SAN DIEGO GAS & ELECTRIC CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002
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Commission file number 1-3779
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SAN DIEGO GAS & ELECTRIC COMPANY
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(Exact name of registrant as specified in its charter)

California 95-1184800
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

8330 Century Park Court, San Diego, California 92123
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(Address of principal executive offices)
(Zip Code)

(619) 696-2000
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes X No
----- -----

Common stock outstanding: Wholly owned by Enova Corporation

ITEM 1. FINANCIAL STATEMENTS.

SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions

SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions

SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

This Quarterly Report on Form 10-Q is that of San Diego Gas & Electric
Company (SDG&E or the company). SDG&E's common stock is wholly owned by
Enova Corporation (Enova), which is a wholly owned subsidiary of Sempra
Energy, a California-based Fortune 500 holding company. The financial
statements herein are the Consolidated Financial Statements of SDG&E and
its sole subsidiary, SDG&E Funding LLC.

Sempra Energy also indirectly owns the common stock of Southern
California Gas Company (SoCalGas). SDG&E and SoCalGas are collectively
referred to herein as "the California utilities."

The accompanying Consolidated Financial Statements have been prepared in
accordance with the interim-period-reporting requirements of Form 10-Q.
Results of operations for interim periods are not necessarily indicative
of results for the entire year. In the opinion of management, the
accompanying statements reflect all adjustments necessary for a fair
presentation. These adjustments are only of a normal recurring nature.
Certain changes in classification have been made to prior presentations
to conform to the current financial statement presentation.

Information in this Quarterly Report is unaudited and should be read in
conjunction with the company's Annual Report on Form 10-K for the year
ended December 31, 2001 (Annual Report) and Quarterly Reports on Form
10-Q for the three months ended March 31, 2002 and the three months
ended June 30, 2002.

The company's significant accounting policies are described in Note 2 of
the notes to Consolidated Financial Statements in the company's Annual
Report. The same accounting policies are followed for interim reporting
purposes.

As described in the notes to Consolidated Financial Statements in the
company's Annual Report, SDG&E accounts for the economic effects of
regulation on utility operations (excluding generation operations) in
accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71).

NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (FASB) issued two
statements, SFAS 142 "Goodwill and Other Intangible Assets" and SFAS 143
"Accounting for Asset Retirement Obligations." The former is not
presently relevant to the company.

SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets and requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity increases the carrying amount of the
related long-lived asset to reflect the future retirement cost. Over
time, the liability is accreted to its present value and paid. The
capitalized cost is depreciated over the useful life of the related
asset. SFAS 143 is effective for the company beginning in 2003.

Upon adoption of SFAS 143, the company estimates that it would record an
addition of $100 million to utility plant representing the company's
share of the San Onofre Nuclear Generating Station (SONGS) estimated
future decommissioning costs (as discounted to the present value at the
date the various units began operation), and a corresponding retirement
obligation liability of $350 million (which includes accretion of that
discounted value to December 31, 2002). The nuclear decommissioning
trusts' balance of $498 million at September 30, 2002 represents amounts
collected for future decommissioning costs and earnings thereon, and has
a corresponding offset in accumulated depreciation ($356 million related
to SONGS Units 2 and 3) and deferred credits ($142 million related to
SONGS Unit 1). That total amount would be reduced by $450 million, based
on the $100 million depreciable base. The difference between the various
amounts will be recorded as a regulatory liability of $200 million to
reflect that SDG&E has collected the funds more quickly than SFAS 143
would accrete the retirement liability and depreciate the asset. Except
for SONGS, the company has not yet determined the effect of SFAS 143 on
its financial statements.

In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" that replaces SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS 144 governs the determination of whether the carrying
value of certain assets, primarily property, plant and equipment, should
be reduced. SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections", was
issued in April 2002 and will be effective for the company on January 1,
2003. In June, 2002, the FASB issued SFAS 146 "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue
94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity," and is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption
of these statements will not have a material impact on the company's
financial statements.

In June 2002, a consensus was reached in Emerging Issues Task Force
(EITF) Issue 02-3 "Issues Related to Accounting for Contracts Involved
in Energy Trading and Risk Management Activities," which codifies and
reconciles existing guidance on the recognition and reporting of gains
and losses on energy trading contracts and addresses other aspects of
the accounting for contracts involved in energy trading and risk
management activities.

