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 March 31, 2003
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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
- -------------------------------------------------------------------
(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
----- -----

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

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

Common stock outstanding: Wholly owned by Enova Corporation

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 California Public
Utilities Commission, the California Legislature, the Department of
Water Resources, and the Federal Energy Regulatory Commission; 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
status of deregulation of retail natural gas and electricity delivery;
the timing and success of business development efforts; and other
uncertainties, all of which are difficult to predict and many of which
are beyond the control of the 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.

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
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 all of 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 Annual Report on Form 10-K for the year ended
December 31, 2002 (Annual Report).

The company's significant accounting policies are described in Note 1 of
the notes to Consolidated Financial Statements in the Annual Report. The
same accounting policies are followed for interim reporting purposes.

As described in the notes to Consolidated Financial Statements in the
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).

COMPREHENSIVE INCOME

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

Three months
ended
March 31,
--------------
(Dollars in millions) 2003 2002
- ----------------------------------------------

Net income $ 47 $ 55

Minimum pension liability
adjustments (6) --

--------------
Comprehensive income $ 41 $ 55
- ----------------------------------------------

2. NEW ACCOUNTING STANDARDS

SFAS 143, "Accounting for Asset Retirement Obligations": The adoption of
SFAS 143 on January 1, 2003 resulted in the recording of an addition of
$71 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 dates
the units began operation) and accumulated depreciation of $41 million
related to the increase to utility plant, for a net increase of $30
million. In addition, the company recorded a corresponding retirement
obligation liability of $309 million (which includes accretion of that
discounted value to December 31, 2002) and a regulatory liability of
$215 million to reflect that SDG&E has collected the funds from its
customers more quickly than SFAS 143 would accrete the retirement
liability and depreciate the asset. These liabilities, less the $494
million recorded as accumulated depreciation prior to January 1, 2003
(which represents amounts collected for future decommissioning costs),
comprise the offsetting $30 million.

On January 1, 2003, the company recorded additional asset retirement
obligations of $10 million associated with the future retirement of a
former power plant.

The change in the asset retirement obligations for the three months
ended March 31, 2003 is as follows (dollars in millions):

Balance as of January 1, 2003 $ --
Adoption of SFAS 143 319
Accretion expense 5
------
Balance as of March 31, 2003 $ 324*
======

*A portion of the obligation is included in other current liabilities on
the Consolidated Balance Sheets.

Except for the items noted above, the company has determined that there
are no other material retirement obligations associated with tangible
long-lived assets.

3. MATERIAL CONTINGENCIES

ELECTRIC INDUSTRY REGULATION

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 Annual Report. Subsequent
developments are described herein.

Subsequent to the electric capacity shortages of 2000-2001, SDG&E's
service territory has had and continues to have an adequate supply of
electricity. However, various projections of electricity demand in
SDG&E's service territory indicate that, without additional electrical
generation or reductions in electrical usage, beginning in 2005
electricity demand could begin to outstrip available resources. SDG&E's
strategy for meeting this demand is to: (1) reduce power demand through
conservation and efficiency; (2) increase the supply of electricity from
renewable sources, including wind and solar; (3) establish new
transmission lines by 2008 to import more power; and (4) provide new
electric generation by 2005 to meet the expected shortfall. SDG&E is
preparing a request for proposals to meet the electric capacity
shortfall, estimated at 69 megawatts in 2005. In addition, SDG&E is
ahead of the interim schedule in meeting the requirement of obtaining 20
percent of its electricity from renewable sources by 2017.

The power crisis of 2000-2001 has caused the California Public Utilities
Commission (CPUC) to adjust its plan for deregulation of electricity. In
addition, several California state agencies, including the CPUC, the
Consumer Power and Conservation Financing Authority, and the Energy
Resources Conservation and Development Commission, recently issued a
draft Energy Action Plan for California. The plan calls for a
continuation of regulated electricity rates and existing direct access
contracts, increased conservation, more renewable energy, and a stable
regulatory environment that encourages private investment in the state.

