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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are necessarily based upon various assumptions involving judgments with respect to the future and other risks, including, among others, local, regional and national economic, competitive, political, legislative and regulatory conditions and developments; actions by the California Public Utilities Commission, the California State Legislature, the California Department of Water Resources, and the Federal Energy Regulatory Commission and other regulatory bodies in the United States; capital markets conditions, inflation rates, interest rates and exchange rates; energy and trading markets, including the timing and extent of changes in commodity prices; the availability of electric power, natural gas and liquefied natural gas; weather conditions and conservation efforts; war and terrorist attacks; business, regulatory, environmental and legal decisions and requirements; the status of deregulation of retail natural gasga s and electricity delivery; the timing and success of business development efforts; the resolution of litigati on;litigation; and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the company. Readers are cautioned not to rely unduly on any forward-looking statements and are urged to review and consider carefully the risks, uncertainties and other factors which affect the company's business described in this report and other reports filed by the company from time to time with the Securities and Exchange Commission.

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PART I

ITEM 1. BUSINESS AND RISK FACTORS

Description of Business

A description of San Diego Gas & Electric Company (SDG&E or the company) is given in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.

SDG&E's&E’s common stock is wholly owned by Enova Corporation, which is a wholly owned subsidiary of Sempra Energy, a California-based Fortune 500 holding company. The financial statements herein are the Consolidated Financial Statements of SDG&E, and its sole subsidiary, SDG&E Funding LLC.LLC, and a variable interest entity of which it is the primary beneficiary. Sempra Energy also indirectly owns the common stock of Southern California Gas Company (SoCalGas). SDG&E and SoCalGas are collectively referred to herein as "the CaliforniaSempra Utilities."

Company Website

The company's website address is http://www.sdge.com/www.sdge.com and Sempra Energy'sEnergy’s website address is http://www.sempra.com. The company makes available free of charge via a hyperlink on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Risk Factors

The following risk factors and all other information contained in this report should be considered carefully when evaluating SDG&E.the company. These risk factors could affect the actual results of SDG&Ethe company and cause such results to differ materially from those expressed in any forward-looking statements of, or made by or on behalf of SDG&E.the company. Other risks and uncertainties, in addition to those that are described below, may also impair its business operations. If any of the following risks occurs, SDG&E'sbusiness,the company's business, cash flows, results of operations and financial condition could be seriously harmed. These risk factors should be read in conjunction with the other detailed information concerning SDG&Ethe company set forth in the notesNotes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein..herein.

SDG&E is subject to extensive regulation by state, federal and local legislation and regulatory authorities, which may adversely affect the operations, performance and growth of its businessbusiness.

The California Public Utilities Commission (CPUC), which consists of five commissioners appointed by the Governor of California for staggered six-year terms, regulates SDG&E's rates (except electric transmission rates, which are regulated by the Federal Energy Regulatory Commission (FERC)) and conditions of service, sales of securities, capital structure, rates of return, rates of depreciation, the uniform systems of accounts examination of records and long-term resource procurement. The CPUC conducts various reviews of utility performance (which may include reasonableness and prudency reviews)reviews of capital expenditures, natural gas and electricity procurement, and other costs, and reviews and audits of the company's records) and affiliate relationships and conducts audits and investigations into various matters which may, from time to time, result in disallowances and penalties adversely affecting earnings and cash flows. Various proceedings involving the CPUC and relating to SDG&E's rates, costs, incentive mechanisms and performance-based regulation and compliance with affiliate and holding company rules are discussed in Notes 10 and 11 of the notesNotes to Consolida tedConsolidated Financial

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Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.

The company may expend funds prior to receiving regulatory approval to proceed with a major capital project. If the project does not receive regulatory approval or management decides not to proceed with the project, the company may not be able to recover the amount expended for that project.

Periodically,SDG&E's rates are approved by the CPUC based on forecasts ofauthorized capital expenditures and operating costs. If the company's actual capital expenditures and operating costs were to exceed the amount included in its base rates approved by the CPUC, it wouldcould adversely affect earnings and cash flows.

