrial
waste treatment facilities in the California communities of Fresno and
Carson, where the Company had disposed of wastes. During 2000, the
Company settled with the other PRPs at these sites for $425,000 and has
no additional liability.

In December 1999, SoCalGas was notified that it is a PRP at a waste
treatment facility in Bakersfield, California. SoCalGas is working with
other PRPs in order to remove from the site certain liquid wastes that
threaten to be released. It is too early to determine the existence or
extent of any prior releases or SoCalGas' potential total liability.

In March 2000, SoCalGas was notified it is a PRP at a former mercury
recycling facility in Brisbane, California. Total potential liability is
estimated at less than $10,000. Also in March 2000, SoCalGas was sued in
Federal District Court as a PRP in a waste oil disposal site in Los
Angeles. Plaintiffs alleged that SoCalGas had transported various
petroleum wastes to the site in the 1950s for recycling. SoCalGas settled
with plaintiffs in December 2000 for $200,000.

In addition, the Company 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, 2000, 18 of these sites have been
remediated, of which 14 have received certification from the California
Environmental Protection Agency. Preliminary investigations, at a
minimum, have been completed on 40 of the gas plant sites.

At December 31, 2000, SoCalGas' estimated remaining investigation and
remediation liability related to hazardous waste sites, including the
manufactured-gas plant sites detailed above, was $57.6 million, of which
90 percent is authorized to be recovered through the Hazardous Waste
Collaborative mechanism. 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.

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

OTHER MATTERS

Research, Development and Demonstration (RD&D)
The SoCalGas RD&D portfolio is focused in five major areas: operations,
utilization systems, power generation, public interest and
transportation. Each of these activities provides benefits to customers
and society by providing more cost-effective, efficient natural gas
equipment with lower emissions, increased safety and reduced
environmental mitigation and other utility operating costs. The CPUC has
authorized SoCalGas to recover its operating costs associated with RD&D.
An annual average of $7.9 million has been spent for the last three
years.

Employees of Registrant
As of December 31, 2000, SoCalGas had 5,853 employees, compared to 6,079
at December 31, 1999.

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 remains in effect through March 31, 2002.

ITEM 2. PROPERTIES

Natural Gas Properties
At December 31, 2000, SoCalGas owned 2,846 miles of transmission and
storage pipeline, 45,150 miles of distribution pipeline and 44,547 miles
of service piping. It also owned 10 transmission compressor stations and
6 underground storage reservoirs (with a combined working capacity of
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.

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

ITEM 3. LEGAL PROCEEDINGS

Except for the matters described in Note 11 of the notes to Consolidated
Financial Statements or referred to elsewhere in this Annual Report,
neither the Company nor its subsidiaries are party to, nor is their
property the subject of, any material pending legal proceedings other than
routine litigation incidental to their businesses.

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.

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in millions)

At December 31, or for the years then ended
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------

Income Statement Data:
Operating revenues $2,854 $2,569 $2,472 $2,738 $2,563
Operating income $ 263 $ 271 $ 218 $ 259 $ 286
Dividends on preferred stock $ 4 $ 4 $ 4 $ 4 $ 5
Earnings applicable to
common shares $ 207 $ 180 $ 143 $ 180 $ 196

Balance Sheet Data:
Total assets $4,828 $4,110 $4,571 $4,977 $5,186
Long-term debt $ 821 $ 939 $ 985 $1,118 $1,225
Short-term debt (a) $ 120 $ 30 $ 249 $ 502 $ 411
Shareholders' equity $1,526 $1,426 $1,547 $1,469 $1,440

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

Since PE 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.

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 1998 through 2000, and provides information
about the capital resources, liquidity and financial performance of
PE. 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.
PE is an energy services company whose only direct subsidiary is
SoCalGas, the nation's largest natural gas distribution utility.
SoCalGas owns and operates a natural gas distribution, transmission
and storage system supplying natural gas throughout a 23,000-square
mile service territory comprising most of southern California and part
of central California. SoCalGas provides natural gas service to
residential, commercial, industrial, utility electric generation and
wholesale customers through 5.0 million meters in a service area with
a population of 18.4 million.

Supply/demand imbalances are affecting the price of natural gas
in California more than in the rest of the country because of
California's dependence on natural gas fired electric generation due
to air-quality considerations.
The uncertainties shaping California's electric industry and
business environment also affect the Company's operations.
These recent developments are continuing to change. Information
as of March 7, 2001, the date this report was prepared, is found
herein, primarily under "Results of Operations" and "Factors
Influencing Future Performance" and in Note 11 of the notes to
Consolidated Financial Statements.

Business Combinations
Sempra Energy (the Parent) 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.
Expenses incurred by PE in connection with this event were $35
million, aftertax, for the year ended December 31, 1998. No
significant expenses were incurred subsequently.
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 the CES/Way acquisition were $7 million,
aftertax, all in the year ended December 31, 1998.
The costs of the transactions discussed above consist primarily
of employee-related costs, and investment banking, legal, regulatory
and consulting fees.
As a result of the PE/Enova business combination, PE dividended
its nonutility subsidiaries to Sempra Energy during 1998 and early
1999. SoCalGas is now the sole direct subsidiary of PE. See Note 1 of
the notes to the Consolidated Financial Statements for additional
information.

Capital Resources And Liquidity
The Company's operations have historically been 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 consist of capital expenditures for utility
plant.

Cash Flows From Operating Activities
The increase in cash flows from operating activities in 2000 was
primarily due to higher accounts payable and overcollected regulatory
balancing accounts, partially offset by increased accounts receivable.
The increases in accounts payable and accounts receivable were
primarily due to higher prices for natural gas. The regulatory
balancing account overcollections resulted from higher sales volume
and the actual cost of gas being slightly lower than amounts being
collected in rates.
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 the absence of business combination expenses and
lower income tax payments in 1999. See Note 1 of the notes to the
Consolidated Financial Statements for additional information.

Cash Flows From Investing Activities
Cash flows from investing activities primarily represent capital
expenditures for utility plant at SoCalGas.
Capital expenditures were $198 million in 2000, compared to $146
million and $150 million spent in 1999 and in 1998, respectively. The
increase in capital expenditures in 2000 is primarily due to
improvements to the gas distribution system and expansion of pipeline
capacity to meet increased demand by electric generators and
commercial and industrial customers. The decrease in capital
expenditures in 1999 is primarily due to shifting of certain functions
to Sempra Energy following the PE/Enova business combination.
Capital expenditures in 2001 are expected to be comparable to
those of 2000. They will be financed primarily by operations and debt
issuances.

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 jointly owned by Enova and
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 and now named Sempra Energy Global Enterprises, in early
1999.

Cash Flows From Financing Activities
Net cash used in financing activities decreased in 2000 compared to
1999 primarily due to lower long-term and short-term debt repayments.
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.

Long-Term and Short-Term Debt

Cash was used for the repayment of $30 million of unsecured notes in
2000.
In 1999, cash was used for the repayment of $75 million of
unsecured notes and $43 million of short-term debt.
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 $94 million of debt issued to finance the
Comprehensive Settlement as discussed in Note 12 of the notes to
Consolidated Financial Statements.

Stock Redemptions

On February 2, 1998, SoCalGas redeemed all outstanding shares of its
7.75% Series Preferred Stock at a cost of $25.09 per share, or $75
million including accrued dividends.

