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, 2005
-------------------------------------

Commission file number 1-3779
---------------------------------------------

SAN DIEGO GAS & ELECTRIC COMPANY
----------------------------------------------------------
(Exact name of registrant as specified in its charter)

California 95-1184800
- ------------------------------- -------------------
(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 No X
----- -----

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

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

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional and national economic,
competitive, political, legislative and regulatory conditions and
developments; actions by the California Public Utilities Commission,
the California State Legislature, the California Department of Water
Resources, and the Federal Energy Regulatory Commission and other
regulatory bodies in the United States; capital markets conditions,
inflation rates, interest rates and exchange rates; energy and trading
markets, including the timing and extent of changes in commodity
prices; the availability of natural gas; weather conditions and
conservation efforts; war and terrorist attacks; business, regulatory,
environmental and legal decisions and requirements; the status of
deregulation of retail natural gas and electricity delivery; the timing
and success of business development efforts; the outcome of litigation;
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.

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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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

4

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

5

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

6

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 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, 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.

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, 2004 (the 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.

SDG&E accounts for the economic effects of regulation on utility
operations in accordance with Statement of Financial Accounting
Standards (SFAS) 71, Accounting for the Effects of Certain Types of
Regulation.

In accordance with SFAS 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits, the following table provides
the components of benefit costs for the quarters ended March 31:

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Note 6 of the notes to Consolidated Financial Statements in the Annual
Report discusses the company's expected contribution to its pension and
other postretirement benefit plans in 2005. For the quarter ended March
31, 2005, the company made pension and other postretirement benefit
plan contributions of $1 million each.

Changes in asset-retirement obligations, as defined in SFAS 143,
Accounting for Asset Retirement Obligations, for the quarters ended
March 31, 2005 and 2004 are as follows (dollars in millions):

2005 2004
- ------------------------------------------------------------------
Balance as of January 1 $ 339* $ 326*
Accretion expense 6 6
Payments (2) (3)
------ ------
Balance as of March 31 $ 343* $ 329*
- ------------------------------------------------------------------

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

At March 31, 2005 and December 31, 2004, the estimated removal costs
recorded as a regulatory liability were $926 million and $913 million,
respectively.

NOTE 2. NEW ACCOUNTING STANDARDS

Stock-Based Compensation: In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS 123 (revised), a revision of SFAS
123, Accounting for Stock-Based Compensation, which establishes the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services received. This statement requires
companies to measure and record the cost of employee services received
in exchange for an award of equity instruments based on the grant-date
fair value of the award and gives companies three alternative
transition methods. Sempra Energy has not determined the transition
method it will use. The effective date of this statement is January 1,
2006 for Sempra Energy.

FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" (FIN 46): Contracts under
which SDG&E acquires power from generation facilities otherwise
unrelated to SDG&E could result in a requirement for SDG&E to
consolidate the entity that owns the facility. As permitted by the
interpretation, SDG&E is continuing the process of determining whether
it has any such situations and, if so, gathering the information that
would be needed to perform the consolidation. The effects of this, if
any, are not expected to significantly affect the financial position of
SDG&E and there would be no effect on results of operations or
liquidity.

FIN 47, "Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143": Issued in March 2005, FIN 47
clarifies that the term conditional asset-retirement obligation as used
in SFAS 143, Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset-retirement activity in which the

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timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the entity. FIN 47
requires companies to recognize a liability for the fair value of a
conditional asset-retirement obligation if the fair value of the
obligation can be reasonably estimated. FIN 47 is effective for the
company's 2005 annual report. The company has not determined the effect
of FIN 47 on its financial position or results of operations.

NOTE 3. COMPREHENSIVE INCOME

The following is a reconciliation of net income to comprehensive
income.
Quarters
ended
March 31,
--------------
(Dollars in millions) 2005 2004
- ---------------------------------------------------------------

Net income $ 60 $ 51

Financial instruments, net of income tax
of $1 (Note 4) 1 --
--------------
Comprehensive income $ 61 $ 51
- ----------------------------------------------------------------

NOTE 4. FINANCIAL INSTRUMENTS

Accounting for Derivative Instruments and Hedging Activities

In accordance with SFAS 133 and related amendments SFAS 138 and 149
(collectively SFAS 133), derivative instruments and related hedges are
recognized as assets or liabilities on the balance sheet (measured at
fair value) and changes in their fair values are recognized in earnings
unless the derivative qualifies as an accounting hedge.