To promote efficient operations and improved productivity and to move away from reasonableness reviews and disallowances, the CPUC adoptedapplies Performance-Based Regulation (PBR) forto the CaliforniaSempra Utilities. Under PBR, regulators require future income potential to be tied to achieving or exceeding specific performance and operating income goals, rather than relying solely on expanding utility plant to increase earnings. The three areas that are eligible for PBR rewards are: operational incentives based on measurements of safety, reliability and customer satisfaction;service; energy efficiency rewards based on the effectiveness of the programs; and natural gas procurement rewards. Although SDG&E has received PBR rewards in the past, there can be no assurance that it will receive rewards in the future, or that they would be of comparable amounts. Additionally, if the company fails to achieve certain minimum performance levels established under the PBR mechanisms, it may be assessedasses sed financial disallowances or penalt iespenalties which could negatively affect earnings and cash flows.

The FERC regulates electric transmission rates, the transmission and wholesale sales of electricity in interstate commerce, transmission access, the rates of return on transmission investments and other similar matters involving SDG&E.

The company may be adversely affected by new regulations, decisions, orders or interpretations of the CPUC, FERC or other regulatory bodies. New legislation, regulations, decisions, orders or interpretations could change how the company operates, could affect its ability to recover various costs through rates or adjustment mechanisms, or could require the company to incur additional expenses.

The construction and expansion of the company’s electric transmission and distribution facilities and natural gas pipelines require numerous permits and approvals from federal, state and local governmental agencies. If there are delays in obtaining required approvals, or if the company fails to obtain or maintain required approvals or to comply with applicable laws or regulations, its business, cash flows, results of operations and financial condition could be materially adversely affected.

SDG&E may incur substantial costs and liabilities as a result of its ownership of nuclear facilities.

SDG&E ownshas a 20%20-percent ownership interest in the San Onofre Nuclear Generating Station (SONGS), a 2,150 megawatt2,150-megawatt (MW) nuclear generating facility near San Clemente, California. The Nuclear Regulatory Commission (NRC) has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. SDG&E's ownership interest in SONGS subjects it to the risks of nuclear generation, which include:

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  the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;

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  limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and

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  uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.

The CaliforniaSempra Utilities' future results of operations, and financial condition and cash flows may be materially adversely affected by the outcome of pending litigation against them.

The California energy crisis of 2000-2001 has generated numerous lawsuits, governmental investigations and regulatory proceedings involving many energy companies, including Sempra Energy and the California Utilities. In January 2006, Sempra Energy and the California Utilities reached agreement to settle several of these lawsuits including, subject to court and other approvals, the principal class action antitrust lawsuits in which they are defendants. The companies remain defendants in several additional lawsuits arising out of the energy crisis, including lawsuits commenced in the fourth quarter of 2005 by the California Attorney General. The company is also responding to an ongoing CPUC proceeding related to the increase in natural gas prices at the California-Arizona border in 2000-2001. Sempra Energy and the California Utilitiesnumerous lawsuits. They have expended and continue to expend substantial amounts defending these lawsuits and in connection with related investigations and regulatory proceedings. Sempra Ener gyproceedings and the California Utilities have established reserves that they believe to be appropriate for their ultimate resolution. However, uncertainties inherent in complex legal proceedings make it difficult to estimate with any degree of certainty the agreedcosts and unresolved issues. However, given the uncertainties involved ineffects of resolving litigation,legal matters. Accordingly, costs ultimately incurred may differ materially from estimated costs and could materially adversely affect Sempra Energy's and the CaliforniaSempra Utilities' business, cash flows, results of operations and financial condition may be materially adversely affected.condition.

These proceedings are discussed in Note 12 of the notesNotes to Consolidated Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein.

Future environmental compliance costs could adversely affect SDG&E's profitability.

SDG&E is subject to extensive federal, state and local statutes, rules and regulations relating to environmental protection, including, in particular, global warming and greenhouse gas (GHG) emissions. It is required to obtain numerous governmental permits, licenses and other approvals to construct and operate its business. The company's cash flows, ability to pay dividends and ability to meet its debt obligations largely depend oncompany also is generally responsible for all on-site liabilities associated with the performanceenvironmental condition of its utilityelectric generation facilities and other energy projects, regardless of when the liabilities arose and whether they are known or unknown. If SDG&E fails to comply with applicable environmental laws, it may be subject to penalties, fines and/or curtailments of its operations.