Dividends

Dividends paid to the Parent amounted to $100 million both in 2000 and
1999, and $97 million in 1998.
The payment of future dividends and the amount thereof are within
the discretion of the Company's board of directors.

Capitalization
Total capitalization including the current portion of long-term debt
was $2.5 billion at December 31, 2000. The debt to capitalization
ratio was 38 percent at December 31, 2000. Significant changes in
capitalization during 2000 included dividends declared to the Parent
and repayment of long-term debt.

Cash and Cash Equivalents
Cash and cash equivalents were $205 million at December 31, 2000. This
cash is available for investment in projects consistent with the
Company's strategic direction, capital expenditures, the retirement of
debt, the repurchase of common stock, the payment of dividends and
other corporate purposes. The Company anticipates that operating cash
required in 2001 for capital expenditures, dividends and debt payments
will be provided by cash generated from operating activities and from
long-term and short-term debt issuances.
In addition to cash generated from ongoing operations, SoCalGas
has a credit agreement that permits short-term borrowings of up to
$170 million. This agreement expires in 2002. For additional
information see Note 3 of the notes to Consolidated Financial
Statements.
In December 2000, PE and Sempra Energy jointly filed a shelf
registration for the public offering of up to $500 million of debt
securities of PE, guaranteed by Sempra Energy. As yet, no debt
securities have been issued under this registration statement. For
additional information, see Notes 4 and 12 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.

Results of Operations
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 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.
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. The CPUC currently is studying the issue of
restructuring for sales to core customers and, as mentioned above,
supply/demand imbalances are affecting the price of natural gas in
California more than in the rest of the country because of
California's dependence on natural gas fired electric generation due
to air-quality considerations.

See additional discussions of natural gas-industry restructuring
below under "Factors Influencing Future Performance" and in Note 12 of
the notes to Consolidated Financial Statements.
In connection with restructuring of the natural gas industry,
SoCalGas received approval from the CPUC for Performance-Based
Ratemaking (PBR). Under PBR, income potential is tied to achieving or
exceeding specific performance and productivity measures, rather than
to expanding utility plant in a market where a utility already has a
highly developed infrastructure (see Note 12 of the notes to
Consolidated Financial Statements).

The table below summarizes the components of natural gas volumes and
revenues by customer class for 2000, 1999 and 1998.

SoCalGas
GAS SALES, TRANSPORTATION & EXCHANGE
(Dollars in millions, volumes in billion cubic feet)

Gas Sales Transportation & Exchange Total
-----------------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
-----------------------------------------------------------------------

2000:
Residential 251 $2,167 3 $ 12 254 $2,179
Commercial and Industrial 86 621 317 209 403 830
Utility Electric Generation -- -- 310 106 310 106
Wholesale -- -- 166 54 166 54
-----------------------------------------------------------------------
337 $2,788 796 $381 1,133 3,169
Balancing accounts and other (315)
---------
Total $2,854
---------------------------------------------------------------------------------------------

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

2000 Compared to 1999

Net income for 2000 increased to $211 million compared to net income
of $184 million in 1999. The increase is primarily due to higher non-
core gas throughput, the sale of SoCalGas' investment in Plug Power,
and lower operating and maintenance expenses. Net income for the
fourth quarter of 2000 increased to $58 million compared to $51
million for the fourth quarter of 1999. The increase is primarily due
to higher non-core gas throughput and the sale of the SoCalGas'
investment in Plug Power.
Natural gas revenues increased from $2.6 billion in 1999 to $2.9
billion in 2000, primarily due to higher prices for natural gas in
2000 (see discussion of balancing accounts and gas revenues in Note 2
of the notes to Consolidated Financial Statements) and higher UEG
revenues. The increase in UEG revenues was due to higher demand for
electricity in 2000. In addition, the generating plants receiving gas
transportation from SoCalGas are operating at higher capacities than
previously, as discussed below.
The cost of natural gas distributed increased from $1.0 billion
in 1999 to $1.4 billion in 2000. The increase was largely due to
higher prices for natural gas. Prices for natural gas have increased
due to the increased use of natural gas to fuel electric generation,
colder winter weather, and population growth in California. Under the
current regulatory framework, changes in core-market natural gas
prices do not affect net income, since the actual commodity cost of
natural gas for core customers is included in customer rates on a
substantially current basis.
Operating expenses decreased from $748 million in 1999 to $696
million in 2000. The decrease was primarily due to lower pension
expense in 2000.

1999 Compared to 1998

Net income for 1999 increased to $184 million compared to net income
of $147 million in 1998. The increase is primarily due to the
business-combination expenses of $35 million, after-tax, in 1998 (none
in 1999). Net income for the fourth quarter of 1999 was consistent
with the fourth quarter of 1998.
Natural gas revenues increased from $2.5 billion in 1998 to $2.6
billion in 1999. The increase was primarily due to higher UEG
revenues, partially offset by a decrease in residential, 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 from $0.8
billion in 1998 to $1.0 billion in 1999. The increase was largely due
to an increase in the average price of natural gas purchased.
Operating expenses decreased from $930 million in 1998 to $748
million in 1999. The decrease was primarily due to the $60 million of
business-combination costs in 1998.

Other Income and Deductions, Interest Expense and Income Taxes

Other Income and Deductions

Other income and deductions, which primarily consists of interest
income and/or expense from short-term investments and regulatory
balancing accounts, was $47 million, $1 million and ($1) million for
the years ended December 31, 2000, 1999 and 1998, respectively. The
increase in 2000 is due to higher interest earned on loans to Sempra
Energy, lower quasi-reorganization expenses, and a gain recognized on
the sale of SoCalGas' investment in Plug Power.

Interest Expense

Interest expense increased to $99 million in 2000 from $88 million in
1999, primarily due to a reversal of interest expense related to
income-tax issues in 1999 as a result of favorable income-tax rulings,
partially offset by lower interest expense on long-term debt due to
lower long-term debt balances during 2000. Interest expense was $70
million for 1998. The increase in interest expense in 1999 compared to
1998 is primarily due to higher interest expense on loans to
affiliates, partially offset by the reversal of interest expense noted
above.

Income Taxes

Income tax expense was $185 million, $166 million and $127 million for
the years ended December 31, 2000, 1999 and 1998, respectively. The
increase in income tax expense for 2000 compared to 1999 is primarily
due to the increase in income before taxes as a result of lower Quasi-
Reorganization expenses in 2000. 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. The effective
income tax rates were 46.7 percent, 47.4 percent and 46.4 percent for
the same years. 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. The factors influencing financial performance are
summarized below.

Natural Gas Restructuring and Gas Rates

Supply/demand imbalances are affecting the price of
natural gas in California more than in the rest of the country
because of California's dependence on natural gas fired
electric generation due to air-quality considerations. The
average price of natural gas at the California/Arizona (CA/AZ)
border was $6.25/mmbtu in 2000, compared with $2.33/mmbtu in
1999. On December 11, 2000, the average spot-market price at
the CA/AZ border reached a record high of $56.91/mmbtu.
Underlying the high natural gas prices are several factors,
including the increase in natural gas usage for electric
generation, cold winter weather and reduced natural gas supply
resulting from historically low storage levels, lower gas
production and a major pipeline rupture. In December 2000,
SoCalGas filed with the Federal Energy Regulatory Commission
(FERC) for a reinstitution of price caps on short-term
interstate capacity to the CA/AZ border and between the
interstate pipelines and California's local distribution
companies, effective until March 31, 2001. The FERC responded
by issuing extensive data requests, but has not otherwise acted
on SoCalGas' request.
A recent lawsuit, which seeks class-action certification, alleges
that SoCalGas, Sempra Energy, SDG&E and El Paso Energy Corp. acted to
drive up the price of natural gas for Californians by agreeing to stop
a pipeline project that would have brought new and cheaper natural gas
supplies into California. SoCalGas believes the allegations are
without merit.

