SOUTHERN CALIFORNIA GAS CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .

Exact Name of
Commission Registrant IRS Employer
File as specified State of Identification
Number in its charter Incorporation Number
- ---------- -------------- -------------- -----------
1-40 PACIFIC ENTERPRISES California 94-0743670

1-1402 SOUTHERN CALIFORNIA GAS COMPANY California 95-1240705

555 WEST FIFTH STREET, LOS ANGELES, CALIFORNIA 90013
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (213)244-1200
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Pacific Enterprises Preferred Stock: American and Pacific
$4.75 dividend; $4.50 dividend;
$4.40 dividend; $4.36 dividend

Southern California Gas Co. Preferred Stock Pacific
Southern California Gas Co. First Mortgage Bonds: New York
Series Y, due 2021; Series Z, due 2002;
Series BB, due 2023; Series DD, due 2023;
Series EE, due 2025; Series FF, due 2003

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Pacific Enterprises None
Southern California Gas Company None

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

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

Exhibit Index on page 76. Glossary on page 79.

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002:
Pacific Enterprises $51.1 Million
Southern California Gas Company $15.8 Million

Common Stock outstanding without par value as of February 28, 2002:
Pacific Enterprises Wholly owned by Sempra Energy
Southern California Gas Company Wholly owned by Pacific Enterprises

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Information Statement prepared for the May 2002 annual
meeting of shareholders are incorporated by reference into Part
III.

TABLE OF CONTENTS

PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .10
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . .10
Item 4. Submission of Matters to a Vote of Security Holders. .10

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . .11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . .11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . .12
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . .24
Item 8. Financial Statements and Supplementary Data. . . . . .24
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . .67

PART III
Item 10. Directors and Executive Officers of the Registrant . .68
Item 11. Executive Compensation . . . . . . . . . . . . . . . .69
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . .69
Item 13. Certain Relationships and Related Transactions . . . .69

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . .69

Independent Auditors' Consents and Report on Schedule . . . . .71

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . .74

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . .76

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . .79

This Annual Report contains statements that are not historical fact
and constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The words
"estimates," "believes," "expects," "anticipates," "plans,"
"intends," "may," "would" and "should" or similar expressions, or
discussions of strategy or of plans are intended to identify
forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and
assumptions. Future results may differ materially from those
expressed in these forward-looking statements.

Forward-looking statements are necessarily based upon various
assumptions involving judgments with respect to the future and other
risks, including, among others, local, regional, national and
international economic, competitive, political, legislative and
regulatory conditions and developments; actions by the CPUC, the
California Legislature and the FERC; the financial condition of
other investor-owned utilities; 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; business,
regulatory and legal decisions; the pace of deregulation of retail
natural gas and electricity delivery; the timing and success of
business development efforts; and other uncertainties, all of which
are difficult to predict and many of which are beyond the control of
the company. Readers are cautioned not to rely unduly on any
forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect
the company's business described in this annual report and other
reports filed by the company from time to time with the Securities
and Exchange Commission.

ITEM 1. BUSINESS

Description of Business
Pacific Enterprises (PE or the company) is an energy services company
whose only direct subsidiary is Southern California Gas Company
(SoCalGas), the nation's largest natural gas distribution utility. A
description of PE and SoCalGas is given in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" herein.
SoCalGas is PE's only subsidiary and PE itself has no operations.
PE's financial position and operations consist of those of SoCalGas and
some additional items attributable to PE's position as a holding
company (e.g. cash, intercompany accounts, debt and equity.)

GOVERNMENT REGULATION

Local Regulation
SoCalGas has gas franchises with the 239 legal jurisdictions in its
service territory. These franchises allow SoCalGas to locate
facilities for the transmission and distribution of natural gas in the
streets and other public places. Some franchises have fixed terms,
such as that for the city of Los Angeles, which expires in 2012. Most
of the franchises do not have fixed terms and continue indefinitely.
The range of expiration dates for the franchises with definite terms
is 2003 to 2048.

California Utility Regulation
The State of California Legislature, from time to time, passes laws
that regulate SoCalGas' operations. For example, in 1999, the
legislature enacted a law addressing natural gas industry
restructuring.
The California Public Utilities Commission (CPUC), which consists
of five commissioners appointed by the Governor of California for
staggered six-year terms, regulates SoCalGas' rates and conditions of
service, sales of securities, rate of return, rates of depreciation,
uniform systems of accounts, examination of records, and long-term
resource procurement. The CPUC also conducts various reviews of
utility performance and conducts investigations into various matters,
such as deregulation, competition and the environment, to determine
its future policies.

United States Utility Regulation
The Federal Energy Regulatory Commission (FERC) regulates the
interstate sale and transportation of natural gas, the uniform systems
of accounts and rates of depreciation.

Licenses and Permits
SoCalGas obtains a number of permits, authorizations and licenses in
connection with the transmission and distribution of natural gas. They
require periodic renewal, which results in continuing regulation by
the granting agency.

Other regulatory matters are described in Note 12 of the notes to
Consolidated Financial Statements, herein.

SOURCES OF REVENUE

Information on this topic is provided in Note 2 of the notes to
Consolidated Financial Statements herein.

NATURAL GAS OPERATIONS

Utility Services
SoCalGas purchases, sells, distributes, stores and transports natural
gas. It owns and operates a natural gas distribution, transmission and
storage system that supplies natural gas to 5.1 million end-use
customers throughout a 23,000-square-mile service territory from
central California to the Mexican border. SoCalGas also transports gas
to about 1,300 utility electric generation (UEG), wholesale, large
commercial, industrial and off-system (outside the company's normal
service territory) customers.
SoCalGas offers two basic utility services: sale of natural gas
and transportation of natural gas. Natural gas service is also
provided on a wholesale basis to the distribution systems of the City
of Long Beach, Southwest Gas Corporation and San Diego Gas & Electric
Company (SDG&E), an affiliated company.

Supplies of Natural Gas
SoCalGas buys natural gas under several short-term and long-term
contracts. Short-term purchases are from various Southwest U.S. and
Canadian gas suppliers, and are primarily based on monthly spot-market
prices. SoCalGas transports gas under long-term firm pipeline capacity
agreements that provide for annual reservation charges, which are
recovered in rates. SoCalGas has commitments for firm pipeline
capacity under contracts with pipeline companies that expire at
various dates through 2006.
Most of the natural gas purchased and delivered by SoCalGas is
produced outside of California. These supplies are delivered to
SoCalGas' intrastate transmission system by interstate pipeline
companies, primarily El Paso Natural Gas Company and Transwestern
Natural Gas Company. These interstate companies provide transportation
services for supplies purchased from other sources by SoCalGas or its
transportation customers. The rates that interstate pipeline companies
may charge for natural gas and transportation services are regulated
by the FERC.

The following table shows the sources of natural gas deliveries from
1997 through 2001:

Market-sensitive natural gas supplies (supplies purchased on the spot
market as well as under longer-term contracts, ranging from one month
to two years, based on spot prices) account for 100 percent of total
natural gas volumes purchased by SoCalGas. The average price of
natural gas at the California/Arizona (CA/AZ) border was $7.27/mmbtu
in 2001, compared with $6.25/mmbtu in 2000, and $2.33/mmbtu in 1999.
Supply/demand imbalances and a number of other factors associated with
California's energy crisis in late 2000 and early 2001 resulted in
higher natural gas prices during that period. Prices for natural gas
have subsequently decreased in the later part of 2001. As of December
31, 2001, the average spot cash price at the California/Arizona border
was $2.63/mmbtu.
During 2001, SoCalGas delivered 1,153 bcf of natural gas through
its system. Approximately 69 percent of these deliveries were
customer-owned natural gas for which SoCalGas provided transportation
services. The remaining natural gas deliveries were purchased by
SoCalGas and resold to customers. The company estimates that
sufficient natural gas supplies will be available to meet the
requirements of its customers for the next several years.

Customers
For regulatory purposes, customers are separated into core and noncore
customers. Core customers are primarily residential and small
commercial and industrial customers, without alternative fuel
capability. Noncore customers consist primarily of utility electric
generation (UEG), wholesale, large commercial, industrial and off-
system (outside the company's normal service territory) customers. Of
the 5.1 million meters in SoCalGas service territory, only 1,300 serve
the noncore market.
Most core customers purchase natural gas directly from SoCalGas.
Core customers are permitted to aggregate their natural gas
requirement and, up to a limit of 10 percent of SoCalGas' core market,
to purchase natural gas directly from brokers or producers. Beginning
in 2002, the CPUC authorized the removal of the 10 percent limit.
SoCalGas continues to be obligated to purchase reliable supplies of
natural gas to serve the requirements of its core customers. SoCalGas
and SDG&E recently filed an application with the CPUC to combine the
two companies' core procurement portfolios. On March 6, 2002, a
proposed decision was issued which, if approved, will allow SoCalGas
and SDG&E to combine their core procurement portfolios. A final CPUC
decision is expected in mid-2002.
Beginning in 2002, utility procurement services offered to
noncore customers will be phased out. Noncore customers will have the
option to either become core customers, and continue to receive
utility procurement services, or remain noncore customers and purchase
their natural gas from other sources, such as brokers or producers.
Noncore customers will also have to make arrangements to deliver their
purchases to SoCalGas' receipt points for delivery through the
company's transmission and distribution system.
In 2001, approximately 87 percent of the CPUC-authorized natural
gas margin was allocated to the core customers, with 13 percent
allocated to the noncore customers.
Although revenues from transportation throughput is less than for
natural gas sales, SoCalGas generally earns the same margin whether
SoCalGas buys the gas and sells it to the customer or transports
natural gas already owned by the customer.
SoCalGas also provides natural gas storage services for noncore
and off-system customers on a bid and negotiated contract basis. The
storage service program provides opportunities for customers to store
natural gas on an "as available" basis, usually during the summer to
reduce winter purchases when natural gas costs are generally higher.
As of December 31, 2001, SoCalGas was storing approximately 35 bcf of
customer-owned gas.

Demand for Natural Gas
Natural gas is a principal energy source for residential, commercial,
industrial and UEG customers. Natural gas competes with electricity
for residential and commercial cooking, water heating, space heating
and clothes drying, and with other fuels for large industrial,
commercial and UEG uses. Growth in the natural-gas markets is largely
dependent upon the health and expansion of the southern California
economy. SoCalGas added approximately 58,000 new customer meters in
2001 and 69,000 in 2000, representing growth rates of approximately
1.2 percent and 1.4 percent, respectively. SoCalGas expects its growth
rate for 2002 will approximate that of 2001.
During 2001, 99 percent of residential energy customers in
SoCalGas' service area used natural gas for water heating, 96 percent
for space heating, 76 percent for cooking and 55 percent for clothes
drying.
Demand for natural gas by noncore customers is very sensitive to
the price of competing fuels. Although the number of noncore customers
in 2001 was only 1,300, it accounted for approximately 9 percent of
the authorized natural gas revenues and 69 percent of total natural
gas volumes. External factors such as weather, the price of
electricity, electric deregulation, the use of hydroelectric power,
competing pipelines and general economic conditions can result in
significant shifts in demand and market price. The demand for natural
gas by large UEG customers is also greatly affected by the price and
availability of electric power generated in other areas.
Effective March 31, 1998, electric industry restructuring gave
California consumers the option of selecting their electric energy
provider from a variety of local and out-of-state producers. As a
result, natural gas demand for electric generation within southern
California competes with electric power generated throughout the
western United States. Although electric industry restructuring has no
direct impact on SoCalGas' natural gas operations, future volumes of
natural gas transported for electric generating plant customers may be
significantly affected to the extent that regulatory changes divert
electricity generation from SoCalGas' service area.

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

RATES AND REGULATION

Natural Gas Industry Restructuring
The natural gas industry in California experienced an initial phase of
restructuring during the 1980s. In December 2001 the CPUC issued a
decision adopting provisions affecting the structure of the natural
gas industry in California, some of which could introduce additional
volatility into the earnings of SoCalGas and other market
participants. Additional information on natural gas industry
restructuring is provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 12 of the
notes to Consolidated Financial Statements herein.

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

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

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

Cost of Capital
The authorized cost of capital is determined by an automatic
adjustment mechanism based on changes in certain capital market
indices. Additional information on the company's cost of capital is
provided in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 12 of the notes to
Consolidated Financial Statements herein.