SFAS 133 provides for hedge accounting treatment when certain criteria
are met. For derivative instruments designated as fair value hedges,
the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the item to which the risk
being hedged is related; therefore, there is no effect on net income.

For derivative instruments designated as cash flow hedges, the
effective portion of the derivative gain or loss is included in other
comprehensive income, but not in net income until the corresponding
hedged transaction is similarly reflected. Any ineffective portion is
reported in earnings immediately. For the quarter ended March 31, 2005,
pre-tax income arising from the ineffective portion of interest-rate
swaps included $4 million recorded in Other Income and Deductions on
the Statements of Consolidated Income. There was no effect on net
income for the quarter ended March 31, 2004.

The effect of cash flow hedges on other comprehensive income (loss) for
the quarter ended March 31, 2005 was $1 million, and for the quarter
ended March 31, 2004 there was no effect on other comprehensive income.

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The balance in Accumulated Other Comprehensive Income (Loss) at March
31, 2005 related to cash flow hedges was $1 million.

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

The company classifies its forward contracts as follows:

Contracts that meet the definition of normal purchases and sales,
i.e., those that rarely settle by means other than physical delivery
of the commodities involved in the transaction, are eligible for the
normal purchases and sales exception of SFAS 133, whereby they are
accounted for under accrual accounting and recorded in Revenues or
Cost of Sales on the Statements of Consolidated Income at the time
of delivery.

Electric and Natural Gas Purchases and Sales:

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

The transactions associated with fixed-price contracts and other
derivatives had no material impact on the Statements of Consolidated
Income for the quarters ended March 31, 2005 and 2004.

Market Risk

The company's policy is to use derivative physical and financial
instruments to reduce its exposure to fluctuations in interest rates
and commodity prices. Transactions involving these instruments are with
major exchanges and other firms believed to be credit-worthy. The use
of these instruments exposes the company to market and credit risk,
which may at times be concentrated with certain counterparties,
although counterparty nonperformance is not anticipated.

Interest-Rate Risk Management

As described in Note 3 of the notes to Consolidated Financial
Statements in the Annual Report, the company periodically enters into
interest-rate swap agreements to moderate its exposure to interest-rate
changes and to lower the overall cost of borrowing.

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Energy Contracts

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

NOTE 5. REGULATORY MATTERS

COST OF SERVICE FILINGS

There has been no resolution of SDG&E's Petition for Modification or
Application for Rehearing filed in December 2004 and January 2005,
respectively, to increase revenues for each of 2004 and 2005 by $10
million to correct what SDG&E believes was a computational error by the
California Public Utilities Commission (CPUC) concerning SDG&E's
nuclear electric rate revenues.

In July 2004, the California Utilities filed with the CPUC a proposed
settlement of Phase II of their cost of service proceedings, addressing
attrition allowances and performance-based incentive mechanisms. On
March 17, 2005, the CPUC approved the settlement and adopted related
performance measures and incentives.

The CPUC's decision establishes an indexing methodology for post-test-
year ratemaking which includes inflation adjustments and earnings-
sharing mechanisms. The decision is retroactive to January 1, 2005 and
is applicable to years 2005-2007. It eliminates earnings sharing that
would otherwise have been applicable for 2004 and incentive awards for
2004.

For the years 2005-2007, the California Utilities' authorized base-rate
revenues will be annually increased by the increase in the Consumer
Price Index, subject to minimum and maximum percentage increases that
vary with the particular utility and increase yearly. The annual
minimum percentage increases range from 3.2% to 3.8% and the annual
maximum percentage increases range from 4.2% to 4.8%. For these years,
any utility base-rate earnings that exceed the CPUC-authorized rate of
return on ratebase plus 0.5 percentage point will be shared with
customers, in proportions that vary with the amount of the excess,
beginning with customers' receiving 75% of the excess, declining to 25%
as the excess increases. The decision authorizes either utility to file
for a suspension of the indexing and sharing mechanisms if its base-
rate earnings for any year are at least 1.75 percentage points below
its authorized rate of return and authorizes others to file for a
suspension if either utility's base-rate earnings for any year are at
least 1.75 percentage points above its authorized rate of return. The
mechanisms will be automatically suspended for either utility if its
base-rate earnings for either 2005 or 2006 are at least 3 percentage
points above or below its authorized rate of return.