Performance-Based Regulation (PBR)

To promote efficient operations and improved productivity and to move
away from reasonableness reviews and potential 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 goals, as
well as cost reductions, rather than by relying solely on expanding
utility plant in a market where a utility already has a highly
developed infrastructure. See additional discussion of PBR in "Results
of Operations" above and in Note 12 of the notes to Consolidated
Financial Statements.

Allowed Rate of Return

For 2001, 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,
the same as in 2000 and 1999. SoCalGas can earn more than the
authorized rate by controlling costs below approved levels or by
achieving favorable results in certain areas, such as incentive
mechanisms. In addition, earnings are affected by changes in sales
volumes, except for the majority of SoCalGas' core sales.

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 its 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 at risk for 25-percent of the revenue related 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 received authorization from the CPUC
for expedited review of long-term natural gas transportation service
contracts with some noncore customers at fixed transportation rates,
some of which are at lower than the otherwise-applicable tariff rates.
In addition, the CPUC approved changes in the methodology that reduced
the subsidization of core customer rates by noncore customers. This
allocation modification, together with negotiating authority, has
enabled SoCalGas to better compete with new interstate pipelines for
noncore customers.

Noncore Throughput

SoCalGas' earnings will be adversely 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 and
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 25-percent of the lost revenue.
Through July 31, 1999, some of the favorable earnings effect of
higher revenues resulting from higher throughput to noncore customers
was 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 has been 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

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. 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 0.40
Bcf per day of capacity is sold in the secondary market. Under
existing California regulation, unsubscribed capacity costs associated
with the remaining 0.40 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 environmental issues faced by the Company are in
connection with SoCalGas' operations, capital costs to comply with
environmental requirements are generally recovered through the
depreciation components of customer rates. SoCalGas' customers
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 waste, 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 manner
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 (18 completed as of
December 31, 2000 and 24 to be completed) and cleanup of third-party
waste disposal sites used by the Company, which has been identified as
a Potentially Responsible Party (investigations and remediations are
continuing).

Market Risk
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 credit-worthy firms and major
exchanges. The use of these instruments exposes the Company to market
and credit risks which, at times, may be concentrated with certain
counterparties.
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 can 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 8 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 discussion of the Company's primary market-risk
exposures as of December 31, 2000, includes 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.
The VaR on the Company's fixed-rate long-term debt is estimated
at approximately $107 million as of December 31, 2000, assuming a one-
year holding period.

Energy-Price Risk

Market risk related to physical commodities is based upon potential
fluctuations in natural gas 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, 2000, 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 prospective
counterparties' financial condition (including credit ratings),
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.
Almost all of SoCalGas' accounts receivable are with customers
located in California and, therefore, potentially affected by the high
costs of electricity and natural gas in California, as described in
"Factors Influencing Future Performance" and in Note 12 of the notes
to Consolidated Financial Statements.

New Accounting Standards
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." As amended, SFAS 133, 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 adoption of this new standard on January 1, 2001, did not
impact the Company's earnings. However, $982 million in current
assets, $1.1 billion in noncurrent assets, and $4 million in current
liabilities were recorded as of January 1, 2001, in the Consolidated
Balance Sheet as fixed-priced contracts and other derivatives. Due to
the regulatory environment in which SoCalGas operates, regulatory
assets and liabilities were established to the extent that derivative
gains and losses are recoverable or payable through future rates. As
such, $982 million in current regulatory liabilities, $1.1 billion in
noncurrent regulatory liabilities, and $4 million in current
regulatory assets were recorded as of January 1, 2001, in the
Consolidated Balance Sheet. The ongoing effects will depend on future
market conditions and the Company's hedging activities.

In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) 101 - Revenue Recognition. SABs
are not rules issued by the SEC. Rather, they represent
interpretations and practices followed by the SEC's staff in
administering the disclosure requirements of the federal securities
laws. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements; it does not change the
existing rules on revenue recognition. SAB 101 sets forth the basic
criteria that must be met before revenue should be recorded.
Implementation of SAB 101 was required by the fourth quarter of 2000
and had no effect on the Company's consolidated financial statements.

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," "would" and "should" or similar expressions, or discussions of
strategy or of plans are intended to identify forward-looking
statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in these forward-
looking statements.

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions; actions by the CPUC, the California Legislature
and the FERC; the financial condition of other investor-owned
utilities; inflation rates and interest rates; energy markets,
including the timing and extent of changes in commodity prices;
weather conditions; business, regulatory and legal decisions; the pace
of deregulation of retail natural gas and electricity delivery; the
timing and success of business-development efforts; and other
uncertainties, all of which are difficult to predict and many of which
are beyond the control of the 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 SEC.

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, 2000 and 1999,
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, 2000. 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 auditing standards
generally accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of
America.

/s/ DELOITTE & TOUCHE LLP

San Diego, California
January 26, 2001 (February 27, 2001, as to Note 3)

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

For the years ended December 31 2000 1999 1998
------ ------ ------

Operating Revenues $2,854 $2,569 $2,472
------ ------ ------
Operating Expenses
Cost of natural gas distributed 1,361 1,033 840
Operation & maintenance 696 748 930
Depreciation 263 261 259
Income taxes 175 163 125
Other taxes and franchise payments 96 93 100
------ ------ ------
Total operating expenses 2,591 2,298 2,254
------ ------ ------
Operating Income 263 271 218
------ ------ ------
Other Income and (Deductions)
Interest income 64 40 19
Regulatory interest (12) (14) --
Allowance for equity funds used during construction 3 -- 3
Taxes on non-operating income (10) (3) (2)
Preferred dividends of subsidiaries (1) (1) (1)
Other - net 3 (21) (20)
------ ------ ------
Total 47 1 (1)
------ ------ ------
Income Before Interest Charges 310 272 217
------ ------ ------
Interest Charges
Long-term debt 68 82 84
Other 33 8 (13)
Allowance for borrowed funds used during construction (2) (2) (1)
------ ------ ------
Total 99 88 70
------ ------ ------
Net Income 211 184 147
Preferred Dividend Requirements 4 4 4
------ ------ ------
Earnings Applicable to Common Shares $ 207 $ 180 $ 143
====== ====== ======
See notes to Consolidated Financial Statements.

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

Balance at December 31 2000 1999
-------- --------

ASSETS
Property, plant and equipment $6,337 $6,190
Accumulated depreciation (3,571) (3,352)
-------- --------
Property, plant and equipment - net 2,766 2,838
-------- --------
Current assets
Cash and cash equivalents 205 11
Accounts receivable - trade (less allowance for doubtful
receivables of $19 in 2000 and $16 in 1999) 589 281
Accounts and notes receivable - other 83 14
Due from affiliates 214 73
Income taxes receivable -- 34
Deferred income taxes 43 --
Inventories 67 78
Other 84 9
----- -----
Total current assets 1,285 500
----- -----

Regulatory assets 108 201
Notes receivable - affiliate 617 482
Investments and other assets 52 89
------ ------
777 772
------ ------
Total $4,828 $4,110
====== ======

See notes to Consolidated Financial Statements.