Senate Bill 888, introduced on February 21, 2003, would repeal the
provisions of Assembly Bill 1890, which enacted electric industry
restructuring in September 1996. In addition, Senate Bill 429,
introduced on February 20, 2003, would subject the company and other
California energy-utility holding companies to the continuing authority
of the CPUC to enforce any condition placed upon their authorizations to
acquire their California utility subsidiaries, including obligations to
give first priority to the capital requirements of the utilities as
determined by the CPUC to be necessary to meet the utilities'
obligations to serve. It would also require that the CPUC order the
holding companies to infuse into the utility subsidiaries sufficient
capital, of any type deemed necessary by the CPUC, to enable the
utilities to fulfill their service obligations. The likelihood of
passage of either bill is not known.

The CPUC has undertaken a proceeding and issued several decisions
establishing the framework, rules and processes that governed SDG&E's
return to the responsibility of procuring electricity for its customers.
These include decisions (1) allocating to California's investor-owned
utilities (IOUs) the power from the long-term contracts entered into by
the California Department of Water Resources (DWR), with the DWR
retaining the legal and financial responsibility for the contracts; (2)
adopting an Operating Agreement between SDG&E and the DWR to govern the
terms and conditions for SDG&E's administration of DWR contracts; (3)
adopting annual procurement plans that include securing supplies to
satisfy SDG&E's additional power requirements; (4) adopting a 20-year
resource plan to assess SDG&E's resource needs, emphasizing the next
five years; and (5) developing the criteria by which the acceptability
and recovery of procurement transactions will be determined, including
possible development of a procurement incentive mechanism.

The DWR's Operating Agreement with SDG&E, approved by the CPUC, governs
SDG&E's relationship with the DWR now that SDG&E has assumed
administration of the assigned DWR contracts. The agreement provides
that SDG&E is acting as a limited agent on behalf of the DWR in
undertaking energy sales and natural gas procurement functions under the
DWR contracts allocated to its customers. Legal and financial risks
associated with these activities will continue to reside with the DWR.
However, in certain circumstances SDG&E may be obligated to provide
lines of credit in connection with its allocated contracts. On April 17,
2003, SDG&E filed its natural gas procurement plan related to certain
DWR contracts.

NATURAL GAS INDUSTRY RESTRUCTURING

As discussed in Note 11 of the notes to Consolidated Financial
Statements in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. If the December 2001 decision is implemented, it is
not expected to adversely affect the California Utilities' earnings.

BORDER PRICE INVESTIGATION

In November 2002, the CPUC instituted an investigation into the Southern
California natural gas market and the price of natural gas delivered to
the California-Arizona (CA-AZ) border during the period of March 2000
through May 2001. If the investigation determines that the conduct of
any respondent contributed to the natural gas price spikes at the CA-AZ
border during this period, the CPUC may modify the respondent's
applicable natural gas procurement incentive mechanism, reduce the
amount of any shareholder award for the period involved, and/or order
the respondent to issue a refund to ratepayers to offset the higher
rates paid. The California Utilities, included among the respondents to
the investigation, are fully cooperating in the investigation and
believe that the CPUC will ultimately determine that they were not
responsible for the high border prices during this period. Hearings have
been scheduled for the Fall of 2003 and a decision is expected in 2004.

CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES

On February 27, 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to ensure that they have
complied with relevant statutes and CPUC decisions in the management,
oversight and operations of their companies. The CPUC will evaluate
energy-related business activities undertaken by Sempra Energy within
the service territories of SDG&E and SoCalGas, relative to holding
company systems and affiliate activities. In accordance with a December
16, 1997 CPUC order, the California Utilities' transactions with other
Sempra Energy affiliates have been audited each year and there have been
no adverse findings in those audits.