The decision also establishes formula-based performance measures for
customer service, safety and reliability. These provide symmetrical

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annual reward and penalty potentials aggregating approximately $14
million.

With the end of the Incremental Cost Incentive Mechanism in 2003,
SDG&E's San Onofre Nuclear Generating Station (SONGS) ratebase
restarted at $0 on January 1, 2004 and, therefore, SDG&E's earnings
from SONGS are now generally limited to a return on new capital
additions.

Southern California Edison (Edison), the operator of SONGS, has applied
for CPUC approval to replace SONGS' steam generators, which Edison
stated would require an estimated capital expenditure of $782 million.
Hearings before the CPUC on Edison's application were completed on
February 11, 2005 and a final decision addressing the cost
effectiveness of the steam generator project is expected during the
second half of 2005. SDG&E had elected not to participate in the
project. SDG&E nonparticipation would result in a reduction in its
ownership in the project and a proportionate reduction in its share of
SONGS' output. On February 18, 2005, an arbitrator issued a decision
that, based upon Edison's cost calculations, would result in SDG&E's
ownership interest in SONGS and its related share of SONGS' output
being reduced to zero if SDG&E continues to decline to participate in
the project. If this were to occur, SDG&E would seek to recover its
investments in SONGS made since January 1, 2004 ($35 million) and any
future SONGS investments until the reduced ownership becomes effective,
and its return on those investments. The arbitration decision is
subject to CPUC review and approval, with a CPUC decision expected in
2006. The CPUC could require SDG&E to participate in the project or, if
the reductions of SDG&E's ownership percentage resulting from the CPUC
final decision were to be unacceptable, SDG&E may elect to participate.

UTILITY RATEMAKING INCENTIVE AWARDS

Performance-Based Regulation (PBR) and demand-side management (DSM)
awards are not included in the company's earnings before CPUC approval
of the award is received.

On December 30, 2004, a joint settlement agreement between the
California Utilities and the CPUC's Office of Ratepayers Advocates
(collectively, the joint parties) was filed with the CPUC for approval.
The settlement agreement resolves all outstanding shareholder earnings
claims filed with the CPUC commencing in 2000 associated with DSM,
energy efficiency and low-income energy efficiency programs and those
claims that would have been filed through 2007 (for SDG&E's DSM
programs through 1997 and through various dates for the efficiency
programs). The proposed settlement is for $73 million (including
interest, franchise fees, uncollectible amounts and awards earned in
prior years that had not yet then been requested). Approximately $40
million of the $73 million, depending on the timing of the CPUC
approval, would be included in 2005 income. The joint parties requested
expeditious approval of the settlement agreement, without modification.
A CPUC decision is expected in the second or third quarter of 2005.

Other performance incentives pending CPUC approval at March 31, 2005
and, therefore, not included in the company's earnings were (dollars in
millions):

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Program
-----------------------------------
2003 Distribution PBR $ 8.2
Natural gas PBR Year 11 0.2
-----------------------------------
Total $ 8.4
-----------------------------------

The cumulative amount of awards subject to refund based on the outcome
of the Border Price Investigation discussed in "Litigation" below is
$8.4 million, substantially all of which has been included in net
income.

ELECTRIC RESOURCES

The California Department of Water Resources' (DWR) operating agreement
with SDG&E, approved by the CPUC, 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
SDG&E's customers. Legal and financial responsibility associated with
these activities continues to reside with the DWR. Therefore, the
revenues and costs associated with the contracts are not included in
the Statements of Consolidated Income.

In October 2003, the CPUC initiated a proceeding to consider a
permanent methodology for allocating the DWR's revenue requirement
beginning in 2004 through the remaining life of the DWR contracts
(2013). On December 2, 2004, the CPUC issued a decision that would
shift $790 million of the costs to SDG&E's customers over that period
and subsequently initiated consideration of other methods, one of which
could increase that amount by an additional $450 million. On December
20, 2004, SDG&E filed an application for rehearing of the December 2,
2004 decision, arguing that the CPUC reached its decision without the
proper evidentiary review of the method of calculating above-market
costs. On January 13, 2005, the CPUC acted to grant rehearing on that
limited issue.