The company's utilityscope and effect of new environmental laws and regulations, including their effects on current operations and future expansions, are difficult to predict. Increasing international, national, regional and state-level concerns as well as new or proposed legislation and regulation may have substantial effects on operations, operating costs, and the major sourcescope and economics of liquidity.proposed expansion. In particular, state-level laws and regulations as well as proposed national and international legislation and regulation relating to GHG emissions (including carbon dioxide, methane, nitrogen oxide, hydrofluorocarbon, perfluorocarbon and sulfur hexafluoride) may limit or otherwise adversely affect the operations of the company. The company's abilitycompanymay be affected if costs are not recoverable in rates and because the effects of significantly tougher standards may cause rates to pay dividendsincrease to levels that substantially reduce customer demand and growt h. In addition, the company may be subject to penalties if certain mandated renewable energy goals are not met. Further discussion of these matters is provided in Notes 10 and 12 of the Notes to Consolidated Financial Statements herein.

In addition, existing and future laws and regulation on mercury, nitrogen and sulfur oxides, particulates or other emissions could result in requirements for additional pollution control equipment or emission fees and taxes that could adversely affect the company. Moreover, existing rules and regulations may be interpreted or revised in ways that may adversely affect the company and its preferred stockfacilities and operations. Additional information on these matters is largely dependent onprovided in Note 10 of the sufficiency of utility earnings and cash flows in excess of operational needs.Notes to the Consolidated Financial Statements herein. 

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Natural disasters, catastrophic accidents or acts of terrorism could materially adversely affect the company's business, earnings and cash flows.

Like other major industrial facilities, the company's generation facilities, electric transmission and distribution facilities, and natural gas pipelines and storage facilities may be damaged by natural disasters, catastrophic accidents or acts of terrorism. Any such incidents could result in severe business disruptions, significant decreases in revenues or significant additional costs to the company, which could have a material adverse effect on the company's financial condition, earnings and cash flows. Given the nature and location of these facilities, any such incidents also could cause fires, leaks, explosions, spills or other significant damage to natural resources or property belonging to third parties, or personal injuries, which could lead to significant claims against the company. Insurance coverage may become unavailable for certain of these risks and the insurance proceeds received for any loss of or damage to any of its facilities, or for anya ny loss of or damage to natural resources or property or personal injuries caused by its operations, may be insufficient to cover the company'slosses or liabilities without materially adversely affecting the company's financial condition, earnings and cash flows.

The company's cash flows, ability to pay dividends and ability to meet its debt obligations largely depend on the performance of its utility operations.

The company's utility operations are the major source of liquidity. The company's ability to pay dividends on its preferred stock and meet its debt obligations is largely dependent on the sufficiency of utility earnings and cash flows in excess of operational needs.

GOVERNMENT REGULATION

California Utility Regulation

The CPUC, which consists of five commissioners appointed by the Governor of California for staggered six-year terms, regulates SDG&E's rates and conditions of service, sales of securities, raterates of return, capital structure, rates of depreciation, uniform systems of accounts examination of records, and long-term resource procurement.procurement, except as described below under "United States Utility Regulation." The CPUC also has jurisdiction over the proposed construction of major new electric transmission, electric distribution and natural gas transmission and distribution facilities. The CPUC conducts various reviews of utility performance, conducts audits for compliance with regulatory guidelines, and conducts investigations into various matters, such as deregulation, competition and the environment, to determine its future policies. The CPUC also regulates the relationshipinteractions and transactions of the CaliforniaSempra Utilities with Sempra Energy and its affiliates. Further discussion is currently investigating this relationship, as discussed furtherprovided in Note 1011 of the notesNotes to Consolidated Financial Statements herein.

The California Energy Commission (CEC) has discretion overestablishes electric demand forecasts for the state and for specific service territories. Based upon these forecasts, the CEC determines the need for additional energy sources and for conservation programs. The CEC sponsors alternative-energy research and development projects, promotes energy conservation programs and maintains a state-widestatewide plan of action in case of energy shortages. In addition, the CEC certifies power-plant sites and related facilities within California.