COST OF SERVICE

Although the California Utilities requested that a decision in their
Cost of Service applications be effective January 1, 2004, the CPUC
commissioner assigned to the applications has adopted a procedural
schedule that would prevent the CPUC from issuing a decision before the
second quarter of 2004. The California Utilities have filed a motion
seeking reconsideration of this ruling. The motion also seeks
authorization to implement an interim rate increase on January 1, 2004
to reflect an anticipated cost of service decision with any increase in
rates to be subject to refund upon the final determination by the CPUC.

PERFORMANCE-BASED REGULATION (PBR)

On March 28, 2003, SDG&E filed its 2002 Distribution PBR Performance
Report with the CPUC. For 2002, SDG&E exceeded the PBR benchmarks on
five of its six performance indicators, recording a total net reward of
$6 million out of a total possible reward of $14.5 million under the
mechanism. The reward is subject to CPUC approval.

On March 19, 2003, the CPUC's Office of Ratepayer Advocates (ORA) issued
its Monitoring and Evaluation Report on SDG&E's natural gas procurement
activities in Year 9 (August 1, 2001 through July 31, 2002). The ORA
analyzed and confirmed the PBR results put forth by SDG&E resulting in a
Year 9 shared loss of $1.9 million and a shareholder penalty of $1.4
million. The ORA recommended the extension of the PBR mechanism, as
modified in Years 8 and 9, to Year 10. The ORA has stated that the
CPUC's adoption of the natural gas procurement PBR mechanism is
beneficial to both ratepayers and shareholders of SDG&E.

SDG&E's request for a reward of $6.7 million for the PBR natural gas
procurement period ended July 31, 2001 (Year 8) was approved by the CPUC
on January 30, 2003. Since part of the reward calculation is based on
CA-AZ natural gas border price indices, the decision reserved the right
to revise the reward in the future, depending on the outcome of the
CPUC's border price investigation (see above) and the FERC's
investigation into alleged energy price manipulation (see below).

TRANSMISSION RATE INCREASE

On May 2, 2003, the FERC authorized SDG&E's request for modification of
its Transmission Owner Tariff (TO Tariff) to adopt a rate increase and
recover its costs ($20 million through December 31, 2002) associated
with the Valley-Rainbow transmission project. The new transmission rates
are effective October 1, 2003, and will increase the charges for retail
transmission service by $32.3 million (27 percent). The FERC has not yet
approved the rates or the Valley-Rainbow costs and the new rates are
subject to refund once the rate case is concluded.

FERC ACTIONS

The FERC is investigating prices charged to buyers in the California
Power Exchange (PX) and Independent System Operator (ISO) markets by
various electric suppliers. It is seeking to determine the extent to
which individual sellers have yet to be paid for power supplied during
the period of October 2, 2000 through June 20, 2001 and to estimate the
amounts by which individual buyers and sellers paid and were paid in
excess of competitive market prices. Based on these estimates, the FERC
could find that individual net buyers, such as SDG&E, are entitled to
refunds and individual net sellers are obliged to provide refunds. To
the extent any such refunds are actually realized by SDG&E, they would
reduce SDG&E's rate-ceiling balancing account.

In December 2002, a FERC administrative law judge (ALJ) issued
preliminary findings indicating that California owes power suppliers
$1.2 billion (the $3.0 billion that California still owes energy
companies less $1.8 billion energy companies might have overcharged
California). On March 26, 2003, the FERC largely adopted the ALJ's
findings, but expanded the basis for refunds by adopting a staff
recommendation from a separate investigation to change the natural gas
proxy component of the mitigated market clearing price that is used to
calculate refunds. The March 26 order estimates that the replacement
formula for estimating natural gas prices will increase the refund
totals to more than $3.0 billion. The precise number will not be
available until the ISO and PX recalculate the number through their
settlement models based on the final FERC instructions. California is
seeking $8.9 billion in refunds and has appealed the FERC's preliminary
findings and requested rehearing of the March 26 order. The power
sellers have joined in appeal of the FERC's preliminary findings and
requested rehearing.