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

Balance at December 31 2000 1999
-------- --------

CAPITALIZATION AND LIABILITIES
Capitalization
Common Stock $1,282 $1,282
Retained earnings 165 58
Accumulated other comprehensive income (loss) (1) 6
-------- --------
Total common equity 1,446 1,346

Preferred stock 80 80
Long-term debt 821 939
-------- --------
Total capitalization 2,347 2,365
-------- --------
Current liabilities
Accounts payable - trade 368 160
Accounts payable - other 43 60
Regulatory balancing accounts - net 463 154
Income taxes payable 50 --
Deferred income taxes -- 8
Dividends and interest payable 28 29
Current portion of long-term debt 120 30
Due to affiliates 365 327
Other 300 206
-------- --------
Total current liabilities 1,737 974
-------- --------

Deferred credits and other liabilities
Customer advances for construction 16 27
Post-retirement benefits other than pensions 97 101
Deferred income taxes 224 223
Deferred investment tax credits 53 56
Deferred credits and other liabilities 334 344
Preferred stock of subsidiary 20 20
-------- --------
Total deferred credits and other liabilities 744 771
-------- --------
Contingencies and commitments (Note 11)
Total $4,828 $4,110
======== ========

See notes to Consolidated Financial Statements.

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

For the years ended December 31 2000 1999 1998
------ ------ ------

Cash Flows from Operating Activities
Net Income $211 $ 184 $ 147
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 263 261 259
Deferred income taxes and investment
tax credits 5 135 (180)
Other 22 33 (71)
Changes in working capital components
Accounts and notes receivable (377) 158 68
Due to/from affiliates 35 (39) (92)
Income taxes receivable/payable 84 (59) (19)
Inventories 11 (18) (24)
Other current assets (75) (2) 2
Accounts payable 191 (19) (29)
Regulatory balancing accounts 309 36 484
Other taxes payable -- (3) 2
Other current liabilities 93 13 51
------ ------ ------
Net cash provided by operating activities 772 680 598
------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (198) (146) (150)
Loans to affiliates (267) (336) --
Other - net 21 8 (39)
------ ------ ------
Net cash used in investing activities (444) (474) (189)
------ ------ ------
Cash Flows from Financing Activities
Common dividends paid (100) (100) (97)
Preferred dividends paid (4) (4) (4)
Issuance of long-term debt -- -- 75
Payment of long-term debt (30) (75) (150)
Increase (decrease) in short-term debt -- (43) (311)
Sale of common stock -- -- 27
Redemption of preferred stock of a subsidiary -- -- (75)
------ ------ ------
Net cash used in financing activities (134) (222) (535)
------ ------ ------
Increase (decrease) in cash and cash equivalents 194 (16) (126)
Cash and cash equivalents, January 1 11 27 153
------ ------ ------
Cash and cash equivalents, December 31 $ 205 $ 11 $ 27
====== ====== ======
Supplemental Disclosure of Cash Flow Information:
Income tax payments, net of refunds $ 99 $ 92 $ 263
====== ====== ======
Interest payments, net of amount capitalized $ 127 $ 90 $ 72
====== ====== ======
Supplemental Schedule of Noncash Activities:
Dividend of affiliates to Sempra Energy $ -- $ 417 $ 23
====== ====== ======
Capital contribution from Sempra Energy $ -- $ 85 $ 26
====== ====== ======

See notes to Consolidated Financial Statements.

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999, 1998
Dollars in millions

| Deferred Accumulated
| Compensation Other Total
Comprehensive | Preferred Common Retained Relating Comprehensive Shareholders'
Income | Stock Stock Earnings to ESOP Income (Loss) Equity
----------------------------------------------------------------------------------------------------------------

See notes to Consolidated Financial Statements.

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.

As a subsidiary of Sempra Energy, the Company receives certain
services therefrom. Although it is charged its allocable share of the
cost of such services, that cost is less than if the Company had to
provide those services itself.

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 prepares 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 records 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. Additional information on the effects of regulation on the
Company is provided in Note 12.

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 to return excess collections to customers.

Regulatory Assets

Regulatory assets include unrecovered premiums on early retirement of
debt and other expenditures that the Company expects to recover in
future rates. See Note 12 for additional information.

Inventories

Included in inventories at December 31, 2000, were $11 million of
materials and supplies ($11 million in 1999), and $56 million of
natural gas ($67 million in 1999). 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.

Loans to Affiliate

PE has promissory notes receivable from Sempra Energy. The notes bear
interest based on short-term commercial paper rates, and are due on
demand. The notes receivable were $702 million and $448 million at
December 31, 2000 and 1999, respectively.

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 4.36, 4.39, 4.36
in 2000, 1999 and 1998, 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

Comprehensive income includes all changes, except those resulting from
investments by owners and distributions to owners, in the equity of a
business enterprise from transactions and other events including, as
applicable, minimum pension liability adjustments and unrealized gains
and losses on marketable securities that are classified as available-
for-sale. At December 31, 1999, the Company had one such investment,
which increased in value during 1999. In October 2000, this investment
was sold. These changes are reflected 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 the 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 were added to shareholders' equity at that
time. Other liabilities established in connection with discontinued
operations and the quasi-reorganization will be resolved in future
years. Management believes the provisions 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.

Basis of Presentation

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

New Accounting Standards

Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." As amended, SFAS 133 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
exposure.

The adoption of this new standard on January 1, 2001, did not
impact the Company's earnings. However, $982 million in current
assets, $1.1 billion in noncurrent assets, and $4 million in
current liabilities were recorded as of January 1, 2001, in the
Consolidated Balance Sheet as fixed-priced contracts and other
derivatives. Due to the regulatory environment in which SoCalGas
operates, regulatory assets and liabilities were established to
the extent that derivative gains and losses are recoverable or
payable through future rates. As such, $982 million in current
regulatory liabilities, $1.1 billion in noncurrent regulatory
liabilities, and $4 million in current regulatory assets were
recorded as of January 1, 2001, in the Consolidated Balance Sheet.
The ongoing effects will depend on future market conditions and
the Company's hedging activities.
In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) 101 - Revenue
Recognition. SABs are not rules issued by the SEC. Rather, they
represent interpretations and practices followed by the SEC's
staff in administering the disclosure requirements of the federal
securities laws. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements; it
does not change the existing rules on revenue recognition. SAB 101
sets forth the basic criteria that must be met before revenue
should be recorded. Implementation of SAB 101 was required by the
fourth quarter of 2000 and had no effect on the Company's
consolidated financial statements.

NOTE 3: SHORT-TERM BORROWINGS

At December 31, 2000, SoCalGas had a $200 million credit
agreement, which was available to support commercial paper. At
December 31, 2000, and 1999, SoCalGas' lines of credit were
unused. On February 9, 2001, the agreement expired and was
replaced on February 27, 2001, with a $170 million one-year
agreement. This agreement bears interest at various rates based
on market rates and SoCalGas' credit rating.