The CEC conducts a 20-year forecast of supply availability and prices for every market sector consuming natural gas in California. This forecast includes resource evaluation, pipeline capacity needs, natural gas demand and wellhead prices, and costs of transportation and distribution. This analysis is used to support long-term investment decisions.

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CaliforniaAssembly Bill 32, the California Global Warming Solutions Act of 2006, makes the California Air Resources Board (CARB) responsible for monitoring and reducing GHG emissions. The bill requires CARB to develop and adopt a comprehensive plan for achieving real, quantifiable and cost-effective GHG emission reductions including, among other things, a statewide GHG emissions cap, mandatory reporting rules, and regulatory and market mechanisms to achieve reductions of GHG emissions. CARB is a part of the California Environmental Protection Agency, an organization which reports directly to the Governor's Office in the Executive Branch of California State Government.

United States Utility Regulation

The FERC regulates the interstate sale and transportation of natural gas, the transmission and wholesale sales of electricity in interstate commerce, transmission access, rates of return on transmission investment, the uniform systems of accounts, rates of depreciation and electric rates involving sales for resale. Both the FERC and the CPUC are currently investigating prices charged to the California investor-owned utilities (IOUs) by various suppliers of natural gas and electricity. Further discussion is provided in Notes 9, 10and 11 of the notes to Consolidated Financial Statements herein.

The NRC oversees the licensing, construction and operation of nuclear facilities.facilities in the United States. NRC regulations require extensive review of the safety, radiological and environmental aspects of these facilities. Periodically, the NRC requires that newly developed data and techniques be used to re-analyzereanalyze the design of a nuclear power plant and, as a result, requires plant modifications as a condition of continued operation in some cases.

Local Regulation

SDG&E has electric franchises with the two counties and the 26 cities in its electric service territory, and natural gas franchises with the one county and the 18 cities in its natural gas service territory. These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas in streets and other public places. Most of the franchises have indeterminateindefinite lives, except for the electric and natural gas franchises with the cities of (with expiration dates as indicated) Encinitas (2012), Chula Vista (2015), San Diego (2020), and Coronado (2028) and Chula Vista (2035), and the natural gas franchises with the city of Escondido (2035) and the county of San Diego (2029) and the city of Escondido (2035).

Licenses and Permits

SDG&E obtains numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity. They require periodic renewal, which results in continuing regulation by the granting agency.

Other regulatory matters are described in Notes 910 and 1011 of the notesNotes to Consolidated Financial Statements herein.

NATURAL GAS UTILITY OPERATIONS

Resource Planning and Natural Gas Procurement and Transportation

The company is engaged in the purchase, sale and distribution of natural gas. The company's resource planning, powernatural gas procurement, contractual commitments and related regulatory matters are discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1011 and 1112 of the notesNotes to Consolidated Financial Statements herein.

Customers

For regulatory purposes, customers are separated intoclassified as either core andor noncore customers. Core customers are primarily residential and small commercial and industrial customers, without alternative fuel

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capability. Noncore customers consist primarily of electric generation, and large commercial and industrial customers.

Most core customers purchase natural gas directly from the company. CoreWhile customers are permitted to aggregate their natural gas requirement and purchase directly from brokers or producers. Theproducers, the company continues to be obligated to purchaseprovide reliable supplies of natural gas to serve the requirements of core customers.

Natural Gas Procurement and Transportation

Most of the natural gas purchased and delivered by the company is produced outside of California, primarily in the southwestern U.S., U.S. Rockies and Canada. Thecompany purchases natural gas under short-term contracts, which are primarily based on monthly spot-market prices.

SDG&E has long-term natural gas transportation contracts with various interstate pipelines that expire on various dates between 20062008 and 2023. SDG&E currently purchases natural gas on a spot basis from Canada, the Rocky Mountain areaU.S. Rockies and the Southwesternsouthwestern U.S. to fill its long-term pipeline capacity and purchases additional spot-market supplies delivered directly to California for its remaining requirements. SDG&E continues its ongoing assessment of its pipeline capacity portfolio, including the release of a portion of this capacity to third parties. In accordance with regulatory directives, SDG&E has reconfigured its pipeline capacity portfolio as of November 2005 to secure firm transportation rights from a diverse mix of U.S. and Canadian supply sources for its projected core customer natural gas requirements. All of SDG&E's natural gas is delivered through SoCalGas' pipelines under a long-term transportation agreement. In addition, under separate agreements expiring in March 2008, , SoCalGas provides SDG&E up to nine billion cubic feet (Bcf) of storage capacity.