In addition to the refund proceeding described above, the FERC is also
investigating whether there was manipulation of short-term energy prices
in the West that would constitute violations of applicable tariffs and
warrant disgorgement of associated profits. In this proceeding, the FERC
has authority to look at time periods outside of the October 2, 2000
through June 20, 2001 period relevant to the refund proceeding. In May
2002 the FERC ordered all energy companies engaged in electric energy
trading activities to state whether they had engaged in various specific
trading activities described as manipulating or "gaming" the California
energy markets. In response to the inquiry, SDG&E 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
regarding natural gas trading, the California Utilities have denied
engaging in "wash" or "round trip" trading activities. The companies are
also cooperating with the FERC and other governmental agencies and
officials in their various investigations of the California energy
markets.

On March 26, 2003, the FERC released the staff's final report on the
market manipulation issue. Among other things, the staff recommends that
37 companies, including SDG&E, comment on whether the FERC should issue
a "show cause" order that, if issued, would require them to establish
that their activities did not constitute "gaming" or "anomalous market
behavior" in violation of the ISO and PX tariffs. If the FERC were to
conclude that tariff violations had occurred, it could order various
remedies including recovery of profits and suspension or termination of
market-based trading authority.

NUCLEAR INSURANCE

SDG&E and the other co-owners of SONGS have insurance to respond to any
nuclear liability claims related to SONGS. The insurance policy provides
$300 million in coverage, which is the maximum amount available. In
addition to this primary financial protection, the Price-Anderson Act
provides for up to $9.25 billion of secondary financial protection if
the liability loss exceeds the insurance limit. Should any of the
licensed/commercial reactors in the United States experience a nuclear
liability loss which exceeds the $300 million insurance limit, all
utilities owning nuclear reactors could be assessed under the Price-
Anderson Act to provide the secondary financial protection. SDG&E and
the other co-owners of SONGS could be assessed up to $176 million under
the Price-Anderson Act. SDG&E's share would be $36 million unless
default occurs by any other SONGS co-owner. In the event the secondary
financial protection limit is insufficient to cover the liability loss,
the Price-Anderson Act provides for Congress to enact further revenue
raising measures to pay claims. These measures could include an
additional assessment on all licensed reactor operators. SDG&E and the
other co-owners of SONGS have $2.75 billion of nuclear property,
decontamination and debris removal insurance.

The coverage also provides the SONGS owners up to $490 million for
outage expenses incurred because of accidental property damage. This
coverage is limited to $3.5 million per week for the first 52 weeks, and
$2.8 million per week for up to 110 additional weeks. Coverage is also
provided for the cost of replacement power, which includes indemnity
payments for up to three years, after a waiting period of 12 weeks. The
insurance is provided through a mutual insurance company owned by
utilities with nuclear facilities. Under the policy's risk sharing
arrangements, insured members are subject to retrospective premium
assessments if losses at any covered facility exceed the insurance
company's surplus and reinsurance funds. Should there be a retrospective
premium call, SDG&E could be assessed up to $7.2 million.

Both the nuclear liability and property insurance programs include
industry aggregate limits for SONGS losses, including replacement power
costs, 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, unlawfully sought to control natural gas and
electricity markets. In March 2003, plaintiffs in these cases and the
applicable El Paso Corp. entities announced that they had reached a
settlement in principle of the class actions, certain of the individual
actions, claims asserted by the California Attorney General and by other
western states, and certain complaint proceedings filed with FERC by the
CPUC and the California Energy Oversight Board. The terms of the
settlement remain subject to approval by the relevant state courts and
the FERC. One of the settlement terms provides that El Paso will assist
the plaintiffs in their litigation against the remaining defendants.

In April 2003, Sierra Pacific and its utility subsidiary Nevada Power
jointly filed a lawsuit in U.S. District Court in Las Vegas against
major natural gas suppliers, including Sempra Energy and the California
Utilities, seeking damages resulting from an alleged conspiracy to drive
up or control natural gas prices, eliminate competition and increase
market volatility.