Such a shift would not affect SDG&E's net income, but would adversely
affect its customers' commodity costs. In the near term, the effect on
SDG&E's cash flows would be minor, but could become significant in
later years unless rate ceilings imposed by Assembly Bill 1X, which
froze total rates for most residential customers at the February 2001
level, are increased to provide more-contemporaneous recovery. Until
January 1, 2016, CPUC Decision 04-12-048 provides SDG&E with a true-up
triggering mechanism when an overcollection or undercollection in
SDG&E's power procurement balancing account exceeds approximately five
percent of the prior year's recorded electric commodity revenue.

SDG&E's long-term resource plan identifies the forecasted needs for
capacity resources within its service territory to support transmission
grid reliability. A 10-year resource plan was approved by the CPUC in
December 2004, in a proceeding to consider utility resource planning,
including energy efficiency, contracted power, demand response,
qualifying facilities, renewable generation and distributed generation.
Further discussion of this plan is included in the Annual Report. In
December 2004, the CPUC also endorsed SDG&E's continued analysis and

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planning for a 500-kV transmission line. SDG&E expects to file for a
new transmission line by the end of 2005.

RECOVERY OF CERTAIN DISALLOWED TRANSMISSION COSTS

The Federal Court of Appeals has set oral argument for May 9, 2005 on
SDG&E's appeal of a Federal Energy Regulatory Commission (FERC)
decision that denied SDG&E recovery in its transmission rates of the
differentials between certain payments to SDG&E by its co-owners of the
Southwest Powerlink (SWPL) and charges assessed to SDG&E under the
California Independent System Operator (ISO) FERC tariff. As a result
of the FERC decision, SDG&E has been and is incurring unreimbursed
costs of $5 million to $11 million per year, including $2.7 million in
the first quarter of 2005.

In July 2001, SDG&E filed an arbitration claim against the ISO,
claiming the ISO should not charge SDG&E for the transmission losses
attributable to its SWPL co-owners' energy schedules. In October 2003,
the arbitrator awarded SDG&E all amounts claimed, which totaled $22
million, including interest, as of the time of the award. The ISO
appealed this result to the FERC and a decision on this appeal is
pending.

SDG&E has also challenged at the FERC the ISO's grid management charges
assessed on the subject SWPL schedules. In January 2004, the FERC
denied rehearing of its Opinion No. 463, which upheld such charges on
the subject SWPL schedules for 2001 through 2003, but ordered certain
refunds to SDG&E. The refunds are pending before the FERC. In March
2004, SDG&E petitioned the U.S. Court of Appeals for review of these
FERC orders. The court has held SDG&E's appeal in abeyance pending the
FERC's disposition of other parties' rehearing requests.

SDG&E has also commenced a private arbitration to reform the SWPL
Participation Agreements to remove prospectively SDG&E's obligation to
provide to its SWPL co-owners the services that result in unreimbursed
ISO tariff charges. The parties have agreed to hold the arbitration in
abeyance pending resolution of the related FERC proceedings.

SDG&E and the ISO have entered into discussions in an attempt to settle
this matter.

NATURAL GAS MARKET OIR

The CPUC's Natural Gas Market Order Instituting Rulemaking (OIR) was
instituted in January 2004 and is being addressed in two phases. A
decision on Phase I was issued in September 2004; Phase II has had a
prehearing conference and is awaiting CPUC direction on further
proceedings. Further discussion of Phase I and Phase II is included in
the Annual Report.

In Phase I, the CPUC's objective was to develop a process enabling the
CPUC to review and approve new interstate capacity contracts before
they are executed. The Phase I decision directed SoCalGas and SDG&E to
file an application to establish proposals for transmission system
integration, firm access rights and off-system delivery services. In
Phase II, the CPUC will investigate the need for emergency natural gas
storage reserves and the role of utilities in backstopping the noncore

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market, and address ratemaking policies. The focus of the OIR is the
period from 2006 to 2016. Since Natural Gas Industry Restructuring
(GIR), as discussed in the Annual Report, would end in August 2006 and
there is overlap between GIR and the OIR issues, a number of parties
(including SoCalGas) have requested the CPUC not to implement GIR.