According to "Btu's Daily Gas Wire", the annual average spot price of A December 2007 CPUC decision directs that, effective April 1, 2008, natural gas at the California/Arizona border was $7.62 per million British thermal unit (mmbtu) in 2005 ($11.42 per mmbtu in December 2005), compared with $5.57 per mmbtu in 2004procurement for both SDG&E’s and $5.13 per mmbtu in 2003.The company's weighted average cost (including transportation charges) per mmbtu ofSoCalGas’ natural gas was $8.67 in 2005, $6.11in 2004 and $5.14in 2003.core customers be combined into a single supply portfolio to be administered by SoCalGas. All SDG&E assets associated with it s core customer natural gas supply portfolio will be transferred or assigned to SoCalGas.

Demand for Natural Gas

The company faces competition in the residential and commercial customer markets based on the customers' preferences for natural gas compared with other energy products. In the non-core industrial market, some customers are capable of using alternate fuels which can affect the demand for natural gas. The company's ability to maintain its industrial market share is largely dependent on the relative spread between energy prices. The demand for natural gas by electric generators is influenced by a number of factors. In the short-term, natural gas use by electric generators is impacted by the availability of alternative sources of generation. The availability of hydroelectricity is highly dependent on precipitation in the western United States.U.S. and Canada. In addition, natural gas use is impacted by the performance of other generation sources in the western United States,U.S., including nuclear and coal, renewable energy and other natural gas facilities outsideoutsi de the service area. Natural gas use is also impacted by changes in end-use electricity demand. For example, nat uralnatural gas use generally increases during summerextended heat waves. Over the long-term, natural gas used to generate electricity will be influenced by additional factors such as the location of new power plant construction and the development of renewable energy resources. MoreRecently, more generation capacity currently is beinghas been constructed outside Southern California than within the California Utilities'SDG&E's service area. This new generation will likely displace the output of older, less efficientless-efficient local generation, reducing the use of natural gas for local electric generation. Over the next few years, however, construction and planned construction of smaller natural gas-fired peaking and other electric generation facilities within SDG&E’s service area are expected to result in a slight overall increase in the demand for local natural gas for electric generation.

Effective March 31, 1998, electric industry restructuring provided out-of-state producers the option to provide power to California utility customers. 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 the company's natural gas operations, future volumes of naturalU.S.

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Natural gas transported for electric generating plant customers may be significantly affected to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the company's service area.

Growth in the natural gas markets is largely dependent upon the health and expansion of the Southern California economy and prices of other energy products. External factors such as weather, the price of electricity, electric deregulation, the use of hydroelectric power, development of renewable energy resources, development of new natural gas supply sources and general economic conditions can result in significant shifts in demand and market price. The company added 12,0005,000 and 8,000 new customer meters in each of 20052007 and 2004,2006, respectively, representing growth rates of 1.50.7 percent and 1.0 percent in both years.2007 and 2006, respectively. The slower growth in 2007 reflects a slowdown in the housing market. The company expects that its growth rate for 20062008 will approximate 2005's.that of 2007.

The natural gas distribution business is seasonal in nature and revenues generally are greater during the winter months. As is prevalent in the industry, the company injects natural gas into storage during the summer months (usually April through October) for withdrawal from storage during the winter months (usually November through March) when customer demand is higher.

ELECTRIC UTILITY OPERATIONS

Customers

At December 31, 2005,2007, the company had 1.31.4 million customer meters consisting of 1,188,0001,210,600 residential, 141,000146,300 commercial, 480500 industrial, 1,9902,000 street and highway lighting and 6,7005,400 direct access. The company's service area covers 4,100 square miles. The company added 20,00010,000 new electric customer meters in 20052007 and 22,00017,000 in 2004,2006, representing growth rates of 1.5%0.7 percent and 1.7%,1.3 percent, respectively. The company expects that its growth rate for 2008 will approximate that of 2007.