Most of the consensus reached by the EITF is not applicable to SDG&E,
because of the way the company conducts business and the requirements of
SFAS 71.

2. MATERIAL CONTINGENCIES

ELECTRIC INDUSTRY RESTRUCTURING

The restructuring of California's electric utility industry has
significantly affected the company's electric utility operations. The
background of this issue is described in the company's Annual Report.
Subsequent developments are described herein.

SDG&E's AB 265 undercollection balance has been reduced from $392
million at December 31, 2001, to $270 million at September 30, 2002.
SDG&E has filed an application with the California Public Utilities
Commission (CPUC) for a rate surcharge to expedite recovery of this
undercollection. However, even at current rates and allocation of those
rates between the California Department of Water Resources (DWR) and
SDG&E, the balance is expected to be completely recovered by mid 2005.
Also at issue is the ownership of certain power sale profits. As
previously discussed in Note 12 of the notes to Consolidated Financial
Statements in the Annual Report, the CPUC rejected portions of a
memorandum of understanding with respect to a settlement of regulatory
issues related to electricity contracts held by SDG&E. A proposed
settlement would have granted SDG&E ownership of its power sale profits
in exchange for crediting $219 million to customers to offset a portion
of the rate-ceiling balancing account. Instead, the CPUC asserted that
all the profits associated with the contracts (which the CPUC estimated
to be $363 million) should accrue to the benefit of customers. The
company believes the CPUC's calculation of these profits is incorrect.
Moreover, the company believes that all profits associated with the
contracts properly are for the benefit of SDG&E shareholders rather than
customers. Accordingly, SDG&E has challenged the CPUC's disallowance of
profits from the contracts in both the California Court of Appeals and
in Federal District Court.

These court proceedings have been held in abeyance pending the CPUC's
consideration of another proposed settlement, which was negotiated with
the CPUC legal division in June 2002. The settlement, if approved by the
CPUC, would dispose of all issues relating to the contracts by
allocating an additional $24 million of power sale profits to customers
by a reduction of the rate-ceiling balancing account. The settlement, if
approved, would not adversely affect SDG&E's financial position,
liquidity or results of operations. A proposed CPUC decision issued in
September 2002 would reject the settlement, deny SDG&E's request for a
surcharge, and require SDG&E to reduce its AB 265 undercollection by
$130 million to reflect profits from the intermediate-term contracts
from June 2000 through January 2001. An alternate proposed decision
issued in October 2002 would essentially adopt the June 2002 settlement.
Final resolution of this matter is expected by the end of 2002. If the
settlement is not approved, SDG&E intends to proceed with its previously
instituted litigation seeking the allocation of all power sale profits
to shareholders.

On March 21, 2002, the CPUC affirmed its decision prohibiting new direct
access (DA) contracts after September 20, 2001, but rejected a proposal
to make the prohibition retroactive to July 1, 2001. Contracts in place
as of September 20, 2001 may be renewed or assigned to new parties. On
November 7, 2002, the CPUC issued a decision adopting DA exit fees with
a cap of 2.7 cents per kWh. This decision will have no effect on SDG&E's
cash flows or results of operations because any shortfall due to the cap
on the exit fees will be funded by bundled customers in current rates.

On April 4, 2002, the CPUC approved a plan that determines how much
ratepayer revenue the state's investor-owned utilities (IOUs) can
collect in 2002 for utility-retained generation. SDG&E continues to
collect the system average rate of 7.96 cents/kWh for commodity costs
(the 6.5-cent commodity rate ceiling, plus an amount sufficient to repay
the DWR for its purchases of power for utility customers). SDG&E also
collects a 0.7-cent/kWh competition transition charge (CTC). The excess,
if any, of the system average rate and CTC rate over actual costs is
used to reduce the AB 265 undercollection balance described above.