CPUC INVESTIGATION OF COMPLIANCE WITH AFFILIATE RULES

In February 2003, the CPUC opened an investigation of the business
activities of SDG&E, SoCalGas and Sempra Energy to determine if they
have complied with statutes and CPUC decisions in the management,
oversight and operations of their companies.

Beginning in November 2004, the CPUC initiated an independent audit to
evaluate energy-related holding company systems and affiliate
activities undertaken by Sempra Energy within the service territories
of SDG&E and SoCalGas. A final audit report, covering years 1997
through 2003, is due on August 31, 2005. The scope of the audit will be
broader than the annual affiliate audit.

On May 2, 2005, the California Utilities filed with the CPUC the
results of the annual independent audit of the California Utilities'
transactions with other Sempra Energy affiliates. In response to a
finding of the auditor that utility procurement information was
improperly provided to an affiliated risk management consulting firm
employed by Sempra Energy, the California Utilities will adopt the
auditor's recommendation to perform risk management functions
themselves rather than utilizing Sempra Energy's Risk Management
Department.

ELECTRIC METERS

In March 2005, SDG&E submitted a proposal to the CPUC for installing
advanced electric meters with integrated two-way communications. This
advanced metering infrastructure (AMI) has the capability to measure
usage at frequent intervals, and would enable SDG&E to establish rates
that vary by time, thus encouraging customers to conserve and to shift
usage from time periods of high prices or capacity constraints. AMI
could also result in efficiency improvements by eliminating the need
for manual meter reading and by streamlining the handling of outages
and routine services by providing SDG&E with real-time diagnostics of
customers' electric usage. Installing AMI would require spending $420
million over four years, including $13 million in 2005 if CPUC approval
is received on a timely basis. A CPUC decision is expected by the first
quarter of 2006.

SOUTHERN CALIFORNIA FIRES

The company had expected a decision on recovery of its costs during the
first quarter of 2005. The assigned administrative law judge (ALJ)
recently indicated that he now expects to issue a proposed decision
during the second quarter of 2005.

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NOTE 6. CONTINGENCIES

NUCLEAR INSURANCE

SDG&E and the other owners of SONGS have insurance to respond to
nuclear liability claims related to SONGS. The insurance provides
coverage of $300 million, the maximum amount available. In addition,
the Price-Anderson Act provides for up to $10.5 billion of secondary
financial protection. 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 to provide the secondary financial protection.
SDG&E's total share would be $40 million, subject to an annual maximum
assessment of $4 million, unless a default were to occur by any other
SONGS owner. In the event the secondary financial protection limit were
insufficient to cover the liability loss, SDG&E could be subject to an
additional assessment.

SDG&E and the other owners of SONGS have $2.75 billion of nuclear
property, decontamination and debris removal insurance and up to $490
million for outage expenses and replacement power costs 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, after a waiting period of 12 weeks. The
insurance is provided through a mutual insurance company, through which
insured members are subject to retrospective premium assessments (up to
$8.8 million in SDG&E's case).

The nuclear liability and property insurance programs subscribed to by
members of the nuclear power generating industry include industry
aggregate limits for non-certified acts (as defined by the Terrorism
Risk Insurance Act) of terrorism-related SONGS losses, including
replacement power costs. An industry aggregate limit of $300 million
exists for liability claims. An industry aggregate limit of $3.24
billion exists for property claims, including replacement power costs,
for non-certified acts of terrorism. These limits are the maximum
amount to be paid to members who sustain losses or damages from these
non-certified terrorist acts. For certified acts of terrorism, the
individual policy limits stated above apply.

Further information is provided in the Annual Report.

LITIGATION

Except for the matters referred to below, 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. Further background on these matters is
provided in the Annual Report. At March 31, 2005, the company had
accrued $37 million to provide for the costs of legal proceedings
related to the 2000-2001 California energy crisis. Management believes
that none of these matters will have material adverse effect on the
company's financial condition.