ENVIRONMENTAL MATTERS

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

Hazardous Substances
In 1994, the CPUC approved the Hazardous Waste Collaborative
Memorandum account, a mechanism that allows SoCalGas to recover in
rates the costs associated with the cleanup of sites contaminated with
hazardous waste. In general, SoCalGas is allowed to recover 90 percent
of its cleanup costs and any related costs of litigation.
During the early 1900s, SoCalGas and its predecessors
manufactured gas from coal or oil. The manufacturing sites often have
become contaminated with the hazardous residual by-products of the
process. SoCalGas has identified 42 former manufactured-gas plant
sites at which it (together with other users as to 21 of these sites)
may have cleanup obligations. As of December 31, 2001, 18 of these
sites have been remediated, of which 14 have received certification
from the California Environmental Protection Agency. Preliminary
investigations, at a minimum, have been completed on 41 of the sites.
At December 31, 2001, SoCalGas' estimated remaining investigation and
remediation liability for all of these sites is $54.5 million.
SoCalGas lawfully disposed of wastes at permitted facilities
owned and operated by other entities. Operations at these facilities
may result in actual or threatened risks to the environment or public
health. Under California law, businesses that arrange for legal
disposal of wastes at a permitted facility from which wastes are later
released, or threaten to be released, can be held financially
responsible for corrective actions at the facility.
SoCalGas has been named as a potentially responsible party (PRP)
for two landfill sites and five industrial waste disposal sites, from
which releases have occurred as described below.
Remedial actions and negotiations with other PRPs and the United
States Environmental Protection Agency have been in progress since
1986 and 1993 for the two landfill sites. The company's share of costs
to remediate these sites is estimated to be $10.4 million ($0.7
million for the first site and $9.7 million for the second site). Of
this, $5.0 million has been spent since 1987 ($140,000 in 2001) and
the company recently signed a Consent Decree to settle and liquidate
all remaining liabilities at the second site for $5.7 million.
In the early 1990s, the company was notified of hazards at two
industrial waste treatment facilities in the California communities of
Fresno and Carson, where the company had disposed of wastes. During
2000, the company settled with the other PRPs at these sites for $0.4
million and has no additional liability.
In December 1999, SoCalGas was notified that it is a PRP at a
waste treatment facility in Bakersfield, California. SoCalGas is
working with other PRPs in order to remove from the site certain
liquid wastes that threaten to be released. SoCalGas has reserved
$0.8 million in contingent environmental liability for its share of
site cleanup. Amounts expended to date are $0.1 million, including
$11,000 in 2001.
In March 2000, SoCalGas was notified it is a PRP at a former
mercury recycling facility in Brisbane, California. Total potential
liability is estimated at $5,900. Settlement and payment to the State
of California is expected by mid-2002. Also in March 2000, SoCalGas
was sued in Federal District Court as a PRP in a waste oil disposal
site in Los Angeles. Plaintiffs alleged that SoCalGas had transported
various petroleum wastes to the site in the 1950s for recycling.
SoCalGas settled with plaintiffs in December 2000 for $0.2 million.
At December 31, 2001, SoCalGas' estimated remaining investigation
and remediation liability related to hazardous waste sites, including
the manufactured gas sites, was $54.5 million, of which 90 percent is
authorized to be recovered through the Hazardous Waste Collaborative
mechanism. SoCalGas believes that any costs not ultimately recovered
through rates, insurance or other means, will not have a material
adverse effect on SoCalGas' results of operations or financial
position.
Estimated liabilities for environmental remediation are recorded
when amounts are probable and estimable. Amounts authorized to be
recovered in rates under the Hazardous Waste Collaborative mechanism
are recorded as a regulatory asset.

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

OTHER MATTERS

Research, Development and Demonstration (RD&D)
The SoCalGas RD&D portfolio is focused in five major areas:
operations, utilization systems, power generation, public interest and
transportation. Each of these activities provides benefits to
customers and society by providing more cost-effective, efficient
natural gas equipment with lower emissions, increased safety, and
reduced environmental mitigation and other operating costs. The CPUC
has authorized SoCalGas to recover its operating costs associated with
RD&D. An annual average of $7.5 million has been spent over the last
three years.

Employees of Registrant
As of December 31, 2001, SoCalGas had 6,063 employees, compared to
5,853 at December 31, 2000.

Wages
Field, technical and most clerical employees at SoCalGas are
represented by the Utility Workers' Union of America or the
International Chemical Workers' Council. The collective bargaining
agreement on wages, hours and working conditions remains in effect
through March 31, 2002. Negotiations for a new agreement are currently
in progress.

ITEM 2. PROPERTIES

Natural Gas Properties
At December 31, 2001, SoCalGas owned approximately 2,845 miles of
transmission and storage pipeline, 45,620 miles of distribution
pipeline and 44,868 miles of service piping. It also owned 10
transmission compressor stations and 6 underground storage reservoirs,
with a combined working capacity of 121.1 billion cubic feet.

Other Properties
SoCalGas has a 15-percent limited partnership interest in a 52-story
office building in downtown Los Angeles. SoCalGas leases approximately
half of the building through the year 2011. The lease has six separate
five-year renewal options.
The company owns or leases other offices, operating and
maintenance centers, shops, service facilities, and equipment
necessary in the conduct of business.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

As a result of the formation of Sempra Energy as described in Note 1
of notes to Consolidated Financial Statements, all of the issued and
outstanding common stock of PE is owned by Sempra Energy. The
information required by Item 5 concerning dividends declared is
included in the "Statements of Consolidated Changes in Shareholders'
Equity" set forth in Item 8 of this Annual Report herein.

ITEM 6. SELECTED FINANCIAL DATA

Since SoCalGas is a wholly owned subsidiary of Pacific Enterprises, per
share data has been omitted.
This data should be read in conjunction with the Consolidated
Financial Statements and notes to Consolidated Financial Statements
contained herein.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Pacific Enterprises and Southern
California Gas Company

Introduction

This section includes management's discussion and analysis of
operating results from 1999 through 2001, and provides information
about the capital resources, liquidity and financial performance of
Pacific Enterprises (PE) and Southern California Gas Company
(SoCalGas). SoCalGas, PE or the two together are referred to as the
company herein, the distinction being indicated by the context. It
also focuses on the major factors expected to influence future
operating results and discusses investment and financing plans. It
should be read in conjunction with the Consolidated Financial
Statements included in this Annual Report.
PE is a holding company whose only direct subsidiary is SoCalGas,
the nation's largest natural gas distribution utility. SoCalGas owns
and operates a natural gas distribution, transmission and storage
system supplying natural gas throughout a 23,000-square mile service
territory comprising most of southern California and part of central
California. SoCalGas provides natural gas service to residential,
commercial, industrial, electric generation and wholesale customers
through 5 million meters in a service area with a population of 18
million.

Business Combination

Sempra Energy was formed as a holding company for PE and Enova
Corporation (Enova), the parent corporation of San Diego Gas &
Electric Company (SDG&E), in connection with a business combination
that was completed on June 26, 1998 (the business combination). In
connection with the business combination, the holders of common stock
of PE and Enova became the holders of Sempra Energy's common stock.
As a result of the business combination, PE dividended its
nonutility subsidiaries to Sempra Energy during 1998 and early 1999.
See Note 1 of the notes to the Consolidated Financial Statements for
additional information.

Capital Resources And Liquidity

SoCalGas' operations have historically been a 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 December 31, 2001, the company had $13 million in cash and
$620 million in unused, committed lines of credit (of which SoCalGas
had $120 million in unused lines of credit). 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. Management believes that cash flows from operations and
from debt issuances are adequate to meet capital expenditure
requirements and other commitments.

Cash Flows From Operating Activities

The decrease in cash flows from operating activities in 2001 compared
to 2000 was the result of SoCalGas' balancing account activity. This
included returns of prior overcollections and the temporary effects of
higher-than-expected costs of natural gas and public purpose programs
and lower-than expected sales volumes. The increase in cash flows from
operating activities in 2000 was primarily due to higher accounts
payable and overcollected regulatory balancing accounts, partially
offset by increased accounts receivable. The increases in accounts
payable and accounts receivable were primarily due to higher prices
for natural gas. The regulatory balancing account overcollections
resulted from higher sales volume and the actual cost of gas being
slightly lower than amounts being collected in rates on a current
basis.

Cash Flows From Investing Activities

Cash flow used in investing activities decreased in 2001 due to loan
repayments being made by Sempra Energy to the company in 2001 compared
to loans being made to Sempra Energy in 2000, partially offset by an
increase in capital expenditures for utility plant. Capital
expenditures were $294 million in 2001, compared to $198 million and
$146 million in 2000 and in 1999, respectively. Increases in capital
expenditures in 2001 and 2000 were primarily due to improvements to
the gas distribution system and expansion of pipeline capacity to meet
increased demand by electric generators and by commercial and
industrial customers.
Over the next five years, the company expects to make capital
expenditures of approximately $2.0 billion. Capital expenditures in
2002 are expected to be comparable to those of 2001. They will be
financed primarily by operations and debt issuances.
Construction, investment and financing programs are continuously
reviewed and revised by the company in response to changes in economic
conditions, 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 increased in 2001 compared to
2000 primarily due to the increase in long-term debt repayments and
higher dividends paid by PE in 2001.
Net cash used in financing activities decreased in 2000 compared
to 1999 primarily due to lower long-term debt repayments. For
SoCalGas, the decrease was also attributable to lower dividends paid
in 2000.

Long-Term and Short-Term Debt
In 2001, cash was used for the repayment of $150 million of first-
mortgage bonds and $120 million of unsecured notes. PE had an
offsetting increase of $50 million in short-term debt.
Cash was used for the repayment of $30 million of unsecured notes
in 2000. In 1999, cash was used for the repayment of $75 million of
unsecured notes. PE also repaid $43 million of short-term debt.

Dividends
Dividends paid to Sempra Energy amounted to $190 million in 2001 and
$100 million in each of 2000 and 1999. Dividends paid by SoCalGas to
PE amounted to $190 million, $200 million and $278 million in 2001,
2000 and 1999, respectively.
The payment of future dividends and the amount thereof are within
the discretion of the companies' boards of directors. The CPUC's
regulation of SoCalGas' capital structure limits to $280 million the
portion of its December 31, 2001 retained earnings that is available
for dividends to PE.

Capitalization

Total capitalization at December 31, 2001, was $2.3 billion of which
$2.1 billion applied to SoCalGas. The debt-to-capitalization ratios
were 32 percent and 35 percent at December 31, 2001 for PE and
SoCalGas, respectively. Significant changes in capitalization during
2001 included dividends declared and repayment of long-term debt.

Cash and Cash Equivalents

Cash and cash equivalents are available for investment in projects
consistent with the company's strategic direction, retirement of debt,
payment of dividends and other corporate purposes.
In addition to cash generated from ongoing operations, PE has a
credit agreement which permits short-term borrowings of up to $500
million, and/or supports its commercial paper. This agreement expires
in 2003. SoCalGas has a $170 million line of credit which expires in
2002. These revolving lines of credit were unused at December 31, 2001
and 2000. At December 31, 2001, SoCalGas had $50 million in short-term
debt outstanding.

Commitments

The following is a summary of the company's contractual commitments at
December 31, 2001 (in millions of dollars). Additional information
concerning these commitments is provided above and in Notes 3, 4 and
11 of the notes to Consolidated Financial Statements.

Results of Operations
To understand the operations and financial results of the company, it
is important to understand the ratemaking procedures that SoCalGas
follows.
SoCalGas is regulated by the CPUC. It is the responsibility of
the CPUC to determine that utilities operate in the best interests of
their customers and have the opportunity to earn a reasonable return
on investment.
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. In December 2001, the CPUC issued a decision
adopting several provisions that the company believes will make gas
service more reliable, efficient and better tailored to the desires of
customers. The CPUC is still considering the schedule for
implementation of these regulatory changes, but it is expected that
most of the changes will be implemented during 2002.
In connection with restructuring of energy regulation, SoCalGas
received approval from the CPUC for Performance-Based Ratemaking (PBR).
Under PBR, income potential is tied to achieving or exceeding specific
performance and productivity measures, rather than to expanding utility
plant in a market where a utility already has a highly developed
infrastructure.
See additional discussions of natural gas-industry restructuring
below under "Factors Influencing Future Performance" and in Note 12 of
the notes to Consolidated Financial Statements.