Operating costs of SONGS Units 2 and 3, including nuclear fuel and
related financing costs, and incremental capital expenditures are
recovered through a performance incentive pricing plan (ICIP) which
allows SDG&E to receive approximately 4.4 cents per kilowatt-hour for
SONGS generation. Any differences between these costs and the incentive
price affect net income and, for the nine-month period ended September
30, 2002, ICIP contributed $37 million to SDG&E's net income. The CPUC
has rejected an administrative law judge's proposed decision to end ICIP
prior to its December 31, 2003 scheduled expiration date. However, the
CPUC has also denied the previously approved market-based pricing for
SONGS beginning in 2004 and instead provided for traditional rate-making
treatment under which the SONGS ratebase would begin at zero,
essentially eliminating earnings from SONGS until ratebase grows. SDG&E
has applied for a rehearing of this decision as contrary to market-based
pricing contemplated by the overall SONGS ratemaking mechanism adopted
by the CPUC in establishing ICIP in 1996. If SDG&E were to be granted
market-based rates, SDG&E believes the impact of the end of ICIP would
be somewhat reduced.

Since early 2001, the DWR has procured power for each of the California
IOUs and the CPUC has established the allocation of the power and the
related cost responsibility among the IOUs for that power. SDG&E's
allocation results in its overall rates being comparable to those of the
other two California electric IOUs, Southern California Edison (Edison)
and Pacific Gas and Electric (PG&E).

The CPUC intends for the utilities to take the procurement function back
from DWR by the beginning of 2003. On September 19, 2002, the CPUC
issued a decision on how the power from the long-term contracts signed
by DWR should be allocated to the customers of each of the utilities for
purposes of determining the amount of additional power each utility will
be required to procure in 2003 and thereafter to fill out its resource
needs. The reasonableness of the IOUs' administration and dispatch of
the allocated contracts will be reviewed by the CPUC in an annual
proceeding. Assembly Bill 57 (AB 57), signed by California Governor
Davis on September 24, 2002, requires the CPUC to make this
determination, and to establish procedures that will allow utilities to
recover their electric procurement costs in a timely fashion without the
need for retrospective reasonableness reviews. SDG&E believes that a
return to the procurement function in accordance with AB 57 would have
no adverse impact on its financial position or results of operations.

On August 22, 2002, the CPUC issued a decision authorizing California's
IOUs to begin buying power to cover their net short energy requirements
starting on January 1, 2003. The net short is the difference between the
amount of electricity needed to cover a utility's customer demand and
the power provided by owned generation and existing contracts, including
the long-term power contracts allocated to the customers of each IOU by
the DWR (see above). The IOUs are authorized to enter into contracts of
up to five years for power from traditional sources, and up to 15 years
for power from renewable sources. Based upon the DWR's allocation, SDG&E
will be required to purchase approximately 10 percent of its customer
requirements in 2003.

On October 24, 2002, the CPUC issued a decision in the Electric
Procurement proceeding that directs the resumption of the electric
commodity procurement function by IOUs by January 1, 2003, and begins
the implementation of recent legislation regarding procurement and
renewables portfolio standard addressed in AB 57 and Senate Bill 1078.
The decision establishes a process for review and approval of the
utilities' updated 2003 procurement plans before January 1, 2003, and
long-term (20-year) procurement plans during 2003. The CPUC has
authorized the utilities to use derivatives to manage procurement risk
and to acquire a variety of resource types including utility ownership,
conventional generation, distributed generation, self generation, demand
side resources, transmission and renewables. A renewables portfolio
standard is adopted, requiring an additional one percent of energy sales
each year to be supplied by renewable sources. A semiannual cost review
and rate revision mechanism is established, and a trigger is established
for more frequent changes if balances exceed four percent of annual,
non-DWR generation revenues, to provide for timely recovery of any
undercollections. The decision expresses interest in an approach to an
incentive mechanism that rewards or penalizes utilities relative to
their performance against a benchmark.

The CPUC has placed a moratorium on the IOUs' purchasing electricity
from their affiliates either for two years or until the CPUC completes a
rulemaking on this matter.

The State of California has commenced the sale of $11.95 billion in
revenue bonds, the proceeds of which are needed to repay monies the
state borrowed from its general fund and other short-term lenders to
purchase electricity for its residents during the energy crisis of 2001
and 2002. The bonds include a variety of variable-rate and fixed-rate
instruments with maturity dates of up to 20 years. Sale of the bonds is
expected to close in November 2002. A CPUC decision issued in October
2002 implements a separate bond charge to be passed on to the IOUs'
customers. Due to SDG&E's billable rates being limited by the CPUC, the
decision potentially could result in a revenue shortfall that would be
recorded in a balancing account until disposition in the DWR Revenue
Requirements Phase of this proceeding.