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California Energy Crisis

Dramatic increases in the prices of electricity and natural gas in
California during 2000 and 2001 have resulted in many, often
duplicative, governmental investigations, regulatory proceedings and
lawsuits involving numerous energy companies seeking recovery of tens
of billions of dollars for allegedly unlawful activities asserted to
have caused or contributed to increased energy prices. The material
proceedings that involve the company are summarized below.

Natural Gas Cases

Class-action and individual antitrust and unfair competition lawsuits
filed in 2000 and thereafter, and currently consolidated in San Diego
Superior Court, allege that Sempra Energy, SoCalGas and SDG&E, along
with El Paso Natural Gas Company (El Paso) and several of its
affiliates, unlawfully sought to control natural gas and electricity
markets. In December 2003, the Court approved a settlement whereby the
applicable El Paso entities will pay approximately $1.6 billion to
resolve these claims (including cases involving unrelated claims not
applicable to Sempra Energy, SoCalGas or SDG&E). The proceeding against
Sempra Energy and the California Utilities has not been resolved and
continues to be litigated. The plaintiffs' damage claims, as revised,
assert damages of approximately $23 billion (after applicable
trebling). Trial is scheduled to commence on September 2, 2005.

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

The company is cooperating with an investigation being conducted by the
California Attorney General into possible anti-competitive behavior in
the natural gas and electricity markets during 2000-2001. Several of
the company's senior officers have testified at investigational
hearings conducted by the California Attorney General's Office, and the
company expects additional hearings to be held.

In April 2003, Sierra Pacific Resources and its utility subsidiary
Nevada Power filed a lawsuit in U.S. District Court in Las Vegas
against major natural gas suppliers, and included Sempra Energy, the
California Utilities and other company subsidiaries, seeking recovery
of damages alleged to aggregate in excess of $150 million (before
trebling). The U.S. District Court dismissed the case in November 2004,
determining that this is a matter for the FERC to resolve. In January
2005, plaintiffs filed an appeal with the Ninth Circuit Court of
Appeals.

In July 2004, 12 antitrust actions were filed against the company
alleging that energy prices were unlawfully manipulated by defendants'
reporting artificially inflated natural gas prices to trade
publications and by entering into wash trades.

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Electricity Cases

Various antitrust lawsuits, which seek class-action certification,
allege that numerous entities, including Sempra Energy and certain
subsidiaries, including SDG&E, that participated in the wholesale
electricity markets unlawfully manipulated those markets. Collectively,
these lawsuits allege damages against all defendants in an aggregate
amount in excess of $16 billion (before trebling). In January 2003, the
federal court granted a motion to dismiss one of these lawsuits, filed
by the Snohomish County, Washington Public Utility District, 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 was appealed to the Ninth Circuit U.S. Court of Appeals.

CPUC Border Price Investigation

In November 2002, the CPUC instituted an investigation into the
Southern California natural gas market and the price of natural gas
delivered to the California - Arizona border between March 2000 and May
2001. A CPUC Administrative Law Judge-proposed decision has been
rejected by the CPUC.

The portion of this investigation relating to the California Utilities
is still open. If the investigation were to determine that the conduct
of either of the California Utilities contributed to the natural gas
price spikes that occurred during the investigation period, the CPUC
may modify the party's natural gas procurement incentive mechanism,
reduce the amount of any shareholder award for the period involved,
and/or order the party to issue a refund to ratepayers. At March 31,
2005, the cumulative amount of shareholder awards, substantially all of
which has been included in net income, was $8.4 million.

The CPUC may hold additional rounds of hearings to consider whether
other companies, including other California utilities, contributed to
the natural gas price spikes or issue an order terminating the
investigation. No hearings have yet been scheduled and discovery is
ongoing.