Resource Planning and Power Procurement

SDG&E's resource planning, power procurement and related regulatory matters are discussed below, in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 9, 10, 11 and 1112 of the notesNotes to Consolidated Financial Statements herein.

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Electric Resources

Based on CPUC-approved purchased-power contracts currently in place with SDG&E'sits various suppliers, its Palomar and SDG&E'sMiramar generating facilities and its 20-percent share of a generating plant, as of December 31, 2005,ownership interest in SONGS, the supply of electric power available to SDG&E as of December 31, 2007, is as follows:

* Effective January 1, 2007, 1,200 megawatts were reallocated to Southern California Edison (Edison) by the CPUC, as described in Note 9 of the notes to Consolidated Financial Statements.
** Department of Water Resources

Under the contract with PGE, SDG&E pays a capacity charge plus a charge based on the amount of energy received and/or PGE's non-fuel costs. Costs under most of the contracts with QFs are based on SDG&E's avoided cost. Charges under the remaining contracts are for firm and as-available energy and are based on the amount of energy received.received, or are tolls based on available

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capacity. The prices under these contracts are at the market value at the time the contracts were negotiated.

SONGS

Natural Gas Supply

SDG&E owns 20 percentbuys natural gas under short-term contracts for its Palomar and Miramar generating facilities and for the Cabrillo Power I, LLC and LSP South Bay, LLC tolling contracts. Purchases are from various southwestern U.S. suppliers and are primarily based on monthly and spot-market prices. All of SDG&E's natural gas is delivered through SoCalGas' pipelines under a two-year transportation agreement which expires on March 31, 2008.

SDG&E also buys natural gas as the DWR’s limited agent for the DWR-allocated contracts. Most of the natural gas deliveries for the DWR-allocated contracts are transported through the Kern Pipeline under a long-term transportation agreement. The DWR is financially responsible for the costs of gas and transportation.

SONGS

SDG&E has a 20-percent ownership interest in SONGS, which is located south of San Clemente, California. SONGS consists of threetwo operating nuclear generating units.units and one that is permanently shut down and is being decommissioned. The citiescity of Riverside and Anaheim own a total of 5owns 1.79 percent of Units 2 and 3.3, and Southern California Edison (Edison), the operator of SONGS, owns the remaining interestsinterests.

Units 2 and 3 began commercial operation in August 1983 and April 1984, respectively. SDG&E's share of the capacity is the operator214 MW of SONGS.Unit 2 and 216 MW of Unit 3.

Unit 1 was removed from service in November 1992 when the CPUC issued a decision to permanently shut it down. Decommissioning of Unit 1 is now in progress and its spent nuclear fuel is being stored on site.site in an independent spent fuel storage installation (ISFSI) licensed by the NRC.

Units 2 and 3 began commercial operation in August 1983 and April 1984, respectively. SDG&E's share of the capacity is 214 MW of Unit 2 and 216 MW of Unit 3.

SDG&E hadhas fully recovered its SONGS capital investment through December 31, 2003.2003 and earns a return only on subsequent capital additions, including the company's share of costs associated with planned steam generator replacements.

Additional information concerning the SONGS units and nuclear decommissioning is provided below, in "Environmental Matters" herein, and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein and in Notes 3, 94, 10 and 1112 of the notesNotes to Consolidated Financial Statements herein.

Nuclear Fuel Supply

The nuclear fuel supply cycle includes materials and services (uranium oxide, conversion of uranium oxide to uranium hexafluoride, uranium enrichment services, and fabrication of fuel assemblies) performed by others under various contracts which extend through 2008.2012. The availability and the cost of the various components of the nuclear-fuelnuclear fuel cycle for SDG&E's nuclear facilities20-percent ownership interest in SONGS in subsequent years cannot be estimated at this time.

Spent fuel from SONGS is being stored on site in both the independentISFSI and spent fuel storage installation, wherepools. Upon completion of the current phase of Unit 1 decommissioning, the site will have adequate space to

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build ISFSI storage capacity is expected to be adequate through 2022, the expiration date of the units' NRC operating license. Pursuant to the Nuclear Waste Policy Act of 1982, SDG&E entered into a contract with the U.S. Department of Energy (DOE) for spent-fuel disposal. Under the agreement, the DOE is responsible for the ultimate disposal of spent fuel from SONGS. SDG&E pays the DOE a disposal fee of $1.00 per megawatt-hour of net nuclear generation, or $3 million per year. The DOE projects that it will not begin accepting spent fuel until 20102017 at the earliest.