GAS INDUSTRY RESTRUCTURING

As discussed in Note 13 of the notes to Consolidated Financial
Statements in the Annual Report, in December 2001 the CPUC issued a
decision related to gas industry restructuring, with implementation
anticipated during 2002. However, implementation has been delayed and
the CPUC has ordered additional hearings.

CPUC INVESTIGATION OF ENERGY-UTILITY HOLDING COMPANIES

In January 2002, the CPUC issued a decision that broadly determined that
a holding company would be required to provide cash to a utility
subsidiary to cover its operating expenses and working capital to the
extent they are not adequately funded through retail rates. Also in
January 2002, the CPUC ruled that it had jurisdiction to create the
holding company system and, therefore, retains jurisdiction to enforce
conditions to which the holding companies had agreed. The company filed
a request for rehearing on the issues, which the CPUC denied on July 17,
2002. The company is seeking judicial review of the orders in the
California Court of Appeals. The company filed its appeal on August 19,
2002.

NUCLEAR INSURANCE

SDG&E and the other co-owners of SONGS have purchased primary insurance
of $200 million, the maximum amount available, for public-liability
claims. An additional $9.25 billion of coverage is provided by secondary
financial protection required by the Nuclear Regulatory Commission and
provides for loss sharing among utilities owning nuclear reactors if a
costly accident occurs. SDG&E and the other co-owners of SONGS could be
assessed retrospective premium adjustments of up to $176 million
(SDG&E's share is $36 million unless default occurs by any other co-
owner) in the event of a nuclear incident involving any of the licensed,
commercial reactors in the United States, if the amount of the loss
exceeds $200 million. In the event the public-liability limit stated
above is insufficient, the Price-Anderson Act provides for Congress to
enact further revenue-raising measures to pay claims, which could
include an additional assessment on all licensed reactor operators.

Insurance coverage is provided for up to $2.75 billion of property
damage and decontamination liability. This coverage also provides
indemnity payments of $3.5 million per week, for up to 52 weeks, and
then $2.8 million per week, for up to 110 weeks, for the cost of
replacement power. There is a waiting period of 12 weeks. Coverage is
provided through a mutual insurance company owned by utilities with
nuclear facilities. If losses at any of the nuclear facilities covered
by the risk-sharing arrangements were to exceed the accumulated funds
available from these insurance programs, SDG&E could be assessed
retrospective premium adjustments of up to $7.4 million.

Both the public-liability and property insurance include coverage for
SDG&E's and the other co-owners' losses resulting from acts of
terrorism.

LITIGATION

Lawsuits filed in 2000 and currently consolidated in San Diego Superior
Court seek class-action certification and damages, alleging that Sempra
Energy, SoCalGas and SDG&E, along with El Paso Energy Corp. and several
of its affiliates, sought to maintain their positions in the natural gas
market by agreeing, among other things, to restrict the supply of
natural gas into Southern California. On October 16, 2002, the assigned
San Diego Superior Court judge ruled that the case can proceed with
discovery and that the California courts, rather than the Federal Energy
Regulatory Commission (FERC), have jurisdiction in the case. This was a
preliminary ruling and not a ruling on the merits or facts of the case.
The northern California cases which only name El Paso as a defendant are
scheduled for trial in September 2003 and the remainder of the cases are
set for trial in January 2004. In November 2002, the Nevada Attorney
General filed a similar lawsuit in Nevada.

SDG&E and two other subsidiaries of Sempra Energy, along with all other
sellers in the western power market, have been named defendants in a
complaint filed at the FERC by the California Attorney General's office
seeking refunds for electricity purchases based on alleged violations of
FERC tariffs. The FERC has dismissed the complaint. The California
Attorney General's office requested a rehearing, which the FERC denied.
The California Attorney General has filed an appeal in the 9th Circuit.

Management believes the above allegations are without merit.

In connection with its investigation into California energy prices, in
May 2002 the FERC ordered all energy companies engaged in electric
energy trading activities to state whether they had engaged in "death
star," "load shift," "wheel out," "ricochet," "inc-ing load" and various
other specific trading activities as described in memos prepared by
attorneys retained by Enron Corporation and in which it was asserted
that Enron was manipulating or "gaming" the California energy markets.
In response to the inquiry, SDG&E has denied using any of these
strategies. It did disclose and explain a single de minimus 100-MW
transaction for the export of electricity out of California. In response
to a related FERC inquiry, it has also denied engaging in "wash" or
"round trip" trading activities. SDG&E is also cooperating with the FERC
and other governmental agencies and officials in their various
investigations of the California energy markets.