NOTE 4: LONG-TERM DEBT

--------------------------------------------------------------
December 31,
(Dollars in millions) 2000 1999
--------------------------------------------------------------
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
5.670% Notes, January 15, 2028 75 75
SFr. 15,695,000 6.375% Foreign
Interest Payment Securities 8 8
8.750% Notes, July 6, 2000 - 30
-----------------------
203 233
-----------------------

Total 953 983

Less:
Current portion of long-term debt 120 30
Unamortized discount on
long-term debt 12 14
-----------------------

Total $ 821 $ 939
--------------------------------------------------------------

Maturities of long-term debt are $120 million in 2001, $100 million in
2002, $175 million in 2003 and $558 million after 2005. SoCalGas has
CPUC authorization to issue an additional $455 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 $585 million of
first-mortgage bonds as of December 31, 2000, subject to CPUC
authorization.

Unsecured Long-Term Debt

In July 2000, SoCalGas repaid $30 million of 8.75 percent medium-term
notes upon maturity.
In May 1996, SoCalGas issued SFr. 15,695,000 ($8 million) of
6.375% Foreign Interest Payment Securities. The securities are
renewable at ten-year intervals at reset interest rates. The next put
date for the securities is May 14, 2006.

Callable Bonds

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

Recent Shelf Registration

In December 2000, PE and Sempra Energy jointly filed a shelf
registration for the public offering of up to $500 million of debt
securities of PE, guaranteed by Sempra Energy. Any securities under
this shelf registration are offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933. At December
31, 2000, no debt securities have been issued under this registration
statement.

NOTE 5: INCOME TAXES

The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
-----------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.2 7.4 9.9
State income taxes - net of
federal income tax benefit 6.9 7.3 4.7
Tax credits (0.7) (0.9) (1.0)
Other - net 0.3 (1.4) (2.2)
-----------------------------
Effective income tax rate 46.7% 47.4% 46.4%
-----------------------------------------------------------------------

The components of income tax expense are as follows:
-----------------------------------------------------------------------
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------
Current:
Federal $139 $ 22 $242
State 41 9 65
-----------------------------
Total current taxes 180 31 307
-----------------------------
Deferred:
Federal 7 113 (139)
State - 25 (38)
-----------------------------
Total deferred taxes 7 138 (177)
-----------------------------
Deferred investment tax credits - net (2) (3) (3)
-----------------------------
Total income tax expense $185 $166 $127
-----------------------------------------------------------------------

Federal and state income taxes are allocated between operating income
and other income.

Accumulated deferred income taxes at December 31 result from the
following:

----------------------------------------------------------------
(Dollars in millions) 2000 1999
----------------------------------------------------------------
Deferred Tax Liabilities:
Differences in financial and
tax bases of utility plant $ 447 $ 471
Regulatory balancing accounts 11 16
Regulatory assets 39 69
Other 11 18
--------------------
Total deferred tax liabilities 508 574
--------------------
Deferred Tax Assets:
Investment tax credits 38 39
Comprehensive Settlement (see Note 12) 26 42
Postretirement benefits 39 69
Other deferred liabilities 143 98
Restructuring costs 43 43
Other 38 52
--------------------
Total deferred tax assets 327 343
--------------------
Net deferred income tax liability $ 181 $ 231
--------------------------------------------------------------

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

Dollars in millions 2000 1999
--------------------------------------------------------------
Current liability (asset) $ (43) $ 8
Noncurrent liability 224 223
--------------------
Total $ 181 $ 231
--------------------------------------------------------------

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 have been transferred from the Company's plans
to plans of related entities. In connection with voluntary separations
related to the business combination, the Company recorded a $51
million special termination benefit and a $30 million settlement gain
in 1998.
During 2000, the Company participated in another voluntary
separation program. As a result, the Company recorded a $40 million
special termination benefit in 2000.

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:

---------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-----------------------------------------------
(Dollars in millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------

Weighted-Average Assumptions
as of December 31:
Discount rate 7.25%(1) 7.75% 7.75% 7.75%
Expected return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Cost trend of covered
health care charges - - 7.50%(2) 7.75%(2)

Change in Benefit Obligation:
Net benefit obligation at
January 1 $1,057 $1,156 $ 408 $ 446
Service cost 23 28 8 11
Interest cost 84 77 28 30
Plan participants' contributions - - - 1
Actuarial (gain) loss 79 (120) (17) (62)
Curtailments (4) - 4 -
Transfer of liability (3) - (6) - -
Special termination benefits 34 - 2 -
Gross benefits paid (148) (78) (18) (18)
-----------------------------------------------
Net benefit obligation at
December 31 1,125 1,057 415 408
-----------------------------------------------

Change in Plan Assets:
Fair value of plan assets
at January 1 1,971 1,595 463 379
Actual return on plan assets (141) 453 (23) 77
Employer contributions - 1 10 24
Plan participants' contributions - - - 1
Transfer of assets (3) - - 2 -
Gross benefits paid (148) (78) (18) (18)
-----------------------------------------------
Fair value of plan assets
at December 31 1,682 1,971 434 463
-----------------------------------------------
Funded status at December 31 557 914 19 55
Unrecognized net actuarial gain (591) (969) (116) (156)
Unrecognized prior service cost 38 45 - -
Unrecognized net transition
obligation 2 3 - -
-----------------------------------------------
Net recorded asset (liability)
at December 31 $ 6 $ (7) $ (97) $(101)
---------------------------------------------------------------------------------
(1) Discount rate decreased from 7.75% to 7.25%, effective March 1, 2000.
(2) Decreasing to ultimate trend of 6.50% in 2004.
(3) To reflect transfer of plan assets and liability to Sempra Energy.

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

------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
---------------------------------------------
(Dollars in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------

Prepaid benefit cost $ 15 - - -
Accrued benefit cost (9) $ (7) $(97) $(101)
Additional minimum liability (4) (2) - -
Intangible asset 1 2 - -
Accumulated other
comprehensive income, pretax 3 - - -
------------------------------------------------------------------------------------
Net recorded asset(liability) $ 6 $ (7) $(97) $(101)
------------------------------------------------------------------------------------

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

------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
--------------------------------------------------
For the years ended December 31 2000 1999 1998 2000 1999 1998
(Dollars in millions)
------------------------------------------------------------------------------------

Service cost $ 23 $ 28 $ 33 $ 8 $ 11 $ 12
Interest cost 84 77 95 28 30 31
Expected return on assets (131) (112) (128) (32) (27) (24)
Amortization of:
Transition obligation 1 1 1 9 9 9
Prior service cost 4 4 3 - - -
Actuarial gain (29) (14) (12) (8) - -
Special termination benefits 33 - 48 7 - 3
Settlement credit - - (30) - - -
Regulatory adjustment 18 17 - 28 24 9
--------------------------------------------------

Total net periodic benefit cost $ 3 $ 1 $ 10 $ 40 $ 47 $ 40
------------------------------------------------------------------------------------

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:

----------------------------------------------------------------------
(Dollars in millions) 1% Increase 1% Decrease
----------------------------------------------------------------------
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $ 6 $ (6)
Effect on the health care component of the
accumulated other postretirement benefit $61 $(58)
obligation
----------------------------------------------------------------------

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 $16 million and $12 million, respectively, as of
December 31, 2000, and $12 million and $9 million, respectively, as of
December 31, 1999.

Other postretirement benefits include retiree life insurance,
medical benefits for retirees and their spouses, and Medicare Part B
reimbursement for certain retirees.