The table below summarizes SoCalGas' natural gas volumes and revenues
by customer class:

GAS SALES, TRANSPORTATION AND EXCHANGE
(Dollars in millions, volumes in billion cubic feet)
For the years ended December 31

2001 Compared to 2000

Net income for SoCalGas increased to $208 million in 2001 compared to
$207 million in 2000 primarily due to higher gas volumes in 2001,
offset by the gain on sale of SoCalGas' investment in Plug Power
during 2000. In addition to the above factors, PE's net income
included less interest income from affiliates in 2001. Net income for
the fourth quarter of 2001 decreased compared to the fourth quarter of
2000 for both SoCalGas and PE. The decrease was primarily due to the
sale of the investment in Plug Power during the fourth quarter of
2000.
Natural gas revenues increased from $2.9 billion in 2000 to $3.7
billion in 2001, and the cost of natural gas distributed increased
from $1.4 billion in 2000 to $2.1 billion in 2001. These increases
were due to higher average gas prices and higher volumes of gas sales
in 2001. Under the current regulatory framework, changes in core-
market natural gas prices (gas purchased for customers who are
primarily residential and small commercial and industrial customers,
without alternative fuel capability) do not affect net income, since
current or future core customer rates generally recover the actual
cost of natural gas on a substantially concurrent basis. See
discussion of balancing accounts in Note 2 of the notes to
Consolidated Financial Statements.
Other operating expenses increased in 2001 compared to 2000 due
to higher costs for company-use fuel (as a result of higher gas
prices), higher employee benefit expenses and operation costs covered
by balancing accounts.

2000 Compared to 1999

Net income for 2000 increased compared to net income in 1999. The
increase was primarily due to higher non-core gas throughput, the gain
on sale of SoCalGas' investment in Plug Power noted above, and lower
operating and maintenance expenses. For the fourth quarter of 2000,
net income for SoCalGas decreased compared to the fourth quarter of
1999. The decrease was primarily due to the favorable resolution of
income tax issues in 1999, partially offset by higher non-core gas
throughput and the sale of the investment in Plug Power. In addition
to the above factors, net income for PE increased in the fourth
quarter of 2000 due to higher expenses associated with other, former
PE subsidiaries in 1999.
Natural gas revenues increased from $2.6 billion in 1999 to $2.9
billion in 2000, primarily due to higher prices for natural gas in
2000 and higher revenues from electric-generation customers. The
increase in these revenues was due to higher demand for electricity in
2000 which increased prices and volumes.
The cost of natural gas distributed increased from $1.0 billion
in 1999 to $1.4 billion in 2000. The increase was largely due to
higher prices for natural gas. Prices for natural gas have increased
due to the increased use of natural gas to fuel electric generation,
colder winter weather and population growth in California.
Other operating expenses decreased in 2000 compared to 1999
primarily due to lower pension expense in 2000.

Other Income and Deductions, Interest Expense and Income Taxes

Other Income and Deductions

Other income and deductions consist primarily of interest income from
short-term investments and interest income or expense from regulatory
balancing accounts. This decreased in 2001 as compared to 2000 due to
lower interest from affiliates, and due to the 2000 gain on the sale
of SoCalGas' investment in Plug Power. Other income increased in 2000
compared to 1999 primarily due to higher interest earned on loans to
affiliates, and also due to the gain recognized on the sale of Plug
Power.

Interest Expense

Interest expense decreased in 2001 as compared to 2000 due to
SoCalGas' repayments of $270 million in long-term debt during the
fourth quarter of 2001, and also due to lower interest expense to
affiliates. Interest expense increased in 2000 as compared to 1999
primarily due to SoCalGas' 1999 reversal of previously accrued
interest related to income-tax issues as a result of favorable income-
tax rulings.

Income Taxes

Income tax expense decreased in 2001 as compared to 2000 due to lower
income before taxes, and higher deductions related to capitalized
costs. Income tax expense at PE increased in 2000 as compared to 1999
primarily due to an increase in income before taxes.

Factors Influencing Future Performance

Performance of PE in the near future will depend on the results of
SoCalGas. The factors influencing SoCalGas' future performance are
summarized below.

Natural Gas Restructuring and Gas Rates

On December 11, 2001, the CPUC issued a decision adopting the
following provisions affecting the structure of the natural gas
industry in California, some of which could introduce additional
volatility into the earnings of SoCalGas and other market
participants: a system for shippers to hold firm, tradable rights to
capacity on SoCalGas' major gas transmission lines with SoCalGas'
shareholders at risk for whether market demand for these rights will
cover the cost of these facilities; a further unbundling of SoCalGas'
storage services, giving SoCalGas greater upward pricing flexibility
(except for storage service for core customers) but with increased
shareholder risk for whether market demand will cover storage costs;
new balancing services including separate core and noncore balancing
provisions; a reallocation among customer classes of the cost of
interstate pipeline capacity held by SoCalGas and an unbundling of
interstate capacity for gas marketers serving core customers; and the
elimination of noncore customers' option to obtain gas supply service
from SoCalGas. The CPUC is still considering the schedule for
implementation of these regulatory changes, but it is expected that
most of the changes will be implemented during 2002.

Allowed Rate of Return

SoCalGas is authorized to earn a rate of return on rate base (ROR) of
9.49 percent and a rate of return on common equity (ROE) of 11.6
percent, the same as in 2001 and 2000. These rates will continue to be
effective until the next periodic review by the CPUC unless interest-
rate changes are large enough to trigger an automatic adjustment prior
thereto. SoCalGas can earn more than the authorized rate by
controlling costs below approved levels or by achieving favorable
results in certain areas, such as various incentive mechanisms. In
addition, earnings are affected by changes in sales volumes, except
for the majority of core sales.

Utility Integration

On September 20, 2001 the CPUC approved Sempra Energy's request to
integrate the management teams of SoCalGas and SDG&E. The decision
retains the separate identities of each utility and is not a merger.
Instead, utility integration is a reorganization that consolidates
senior management functions of the two utilities and returns to the
utilities a significant portion of shared support services currently
provided by Sempra Energy's centralized corporate center. Once
implementation is completed, the integration is expected to result in
more efficient and effective operations.
In a related development, a CPUC draft decision would allow
SoCalGas and SDG&E to combine their natural gas procurement
activities. The CPUC is scheduled to act on the draft decision at its
April 4, 2002 meeting.

Environmental Matters
The company's operations are subject to federal, state and local
environmental laws and regulations governing such things as hazardous
wastes, air and water quality, land use, solid-waste disposal and the
protection of wildlife.
Utility capital costs to comply with environmental requirements
are generally recovered through customer rates. Therefore, the
likelihood of the company's financial position or results of
operations being adversely affected in a significant manner is
believed to be remote.
The environmental issues currently facing the company or resolved
during the latest three-year period include investigation and
remediation of its manufactured-gas sites and cleanup of third-party
waste-disposal sites used by the company. See additional discussions
of environmental issues in Note 11 of the notes to Consolidated
Financial Statements.

Market Risk
Market risk is the risk of erosion of the company's cash flows, net
income, asset values and equity due to adverse changes in prices for
natural gas, and in interest rates.
The company's policy is to use derivative financial instruments
to reduce its exposure to fluctuations in interest rates and natural
gas prices. Transactions involving these financial instruments are
with firms believed to be credit-worthy and major exchanges. The use
of these instruments exposes the company to market and credit risks
which, at times, may be concentrated with certain counterparties.
There were no unusual concentrations at December 31, 2001 that would
indicate an unacceptable level of risk.
SoCalGas uses energy derivatives to manage natural gas price risk
associated with servicing its load requirements. In addition, SoCalGas
makes limited use of natural gas derivatives for trading purposes.
These instruments can include forward contracts, futures, swaps,
options and other contracts. In the case of both price-risk management
and trading activities, the use of derivative financial instruments by
the company is subject to certain limitations imposed by company
policy and regulatory requirements. See Note 8 of the notes to
Consolidated Financial Statements for further information regarding
the use of energy derivatives by the company.
Sempra Energy has adopted corporate-wide policies governing its
market-risk management and trading activities. An Energy Risk
Management Oversight Committee, consisting of senior officers,
oversees company-wide energy risk management activities to ensure
compliance with Sempra Energy's stated energy-risk management and
trading policies. In addition, SoCalGas' risk-management committee
monitors and controls energy-price risk management and trading
activities independently from the employees responsible for creating
or actively managing these risks.
Along with other tools, the company uses Value at Risk (VaR) to
measure its exposure to market risk. VaR is an estimate of the
potential loss on a position or portfolio of positions over a
specified holding period, based on normal market conditions and within
a given statistical confidence interval. The company has adopted the
variance/covariance methodology in its calculation of VaR, and uses
both the 95-percent and 99-percent confidence interval. Holding
periods are specific to the types of positions being measured, and are
determined based on the size of the position or portfolios, market
liquidity, purpose and other factors. Historical volatilities and
correlations between instruments and positions are used in the
calculation. As of December 31, 2001, the VaR of SoCalGas' natural gas
positions was not material.
The following discussion of the company's primary market-risk
exposures as of December 31, 2001, includes further discussion of how
these exposures are managed.

Commodity-Price Risk

Market risk related to physical commodities is based upon potential
fluctuations in the prices and basis of natural gas. The company's
market risk is impacted by changes in volatility and liquidity in the
markets in which natural gas or related financial instruments are
traded. The company is exposed, in varying degrees, to price risk in
the natural gas markets. The company's policy is to manage this risk
within a framework that considers the unique markets, and operating
and regulatory environments.
SoCalGas' market risk exposure is limited due to CPUC-authorized
rate recovery of natural gas purchase, sale and storage activity.
However, at times it may be exposed to limited market risk as a result
of activities under the Gas Cost Incentive Mechanism (GCIM), which is
discussed in Note 12 of the notes to Consolidated Financial
Statements. SoCalGas manages this risk within the parameters of the
company's market-risk management and trading framework.

Interest-Rate Risk

The company is exposed to fluctuations in interest rates primarily as
a result of its fixed-rate long-term debt. The company has
historically funded utility operations through long-term debt issues
with fixed interest rates and these interest rates are recovered in
utility rates. With the restructuring of the regulatory process, the
CPUC has permitted greater flexibility within the debt-management
process. As a result, recent debt offerings have been selected with
short-term maturities to take advantage of yield curves, or have used
a combination of fixed-rate and floating-rate debt. Subject to
regulatory constraints, interest-rate swaps may be used to adjust
interest-rate exposures when appropriate, based upon market
conditions.
At December 31, 2001, SoCalGas had $508 million of fixed-rate debt
and $175 million of variable-rate debt. Interest on fixed-rate utility
debt is fully recovered in rates on a historical cost basis and
interest on variable-rate debt is provided for in rates on a forecasted
basis. At December 31, 2001, SoCalGas' fixed-rate debt had a one-year
VaR of $96 million and SoCalGas variable-rate debt had a one-year VaR
of $1 million.
At December 31, 2001, the notional amount of interest-rate swap
transactions totaled $175 million. See Notes 4 and 8 of the notes to
Consolidated Financial Statements for further information regarding
these swap transactions.

Credit Risk

Credit risk relates to the risk of loss that would be incurred as a
result of nonperformance by counterparties pursuant to the terms of
their contractual obligations. The company avoids concentration of
counterparties and maintains credit policies with regard to
counterparties that management believes significantly minimize overall
credit risk. These policies include an evaluation of prospective
counterparties' financial condition (including credit ratings),
collateral requirements under certain circumstances, and the use of
standardized agreements that allow for the netting of positive and
negative exposures associated with a single counterparty.
The company monitors credit risk through a credit-approval
process and the assignment and monitoring of credit limits. These
credit limits are established based on risk and return considerations
under terms customarily available in the industry.
The company periodically enters into interest-rate swap agreements
to moderate exposure to interest-rate changes and to lower the overall
cost of borrowing. The company would be exposed to interest-rate
fluctuations on the underlying debt should other parties to the
agreement not perform.

Critical Accounting Policies
The company's most significant accounting policies are described in
Note 2 of the notes to Consolidated Financial Statements. The most
critical policies are Statement of Financial Accounting Standards
(SFAS) 71 "Accounting for the Effects of Certain Types of Regulation,"
and SFAS 133 and SFAS 138 "Accounting for Derivative Instruments and
Hedging Activities" and "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," (see below). All of these policies
are mandatory under generally accepted accounting principles and the
regulations of the Securities and Exchange Commission. Each of these
policies has a material effect on the timing of revenue and expense
recognition for significant company operations.
In connection with the application of these and other accounting
policies, the company makes estimates and judgments about various
matters. The most significant of these involve the calculation of fair
values, and the collectibility of regulatory and other assets. As
discussed elsewhere herein, the company uses exchange quotations or
other third-party pricing to estimate fair values whenever possible.
When no such data is available, it uses internally developed models or
other techniques. The assumed collectibility of regulatory assets
considers legal and regulatory decisions involving the specific items
or similar items. The assumed collectibility of other assets considers
the nature of the item, the enforceability of contracts where
applicable, the creditworthiness of other parties and other factors.