Various lawsuits, which seek class-action certification, allege that
Sempra Energy and certain company subsidiaries unlawfully manipulated
the electric-energy market. In January 2003, the applicable Federal
Court granted a motion to dismiss a similar lawsuit on the grounds that
the claims contained in the complaint were subject to the Filed Rate
Doctrine and were preempted by the Federal Power Act. That ruling has
been appealed.

Except for the matters 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 none of these matters will have a material
adverse effect on the company's financial condition or results of
operations.

4. FINANCIAL INSTRUMENTS

Note 8 of the notes to Consolidated Financial Statements in the Annual
Report discusses the company's financial instruments, including the
adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which recognizes all
derivatives as either assets or liabilities on the balance sheet,
measures those instruments at fair value, and recognizes any changes in
the fair value of derivatives in earnings for the period that the change
occurs unless the derivative qualifies as an effective hedge that
offsets certain exposure.

The company utilizes derivative financial instruments to manage its
exposure to unfavorable changes in commodity prices, which are subject
to significant and often volatile fluctuations. Derivative financial
instruments include futures, forwards, swaps, options and long-term
delivery contracts. These contracts allow the company to predict with
greater certainty the effective prices to be received by the company
and, in the case of the California Utilities, their customers. As
allowed under SFAS 133, the company has elected to take the normal
purchases and sales exception for certain contracts that are settled by
physical delivery. These contracts are accounted for at historical cost
with gains and losses reflected in the income statement at the contract
settlement date.

Fixed-price contracts and other derivatives on the Consolidated Balance
Sheets primarily reflect the company's derivative gains and losses
related to long-term delivery contracts for purchased power and natural
gas transportation. The company has established regulatory assets and
liabilities to the extent that these gains and losses are recoverable or
payable through future rates. The changes in fixed-price contracts and
other derivatives on the consolidated balance sheets for the three
months ended March 31, 2003 were primarily due to physical deliveries
under long-term purchased-power and natural gas transportation
contracts. The transactions associated with fixed-price contracts and
other derivatives had no material impact to the Statements of
Consolidated Income for the three months ended March 31, 2003 or 2002.

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 Annual Report.

RESULTS OF OPERATIONS

Electric revenues increased to $397 million in 2003 from $278 million in
2002, and the cost of electric fuel and purchased power increased to
$163 million in 2003 from $61 million in 2002. These changes were mainly
due to the effect of the DWR's purchasing the net short position of
SDG&E during 2002, and changes in electric commodity costs and the
increases in authorized revenue to recover increases in sales volumes.
Under the current regulatory framework, changes in commodity costs
normally do not affect net income. The commodity costs associated with
the DWR's purchases and the corresponding sale to SDG&E's customers are
not included in the Statements of Consolidated Income as SDG&E was
merely transmitting the electricity from the DWR to the customers,
acting as a conduit to pass through the electricity from the DWR to the
customers. During 2003, costs associated with long-term contracts
allocated to SDG&E from the DWR were likewise not included in the income
statement, since the DWR retains legal and financial responsibility for
these contracts.

Natural gas revenues increased to $165 million in 2003 from $149 million
in 2002, and the cost of natural gas distributed increased to $85
million in 2003 from $78 million in 2002. These changes were primarily
attributable to natural gas cost increases, which are passed on to
customers, partially offset by reduced volumes.

Under the current regulatory framework, changes in core-market natural
gas prices (natural gas purchased for customers that are primarily
residential and small commercial and industrial customers without
alternative fuel capability) or consumption levels do not affect net
income, since core customer rates generally recover the actual cost of
natural gas on a substantially concurrent basis and consumption levels
are fully balanced. However, SDG&E's gas procurement PBR mechanism
provides an incentive mechanism by measuring SDG&E's procurement of gas
against a benchmark price comprised of monthly gas indices, resulting in
shareholder rewards for costs achieved below the benchmark and
shareholder penalties when costs exceed the benchmark.