Savings Plan

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. Employer contributions, after one year of completed service,
are used to purchase 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. The employee's
contributions, at the direction of the employees, are primarily
invested in Sempra Energy stock, mutual funds or institutional trusts.
Employer contributions for the SoCalGas plan are partially funded by
the Sempra Energy Employee Stock Ownership Plan and Trust (formerly
the Pacific Enterprises Employee Stock Ownership Plan and Trust).
SoCalGas' contributions to the savings plan were $5 million in 2000,
$6 million in 1999 and $7 million in 1998.

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, 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 only its disclosure requirements and
continues to account for stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The subsidiaries record an expense for the plans to the extent
that subsidiary employees participate in the plans, or that
subsidiaries are allocated a portion of Sempra Energy's costs of the
plans. PE recorded expenses (credits) of $2 million, ($4) million and
$8 million in 2000, 1999 and 1998, respectively.

NOTE 8: FINANCIAL INSTRUMENTS

Fair Value

The fair values of the Company's financial instruments (cash,
temporary investments, notes receivable, dividends payable, short-term
and long-term debt, customer deposits, and preferred stock) 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 were $1.0 billion and $0.9 billion, respectively, at
both December 31, 2000 and December 31, 1999. The carrying amounts
and fair values of the combined preferred stock and preferred stock of
subsidiaries were $100 million and $56 million, respectively, at
December 31, 2000, and $100 million and $71 million, respectively, at
December 31, 1999. The fair values of the long-term debt and preferred
stock were estimated based on quoted market prices for them or for
similar issues.

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), 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. At December 31,
2000, unrealized gains associated with these activities totaled $72
million. These savings will be passed on to customers during the
first quarter of 2001. At December 31, 1999, gains and/or losses from
natural gas futures contracts were not material to the Company's
financial statements.

NOTE 9: PREFERRED STOCK OF SUBSIDIARY

-----------------------------------------------------------------
SoCalGas
December 31,
(Dollars in millions) 2000 1999
-----------------------------------------------------------------
Not subject to mandatory redemption:
$25 par value, authorized 1,000,000 shares
6% Series, 28,134 shares outstanding $ 1 $ 1
6% Series A, 783,032 shares outstanding 19 19
Without par value, authorized 10,000,000 shares - -
--------------
$20 $20
-----------------------------------------------------------------

None of SoCalGas' series of preferred stock are callable. All series
have one vote per share and cumulative preferences as to dividends. On
February 2, 1998, SoCalGas redeemed all outstanding shares of its
7.75% Series Preferred Stock at a price per share of $25 plus accrued
dividends. The total cost to SoCalGas was $75 million.

NOTE 10: SHAREHOLDERS' EQUITY

The Company is authorized to issue 600 million shares of common stock,
10 million shares of Preferred Stock and 5 million shares of Class A
Preferred Stock. All shares of PE common stock are owned by Sempra
Energy.

COMMON EQUITY
-------------------------------------------------------------------
December 31,
(Dollars in millions) 2000 1999
-------------------------------------------------------------------
Common stock $ 1,282 $ 1,282
Retained earnings 165 58
Accumulated other comprehensive income (1) 6
-------------------------
Total common equity $ 1,446 $ 1,346
-------------------------------------------------------------------
PREFERRED STOCK
-------------------------------------------------------------------
Call December 31,
(Dollars in millions except call price) Price 2000 1999
-------------------------------------------------------------------

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 preferred stock $ 80 $ 80
-------------------------------------------------------------------

All or any part of every series of presently outstanding 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,
together with the accrued and accumulated dividends to the date of
redemption. All series have one vote and cumulative preferences as to
dividends.

NOTE 11: COMMITMENTS AND CONTINGENCIES

Natural Gas Contracts

SoCalGas buys natural gas under short-term and long-term contracts.
Short-term purchases under these contracts are primarily from various
Southwest U.S. and Canadian gas suppliers, and are primarily based on
monthly spot-market prices. SoCalGas transports gas under long-term
firm pipeline capacity agreements that provide for annual reservation
charges. SoCalGas recovers such fixed charges in rates. SoCalGas has

commitments for firm pipeline capacity under contracts with pipeline
companies that expire at various dates through 2006. In 1998, SoCalGas
restructured its long-term commodity contracts with suppliers of
California offshore and Canadian Gas. These contracts expire at the
end of 2003.

At December 31, 2000, the future minimum payments under natural
gas contracts were:

-----------------------------------------------------------------
Storage and
(Dollars in millions) Transportation Natural Gas
-----------------------------------------------------------------
2001 $ 182 $1,268
2002 178 360
2003 180 262
2004 182 -
2005 177 -
Thereafter 92 -
----------------------------------
Total minimum payments $ 991 $ 1,890
-----------------------------------------------------------------

Total payments under the contracts were $1.4 billion in 2000, $1.1
billion in 1999, and $0.9 billion in 1998.

Leases

PE and SoCalGas have operating leases on real and personal property
expiring at various dates from 2001 to 2030. Certain leases on office
facilities contain escalation clauses requiring annual increases in
rent ranging from 4 percent to 5 percent. The rentals payable under
these leases are determined on both fixed and percentage bases, and
most leases contain options to extend, which are exercisable by PE or
SoCalGas.

At December 31, 2000, the minimum rental commitments payable in
future years under all noncancellable leases were:

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

(Dollars in millions)
-----------------------------------------------------------------
2001 $ 39
2002 41
2003 41
2004 40
2005 40
Thereafter 249
-----------------------------------------------------------------
Total future rental commitment $ 450
-----------------------------------------------------------------

Rent expense totaled $55 million in 2000, $52 million in 1999 and $55
million in 1998.

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 $56 million at December 31,
2000. These leases are included in the above table.

Other Commitments and Contingencies

At December 31, 2000, commitments for capital expenditures were
approximately $12 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. Significant costs are incurred 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 2000, 1999 and 1998,
and are not expected to be significant over the next five years. The
Company has been associated with various sites which may require
remediation under federal, state or local environmental laws. The
Company 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, is not known.
The environmental issues currently facing the Company or resolved
during the latest three-year period include investigation and
remediation of its manufactured-gas sites (18 completed as of December
31, 2000 and 24 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).

Litigation

A recent lawsuit, which seeks class-action certification, alleges
that Sempra Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted
to drive up the price of natural gas for Californians by agreeing
to stop a pipeline project that would have brought new and cheaper
natural gas supplies into California. The Company believes the
allegations are without merit.
Except for the matter referred to above, neither the Company nor
its subsidiary are party to, nor is their property the subject of, any
material pending legal proceedings other than routine litigation
incidental to their businesses. 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

The Company 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 natural gas sales to noncore
customers. In January 1998, the CPUC released a staff report
initiating a project 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 July 1999, after hearings, the CPUC issued a decision stating
which natural gas regulatory changes it found most promising,
encouraging parties to submit settlements addressing those changes,
and providing for further hearings if necessary.
In October 1999, the state of California enacted a law (AB 1421)
which requires that natural 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 natural gas from a
nonutility provider. The law prohibits the CPUC from unbundling most
distribution-related natural gas services (including meter reading)
and after-meter services (including leak investigation, inspecting
customer piping and appliances, pilot relighting and carbon monoxide
investigation) for core customers. The objective is to preserve both
customer safety and customer choice.
Between late 1999 and April 2000, several conflicting settlement
proposals were filed by various groups of parties that addressed the
changes the CPUC found promising in July 1999. The principal issues in
dispute included: whether firm, tradable rights to capacity on
SoCalGas' major gas transmission lines should be created, with
SoCalGas at risk for market demand for the recovery of the cost of
these facilities; the extent to which SoCalGas' storage services
should be further unbundled and SoCalGas be put at greater risk for
recovery of storage costs; the manner in which interstate pipeline
capacity held by SoCalGas to serve core markets should be allocated to
core customers who purchase gas from energy service providers other
than SoCalGas; and the recovery of the utilities' costs to implement
whatever regulatory changes are adopted. Additional proposals included
improving the access of energy service providers to sell natural gas
supply to core customers of SoCalGas.