FERC Refund Proceedings

In December 2002, a FERC ALJ issued preliminary findings indicating
that the California Power Exchange (PX) and ISO owe power suppliers
$1.2 billion for the October 2, 2000 through June 20, 2001 period (the
$3.0 billion that the California PX and ISO still owe energy companies
less $1.8 billion that the energy companies charged California
customers in excess of the preliminarily determined competitive market
clearing prices). In March 2003, the FERC adopted its ALJ's findings,
but changed the calculation of the refund by basing it on a different
estimate of natural gas prices. The March 26 order estimates that the
replacement formula for estimating natural gas prices will increase the
refund obligations from $1.8 billion to more than $3 billion for the
same time period. Pending in the Ninth Circuit are various parties'
appeals on aspects of the FERC's order. On April 12 and 13, 2005, the
Ninth Circuit heard oral argument on issues relating to the scope of
the refund proceeding and whether the FERC had jurisdiction to order
refunds from governmental entities.

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FERC Manipulation Investigation

The FERC is separately investigating whether there was manipulation of
short-term energy markets in the western United States that would
constitute violations of applicable tariffs and warrant disgorgement of
associated profits. In this proceeding, the FERC's authority is not
confined to the periods 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 in violation of the PX and ISO tariffs.

On June 25, 2003, the FERC issued several orders requiring various
entities to show cause why they should not be found to have violated
California ISO and PX tariffs. The FERC directed 43 entities, including
SDG&E, to show cause why they should not disgorge profits from certain
transactions between January 1, 2000 and June 20, 2001 that are
asserted to have constituted gaming and/or anomalous market behavior
under the California ISO and/or PX tariffs. SDG&E and the FERC resolved
the matter through a settlement, which documents the ISO's finding that
SDG&E did not engage in market activities in violation of the ISO or PX
tariffs, and in which SDG&E agreed to pay $27,792 into a FERC-
established fund.

Settlement of Claims Associated with the FERC's Investigations

On January 13, 2005, SDG&E announced a $23.8 million settlement
(including an unsecured claim in the Mirant bankruptcy proceeding
valued at approximately $2.4 million), which resolves specified claims
against merchant generator Mirant Corp. for the 2000-2001 energy crisis
period. The settlement has received final CPUC, FERC and U.S.
Bankruptcy Court (for Mirant) approval. The majority of the funds is
expected to be received within 20 days of receiving FERC approval (on
or before May 12, 2005) with the remainder contingent on certain
actions by the FERC, the ISO and the PX. Receipt of the remaining
amounts by SDG&E would take place at the conclusion of the FERC refund
proceeding, now expected to be in early 2006. These funds would be
received for the benefit of SDG&E's bundled customers and will
reimburse SDG&E for the costs of litigating this matter. The unsecured
claim in the bankruptcy proceeding is estimated to be paid out at a
rate of 60 cents on the dollar and is not guaranteed. Funds associated
with the unsecured claim will not be disbursed until a final decision
is reached in the bankruptcy proceeding, expected in the third quarter
of 2005.

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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" and "Risk Factors" contained in the Annual Report.

RESULTS OF OPERATIONS

Electric revenues increased as a result of higher costs of electric
fuel and purchased power resulting from increased volumes and electric
commodity costs. Under the current regulatory framework, changes in
commodity costs generally do not affect net income.

Natural gas revenues increased as a result of higher natural gas costs,
which are passed on to customers.

Under the current regulatory framework, the cost of natural gas
purchased for customers and the variations in that cost are passed
through to the customers on a substantially concurrent basis. However,
SDG&E's natural gas procurement PBR mechanism provides an incentive
mechanism by measuring SDG&E's procurement of natural gas against a
benchmark price comprised of monthly natural gas indices, resulting in
shareholder awards for costs achieved below the benchmark and
shareholder penalties when costs exceed the benchmark. Further
discussion is provided in Notes 1 and 11 of the notes to Consolidated
Financial Statements in the Annual Report.

The tables below summarize the electric and natural gas volumes and
revenues by customer class for the quarters ended March 31, 2005 and
2004.

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

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Although revenues and costs associated with long-term contracts
allocated to SDG&E from the DWR are not included in the income
statement, the associated volumes and distribution revenue are included
in the above table.

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

Net Income

Net income for SDG&E increased by $9 million (18%) to $60 million in
2005, primarily due to the favorable resolution of income-tax issues in
2005.

CAPITAL RESOURCES AND LIQUIDITY

The company's operations are a major source of liquidity. At March 31,
2005, the company had $8 million in unrestricted cash and $233 million
in available unused, committed lines of credit.