Except for the matters referred to above, neither the company nor its
subsidiary is 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 financial
condition or results of operations.

3. COMPREHENSIVE INCOME

The following is a reconciliation of net income to comprehensive income.

Three Months Nine Months
Ended Ended
September 30, September 30,
-----------------------------------
(Dollars in millions) 2002 2001 2002 2001
- -------------------------------------------------------------------
Net income $ 48 $ 45 $ 155 $ 137

Minimum pension liability
adjustments -- -- (1) --

-----------------------------------
Comprehensive income $ 48 $ 45 $ 154 $ 137
- -------------------------------------------------------------------

4. FINANCIAL INSTRUMENTS

Note 9 of the notes to Consolidated Financial Statements in the
company's Annual Report discusses the company's financial instruments,
including the adoption of SFAS 133 and SFAS 138, accounting for
derivative instruments and hedging activities, market risk, interest-
rate risk management, energy derivatives and contracts, and fair value.
Additional activity and information since January 1, 2002 related to
financial instruments are described herein.

At September 30, 2002, $1 million in other current assets, $66 million
in current liabilities and $628 million in deferred credits and other
liabilities were recorded in the Consolidated Balance Sheets for fixed-
priced contracts and other derivatives. Regulatory assets and
liabilities were established to the extent that derivative gains and
losses are recoverable or payable through future rates. As such, $66
million in current regulatory assets, $628 million in noncurrent
regulatory assets and $1 million in other current liabilities were
recorded in the Consolidated Balance Sheets as of September 30, 2002.

There was no material impact to the Statements of Consolidated Income
for the nine months ended September 30, 2002. For the nine months ended
September 30, 2001, $2 million of losses were recorded in other income
in the Statements of Consolidated Income.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained in the company's Annual Report.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly 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 and developments; actions by the CPUC, the
California Legislature, the DWR, and the FERC; capital market
conditions, inflation rates, interest rates and exchange rates; energy
and trading markets, including the timing and extent of changes in
commodity prices; weather conditions and conservation efforts; war and
terrorist attacks; 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 report and other reports filed by
the company from time to time with the Securities and Exchange
Commission.

See also "Factors Influencing Future Performance" below.

CAPITAL RESOURCES AND LIQUIDITY

The company's utility operations are a major source of liquidity. During
the period beginning in the third quarter of 2000 and continuing into
the first quarter of 2001, SDG&E's liquidity and its ability to make
funds available to Sempra Energy were adversely affected by the electric
cost undercollections resulting from a temporary ceiling on electric
rates legislatively imposed in response to high electric commodity
costs. Growth in these undercollections has ceased as a result of an
agreement with the DWR, under which the DWR is obligated to purchase
SDG&E's full net short position consisting of the power and ancillary
services required by SDG&E's customers that are not provided by SDG&E's
nuclear generating facilities or its previously existing purchase power
contracts. The agreement with the DWR extends through December 31, 2002.
The CPUC is conducting proceedings intended to establish guidelines and
procedures for the resumption of electricity procurement by SDG&E and
the other California IOUs and in October 2002 issued a decision
directing the resumption of the electric commodity procurement function
by the IOUs by January 1, 2003. In addition, AB 57 and implementing
decisions by the CPUC provide for periodic adjustments to rates that
would reflect the costs of power and are intended to ensure that
undercollections for the commodity cannot exceed four percent of the
annual non-DWR generation revenues. See further discussion in the
company's Annual Report and the discussion of AB 57 in Note 2 of the
notes to Consolidated Financial Statements.

CASH FLOWS FROM OPERATING ACTIVITIES

For the nine-month period ended September 30, 2002, the increase in cash
flows from operations compared to the corresponding period in 2001 was
primarily due to the continuing decrease in SDG&E's undercollection of
purchased-power costs (the balance of which decreased to $392 million at
December 31, 2001 and $270 million at September 30, 2002 from a high in
mid-2001 of $750 million) and the decrease in trade accounts payable due
to the DWR's purchasing SDG&E's net short position beginning in 2001,
partially offset by the tax effect associated with the changes in
undercollected balancing accounts.