New Accounting Standards
Effective January 1, 2001, the company adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." As amended, SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position, measure those
instruments at fair value and recognize changes in the fair value of
derivatives in earnings in the period of change unless the derivative
qualifies as an effective hedge that offsets certain exposure.
The company utilizes derivative financial instruments to reduce
its exposure to unfavorable changes in energy prices, which are
subject to significant and often volatile fluctuation. Derivative
financial instruments are comprised of futures, forwards, swaps,
options and long-term delivery contracts. These contracts allow
SoCalGas to predict with greater certainty the effective prices to be
received and the prices to be charged to its customers.
Upon adoption of SFAS 133 on January 1, 2001, the company is
classifying its forward contracts as follows:

Normal Purchase and Sales: These forward contracts are excluded from
the requirements of SFAS No. 133. The realized gains and losses on
these contracts are reflected in the income statement at the contract
settlement date. The contracts that generally qualify as normal
purchases and sales are long-term contracts that are settled by
physical delivery.

Cash Flow Hedges: The unrealized gains and losses related to these
forward contracts are included in accumulated other comprehensive
income, a component of shareholders' equity, and reflected in the
Statements of Consolidated Income when the corresponding hedged
transaction is settled.

Gas Purchases and Sales: The unrealized gains and losses related to
these forward contracts are reflected on the balance sheet as
regulatory assets and liabilities, to the extent derivative gains and
losses will be recoverable or payable in future rates.

If gains and losses at SoCalGas are not recoverable or payable through
future rates, SoCalGas will apply hedge accounting if certain criteria
are met. In instances where hedge accounting is applied to energy
derivatives, cash flow hedge accounting is elected and, accordingly,
changes in fair values of the derivatives are included in other
comprehensive income and reflected in the Statements of Consolidated
Income when the corresponding hedged transaction is settled. The
effect on other comprehensive income for the year ended December 31,
2001 was not material. In instances where energy derivatives do not
qualify for hedge accounting, gains and losses are recorded in the
Statements of Consolidated Income.
The adoption of this new standard on January 1, 2001, did not
impact the company's earnings. However, $982 million in current
assets, $1.1 billion in noncurrent assets, and $4 million in current
liabilities were recorded as of January 1, 2001, in the Consolidated
Balance Sheets as fixed-priced contracts and other derivatives. Due to
the regulatory environment in which SoCalGas operates, regulatory
assets and liabilities were established to the extent that derivative
gains and losses are recoverable or payable through future rates. As
such, $982 million in current regulatory liabilities, $1.1 billion in
noncurrent regulatory liabilities, and $4 million in current
regulatory assets were recorded as of January 1, 2001, in the
Consolidated Balance Sheets. See Note 8 of the notes to Consolidated
Financial Statements for additional information on the effects of SFAS
133 on the financial statements at December 31, 2001. The ongoing
effects will depend on future market conditions and the company's
hedging activities.
In July 2001, the Financial Accounting Standards Board (FASB)
issued three statements, SFAS 141 "Business Combinations," SFAS 142
"Goodwill and Other Intangible Assets" and SFAS 143 "Accounting for
Asset Retirement Obligations." The first two are not presently
relevant to the company.
SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This applies to
legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or
normal operation of a long-lived asset. It requires entities to record
the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially
recorded, the entity increases the carrying amount of the related
long-lived asset to reflect the future retirement cost. Over time, the
liability is accreted to its present value and paid, and the
capitalized cost is depreciated over the useful life of the related
asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company has not yet
determined the effect of SFAS 143 on its Consolidated Balance Sheets,
but has determined that it will not have a material impact on its
Statements of Consolidated Income.
In August 2001, the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets,
including discontinued operations. SFAS 144 requires that those long-
lived assets classified as held for sale be measured at the lower of
carrying amount or fair value less cost to sell. Discontinued
operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. SFAS
144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The company has not yet determined the effect of
SFAS 144 on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required by Item 7A is set forth under "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Pacific
Enterprises

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Pacific Enterprises:

We have audited the accompanying consolidated balance sheets of
Pacific Enterprises and subsidiaries as of December 31, 2001 and 2000,
and the related statements of consolidated income, cash flows and
changes in shareholders' equity for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pacific
Enterprises and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of
America.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 4, 2002 (March 5, 2002 as to Note 12)

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

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

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

PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
Dollars in millions

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BUSINESS COMBINATION

Sempra Energy was formed as a holding company for Pacific Enterprises
(PE) the parent company of Southern California Gas Company (SoCalGas)
and Enova Corporation (Enova), the parent company of San Diego Gas &
Electric (SDG&E), in connection with a business combination that was
completed on June 26, 1998. As a result of the combination, each
outstanding share of common stock of Enova was converted into one
share of common stock of Sempra Energy, and each outstanding share of
common stock of PE was converted into 1.5038 shares of common stock of
Sempra Energy.
As a result of the business combination, PE dividended its
nonutility subsidiaries to Sempra Energy during 1998 and early 1999.
SoCalGas is now the sole direct subsidiary of PE.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

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

Effects of Regulation

The accounting policies of the company conform with generally accepted
accounting principles for regulated enterprises and reflect the
policies of the California Public Utilities Commission (CPUC) and the
Federal Energy Regulatory Commission (FERC).
The company prepares its financial statements in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation,"
under which a regulated utility records a regulatory asset if it is
probable that, through the ratemaking process, the utility will
recover that asset from customers. Regulatory liabilities represent
future reductions in rates for amounts due to customers. To the extent
that portions of the utility operations cease to be subject to SFAS
No. 71, or recovery is no longer probable as a result of changes in
regulation or the utility's competitive position, the related
regulatory assets and liabilities would be written off. In addition,
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," affects utility plant and
regulatory assets such that a loss must be recognized whenever a
regulator excludes all or part of an asset's cost from rate base. The
application of SFAS No. 121 continues to be evaluated in connection
with industry restructuring. Information concerning regulatory assets
and liabilities is described below in "Revenues," "Regulatory
Balancing Accounts" and "Regulatory Assets and Liabilities," and
industry restructuring is described in Note 12.

Revenues

Revenues for SoCalGas are derived from deliveries of natural gas to
customers and changes in related regulatory balancing accounts.
Revenue for natural gas sales and services are generally recorded
under the accrual method and these revenues are recognized upon
delivery. Natural gas storage contract revenues are accrued on a
monthly basis and reflect reservation, storage and injection charges
in accordance with negotiated agreements, which have one-year to
three-year terms. Operating revenue includes amounts for services
rendered but unbilled (approximately one-half month's deliveries) at
the end of each year.
Additional information concerning utility revenue recognition is
discussed below under "Regulatory Balancing Accounts" and "Regulatory
Assets and Liabilities."

Regulatory Balancing Accounts

The amounts included in regulatory balancing accounts represent net
payables (overcollected balancing accounts less undercollected
balancing accounts) of $85 million and $465 million at December 31,
2001 and 2000, respectively.
Balancing accounts provide a mechanism for charging utility
customers the exact amount incurred for certain costs, primarily
commodity costs. As a result, fluctuations in most costs and
consumption levels do not affect earnings from SoCalGas' operations.
Additional information on regulatory matters is included in Note 12.

Regulatory Assets and Liabilities

In accordance with the accounting principles of SFAS 71 for rate-
regulated enterprises, the company records regulatory assets (which
represent probable future revenues associated with certain costs that
will be recovered from customers through the rate-making process) and
regulatory liabilities (which represent probable future reductions in
revenue associated with amounts that are to be credited to customers
through the rate-making process). They are amortized over the periods
in which the costs are recovered from or refunded to customers in
regulatory revenues.

Regulatory assets (liabilities) as of December 31 consist of the
following (dollars in millions):

2001 2000
------ ------
SoCalGas
----------
Environmental remediation $ 55 $ 58
Fixed-price contracts and other
derivatives 257 --
Unamortized loss on retirement of
debt - net 41 36
Deferred taxes recoverable in rates (158) (100)
Employee benefit costs (132) (60)
Other 5 6
----- -----
Total 68 (60)
PE
-----------
Employee benefit costs 88 96
----- -----
Total PE consolidated $ 156 $ 36
===== =====

Net regulatory assets are recorded on the Consolidated Balance
Sheets at December 31 as follows (dollars in millions):

2001 2000
SoCalGas ------- ------
- --------
Current regulatory assets $ 103 $ 24
Noncurrent regulatory assets 157 --
Current regulatory liabilities (18) --
Noncurrent regulatory liabilities (174) (84)
------ ------
Total 68 (60)

PE
- --------
Noncurrent regulatory assets 88 96
------ ------
Total PE consolidated $ 156 $ 36
====== ======

All assets earn a return or the cash has not yet been expended and the
assets are offset by liabilities that do not incur a carrying cost.

Allowance for Doubtful Accounts

The allowance for doubtful accounts was $14 million, $19 million and
$17 million at December 31, 2001, 2000, and 1999, respectively. The
company recorded a provision for doubtful accounts of $9 million, $9
million and $7 million in 2001, 2000 and 1999, respectively.

Inventories

At December 31, 2001, inventory included natural gas of $34 million,
and materials and supplies of $8 million. The corresponding balances
at December 31, 2000 were $56 million and $11 million, respectively.
Natural gas is valued by the last-in first-out (LIFO) method. When the
inventory is consumed, differences between this LIFO valuation and
replacement cost will be reflected in customer rates. Materials and
supplies are generally valued at the lower of average cost or market.

Due to/from Unconsolidated Affiliates

PE has promissory notes due from Sempra Energy and from Sempra Energy
Global Enterprises (Global) which bear variable interest rates based
on short-term commercial paper rates. These notes were $268 million
and $138 million, respectively, at December 31, 2001 and were included
in noncurrent assets under the caption "due from unconsolidated
affiliates". The corresponding balances at December 31, 2000 were
$469 million and $133 million, respectively. PE also had $3 million
and $15 million due from other affiliates at December 31, 2001 and
2000, respectively.
SoCalGas had a promissory note receivable from Sempra Energy of
$214 million at December 31, 2000, included in current assets under
the caption "due from unconsolidated affiliates." Sempra Energy paid
this promissory note during 2001.
In addition, PE had intercompany payables due to various
affiliates of $168 million and $365 million at December 31, 2001, and
2000, respectively, which are recorded as a current liability. These
balances are due on demand. Of the $168 million balance, $24 million
was recorded at SoCalGas.

Property, Plant and Equipment

Utility plant primarily represents the buildings, equipment and other
facilities used by SoCalGas to provide natural gas service.
The cost of utility plant includes labor, materials, contract
services and related items, and an allowance for funds used during
construction (AFUDC). The cost of most retired depreciable utility
plant, plus removal costs minus salvage value, is charged to
accumulated depreciation. Accumulated depreciation was $3.8 billion and
$3.6 billion at December 31, 2001 and 2000, respectively, which
primarily reflects accumulated depreciation for natural gas utility
plant at SoCalGas of $3.7 billion and $3.6 billion, respectively.
Depreciation expense is based on the straight-line method over the
useful lives of the assets, an average of 23 years in each of 2001,
2000 and 1999, or a shorter period prescribed by the CPUC. The
provision for depreciation as a percentage of average depreciable
utility plant was 4.33, 4.36 and 4.39 in 2001, 2000 and 1999,
respectively. See Note 12 for discussion of industry restructuring.
Maintenance costs are expensed as incurred.
AFUDC, which represents the cost of funds used to finance the
construction of utility plant, is added to the cost of utility plant.
AFUDC also increases income, partly as an offset to interest charges
and partly as a component of other income, shown in the Statements of
Consolidated Income, although it is not a current source of cash.

Long-Lived Assets

In accordance with SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," the company
periodically evaluates whether events or circumstances have occurred
that may affect the recoverability or the estimated useful lives of
long-lived assets. Impairment occurs when the estimated future
undiscounted cash flows exceed the carrying amount of the assets. If
that comparison indicates that the assets' carrying value may be
permanently impaired, such potential impairment is measured based on
the difference between the carrying amount and the fair value of the
assets based on quoted market prices or, if market prices are not
available, on the estimated discounted cash flows. This calculation is
performed at the lowest level for which separately identifiable cash
flows exist. The effects of ratemaking procedures and SFAS 71
significantly reduce the likelihood of any impairment.

Comprehensive Income

Comprehensive income includes all changes, except those resulting from
investments by owners and distributions to owners, in the equity of a
business enterprise from transactions and other events, including, as
applicable, foreign-currency translation adjustments, minimum pension
liability adjustments, unrealized gains and losses on marketable
securities that are classified as available-for-sale, and certain
hedging activities. The components of other comprehensive income are
shown in the Statements of Consolidated Changes in Shareholders'
Equity.