Certain parties contend that the restructuring process is an
appropriate venue for addressing whether SoCalGas should refund
retroactively to September 1999 the cost in rates of ownership and
operation of one of SoCalGas' storage fields. SoCalGas actively
opposes this proposal and the propriety of this venue for its
resolution. In November 2000, these parties entered into a settlement
with SoCalGas in a related CPUC proceeding that provides for no
retroactive refund of the cost in rates of this field. This settlement
is pending CPUC approval.
Hearings in the restructuring case were held in mid-2000 and a
Proposed Decision (PD) was released in November 2000. The PD does not
recommend adoption of shareholder absorption of stranded interstate
pipeline costs or retroactive refund of any amount related to the
storage field. The PD recommends some, but not all, of the changes
proposed by SoCalGas. If adopted, the PD is not expected to have a
negative earnings impact on SoCalGas. A CPUC decision is expected in
2001.
Supply/demand imbalances are affecting the price of natural
gas in California more than in the rest of the country because of
California's dependence on natural gas fired electric generation
due to air-quality considerations. The average price of natural
gas at the California/Arizona (CA/AZ) border was $6.25/mmbtu in
2000, compared with $2.33/mmbtu in 1999. On December 11, 2000, the
average spot-market price at the CA/AZ border reached a record
high of $56.91/mmbtu. Underlying the high natural gas prices are
several factors, including the increase in natural gas usage for
electric generation, cold winter weather and reduced natural gas
supply resulting from historically low storage levels, lower gas
production and a major pipeline rupture. In December 2000,
SoCalGas filed with the FERC for a reinstitution of price caps on
short-term interstate capacity to the CA/AZ border and between the
interstate pipelines and California's local distribution
companies, effective until March 31, 2001. SoCalGas requested that
if the price of natural gas sold into California exceeds 150
percent of the national average, the price should be capped at
that level, plus FERC-imposed transportation costs. The FERC
responded by issuing extensive data requests, but has not
otherwise acted on SoCalGas' request.

Electric Industry Restructuring

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.
Although electric industry restructuring has no significant 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
generation from SoCalGas' service area and as noted in the
following paragraph.
On January 18, 2001, Pacific Gas and Electric Company (PG&E)
filed an emergency application with the CPUC requesting that SoCalGas
be ordered to purchase natural gas or supply available natural gas to
meet PG&E's core procurement needs. Some of PG&E's suppliers are
declining to sell natural gas to PG&E due to its poor credit rating.
Although SoCalGas has agreed to supply a limited amount of natural gas
to PG&E through March 31, 2001 (secured by PG&E customer receivables),
it is still urging rejection of the request which, if approved, could
severely jeopardize SoCalGas' ability to serve its own customers
because of cash flow considerations.

Performance-Based Regulation (PBR)

In recent years, the CPUC has directed utilities to use PBR. To
promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, PBR has replaced
the general rate case and certain other regulatory proceedings for
SoCalGas. Under PBR, regulators generally 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,
at which time the mechanism will be updated. That update will include,
among other things, a reexamination of SoCalGas' reasonable costs of
operation in 2003 to be allowed in rates. Key elements of the current
mechanism include an annual indexing mechanism that adjusts rates by
the inflation rate less a productivity factor and other adjustments to
accommodate major unanticipated events, a sharing mechanism with
customers that applies to earnings that exceed the authorized rate of
return on rate base, rate refunds to customers if service quality
deteriorates or awards if service quality exceeds set standards, and a
change in authorized rate of return and customer rates if interest
rates change by more than a specified amount. A rate change 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 gas-supply contracts. 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 was replaced by the 1999
Biennial Cost Allocation Proceeding (BCAP), which went into
effect on June 1, 2000. The CPUC's decision on the 1999 BCAP
allows 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. 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. On June 8, 2000, the CPUC approved an $8 million
award for the year ended March 31, 1999, and deferred its decision
regarding extending the GCIM beyond March 31, 2000 until an evaluation
is performed by its staff. On January 4, 2001, the CPUC's Energy
Division issued its evaluation report recommending the continuation of
the GCIM with modifications. A CPUC decision is expected by September
2001.
In June 2000, SoCalGas filed its annual GCIM application with the
CPUC, requesting an award of $10 million for the year ended March 31,
2000. On October 30, 2000, the CPUC's Office of Ratepayer Advocates
recommended approval of the award and the extension of the GCIM beyond
March 31, 2000, with certain modifications to the tolerance band and
benchmark price. A CPUC decision is expected by September 2001.

Biennial Cost Allocation Proceeding

On November 4, 1999, the CPUC revised its previous decision on
SoCalGas' 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 is reflected in the
rates adopted in the final 1999 BCAP decision.
On April 20, 2000, the CPUC issued a decision on SoCalGas' 1999
BCAP, adopting an overall decrease in natural gas revenues of $210
million for transportation rates effective June 1, 2000. There is a
return to 75/25 (customer/shareholder) balancing account treatment for
noncore transportation revenues, excluding certain transactions. In
addition, unbundled noncore storage revenues are balanced 50/50
between customers and shareholders. Since the decrease reflects
anticipated changes in corresponding costs, it has no effect on net
income.

Cost of Capital

For 2001, 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 2000 and 1999, unless interest-rate changes are large
enough to trigger an automatic adjustment as discussed above under
"Performance-Based Regulation."

Integration of Core Gas Purchase Functions

On January 11, 2001, SoCalGas and SDG&E filed an application with the
CPUC to integrate their natural gas purchasing departments. The filing
calls for a single natural gas acquisition group to purchase natural
gas for the two utilities' core gas customers by using their pooled
gas portfolio assets. These assets include storage, interstate

capacity and natural gas supply contracts. The two utilities would
charge their core customers the same natural gas commodity rate from
the diversified portfolio. The change would bring increased efficiency
to the utilities' core gas purchase functions. The filing requests
that this change be effective November 1, 2001. A CPUC decision is not
expected until October 2001.

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. As a
result, the Company no longer operates in multiple business segments.

NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarter ended
-------------------------------------------------------
Dollars in millions March 31 June 30 September 30 December 31
-----------------------------------------------------------------------------------

2000
Operating revenues $ 698 $ 630 $ 722 $ 804
Operating expenses 632 565 652 742
-----------------------------------------------------
Operating income $ 66 $ 65 $ 70 $ 62
-----------------------------------------------------

Net income $ 52 $ 49 $ 52 $ 58
Dividends on preferred stock 1 1 1 1
-----------------------------------------------------
Earnings applicable
to common shares $ 51 $ 48 $ 51 $ 57
=====================================================

1999
Operating revenues $ 614 $ 621 $ 561 $ 773
Operating expenses 547 557 484 710
-----------------------------------------------------
Operating income $ 67 $ 64 $ 77 $ 63
-----------------------------------------------------

Net income $ 48 $ 40 $ 45 $ 51
Dividends on preferred stock 1 1 1 1
-----------------------------------------------------
Earnings applicable
to common shares $ 47 $ 39 $ 44 $ 50
=====================================================

Reclassifications have been made to certain of the amounts since they were presented in
the Quarterly Reports on Form 10-Q.