Management believes that these amounts and cash flows from operations
and security issuances will be adequate to finance capital expenditures
and meet liquidity requirements and other commitments. Management
continues to regularly monitor the company's ability to finance the
needs of its operating, financing and investing activities in a manner
consistent with its intention to maintain strong, investment-quality
credit ratings.

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities decreased by $18 million to
$123 million for 2005.

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For the quarter ended March 31, 2005, the company made pension and
other postretirement benefit plan contributions of $1 million each.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities increased by $24 million to $95
million for 2005 primarily due to higher capital expenditures in 2005.

Significant capital expenditures in 2005 are expected to be for
additions to the company's natural gas and electric distribution
systems. These expenditures are expected to be financed by cash flows
from operations and security issuances.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used in financing activities decreased by $118 million to $29
million for 2005. The change was due to an increase in short-term debt
and lower common dividends paid in 2005.

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
Note 5 of the notes to Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND KEY NON-CASH PERFORMANCE INDICATORS

There have been no significant changes to the accounting policies
viewed by management as critical or to key non-cash performance
indicators for the company, as set forth in the Annual Report.

NEW ACCOUNTING STANDARDS

Stock-Based Compensation: In December 2004, the FASB issued SFAS 123
(revised), a revision of SFAS 123, Accounting for Stock-Based
Compensation. This statement requires companies to measure and record
the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The
effective date of this statement is January 1, 2006 for Sempra Energy.

FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143"
(FIN 47): Issued in March 2005, FIN 47 clarifies that the term
conditional asset-retirement obligation as used in SFAS 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to
perform an asset-retirement activity in which the timing and/or method
of settlement are conditional on a future event that may or may not be
within the control of the entity. FIN 47 requires companies to
recognize a liability for the fair value of a conditional asset-
retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 is effective for the company's 2005 annual
report.

Further discussion is provided in Note 2 of the notes to Consolidated
Financial Statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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, 2005, the total Value at Risk of SDG&E's positions was
not material.

ITEM 4. CONTROLS AND PROCEDURES

Company management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in
Exchange Act Rules 13a-15(f). The company has designed and maintains
disclosure controls and procedures to ensure that information required
to be disclosed in the company's reports 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.

The company evaluates the effectiveness of its internal control over
financial reporting based on the framework in Internal Control--
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Under the supervision and
with the participation of management, including the Chief Executive
Officer and the Chief Financial Officer, the company evaluated the
effectiveness of the design and operation of the company's disclosure
controls and procedures as of March 31, 2005, the end of the period
covered by this report. Based on that evaluation, the company's Chief
Executive Officer and Chief Financial Officer concluded that the
company's disclosure controls and procedures were effective at the
reasonable assurance level.

There has been no change in the internal controls over financial
reporting during the company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
company's internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SDG&E and the County of San Diego are continuing to discuss alleged
environmental law violations by SDG&E and its contractors in connection
with the abatement of asbestos-containing materials during the
demolition of a natural gas storage facility in 2001. SDG&E expects
that any settlement with the County would involve payments by SDG&E of
less than $750,000. In January 2005, Sempra Energy and SDG&E received a
grand jury subpoena from the United States Attorney's Office in San

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Diego seeking documents related to this matter and are fully
cooperating with the investigation.

Except as described above and in Notes 5 and 6 of the notes to
Consolidated Financial Statements herein, 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.

Exhibit 31 -- Section 302 Certifications

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

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

Exhibit 32 -- Section 906 Certifications

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

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

(b) Reports on Form 8-K

The following reports on Form 8-K were filed after December 31, 2004:

Current Reports on Form 8-K filed January 11, 2005 and January 18,
2005, discussing the current status of energy crisis litigation.

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

Current Report on Form 8-K filed March 17, 2005, announcing the CPUC's
March 17, 2005, decision in Phase II of the California Utilities' cost
of service proceedings.

Current Report on Form 8-K filed May 4, 2005, filing as an exhibit
Sempra Energy's press release of May 4, 2005, giving the financial
results for the three months ended March 31, 2005.

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SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant 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 4, 2005 By: /s/ S. D. Davis
------------------------------
S. D. Davis
Sr. Vice President-External Relations
and Chief Financial Officer

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