Quasi-Reorganization

In 1993, PE divested its merchandising operations and most of its oil
and gas exploration and production business. In connection with the
divestitures, PE effected a quasi-reorganization for financial
reporting purposes as of December 31, 1992. Certain of the liabilities
established in connection with the quasi-reorganization, including
various income-tax issues, have been favorably resolved. Excess
liabilities of $35 million and $80 million resulting from the
favorable resolution of these issues were restored to shareholders'
equity in December 2001 and November 1999, respectively, but did not
affect the calculation of net income. The remaining liabilities will
be resolved in future years. Management believes the provisions
established for these matters are adequate.

Use of Estimates in the Preparation of the Financial Statements

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

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with maturities of
three months or less at the date of purchase.

Basis of Presentation

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

New Accounting Standards

Effective January 1, 2001, the company adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." As amended, SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position, measure those
instruments at fair value and recognize changes in the fair value of
derivatives in earnings in the period of change unless the derivative
qualifies as an effective hedge that offsets certain exposure.
The company utilizes derivative financial instruments to reduce
its exposure to unfavorable changes in energy prices, which are
subject to significant and often volatile fluctuation. Derivative
financial instruments include futures, forwards, swaps, options and
long-term delivery contracts. These contracts allow SoCalGas to
predict with greater certainty the effective prices to be received and
the prices to be charged to its customers.

Upon adoption of SFAS 133 on January 1, 2001, the company classifies
its forward contracts as follows:

Normal Purchase and Sales: These forward contracts are excluded from
the requirements of SFAS No. 133. The realized gains and losses on
these contracts are reflected in the income statement at the contract
settlement date. The contracts that generally qualify as normal
purchases and sales are long-term contracts that are settled by
physical delivery.

Cash Flow Hedges: The unrealized gains and losses related to these
forward contracts are included in accumulated other comprehensive
income, a component of shareholders' equity, but not reflected in the
Statements of Consolidated Income until the corresponding hedged
transaction is settled.

Gas Purchases and Sales: The unrealized gains and losses related to
these forward contracts are reflected on the balance sheet as
regulatory assets and liabilities, to the extent derivative gains and
losses will be recoverable or payable in future rates.

If gains and losses at SoCalGas are not recoverable or payable through
future rates, SoCalGas will apply hedge accounting if certain criteria
are met.
In instances where hedge accounting is applied to energy
derivatives, cash flow hedge accounting is elected and, accordingly,
changes in fair values of the derivatives are included in other
comprehensive income, but not reflected in the Statements of
Consolidated Income until the corresponding hedged transaction is
settled. The effect on other comprehensive income for the year ended
December 31, 2001 was not material. In instances where energy
derivatives do not qualify for hedge accounting, gains and losses are
recorded in the Statements of Consolidated Income.
The adoption of this new standard on January 1, 2001, did not
impact the company's earnings. However, $982 million in current
assets, $1.1 billion in noncurrent assets, and $4 million in current
liabilities were recorded as of January 1, 2001, in the Consolidated
Balance Sheets as fixed-priced contracts and other derivatives. Due to
the regulatory environment in which SoCalGas operates, regulatory
assets and liabilities were established to the extent that derivative
gains and losses are recoverable or payable through future rates. As
such, $982 million in current regulatory liabilities, $1.1 billion in
noncurrent regulatory liabilities, and $4 million in current
regulatory assets were recorded in the Consolidated Balance Sheets as
of January 1, 2001. See Note 8 for additional information on the
effects of SFAS 133 on the financial statements at December 31, 2001.
The ongoing effects will depend on future market conditions and the
company's hedging activities.
In July 2001, the Financial Accounting Standards Board (FASB)
issued three statements, SFAS 141 "Business Combinations," SFAS 142
"Goodwill and Other Intangible Assets" and SFAS 143 "Accounting for
Asset Retirement Obligations." The first two are not presently
relevant to the company.
SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This applies to
legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or
normal operation of a long-lived asset. It requires entities to record
the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially
recorded, the entity increases the carrying amount of the related
long-lived asset to reflect the future retirement cost. Over time, the
liability is accreted to its present value and paid, and the
capitalized cost is depreciated over the useful life of the related
asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company has not yet
determined the effect of SFAS 143 on its Consolidated Balance Sheets,
but has determined that it will not have a material impact on its
Statements of Consolidated Income.
In August 2001, the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets,
including discontinued operations. SFAS 144 requires that those long-
lived assets be measured at the lower of carrying amount (cost less
accumulated depreciation) or fair value less cost to sell.
Discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet
occurred. SFAS 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that
can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS 144 are effective for fiscal years
beginning after December 15, 2001. The effect of adopting SFAS 144 is
not expected to have a material impact on the company's financial
statements.

NOTE 3. SHORT-TERM BORROWINGS

At December 31, 2001, PE had a $500 million two-year revolving line of
credit, guaranteed by Sempra Energy, for the purpose of providing
loans to Sempra Energy Global Enterprises (Global). The revolving
credit commitment expires in April 2003, at which time then
outstanding borrowings may be converted into a two-year term loan.
Borrowings would be subject to mandatory prepayment should PE's issuer
credit rating cease to be at least BBB- by Standard & Poors (S&P),
should SoCalGas' unsecured long-term credit ratings cease to be at
least BBB by S&P and Baa2 by Moody's, should Sempra Energy's or
SoCalGas' debt-to-total capitalization ratios (as defined in the
agreement) exceed 65 percent, or should there be a change in law
materially and adversely affecting the ability of SoCalGas to pay
dividends or make distributions to PE. Borrowings would bear interest
at rates varying with market rates and the amount of the outstanding
borrowings. PE's line of credit was unused at December 31, 2001.
At December 31, 2001, SoCalGas had a $170 million syndicated
revolving line of credit, which is available to support commercial
paper. Borrowings under the agreement, which expires on May 26, 2002,
would bear interest at various rates based on market rates and
SoCalGas' credit rating. The agreement requires SoCalGas to maintain a
debt-to-total capitalization ratio (as defined in the agreement) of
not to exceed 65 percent. At December 31, 2001, SoCalGas had $50
million of commercial paper outstanding. The revolving line of credit
was unused at December 31, 2001 and 2000.
The company's weighted average interest rate for short-term
borrowings outstanding at December 31, 2001 was 2.04%.

NOTE 4. LONG-TERM DEBT

- --------------------------------------------------------------
December 31,
(Dollars in millions) 2001 2000
- --------------------------------------------------------------
First-mortgage bonds
6.875% August 15, 2002 $ 100 $ 100
5.75% November 15, 2003 100 100
7.375% March 1, 2023 100 100
7.5% June 15, 2023 125 125
Variable rates November 1, 2025
(1.95% at December 31, 2001) 175 175
8.75% October 1, 2021 -- 150
-----------------------
600 750
-----------------------
Unsecured long-term debt
5.67% January 18, 2028 75 75
6.375% May 14, 2006 8 8
6.375% October 29, 2001 -- 120
-----------------------
83 203
-----------------------
Total 683 953
Less:
Current portion of long-term debt 100 120
Unamortized discount on
long-term debt - 12
Market value adjustment on
Interest-rate swap 4 -
-----------------------

Total $ 579 $ 821
- --------------------------------------------------------------

Maturities of long-term debt are $100 million in 2002, $175 million in
2003 and $408 million after 2006.

First-mortgage Bonds

First-mortgage bonds are secured by a lien on utility plant. SoCalGas
may issue additional first-mortgage bonds upon compliance with the
provisions of its bond indentures, which require, among other things,
the satisfaction of pro forma earnings-coverage tests on first-
mortgage bond interest and the availability of sufficient mortgaged
property to support the additional bonds. The most restrictive of
these tests (the property test) would permit the issuance, subject to
CPUC authorization, of an additional $753 million of first-mortgage
bonds as of December 31, 2001.
In November 2001, SoCalGas called its $150 million 8.75 percent
first-mortgage bonds at a premium of 3.59 percent.
On December 11, 2001, SoCalGas entered into an interest-rate swap
which effectively exchanged the fixed rate on its $175 million 6.875
percent first-mortgage bonds for a floating rate. Additional
information is provided under "Interest-Rate Swaps" below.

Unsecured Long-term Debt

Various long-term obligations totaling $83 million are unsecured at
December 31, 2001. In October 2001, SoCalGas repaid $120 million of
6.38 percent medium-term notes upon maturity.

Callable Bonds

At SoCalGas' option, certain fixed-rate bonds may be called at a
premium, including $400 million that are callable in 2003 and $8
million in 2006.

Interest-Rate Swaps

SoCalGas periodically enters into interest-rate swap agreements to
moderate its exposure to interest-rate changes and to lower its
overall cost of borrowing. At December 31, 2001, the company had one
such swap agreement. On December 11, 2001, SoCalGas executed a
cancelable-call interest-rate swap, exchanging its fixed rate
obligation of 6.875 percent on its $175 million first-mortgage bonds
for a floating rate of LIBOR plus 4 basis points. The transaction may
be cancelled every 5 years by either party by payment of the mark-to-
market value, or may be cancelled by the counterparty at any time the
bonds are callable, by payment to SoCalGas of the applicable call
premium on the bonds. The company believes the swap is fully
effective in its purpose of converting the fixed rate stated in the
debt to a floating rate and the swap meets the criteria for accounting
under the short-cut method defined in SFAS no. 133 for fair value
hedges of debt instruments. Accordingly, a market value adjustment to
long-term debt of $4 million was recorded at December 31, 2001 to
reflect, without affecting net income or other comprehensive income,
the favorable economic consequences (as measured at December 31, 2001)
of having entered into the swap transaction. See additional
discussion of interest rate swaps in Note 8.

Financial Covenants

SoCalGas' first-mortgage bond indentures require the satisfaction of
certain bond interest coverage ratios and the availability of
sufficient mortgaged property to issue additional first-mortgage
bonds, but do not restrict other indebtedness. Note 3 discusses the
financial covenants applicable to short-term debt.

NOTE 5. INCOME TAXES

The reconciliation of the statutory federal income tax rate to
the effective income tax rate is as follows:

Years ended December 31 2001 2000 1999
- -----------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.4 5.2 7.4
State income taxes - net of
federal income tax benefit 6.9 6.9 7.3
Tax credits (0.8) (0.7) (0.9)
Other - net (1.1) 0.3 (1.4)
-----------------------------
Effective income tax rate 45.4% 46.7% 47.4%
- -----------------------------------------------------------------------

The components of income tax expense are as follows:

(Dollars in millions) 2001 2000 1999
- -----------------------------------------------------------------------
Current:
Federal $ 116 $ 139 $ 22
State 30 41 9
----------------------------
Total 146 180 31
----------------------------
Deferred:
Federal 20 7 113
State 8 -- 25
----------------------------
Total 28 7 138
----------------------------
Deferred investment tax credits - net (3) (2) (3)
----------------------------
Total income tax expense $ 171 $ 185 $ 166
- ----------------------------------------------------------------------

Federal and state income taxes are allocated between operating income
and other income. PE is included in the consolidated tax return of
Sempra Energy and is allocated income tax expense from Sempra Energy
in an amount equal to that which would result from filing a separate
return.

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

(Dollars in millions) 2001 2000
- ----------------------------------------------------------------------
Deferred Tax Liabilities:
Differences in financial and
tax bases of utility plant $ 295 $ 373
Regulatory balancing accounts 56 11
Regulatory assets 36 39
Other 49 11
--------------------
Total deferred tax liabilities 436 434
--------------------
Deferred Tax Assets:
Investment tax credits 34 38
Postretirement benefits 36 39
Other deferred liabilities 174 143
Restructuring costs 42 43
Other 73 64
--------------------
Total deferred tax assets 359 327
--------------------
Net deferred income tax liability $ 77 $ 107
- ----------------------------------------------------------------------

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

(Dollars in millions) 2001 2000
- ----------------------------------------------------------------------
Current asset $ (33) $ (43)
Noncurrent liability 110 150
--------------------
Total $ 77 $ 107
- ----------------------------------------------------------------------

NOTE 6. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefits

The company sponsors qualified and nonqualified pension plans and
other postretirement benefit plans for its employees. Effective March
1, 1999, the Pacific Enterprises Pension Plan merged with the Sempra
Energy Cash Balance Plan.
During 2000, the company participated in a voluntary
separation program. As a result, the company recorded a $40
million special termination benefit.
The following tables provide a reconciliation of the changes in
the plans' benefit obligations and fair value of assets over the two
years, and a statement of the funded status as of each year end:

The following table provides the amounts recognized on the
Consolidated Balance Sheets (under "sundry" and under "postretirement
benefits other than pensions") at December 31:

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

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

- -----------------------------------------------------------------------
(Dollars in millions) 1% Increase 1% Decrease
- -----------------------------------------------------------------------
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $ 8 $ (6)
Effect on the health care component of the
accumulated other postretirement benefit $76 $(60)
obligation
- -----------------------------------------------------------------------

Except for one nonqualified, unfunded retirement plan, all pension
plans had plan assets in excess of accumulated benefit obligations.
For that one plan the projected benefit obligation and accumulated
benefit obligation were $13 million and $12 million, respectively, as
of December 31, 2001, and $16 million and $12 million, respectively,
as of December 31, 2000.
Other postretirement benefits include retiree life insurance,
medical benefits for retirees and their spouses, and Medicare Part B
reimbursement for certain retirees.