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 2001 annual meeting of
shareholders. The information required on the Company's executive
officers is provided below.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age* Positions
-------------------------------------------------------------------

Stephen L. Baum 59 Chairman, Chief Executive
Officer and President

John R. Light 59 Executive Vice President and
General Counsel

Neal E. Schmale 54 Executive Vice President and
Chief Financial Officer

Frank H. Ault 56 Vice President and Controller

Charles A. McMonagle 50 Vice President and Treasurer

Thomas C. Sanger 57 Corporate Secretary

* As of December 31, 2000.

Each Executive Officer has been an officer of Pacific Enterprises
or one of its affiliates 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 2001 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 2001 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 . . . . . . . . . . . . . . 25

Statements of Consolidated Income for the years
ended December 31, 2000, 1999 and 1998 . . . . . . . . 26

Consolidated Balance Sheets at December 31,
2000 and 1999. . . . . . . . . . . . . . . . . . . . . 27

Statements of Consolidated Cash Flows for the
years ended December 31, 2000, 1999 and 1998 . . . . . 29

Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 . . . . . . . . . . . 30

Notes to Consolidated Financial Statements . . . . . . . 31

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. . . . . . . . . . . . . . . . . . 52

Schedule I--Condensed Financial Information of Parent. . 53

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 56 of this report.

(b) Reports on Form 8-K
There were no reports on Form 8-K filed after September 30, 2000.

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, 333-52926 and 33-44338 of Pacific
Enterprises on Forms S-3 of our report dated January 26, 2001
(February 27, 2001, as to Note 3), appearing in this Annual Report
on Form 10-K of Pacific Enterprises for the year ended December 31,
2000.

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 9, 2001

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 2000 1999 1998
-------- ------- --------
Revenues and other income $ 33 $ -- $ 11
Expenses, interest and income taxes 32 20 20
-------- ------- --------
Income (loss) before subsidiary earnings 1 (20) (9)
Subsidiary earnings 206 200 152
-------- ------- --------
Earnings applicable to common shares $ 207 $ 180 $ 143
======== ======= ========

Condensed Balance Sheets
(Dollars in millions)

Balance at December 31 2000 1999
---------- ----------
Assets:
Current assets $ 43 $ 41
Investment in subsidiary 1,287 1,288
Due from affiliates - long-term 617 487
Deferred charges and other assets 117 153
---------- ----------
Total Assets $ 2,064 $ 1,969
========== ==========
Liabilities and Shareholders' Equity:
Dividends payable $ 1 $ 1
Due to affiliates 364 294
Other current liabilities 31 34
---------- ----------
Total current liabilities 396 329
Other long-term liabilities 142 214
Common equity 1,446 1,346
Preferred stock 80 80
---------- ----------
Total Liabilities and Shareholders' Equity $ 2,064 $ 1,969
========== ==========

PACIFIC ENTERPRISES
Schedule 1 (continued)
Condensed Financial Information of Parent

Condensed Statements of Cash Flows
(Dollars in millions)

For the years ended December 31 2000 1999 1998
-------- ------- -------
Cash flows from operating activities $ (96) $ (120) $ (216)
-------- ------- -------
Expenditures for property, plant and equipment -- -- (12)
Dividends received from subsidiaries 200 278 164
Increase in investments and other assets -- (14) (53)
-------- ------- -------
Cash flows from investing activities 200 264 99
-------- ------- -------
Sale of common stock -- -- 27
Increase (decrease) in short-term debt -- (43) 43
Common dividends paid (100) (100) (97)
Preferred dividends paid (4) (4) (4)
-------- ------- -------
Cash flows from financing activities (104) (147) (31)
-------- ------- -------
Net decrease -- (3) (148)
Cash and Cash Equivalents, January 1 -- 3 151
-------- ------- -------
Cash and Cash Equivalents, December 31 $ -- $ -- $ 3
======== ======= =======
54

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

PACIFIC ENTERPRISES

By: /s/ Stephen L. Baum

Stephen L. Baum
Chairman, Chief Executive Officer
and President

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

Name/Title Signature Date

Principal Executive Officer:
Stephen L. Baum
Chairman, Chief Executive Officer
and President /s/ Stephen L. Baum March 6, 2001

Principal Financial Officer:
Neal E. Schmale
Executive Vice President,
Chief Financial Officer /s/ Neal E. Schmale March 6, 2001

Principal Accounting Officer:
Frank H. Ault
Vice President, Controller /s/ Frank H. Ault March 6, 2001

Directors:
Stephen L. Baum, Chairman /s/ Stephen L. Baum March 6, 2001

Hyla H. Bertea, Director /s/ Hyla H. Bertea March 6, 2001

Ann L. Burr, Director /s/ Ann L. Burr March 6, 2001

Herbert L. Carter, Director /s/ Herbert L. Carter March 6, 2001

Richard A. Collato, Director /s/ Richard A. Collato March 6, 2001

Daniel W. Derbes, Director /s/ Daniel W. Derbes March 6, 2001

Wilford D. Godbold, Jr., Director /s/ Wilford D. Godbold, Jr. March 6, 2001

William D. Jones, Director /s/ William D. Jones March 6, 2001

Ralph R. Ocampo, Director /s/ Ralph R. Ocampo March 6, 2001

William G. Ouchi, Director /s/ William G. Ouchi March 6, 2001

Richard J. Stegemeier, Director /s/ Richard J. Stegemeier March 6, 2001

Thomas C. Stickel, Director /s/ Thomas C. Stickel March 6, 2001

Diana L. Walker, Director /s/ Diana L. Walker March 6, 2001

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

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

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

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

10.05 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).

10.06 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 12 -- Statement Re: Computation of Ratios

12.01 Computation of Ratio of Earnings to Fixed Charges for the years
ended December 31, 2000, 1999, 1998, 1997 and 1996.

Exhibit 21 -- Subsidiaries

21.01 Schedule of Subsidiaries at December 31, 2000.

Exhibit 23 - Independent Auditors' Consent, page 52.

GLOSSARY

AFUDC Allowance for Funds Used During
Construction

BCAP Biennial Cost Allocation Proceeding

Bcf Billion Cubic Feet (of natural gas)

CA/AZ California/Arizona

CPUC California Public Utilities Commission

Enova Enova Corporation

EPA Environmental Protection Agency

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

mmbtu Million British Thermal Units (of natural gas)

PBR Performance-Based Ratemaking/Regulation

PD Proposed Decision

PE Pacific Enterprises

PG&E Pacific Gas and Electric Company

PRP Potential Responsible Party

SAB Staff Accounting Bulletin

SDG&E San Diego Gas & Electric Company

SEC Securities and Exchange Commission

SFAS Statement of Financial Accounting Standards

SoCalGas Southern California Gas Company

UEG Utility Electric Generation

VaR Value at Risk