CASH FLOWS FROM INVESTING ACTIVITIES

For the nine-month period ended September 30, 2002, the increase in cash
flows used in investing activities compared to the corresponding period
in 2001 was primarily due to advances to Sempra Energy, which are
payable on demand, and increased capital expenditures.

Capital expenditures for property, plant and equipment are estimated to
be $400 million for the full year 2002 and are being financed primarily
by internally generated funds and security issuances. Construction,
investment and financing programs are continuously reviewed and revised
in response to changes in competition, customer growth, inflation,
customer rates, the cost of capital, and environmental and regulatory
requirements.

CASH FLOWS FROM FINANCING ACTIVITIES

For the nine-month period ended September 30, 2002, cash flows used in
financing activities increased from the corresponding period in 2001 due
primarily to the remarketing of variable-rate debt during the first
quarter of 2001, which appears as both payments and issuances on the
Condensed Statements of Consolidated Cash Flows, in comparison to the
repayment of long-term debt in 2002.

In June 2002, SDG&E paid off $28 million of 7.625-percent first mortgage
bonds at maturity and, in July 2002, called $10 million of 8.5-percent
first mortgage bonds.

In October 2002, SDG&E paid a dividend of $200 million to its parent
company, which declared a corresponding dividend to Sempra Energy.

In May 2002, SDG&E and SoCalGas replaced their individual revolving
lines of credit with a combined revolving credit agreement under which
each utility may individually borrow up to $300 million, subject to a
combined borrowing limit for both utilities of $500 million. Each
utility's revolving credit line expires on May 16, 2003, at which time
it may convert its then outstanding borrowings to a one-year term loan
subject to having obtained any requisite regulatory approvals relating
to long-term debt. Borrowings under the agreement, which are available
for general corporate purposes including back-up support for commercial
paper and variable-rate long-term debt, would bear interest at rates
varying with market rates and the individual borrowing utility's credit
rating. The agreement requires each utility individually to maintain a
debt-to-total capitalization ratio (as defined in the agreement) of not
to exceed 60 percent. The rights, obligations and covenants of each
utility under the agreement are individual rather than joint with those
of the other utility, and a default by one utility would not constitute
a default by the other. These lines of credit were unused at September
30, 2002.

On September 30, 2002, Moody's Investors Service, Inc., reduced its
ratings of the company's senior secured debt from Aa3 with a negative
outlook to A1 with a stable outlook. In April 2002, Fitch, Inc.
confirmed its prior credit ratings of the company's debt; Standard &
Poor's reduced its ratings of the company's secured debt one notch from
AA- with a negative outlook to A+ with a stable outlook and made
corresponding adjustments in the ratings and outlook of the company's
other debt; and Moody's Investors Service, Inc., confirmed its prior
ratings of the short-term debt and variable rate demand bonds of SDG&E.

RESULTS OF OPERATIONS

The company's net income increased for the nine-month period ended
September 30, 2002, compared to the corresponding period in 2001
primarily due to a $25 million after-tax benefit from the favorable
resolution of income-tax issues from prior years, partially offset by
increased depreciation expense. The company's net income also increased
for the three-month period ended September 30, 2002, compared to the
corresponding period in 2001 primarily due to a $7 million after-tax PBR
reward approved during the quarter, partially offset by increased
depreciation expense.

The tables below summarize electric and natural gas volumes and revenues by
customer class for the nine-month periods ended September 30, 2002 and
2001.

Electric Distribution and Transmission
(Volumes in millions of kWhrs, dollars in millions)

The decreases in electric revenues and in electric fuel and net purchased
power expense for the nine-month period ended September 30, 2002, compared
to the corresponding period in 2001, were primarily due to the effect of
lower electric commodity costs, which are passed on to customers without
markup, and the DWR's purchases of SDG&E's net short position beginning in
February 2001. The increase in electric fuel and net purchased power
expense for the three-month period ended September 30, 2002, compared to
the corresponding period in 2001, was primarily attributable to the DWR's
independent system operator real time market refund during the third
quarter 2001. Under the current regulatory framework, changes in commodity
costs normally do not affect net income, as explained in the Annual Report,
subject to the mechanisms under performance-based ratemaking as explained
in the Annual Report.