The tables below summarize the electric and natural gas volumes and
revenues by customer class for the three months ended March 31, 2003
and 2002.

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

Although commodity-related revenues from the DWR's purchasing of
SDG&E's net short position or from the DWR's allocated contracts are
not included in revenue, the associated volumes and distribution
revenue are included herein.

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

Net income for SDG&E decreased to $47 million in 2003 compared to $55
million in 2002, primarily due to the end of sharing of the merger
savings and increased depreciation and operating expenses, partially
offset by a $6.7 million (pretax) natural gas procurement PBR reward.

CAPITAL RESOURCES AND LIQUIDITY

The company's operations are the major source of liquidity. In addition,
working capital requirements can be met through the issuance of short-
term and long-term debt. Cash requirements primarily consist of capital
expenditures for utility plant. At March 31, 2003, the company had $241
million in cash and $300 million in unused, committed lines of credit
available.

Management believes these amounts, cash flows from operations, and new
debt issuances will be adequate to finance capital expenditure
requirements, and other commitments. Management continues to regularly
monitor the company's ability to adequately meet the needs of its
operating, financing and investing activities.

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities totaled $106 million and $241
million for the three months ended March 31, 2003 and 2002,
respectively. The decrease in cash flows from operations was
attributable to the $86 million income tax payment in the 2003 quarter,
reduced overcollections of balancing accounts in 2003 and the higher
continuing recovery of the AB 265 undercollection in 2002.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash provided by (used in) investing activities totaled $46 million
and $(229) million for the three months ended March 31, 2003 and 2002,
respectively. The change in cash flows from investing activities was
attributable to payments by Sempra Energy on notes due to SDG&E in 2003.
In the first quarter of 2002, advances were made to Sempra Energy from
cash generated by operating activities.

Capital expenditures for property, plant and equipment are estimated to
be $400 million for the full year 2003 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

Net cash used in financing activities totaled $70 million and $19
million for the three months ended March 31, 2003 and 2002,
respectively. The change in cash flows from financing activities was
attributable to dividends paid to Sempra Energy of $50 million in 2003.
In the first quarter of 2002, no dividends were paid to Sempra Energy.

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
Annual Report and in Note 3 of the notes to Consolidated Financial
Statements herein.

Electric Industry Restructuring and Electric Rates

Supply/demand imbalances and a number of other factors resulted in
abnormally high electric-commodity costs beginning in mid-2000 and
continuing into 2001. This caused SDG&E's customer bills to be
substantially higher than normal. In response, legislation enacted in
September 2000 imposed a ceiling on the cost of electricity that SDG&E
could pass on to its small-usage customers on a current basis. SDG&E
accumulated the amount that it paid for electricity in excess of the
ceiling rate in an interest-bearing balancing account, which it
continues to collect from its customers.

Subsequent to the electric capacity shortages of 2000-2001, SDG&E's
service territory has had and continues to have an adequate supply of
electricity. However, various projections of electricity demand in
SDG&E's service territory indicate that, without additional electrical
generation or reductions in electrical usage, beginning in 2005
electricity demand could begin to outstrip available resources. SDG&E's
strategy for meeting this demand is to: (1) reduce power demand through
conservation and efficiency; (2) increase the supply of electricity from
renewable sources, including wind and solar; (3) establish new
transmission lines by 2008 to import more power; and (4) provide new
electric generation by 2005 to meet the expected shortfall. SDG&E is
preparing a request for proposals to meet the electric capacity
shortfall, estimated at 69 megawatts in 2005. In addition, SDG&E is
ahead of the interim schedule in meeting the requirement of obtaining 20
percent of its electricity from renewable sources by 2017.