Savings Plan

SoCalGas offers a savings plan, administered by plan trustees, to all
eligible employees. Eligibility to participate in the plan is
immediate for salary deferrals. Employees may contribute, subject to
plan provisions, from one percent to 15 percent of their regular
earnings. After one year of completed service, the company begins to
make matching contributions. Employer contributions are equal to 50
percent of the first 6 percent of eligible base salary contributed by
employees. Employer contributions are invested in Sempra Energy common
stock (new issuances or market purchases) and must remain so invested
until termination of employment. At the direction of the employees,
the employee's contributions are invested in Sempra Energy stock,
mutual funds, or institutional trusts. Employer contributions for the
SoCalGas plan are partially funded by the Sempra Energy Employee Stock
Ownership Plan and Trust (formerly the Pacific Enterprises Employee
Stock Ownership Plan and Trust). Company contributions to the savings
plan were $7 million in 2001, $5 million in 2000 and $6 million in
1999.

NOTE 7. STOCK-BASED COMPENSATION

Sempra Energy has stock-based compensation plans intended to align
employee and shareholder objectives related to Sempra Energy's long-
term growth. The plans permit a wide variety of stock-based awards,
including Sempra Energy non-qualified stock options, incentive stock
options, restricted stock, stock appreciation rights, performance
awards, stock payments and dividend equivalents.
In 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued. It encourages a fair value-based method of accounting for
stock-based compensation. As permitted by SFAS No. 123, Sempra Energy
and its subsidiaries adopted only its disclosure requirements and
continue to account for stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The subsidiaries record an expense for the plans to the extent
that subsidiary employees participate in the plans, or that
subsidiaries are allocated a portion of Sempra Energy's costs of the
plans. PE recorded expenses (credits) of $3 million, $2 million and
($4 million) in 2001, 2000 and 1999, respectively.

NOTE 8. FINANCIAL INSTRUMENTS

Fair Value

The fair values of certain of the company's financial instruments
(cash, temporary investments, notes receivable, dividends payable,
short-term debt and customer deposits) approximate the carrying
amounts. The following table provides the carrying amounts and fair
values of the remaining financial instruments at December 31:

Accounting for Derivative Activities

Effective January 1, 2001, the company adopted SFAS 133, as amended by
SFAS 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." As amended, SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities
in the statement of financial position, measure those instruments at
fair value and recognize changes in the fair value of derivatives in
earnings in the period of change unless the derivative instruments
qualifies as an effective hedge that offsets certain exposures.
At December 31, 2001, $59 million in current assets, $1 million
in other noncurrent assets, $103 million in current liabilities and
$162 million in noncurrent liabilities were recorded in the
Consolidated Balance Sheets for fixed-priced contracts and other
derivatives. Regulatory assets and liabilities were established to the
extent that derivative gains and losses are recoverable or payable
through future rates. As such, $103 million in current regulatory
assets, $157 million in noncurrent regulatory assets, $50 million in
regulatory balancing account liabilities, $3 million in other current
liabilities and $1 million in accumulated other comprehensive income
were recorded in the Consolidated Balance Sheets as of December 31,
2001. For the year ended December 31, 2001, $3 million in other
operating income was recorded in the Statements of Consolidated
Income. The remaining $4 million was a market value adjustment to
long-term debt related to a fixed-to-floating interest rate swap
agreement discussed below.
Changes in the fair value of derivative instruments of $53
million and $72 million for 2001 and 2000, respectively, have
been recognized in the Statements of Consolidated Income under
"cost of natural gas distributed").

Market Risk

The company's policy is to use derivative financial instruments to
manage exposure to fluctuations in interest rates, foreign-currency
exchange rates and energy prices. Transactions involving these
financial instruments are with firms believed to be credit worthy and
major exchanges. 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

The company periodically enters into interest-rate swap agreements to
moderate exposure to interest-rate changes and to lower the overall
cost of borrowing. At December 31, 2001, SoCalGas had one such
agreement, a cancelable-call interest-rate swap, exchanging a fixed
rate obligation of 6.875% on its $175 million first-mortgage bonds,
maturing in 2025, for a floating rate of LIBOR plus 4 basis points.
The transaction may be canceled every 5 years by either party by
payment of the mark-to-market value, or may be canceled by the
counterparty at any time the bonds are callable, by payment to
SoCalGas of the applicable call premium on the bonds. SoCalGas assumes
the swap is fully effective in its purpose of converting the fixed
rate stated in the debt to a floating rate since the swap meets the
criteria for accounting under the short-cut method defined in SFAS No.
133 for fair value hedges of debt instruments. Accordingly, a market
value adjustment of $4 million (as discussed above) was recorded in
long-term debt at December 31, 2001 and no net gains or losses were
recorded in income in respect of the swap.

Energy Derivatives

SoCalGas utilizes derivative financial instruments to reduce its
exposure to unfavorable changes in natural gas prices which are
subject to significant and often volatile fluctuation. Derivative
financial instruments are comprised of futures, forwards, swaps,
options and long-term delivery contracts. These contracts allow
SoCalGas to predict with greater certainty the effective prices to be
received and the prices to be charged to their customers. See Note 2
of the notes to Consolidated Financial Statements for discussion of
how these derivatives are classified under SFAS 133.

Energy Contracts

SoCalGas records natural gas contracts in "Cost of gas distributed" in
the Statements of Consolidated Income. For open contracts not expected
to result in physical delivery, changes in 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 SoCalGas' contracts result in physical
delivery.

NOTE 9. PREFERRED STOCK OF SOUTHERN CALIFORNIA GAS COMPANY

- -----------------------------------------------------------------
December 31,
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------
$25 par value, authorized 1,000,000 shares
6% Series, 28,049 shares outstanding $ 1 $ 1
6% Series A, 783,032 shares outstanding 19 19
Without par value, authorized 10,000,000 shares - -
--------------
$20 $20
- ----------------------------------------------------------------

None of SoCalGas' preferred stock is callable. All series have one
vote per share and cumulative preferences as to dividends, and have a
liquidation value of $25 per share plus any unpaid dividends. In
addition, the 6% Series preferred stock would also share pro rata with
common stock in the remaining assets.

NOTE 10. PREFERRED STOCK OF PACIFIC ENTERPRISES

- -------------------------------------------------------------------
Call December 31,
(Dollars in millions) Price 2001 2000
- -------------------------------------------------------------------

$4.75 Dividend,
200,000 shares outstanding $100.00 $ 20 $ 20
$4.50 Dividend,
300,000 shares outstanding $100.00 30 30
$4.40 Dividend,
100,000 shares outstanding $101.50 10 10
$4.36 Dividend,
200,000 shares outstanding $101.00 20 20
$4.75 Dividend,
253 shares outstanding $101.00 - -
------------------
Total preferred stock $ 80 $ 80
- -------------------------------------------------------------------

PE is authorized to issue 15,000,000 shares of preferred stock
without par value. The preferred stock is subject to redemption
at PE's option at any time upon not less than 30 days' notice, at
the applicable redemption price for each series, together with
unpaid dividends. All series have one vote per share and
cumulative preferences as to dividends, and have a liquidation
value of $100 per share plus any unpaid dividends.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Natural Gas Contracts

SoCalGas buys natural gas under short-term and long-term
contracts. Short-term purchases are from various Southwest U.S.
and Canadian suppliers and are primarily based on monthly spot-
market prices. SoCalGas transports gas under long-term firm
pipeline capacity agreements that provide for annual reservation
charges, which are recovered in rates. SoCalGas has commitments
for firm pipeline capacity under contracts with pipeline
companies that expire at various dates through 2006.
At December 31, 2001, the future minimum payments under
natural gas contracts were:
- -----------------------------------------------------------------
Storage and
(Dollars in millions) Transportation Natural Gas
- -----------------------------------------------------------------
2002 $ 170 $ 444
2003 172 158
2004 174 --
2005 170 --
2006 92 --
----------------------------------
Total minimum payments $ 778 $ 602
- -----------------------------------------------------------------

Total payments under natural gas contracts were $2.1 billion in
2001, $1.4 billion in 2000, and $1.1 billion in 1999.

Leases

PE and SoCalGas have operating leases on real and personal
property expiring at various dates from 2002 to 2030. Certain
leases on office facilities contain escalation clauses requiring
annual increases in rent ranging from 4 percent to 7 percent. The
rentals payable under these leases are determined on both fixed
and percentage bases, and most leases contain extension options
which are exercisable by PE or SoCalGas.
At December 31, 2001, the minimum rental commitments payable
in future years under all noncancellable leases were:

- -----------------------------------------------------------------
(Dollars in millions) PE SoCalGas
- -----------------------------------------------------------------
2002 $ 42 $ 30
2003 42 30
2004 43 31
2005 43 30
2006 44 31
Thereafter 217 172
- -----------------------------------------------------------------
Total future rental commitment $ 431 $ 324
- -----------------------------------------------------------------

In connection with the quasi-reorganization described in Note 2,
PE recorded liabilities of $102 million to adjust to fair value
the operating leases related to its headquarters and other
facilities at December 31, 1992. The remaining amount of these
liabilities was $49 million at December 31, 2001. These leases
are included in the above table.
PE's rent expense totaled $51 million in 2001, $55 million
in 2000 and $52 million in 1999, which included rent expense for
SoCalGas of $39 million, $41 million, and $39 million,
respectively.

Environmental Issues
The company's operations are subject to federal, state and local
environmental laws and regulations governing hazardous wastes, air and
water quality, land use, solid waste disposal and the protection of
wildlife. As applicable, appropriate and relevant, these laws and
regulations require that the company investigate and remediate the
effects of the release or disposal of materials at sites associated
with past and present operations, including sites at which the company
has been identified as a Potentially Responsible Party under the
federal Superfund laws and comparable state laws. Costs incurred to
operate the facilities in compliance with these laws and regulations
generally have been recovered in customer rates.
Costs that mitigate or prevent future environmental contamination
or extend the life, increase the capacity or improve the safety or
efficiency of property utilized in current operations are capitalized.
The company's capital expenditures to comply with environmental laws
and regulations were $4 million in 2001, $1 million in 2000 and $1
million in 1999. The increase in 2001 is due to purchases of
endangered species habitat land to mitigate the impact of a new
natural gas transmission line and the installation of air quality-
control equipment at a compressor station and at various storage
fields. The cost of compliance with these regulations over the next
five years is not expected to be significant.
Costs that relate to current operations or an existing condition
caused by past operations are generally recorded as a regulatory asset
due to the assurance that these costs will be recovered in rates. In
1994, the CPUC approved the Hazardous Waste Collaborative Memorandum
account, allowing California's energy utilities to recover their
hazardous waste cleanup costs, including those related to Superfund
sites or similar sites requiring cleanup. Recovery of 90 percent of
hazardous waste cleanup costs and related third-party litigation costs
and 70 percent of the related insurance-litigation expenses is
permitted. In addition, the company has the opportunity to retain a
percentage of any insurance recoveries to offset the 10 percent of
costs not recovered in rates.
The environmental issues currently facing the company or resolved
during the latest three-year period include investigation and
remediation of its manufactured-gas sites (18 completed as of December
31, 2001 and 24 to be completed) and cleanup of third-party waste-
disposal sites used by the company, which has been identified as a
Potentially Responsible Party (investigations and remediations are
continuing).
Environmental liabilities are recorded when the company's
liability is probable and the costs are reasonably estimable. In many
cases, however, investigations are not yet at a stage where the
company has been able to determine whether it is liable or, if
liability is probable, to reasonably estimate the amount or range of
amounts of the cost or certain components thereof. Estimates of the
company's liability are further subject to other uncertainties, such
as the nature and extent of site contamination, evolving remediation
standards and imprecise engineering evaluations. The accruals are
reviewed periodically and, as investigations and remediation proceed,
adjustments are made as necessary. At December 31, 2001, the company's
accrued liability for environmental matters was $55 million, of which
approximately $53 million was related to manufactured-gas sites and $2
million to waste-disposal sites used by the company (which has been
identified as a Potentially Responsible Party). The accruals for the
manufactured-gas and waste-disposal sites are expected to be paid
ratably over the next five years. There are no circumstances currently
known to management that would require adjustment to this accrual.