Additional information concerning nuclear-fuel costs and the storage and movement of spent fuel is provided in Notes 910 and 11,12, respectively, of the notesNotes to Consolidated Financial Statements herein.

Power Pools

SDG&E is a participant in the Western Systems Power Pool, which includes an electric-power and transmission-rate agreement with utilities and power agencies located throughout the United States and Canada. More than 270300 investor-owned and municipal utilities, state and federal power agencies, energy brokers and power marketers share power and information in order to increase efficiency and competition in the bulk power market. Participants are able to make power transactions on standardized terms that have been pre-approvedpreapproved by the FERC.

Transmission Arrangements

The Pacific Intertie, consisting of AC and DC transmission lines, connects the Northwest with SDG&E, Pacific Gas & Electric (PG&E), Edison and others under an agreement that expires in July 2007. SDG&E's share of the Pacific Intertie is 266 MW.

Power originating from sources utilizing the Pacific Intertie, as well as power from other sources, can be imported into SDG&E's system via the Edison-SDG&E interconnection at the SONGS switchyard. Five 230-kilovolt transmission lines into SDG&E's system from that interconnection comprise the "South of SONGS" path, which is normally rated at 2200 MW.

SDG&E's 500-kilovolt500-kV Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona, to San Diego. SDG&E's share of the line is 9701,163 MW, although it can be less under certain system conditions.

Mexico's Baja California Norte system is connected to SDG&E's system via two 230-kilovolt230-kV interconnections with firm capability of 408 MW in the north to south direction and 800 MW in the south to north direction.

SDG&E is in the planning stagesapproval phase for the Sunrise Powerlink, a new 500-kilovolt500-kV transmission line between the existing Imperial Valley Substation and a new Central Substationcentral substation to be located within the SDG&E system. The proposed rating of the Sunrise Powerlink is 1,000 MW or higher.MW. The project is subject to CPUC approval andapproval. Further discussion is estimatedprovided in Note 10 of the Notes to cost at least $1 billion. The planned in-service date is June 2010.Consolidated Financial Statements herein.

Transmission Access

The National Energy Policy Act governs procedures for others' requests for transmission service. The FERC approved the California IOUs'investor-owned utilities' (IOUs) transfer of operation and control of their transmission facilities to the Independent System Operator (ISO) in 1998. Additional information regarding the FERC, ISO and transmission issues is provided in Note 10 of the notesNotes to Consolidated Financial Statements herein.

RATES AND REGULATION

Information concerning rates and regulations applicable to the company is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1, 9 and 10 of the notes to Consolidated Financial Statements herein.

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ENVIRONMENTAL MATTERS

Discussions about environmental issues affecting the company are included in Note 11Notes 10 and 12 of the notesNotes to Consolidated Financial Statements 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,mechanism, allowing California's IOUs to recover theircertain hazardous waste cleanup costs, including those related to Superfund sites or similar sites requiring cleanup. RecoveryRate 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.

At December 31, 2005,2007, the company had accrued its estimated remaining investigation and remediation liability related to hazardous waste sites, including numerous locations that had been manufactured-gas plants, of $7.2$0.4 million, of which 90 percent is authorized to be recovered through the Hazardous Waste Collaborative mechanism. This estimated cost excludes remediation costs of $10.3$6 million associated with SDG&E's former fossil-fuel power plants. The company believes that any costs not ultimately recovered through rates, insurance or other means will not have a material adverse effect on the company's consolidated 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.

Electric and Magnetic Fields (EMFs)

Although scientists continue to research the possibility that exposure to EMFs causes adverse health effects, science has not demonstrated a cause-and-effect relationship between exposure to the type of EMFs emitted by power lines and other electrical facilities and adverse health effects. Some laboratory studies suggest that such exposure creates biological effects, but those effects have not been shown to be harmful. The studies that have most concerned the public are epidemiological studies, some of which have reported a weak correlation between childhood leukemia and the proximity of homes to certain power lines and equipment. Other epidemiological studies found no correlation between estimated exposure and any disease. Scientists cannot explain why some studies using estimates of past exposure report correlations between estimated EMF levels and disease, while others do not.