Gas Sales, Transportation and Exchange
(Volumes in billion cubic feet, dollars in millions)

The decreases in natural gas revenues and in the cost of natural gas
purchased for resale were primarily due to lower natural gas commodity
prices. The reduction in gas volumes in the electric generation market
is largely attributable to the loss of approximately 100 million cubic
feet per day of throughput on the SDG&E system when the Baja Norte
pipeline began service in September 2002 and due to the lower level of
electric generation demand. Under the current regulatory framework,
changes in natural gas commodity prices do not affect net income since,
as explained more fully in the Annual Report, current or future customer
rates normally recover the actual commodity cost of natural gas, subject
to the mechanisms under performance-based ratemaking as explained in the
Annual Report.

FACTORS INFLUENCING FUTURE PERFORMANCE

Performance of the company will depend primarily on the ratemaking and
regulatory process, electric and natural gas industry restructuring, and
the changing energy marketplace. These factors are discussed in the
company's Annual Report.

Merger Savings

In October 2001, the CPUC denied the California utilities' request to
continue equal sharing between ratepayers and shareholders of estimated
savings stemming from the 1998 merger between the California utilities'
former parent companies. Instead, the CPUC ordered that all of the
estimated 2003 merger savings go to ratepayers. The annual shareholder
portion of the pretax savings for 2002 is $13 million.

San Onofre Nuclear Generating Station

Operating costs of SONGS Units 2 and 3, including nuclear fuel and
related financing costs, and incremental capital expenditures are
recovered through a performance incentive pricing plan (ICIP) which
allows SDG&E to receive approximately 4.4 cents per kilowatt-hour for
SONGS generation. Any differences between these costs and the incentive
price affect net income and, for the nine-month period ended September
30, 2002, ICIP contributed $37 million to SDG&E's net income. The CPUC
has rejected an administrative law judge's proposed decision to end ICIP
prior to its December 31, 2003 scheduled expiration date. However, the
CPUC has also denied the previously approved market-based pricing for
SONGS beginning in 2004 and instead provided for traditional rate-making
treatment under which the SONGS ratebase would begin at zero,
essentially eliminating earnings from SONGS until ratebase grows. SDG&E
has applied for a rehearing of this decision as contrary to market-based
pricing contemplated by the overall SONGS ratemaking mechanism adopted
by the CPUC in establishing ICIP in 1996. If SDG&E were to be granted
market-based rates, SDG&E believes the impact of the end of ICIP would
be somewhat reduced.

Gas and Electric Rates

On November 7, 2002, the CPUC granted SDG&E an increase in its
authorized return on equity from 10.6 percent to 10.9 percent. This
change will result in a revenue requirement increase of $2.4 million
($1.9 million electric and $0.5 million gas), effective January 1, 2003.
The decision will increase SDG&E's overall rate of return from 8.75
percent to 8.77 percent.

SDG&E has a Gas Procurement Performance-Based Ratemaking (PBR) mechanism
that allows SDG&E to receive a share of the savings it achieves by
buying natural gas for customers below a monthly benchmark. In March
2002, SDG&E requested a reward of $7 million for the PBR natural gas
procurement period ended July 31, 2001 (Year 8). No reward will be
included in SDG&E's earnings until it is approved by the CPUC, which is
expected by the end of 2002. In October 2002, SDG&E filed its Year 9
report for the PBR natural gas procurement period ended July 31, 2002,
reporting a $1.4 million penalty, which has been recorded as of
September 30, 2002.

On June 17, 2002, SDG&E amended its March 21, 2002 joint application
with Southern California Edison requesting the CPUC to set contribution
levels for the SONGS nuclear decommissioning trust funds. SDG&E
requested a rate increase to cover its share of total projected
increased decommissioning costs for SONGS. If approved, the current
annual contribution to SDG&E's trust funds, which is recovered in rates,
would increase to $11.5 million annually from $4.9 million. Prior to
August 1999, SDG&E's annual contribution had been $22 million.

In August 2002, the CPUC issued a resolution approving SDG&E's 2000 PBR
report. The resolution approved SDG&E's request for a total net reward
of $11.7 million (pretax), as well as SDG&E's actual 2000 rate of return
(applicable only to electric distribution and gas transportation) of
8.74 percent, which is below the authorized 8.75 percent. This resulted
in no sharing of earnings in 2000 under the PBR sharing mechanism
described in the company's Annual Report. The financial results herein
include the reward during the third quarter of 2002.