Litigation

Lawsuits filed in 2000 and currently consolidated in San Diego
Superior Court seek class-action certification and allege that
Sempra Energy, SoCalGas, SDG&E and El Paso Energy Corp. acted to
drive up the price of natural gas for Californians by agreeing to
stop a pipeline project that would have brought new and less
expensive natural gas supplies into California. Management believes
the allegations are without merit.
Except for the matter referred to above, neither the company
nor its subsidiaries are party to, nor is their property the subject
of, any material pending legal proceedings other than routine
litigation incidental to their businesses. Management believes that
these matters will not have a material adverse effect on the
company's financial condition or results of operations.

Concentration of Credit Risk

The company maintains credit policies and systems to minimize overall
credit risk. These policies include an evaluation of potential
counterparties' financial condition and an assignment of credit
limits. These credit limits are established based on risk and return
considerations under terms customarily available in the industry.
SoCalGas grants credit to its utility customers, substantially all of
whom are located in its service territory, which covers most of
Southern California and a portion of Central California.

NOTE 12. REGULATORY MATTERS

Gas Industry Restructuring

The natural gas industry in California experienced an initial phase
of restructuring during the 1980s, but the CPUC did not make major
changes after the early 1990s. In January 1998, the CPUC released a
staff report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. In July
1999, after hearings, the CPUC issued a decision stating which
natural gas regulatory changes it found most promising, encouraging
parties to submit settlements addressing those changes, and
providing for further hearings if necessary.
On December 11, 2001, the CPUC issued a decision adopting much
of a settlement that had been submitted in 2000 by SoCalGas and
approximately 30 other parties representing all segments of the gas
industry in Southern California, but which was opposed by other
parties. The CPUC decision adopts the following provisions: a system
for shippers to hold firm, tradable rights to capacity on SoCalGas'
major gas transmission lines with SoCalGas' shareholders at risk for
whether market demand for these rights will cover the cost of these
facilities; a further unbundling of SoCalGas' storage services
giving SoCalGas greater upward pricing flexibility (except for
storage service for core customers) but with increased shareholder
risk for whether market demand will cover storage costs; new
balancing services including separate core and noncore balancing
provisions; a reallocation among customer classes of the cost of
interstate pipeline capacity held by SoCalGas and an unbundling of
interstate capacity for gas marketers serving core customers; and
the elimination of noncore customers' option to obtain gas supply
service from SoCalGas. The CPUC modified the settlement to provide
increased protection against the exercise of market power by persons
who would acquire rights on the SoCalGas gas transmission system.
The CPUC also rejected certain aspects of the settlement that would
have provided more options for gas marketers serving core customers.
The CPUC is still considering the schedule for implementation
of these regulatory changes, but it is expected that most of the
changes will be implemented during 2002.
SoCalGas believes the decision will make gas service more
reliable, efficient and better tailored to the desires of customers.
The decision is not expected to negatively impact SoCalGas'
earnings.

Performance-Based Regulation (PBR)

To promote efficient operations and improved productivity and to
move away from reasonableness reviews and disallowances, the CPUC
has been directing utilities to use PBR. PBR has replaced the
general rate case and certain other regulatory proceedings for
SoCalGas. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility
already has a highly developed infrastructure.
SoCalGas' PBR mechanism was to have been in effect through
December 31, 2002, at which time the mechanism was to be updated.
That update was to include, among other things, a reexamination of
SoCalGas' reasonable costs of operation to be allowed in rates. The
PBR and Cost of Service (COS) cases for SoCalGas were both due to be
filed on December 21, 2001. However, the company's PBR/COS cases
were delayed by an October 10, 2001 CPUC decision such that the
resulting rates would be effective in 2004 instead of 2003. The
decision also denies SoCalGas' request to continue equal sharing
between ratepayers and shareholders of the estimated savings for the
merger discussed in Note 1 and, instead, orders that all of the
estimated 2003 merger savings go to ratepayers. Merger savings
allocable to SoCalGas ratepayers will be refunded through once-a-
year bill credits, as has been the case.
Key elements of the current mechanisms include an annual
indexing mechanism that adjusts rates by the inflation rate less a
productivity factor and other adjustments to accommodate major
unanticipated events, a sharing mechanism with customers that
applies to earnings that exceed the authorized rate of return on
rate base, rate refunds to customers if service quality deteriorates
or awards if service quality exceeds set standards, and a change in
authorized rate of return and customer rates if interest rates
change by more than a specified amount. The rate change is triggered
if the 12-month trailing average of actual market interest rates
increases or decreases by more than 150 basis points and is
forecasted to continue to vary by at least 150 basis points for the
next year. If these events occur, there would be an automatic
adjustment of rates for the change in the cost of capital according
to a formula which applies a percentage of the change to various
capital components.

Gas Cost Incentive Mechanism

The Gas Cost Incentive Mechanism (GCIM) evaluates SoCalGas' natural
gas purchases by comparing their cost with the average price of 30-
day firm spot supplies in the basins in which SoCalGas purchases
natural gas. The mechanism permits full recovery of all costs within
a tolerance band above the benchmark price and refunds all savings
within a tolerance band below the benchmark price. The costs or
savings outside the tolerance band are shared between customers and
shareholders. The CPUC approved the use of natural gas futures for
managing risk associated with the GCIM. SoCalGas enters into natural
gas futures contracts in the open market to mitigate risk and better
manage natural gas costs.
Shareholder awards associated with the GCIM normally are
recorded to SoCalGas' Purchased Gas Balancing Account after the
close of the GCIM period, which covers the utility's gas supply
operations for the twelve months ended March 31. These awards are
not included in earnings until receipt of CPUC approval. In May
2001, the CPUC approved a $10 million shareholder award for GCIM
Year Six ended March 31, 2000, and the CPUC is addressing whether
the GCIM should be extended and, if so, whether it should be with or
without modifications. The CPUC's Energy Division had previously
issued an evaluation report recommending the continuation of the
GCIM with modifications. In July 2001, SoCalGas, the CPUC's Office
of Ratepayer Advocates (ORA) and The Utility Reform Network (TURN),
a consumer-advocacy group, filed a Joint Motion for Adoption of a
settlement agreement to resolve all Phase 2 issues and to continue
the GCIM with modifications. On March 5, 2002, a proposed decision
was issued that, if adopted by the CPUC, would approve the
settlement agreement and continue the mechanism, applying the
modified GCIM beginning with the GCIM Year Seven (see below). A CPUC
decision is expected by the third quarter of 2002.
In June 2001, SoCalGas filed its annual GCIM application with
the CPUC requesting a shareholder award of $106 million for GCIM
Year Seven ended March 31, 2001. Notwithstanding this request the
July 2001 settlement agreement among SoCalGas, the ORA and TURN
would retroactively reduce the award request to $31 million. This
proceeding is separate from the Phase 2 proceeding discussed above
and final CPUC approval is not expected until early 2003.

Demand Side Management Awards

In recent years, the IOUs have participated in a CPUC program whereby
they could earn awards for operating and/or administering energy-
conservation efforts involving their retail customers. SoCalGas has
participated in these programs and has consistently achieved
significant earnings therefrom. As part of the CPUC's review of the
program, a draft decision is proposing that the program be reduced in
scope and that award potentials for the IOUs be eliminated. An
alternate proposal would maintain the award concept, but the potential
awards would probably be reduced. The CPUC is scheduled to review both
proposals at its March 21, 2002 meeting.

Biennial Cost Allocation Proceeding (BCAP)

Rates to recover the changes in the cost of natural gas
transportation services are determined in the BCAP. The BCAP adjusts
rates to reflect variances in customer demand from estimates
previously used in establishing customer natural gas transportation
rates. The mechanism substantially eliminates the effect on income
of variances in market demand and natural gas transportation costs.
SoCalGas filed its 2003 BCAP on September 21, 2001.
On April 20, 2000, the CPUC issued a decision on the 1999 BCAP,
adopting overall decreases in natural gas revenues of $210 million
for transportation rates effective June 1, 2000. There is a return
to 75/25 (customer/shareholder) balancing account treatment for
noncore transportation revenues, excluding certain transactions. In
addition, unbundled noncore storage revenues are balanced 50/50
between customers and shareholders. Since the decreases reflect
anticipated changes in corresponding costs, they have no effect on
net income.

Cost Of Capital

SoCalGas is authorized to earn a rate of return on common equity
(ROE) of 11.6 percent and a 9.49 percent return on rate base (ROR),
the same as in 2001 and 2000. These rates will continue to be
effective in until the next periodic review by the CPUC unless
interest-rate changes are large enough to trigger an automatic
adjustment prior thereto as discussed above under "Performance-Based
Regulation."

Utility Integration

On September 20, 2001 the CPUC approved Sempra Energy's request to
integrate the management teams of SoCalGas and SDG&E. The decision
retains the separate identities of each utility and is not a merger.
Instead, utility integration is a reorganization that consolidates
senior management functions of the two utilities and returns to the
utilities a significant portion of shared support services currently
provided by Sempra Energy's centralized corporate center. Once
implementation is completed, the integration is expected to result
in more efficient and effective operations.
In a related development, a CPUC draft decision would allow
SoCalGas and SDG&E to combine their natural gas procurement activities.
The CPUC is scheduled to act on the draft decision at its April 4, 2002
meeting.

CPUC Investigation of Energy-Utility Holding Companies

The CPUC has initiated an investigation into the relationship
between California's investor owned utilities (IOUs) and their
parent holding companies. Among the matters to be considered in the
investigation are utility dividend policies and practices and
obligations of the holding companies to provide financial support
for utility operations under the agreements with the CPUC permitting
the formation of the holding companies. On January 11, 2002, the
CPUC issued a decision to clarify under what circumstances, if any,
a holding company would be required to provide financial support to
its utility subsidiaries. The CPUC broadly determined that it would
require the holding company to provide cash to a utility subsidiary
to cover its operating expenses and working capital to the extent
they are not adequately funded through retail rates. This would be
in addition to the requirement of holding companies to cover their
utility subsidiaries' capital requirement, as the IOUs have
previously acknowledged in connection with the holding companies'
formations. On January 14, 2002, the CPUC ruled on jurisdictional
issues, deciding that the CPUC had jurisdiction to create the
holding company system and, therefore, retains jurisdiction to
enforce conditions to which the holding companies had agreed. The
company has filed to request rehearing on the issues.

NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --
Southern California Gas Company

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Southern California Gas
Company:

We have audited the accompanying consolidated balance sheets of
Southern California Gas Company and subsidiaries as of December 31,
2001 and 2000, and the related statements of consolidated income, cash
flows and changes in shareholders' equity for each of the three years
in the period ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Southern
California Gas Company and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States of America.

/S/ DELOITTE & TOUCHE LLP

San Diego, California
February 4, 2002 (March 5, 2002 as to Note 12)

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in millions

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions

SOUTHERN CALIFORNIA GAS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
Dollars in millions

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SOUTHERN CALIFORNIA GAS COMPANY

The following notes to Consolidated Financial Statements of Pacific
Enterprises are incorporated herein by reference insofar as they
relate to Southern California Gas Company:

Note 1 - Business Combination
Note 2 - Significant Accounting Policies
Note 3 - Short-term Borrowings
Note 4 - Long-term Debt
Note 7 - Stock-based Compensation
Note 8 - Financial Instruments
Note 11 - Commitments and Contingencies
Note 12 - Regulatory Matters

The following additional notes apply only to Southern California Gas
Company:

NOTE 5. INCOME TAXES

The reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:

Years ended December 31 2001 2000 1999
- ------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Depreciation 5.3 5.6 6.8
State income taxes - net of
federal income tax benefit 6.7 6.8 7.3
Tax credits (0.8) (0.7) (0.6)
Other - net (1.4) 0.2 (1.0)
------------------------------
Effective income tax rate 44.8% 46.9% 47.5%
- ------------------------------------------------------------------

The components of income tax expense are as follows:

(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------
Current:
Federal $ 126 $ 144 $ 36
State 34 42 13
------------------------------
Total 160 186 49
------------------------------
Deferred:
Federal 8 - 112
State 4 (1) 24
------------------------------
Total 12 (1) 136
------------------------------
Deferred investment tax credits - net (3) (2) (3)
------------------------------
Total income tax expense $ 169 $ 183 $ 182
- ------------------------------------------------------------------

Federal and state income taxes are allocated between operating
income and other income. SoCalGas is included in the consolidated
tax return of Sempra Energy and is allocated income tax expense from
Sempra Energy in an amount equal to that which would result from
filing a separate return.