The power crisis of 2000-2001 has caused the California Public Utilities
Commission (CPUC) to adjust its plan for deregulation of electricity. In
addition, several California state agencies, including the CPUC, the
Consumer Power and Conservation Financing Authority, and the Energy
Resources Conservation and Development Commission, recently issued a
draft Energy Action Plan for California. The plan calls for a
continuation of regulated electricity rates and existing direct access
contracts, increased conservation, more renewable energy, and a stable
regulatory environment that encourages private investment in the state.

The CPUC has undertaken a proceeding and issued several decisions
establishing the framework, rules and processes that governed SDG&E's
return to the responsibility of procuring electricity for its customers.
These include decisions (1) allocating to California's investor-owned
utilities (IOUs) the power from the long-term contracts entered into by
the California Department of Water Resources (DWR), with the DWR
retaining the legal and financial responsibility for the contracts; (2)
adopting an Operating Agreement between SDG&E and the DWR to govern the
terms and conditions for SDG&E's administration of DWR contracts; (3)
adopting annual procurement plans that include securing supplies to
satisfy SDG&E's additional power requirements; (4) adopting a 20-year
resource plan to assess SDG&E's resource needs, emphasizing the next
five years; and (5) developing the criteria by which the acceptability
and recovery of procurement transactions will be determined, including
possible development of a procurement incentive mechanism.

See additional discussion of this and related topics in Note 3 of the
notes to Consolidated Financial Statements.

Natural Gas Restructuring and Gas Rates

As discussed in the Annual Report, in December 2001 the CPUC issued a
decision related to natural gas industry restructuring, with
implementation anticipated during 2002. During 2002 the California
Utilities filed a proposed implementation schedule and revised tariffs
and rules required for implementation. However, on February 27, 2003,
the CPUC issued a resolution rejecting without prejudice those proposed
tariffs and rules. If the December 2001 decision is implemented, it is
not expected to adversely affect the California Utilities' earnings.

Cost of Service

Although the California Utilities requested that a decision in their
Cost of Service applications be effective January 1, 2004, the CPUC
commissioner assigned to the applications has adopted a procedural
schedule that would prevent the CPUC from issuing a decision before the
second quarter of 2004. The California Utilities have filed a motion
seeking reconsideration of this ruling. The motion also seeks
authorization to implement an interim rate increase on January 1, 2004
to reflect an anticipated cost of service decision with any increase in
rates to be subject to refund upon the final determination by the CPUC.

NEW ACCOUNTING STANDARDS

New pronouncements that have recently become effective or that are yet
to be effective are SFAS 143 and 148, Interpretations 45 and 46, EITF
02-3, and the rescission of EITF 98-10. SFAS 143 requires accounting and
disclosure changes concerning legal obligations related to future asset
retirements. SFAS 148 amends SFAS 123 and adds two additional transition
methods to the fair value method of accounting for stock-based
compensation. Interpretation 45 clarifies that a guarantor is required
to recognize a liability for the fair value of obligations undertaken in
issuing guarantees. Interpretation 46 addresses consolidation by
business enterprises of variable-interest entities (previously referred
to as "special-purpose entities" in most cases).

SFAS 143, "Accounting for Asset Retirement Obligations" is the only one
of the above that is material to the company. Issued in July 2001,
SFAS 143 addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets. It requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The company has adopted
SFAS 143 beginning January 1, 2003. See further discussion in Note 2 of
the notes to Consolidated Financial Statements.

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 of March 31, 2003, 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 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 3 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 12 - Computation of ratios

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

99.1 Statements of Registrant's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Sec. 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The following report on Form 8-K was filed after December 31, 2002:

Current Report on Form 8-K filed May 1, 2003, filing as an exhibit
Sempra Energy's press release of May 1, 2003, giving the financial
results for the three months ended March 31, 2003.

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: May 5, 2003 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.

May 5, 2003

/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.

May 5, 2003

/S/ DEBRA L. REED
Debra L. Reed
Chief Financial Officer