In September 2002, the CPUC issued a decision denying SoCalGas' and
SDG&E's request to combine their natural gas procurement activities at
this time, pending completion of the CPUC's ongoing investigation of
market power issues.

The California utilities will file applications with the CPUC in
December 2002 to set new base rates. A CPUC decision is expected in late
2003, with new rates to become effective January 1, 2004.

The California utilities have earned rewards for successful
implementation of Demand-Side Management programs that have been
scheduled by the CPUC for payout over several years. In a recent ruling,
a CPUC Administrative Law Judge has indicated an intent to reanalyze the
uncollected portion of past rewards earned by utilities (which have not
been included in SDG&E's income), and potentially recompute the amount
of the rewards. The California utilities will oppose the recomputation.

NEW ACCOUNTING STANDARDS

New statements by the Financial Accounting Standards Board that have
recently become effective or are yet to be effective are numbers 142
through 146. They are described in Note 1 of the notes to Consolidated
Financial Statements. Number 142 is not presently relevant to the
company. Number 143 requires accounting and disclosure changes
concerning legal obligations related to future asset retirements. Number
144 replaces number 121 in dealing with asset impairment issues. Number
145 makes technical corrections to previous statements and number 146
deals with exit and disposal activities, replacing Issue 94-3 of the
Emerging Issues Task Force.

In June 2002, a consensus was reached in Emerging Issues Task Force
(EITF) Issue 02-3 "Issues Related to Accounting for Contracts Involved
in Energy Trading and Risk Management Activities," which codifies and
reconciles existing guidance on the recognition and reporting of gains
and losses on energy trading contracts and addresses other aspects of
the accounting for contracts involved in energy trading and risk
management activities.

ITEM 3. MARKET RISK

There have been no significant changes in the risk issues affecting the
company subsequent to those discussed in the Annual Report. As noted in
that report, SDG&E may, at times, be exposed to limited market risk in
its natural gas purchase and sale activities as a result of activities
under SDG&E's gas Performance-Based Regulation mechanism. The risk is
managed within the parameters of the company's market-risk management
and trading framework.

As of September 30, 2002, the total Value at Risk of SDG&E's natural gas
positions was not material.

ITEM 4. CONTROLS AND PROCEDURES

The company has designed and maintains disclosure controls and
procedures to ensure that information required to be disclosed in the
company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission and is
accumulated and communicated to the company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating these controls and procedures, management recognizes that any
system of controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
objectives and necessarily applies judgment in evaluating the cost-
benefit relationship of other possible controls and procedures.

Under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer,
the company within 90 days prior to the date of this report has
evaluated the effectiveness of the design and operation of the company's
disclosure controls and procedures. Based on that evaluation, the
company's Chief Executive Officer and Chief Financial Officer have
concluded that the controls and procedures are effective.

There have been no significant changes in the company's internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date the company completed its
evaluation.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as described in Note 2 of the notes to Consolidated Financial
Statements, neither the company nor its subsidiary is party to, nor is
their property the subject of, any material pending legal proceedings
other than routine litigation incidental to their businesses.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 10 - Material Contracts

10.1 Amended and Restated Sempra Energy Deferred compensation and
Excess Savings Plan (incorporated by reference from the September
30, 2002 Sempra Energy 10-Q (Commission File No. 1-14201), Exhibit
10.3).

Exhibit 12 - Computation of ratios

12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.

(b) Reports on Form 8-K

The following report on Form 8-K was filed after June 30, 2002:

Current Report on Form 8-K filed August 14, 2002, filing as an exhibit
Statements Under Oath of Principal Executive Officer and Principal
Financial Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings pursuant to 18 U.S.C. Sec. 1350, as created by Section 906
of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934,
SDG&E has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)

Date: November 8, 2002 By: /s/ D.L. Reed
-----------------------------
D.L. Reed
President and
Chief Financial Officer

CERTIFICATIONS

I, Edwin A. Guiles, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of San Diego Gas &
Electric Company;

2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Quarterly Report;

3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and

c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

November 8, 2002

/s/ Edwin A. Guiles
Edwin A. Guiles
Chief Executive Officer

I, Debra L. Reed, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of San Diego Gas &
Electric Company;

2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Quarterly Report;

3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Quarterly Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and

c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

November 8, 2002

/s/ Debra L. Reed
Debra L. Reed
Chief Financial Officer