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

(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Deferred Tax Liabilities:
Differences in financial and
tax bases of utility plant $ 263 $ 342
Regulatory balancing accounts 56 11
Other 20 19
------------------------------
Total deferred tax liabilities 339 372
------------------------------
Deferred Tax Assets:
Investment tax credits 35 38
Other deferred liabilities 174 142
Other 9 26
------------------------------
Total deferred tax assets 218 206
------------------------------
Net deferred income tax liability $ 121 $ 166
- ------------------------------------------------------------------

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

(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Current asset $ (62) $ (74)
Noncurrent liability 183 240
- ------------------------------------------------------------------
Total $ 121 $ 166
- ------------------------------------------------------------------

NOTE 6. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefits

The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two
years, and a statement of the funded status as of each year end:

The following table provides the amounts recognized on the Consolidated
Balance Sheets (under "sundry" and under "postretirement benefits other
than pensions") at December 31:

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

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required on Identification of Directors is
incorporated by reference from "Election of Directors" in the
Information Statement prepared for the May 2002 annual meeting of
shareholders. The information required on the company's executive
officers is set forth below.

Name Age* Positions
- -------------------------------------------------------------------
Pacific Enterprises --

Stephen L. Baum 60 Chairman, Chief Executive
Officer and President

John R. Light 60 Executive Vice President and
General Counsel

Neal E. Schmale 55 Executive Vice President and
Chief Financial Officer

Frank H. Ault 57 Senior Vice President and
Controller

Charles A. McMonagle 51 Vice President and Treasurer

Thomas C. Sanger 58 Corporate Secretary

Southern California Gas Company --

Edwin A. Guiles 52 Chairman and Chief Executive Officer

Debra L. Reed 45 President and Chief Financial Officer

Steven D. Davis 45 Senior Vice President, Customer
Service and External Relations

Terry M. Fleskes 45 Vice President and Controller

Margot A. Kyd 48 Senior Vice President, Corporate
Business Solutions

Roy M. Rawlings 57 Senior Vice President,
Distribution Operations

William L. Reed 49 Senior Vice President, Regulatory
Affairs

Lee M. Stewart 56 Senior Vice President, Gas
Transmission

* As of December 31, 2001.

Each Executive Officer has been an officer or employee of Sempra
Energy or one of its subsidiaries for more than five years, with the
exception of Mssrs. Light and Schmale. Prior to joining the company in
1998, Mr. Light was a partner in the law firm of Latham & Watkins.
Prior to joining the company in 1997, Mr. Schmale was Chief Financial
Officer of Unocal Corporation. Each executive officer at Southern
California Gas Company holds the same position at San Diego Gas &
Electric Company.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from
"Election of Directors" and "Executive Compensation" in the
Information Statement prepared for the May 2002 annual meeting of
shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by Item 12 is incorporated by reference from
"Election of Directors" in the Information Statement prepared for the
May 2002 annual meeting of shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial statements
Page in
This Report

Independent Auditors' Report for Pacific Enterprises . . . . . . . 24

Pacific Enterprises Statements of Consolidated Income
for the years ended December 31, 2001, 2000 and 1999 . . . . . . 25

Pacific Enterprises Consolidated Balance Sheets
at December 31, 2001 and 2000. . . . . . . . . . . . . . . . . . 26

Pacific Enterprises Statements of Consolidated Cash Flows
for the years ended December 31, 2001, 2000 and 1999 . . . . . . 28

Pacific Enterprises Statements of Consolidated Changes in
Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . 30

Pacific Enterprises Notes to Consolidated Financial Statements . . 31

Independent Auditor's Report for Southern California Gas Company. .56

Southern California Gas Company Statements of Consolidated Income
for the years ended December 31, 2001, 2000 and 1999 . . . . . . . 57

Southern California Gas Company Consolidated Balance Sheets at
December 31, 2001 and 2000. . . . . . . . . . . . . . . . . . . . 58

Southern California Gas Company Statements of Consolidated Cash
Flows for the years ended December 31, 2001, 2000 and 1999 . . . . 60

Southern California Gas Company Statements of Consolidated
Changes in Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999. . . . . . . . . . . . . . . . . .61

Southern California Gas Company Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

2. Financial statement schedules

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

Schedule I--Condensed Financial Information of Parent. . . . . . . 72

Any other schedules for which provision is made in Regulation S-X are
not required under the instructions contained therein, are
inapplicable or the information is included in the Consolidated
Financial Statements and the notes thereto.

3. Exhibits
See Exhibit Index on page 76 of this report.

(b) Reports on Form 8-K
There were no reports on Form 8-K filed after September 30, 2001.

INDEPENDENT AUDITORS' CONSENTS AND REPORT ON SCHEDULE

To the Board of Directors and Shareholders of Pacific Enterprises:

We consent to the incorporation by reference in Registration Statement
Numbers 2-96782, 33-26357, 2-66833, 2-96781, 33-21908, and 33-54055 on
Form S-8 and Registration Statement Numbers 33-24830, 333-52926, and
33-44338 on Form S-3 of Pacific Enterprises of our report dated
February 4, 2002 (March 5, 2002 as to Note 12), appearing in this
Annual Report on Form 10-K of Pacific Enterprises for the year ended
December 31, 2001.

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

San Diego, California
March 15, 2002

To the Boards of Directors and Shareholders of Southern California Gas
Company:

We consent to the incorporation by reference in Registration Statement
Numbers 333-70654, 333-45537, 33-51322, 33-53258, 33-59404, and 33-
52663 on Form S-3 of our report dated February 4, 2002 (March 5, 2002
as to Note 12), appearing in the Annual Report on Form 10-K of Southern
California Gas Company for the year ended December 31, 2001.

San Diego, California
March 15, 2002

Schedule I -- CONDENSED FINANCIAL INFORMATION OF PARENT

PACIFIC ENTERPRISES
Schedule 1
Condensed Financial Information of Parent

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

SIGNATURES

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

PACIFIC ENTERPRISES

By: /s/ Stephen L. Baum
.
Stephen L. Baum
Chairman, Chief Executive Officer
and President

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

SIGNATURES

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

SOUTHERN CALIFORNIA GAS COMPANY

By: /s/ Edwin A. Guiles
.
Edwin A. Guiles
Chairman and Chief Executive Officer

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

EXHIBIT INDEX

The Forms 8-K, 10-K and 10-Q referred to herein were filed under
Commission File Number 1-14201 (Sempra Energy), Commission File
Number 1-40 (Pacific Enterprises) and/or Commission File Number 1-
1402 (Southern California Gas Company).

Exhibit 3 -- By-Laws and Articles Of Incorporation

3.01 Articles of Incorporation of Pacific Enterprises (Pacific
Enterprises 1996 Form 10-K; Exhibit 3.01).

3.02 Restated Bylaws of Pacific Enterprises dated November 6, 2001.

3.03 Restated Articles of Incorporation of Southern California Gas Company
(Southern California Gas Company 1996 Form 10-K; Exhibit 3.01).

3.04 Restated Bylaws of Southern California Gas Company dated November 6,
2001.

Exhibit 4 -- Instruments Defining The Rights Of Security Holders

The Company agrees to furnish a copy of each such instrument to the
Commission upon request.

4.01 Specimen Common Stock Certificate of Pacific Enterprises (Pacific
Enterprises 1988 Form 10-K; Exhibit 4.01).

4.02 Specimen Preferred Stock Certificates of Pacific Enterprises (Pacific
Lighting Corporation 1980 Form 10-K; Exhibit 4.02).

4.03 Specimen Preferred Stock Certificates of Southern California Gas
Company (Southern California Gas Company 1980 Form 10-K; Exhibit 4.01).

4.04 First Mortgage Indenture of Southern California Gas Company to American
Trust Company dated October 1, 1940 (Registration Statement No. 2-4504
filed by Southern California Gas Company on September 16, 1940; Exhibit
B-4).

4.05 Supplemental Indenture of Southern California Gas Company to American
Trust Company dated as of July 1, 1947 (Registration Statement No. 2-
7072 filed by Southern California Gas Company on March 15, 1947;
Exhibit B-5).

4.06 Supplemental Indenture of Southern California Gas Company to American
Trust Company dated as of August 1, 1955 (Registration Statement No. 2-
11997 filed by Pacific Lighting Corporation on October 26, 1955;
Exhibit 4.07).

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

4.08 Supplemental Indenture of Southern California Gas Company to Wells
Fargo Bank, National Association dated as of August 1, 1972
(Registration Statement No. 2-59832 filed by Southern California Gas
Company on September 6, 1977; Exhibit 2.19).

4.09 Supplemental Indenture of Southern California Gas Company to Wells
Fargo Bank, National Association dated as of May 1, 1976 (Registration
Statement No. 2-56034 filed by Southern California Gas Company on April
14, 1976; Exhibit 2.20).

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

4.11 Supplemental Indenture of Southern California Gas Company to
Manufacturers Hanover Trust Company of California, successor to Wells
Fargo Bank, National Association, and Crocker National Bank as
Successor Trustee dated as of May 18, 1984 (Southern California Gas
Company 1984 Form 10-K; Exhibit 4.29).

4.12 Supplemental Indenture of Southern California Gas Company to Bankers
Trust Company of California, N.A., successor to Wells Fargo Bank,
National Association dated as of January 15, 1988 (Pacific Enterprises
1987 Form 10-K; Exhibit 4.11).

4.13 Supplemental Indenture of Southern California Gas Company to First
Trust of California, National Association, successor to Bankers Trust
Company of California, N.A. dated as of August 15, 1992 (Registration
Statement No. 33-50826 filed by Southern California Gas Company on
August 13, 1992; Exhibit 4.37).

4.14 Specimen 7 3/4% Series Preferred Stock Certificate (Southern California
Gas Company 1992 Form 10-K; Exhibit 4.15).

Exhibit 10 -- Material Contracts

Compensation
10.01 Sempra Energy Executive Security Bonus Plan effective January 1,
2001 Sempra Energy Form 10-K; Exhibit 10.08).

10.02 Form of Sempra Energy Severance Pay Agreement for Executives
(2001 Sempra Energy Form 10-K; Exhibit 10.07).

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

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

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

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

10.07 Sempra Energy 1998 Long Term Incentive Plan (Incorporated by reference
from the Registration Statement on Form S-8 Sempra Energy Registration
No. 333-56161 dated June 5, 1998; Exhibit 4.1).

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

10.09 Amended and Restated Pacific Enterprises Employee Stock Option Plan
(Southern California Gas Company 1996 Form 10-K; Exhibit 10.10).

Exhibit 12 -- Statement Re: Computation of Ratios

12.01 Pacific Enterprises Computation of Ratio of Earnings to Fixed Charges
for the years ended December 31, 2001, 2000, 1999, 1998, 1997.

12.02 Southern California Gas Company Computation of Ratio of Earnings to
Fixed Charges for the years ended December 31, 2001, 2000, 1999, 1998,
1997.

Exhibit 21 -- Subsidiaries

21.01 Pacific Enterprises Schedule of Subsidiaries at December 31, 2001.

21.02 Southern California Gas Company Schedule of Subsidiaries at
December 31, 2001.

Exhibit 23 -- Independent Auditor's Consents, page 71.

GLOSSARY

AFUDC Allowance for Funds Used During
Construction

BCAP Biennial Cost Allocation Proceeding

Bcf One Billion Cubic Feet (of natural gas)

CA/AZ California/Arizona

COS Cost of Service

CPUC California Public Utilities Commission

Enova Enova Corporation

EPA Environmental Protection Agency

ESOP Employee Stock Ownership Plan

FASB Financial Accounting Standards Board

FERC Federal Energy Regulatory Commission

GCIM Gas Cost Incentive Mechanism

IOUs Investor-Owned Utilities

LIFO Last in first out inventory

mmbtu Million British Thermal Units (of natural
gas)

ORA Office of Ratepayer Advocates

PBR Performance-Based Ratemaking/Regulation

PE Pacific Enterprises

PRP Potentially Responsible Party

ROE Return on Equity

ROR Rate of Return

SDG&E San Diego Gas & Electric Company

SEC Securities and Exchange Commission

SFAS Statement of Financial Accounting Standards

SoCalGas Southern California Gas Company

TURN The Utility Reform Network

VaR Value at Risk

55

2

70

49