To respond to public concerns, the CPUC previously directed California IOUs to adopt a low-cost EMF-reduction policy that requires reasonable design changes to achieve noticeable reduction of EMF levels that are anticipated from new projects. The CPUC has recently reviewed the resultant policy in an Order Instituting Ratemaking and found no new scientific research to support a change to the existing policy, finding existing policy of prudent avoidance to be sufficient and reasonable.

Air and Water Quality

The transmission and distribution of natural gas require the operation of compressor stations, which are subject to increasingly stringent air-quality standards.standards, such as those established by the CARB as discussed under "Government Regulation – California Utility Regulation" herein. Costs to comply with these standards are generally recovered in rates.

In connection with the issuance of operating permits, SDG&E and the other owners of SONGS previously reached an agreement with the California Coastal Commission to mitigate the environmental damage to the marine environment attributed to the cooling-water discharge from SONGS Units 2 and 3. SDG&E's share of the cost is estimated to be $34$36 million, of which $16$25 million had been incurred at December 31, 2005. Rate recovery of 50% of2007, and $11 million is accrued for the remaining costs through 2050. In May 2006, the CPUC adopted a decision in Edison's 2006 General Rate Case, in which decision SDG&E is uncertain.no longer subject to a 50-percent disallowance of cost recovery going forward.

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OTHER MATTERS

Research, Development and Demonstration (RD&D)

Effective January 2005, a surcharge was established by the CPUC for natural gas public interest RD&D. The natural gas public interest research program is administered by the CEC. For 2005, the funding level is subject to a statewide cap of $12 million. The statewide cap increases to $15 million in 2006. For 2005, SDG&E funding for the natural gas public purpose RD&D program was $1 million.

SDG&E continues to fund the California Public Interest Energy Research (PIER) Program for electric research. For 2005, SDG&E's funding level was $6 million for the PIER program.

Employees of Registrant

As of December 31, 2005,2007, the company had 4,505 employees,4,774employees, compared to 4,405 at4,758at December 31, 2004.2006.

Labor Relations

Certain

Field, technical and some clerical employees at SDG&E are represented by the Local 465 International Brotherhood of Electrical Workers. The current contractcollective bargaining agreement for these employees covering wages, hours and working conditions is in effect through August 31, 2008. For these same employees, the agreements covering health and welfare benefits and pension benefits are in effect through December 31, 2010 and December 4, 2009, respectively.

ITEM 2. PROPERTIES

Electric Properties

SDG&E owns two natural gas-fired power plants: a 550-MW electric generation facility (the Palomar generation facility) located in Escondido, California, and a 45-MW electric generation facility (the Miramar generation facility) located in San Diego, California. SDG&E's interest in SONGS is described in "Electric Resources" herein.

At December 31, 2005,2007, SDG&E's electric transmission and distribution facilities included substations, and overhead and underground lines. TheThese electric facilities are located in San Diego, Imperial and Orange counties of California and in Arizona, and consist of 1,8351,886 miles of transmission lines and 21,60122,056 miles of distribution lines. Periodically, various areas of the service territory require expansion to accommodate customer growth.

In 2005, SDG&E purchased a 45-MW electric generation facility located in San Diego, California. In 2006, SDG&E will purchase the 550-MW Palomar power plant, located in Escondido, California, which is being constructed by Sempra Generation.

Natural Gas Properties

At December 31, 2005,2007, SDG&E's natural gas facilities, which are located in San Diego and Riverside counties of California, consisted of the Moreno and Rainbow compressor stations, 166 miles of high pressure transmission pipelines, 8,1008,335 miles of high and low pressure distribution mains and 6,1976,292 miles of service lines.

Other Properties

SDG&E occupies an office complex in San Diego pursuant to antwo separate operating leaseleases, both ending in 2007. TheDecember 2017. One lease can be renewed for twohas four five-year periods.renewal options and the other lease has three five-year renewal options.

The company owns or leases other land, easements, rights of way, warehouses, offices, operating and maintenance centers, shops, service facilities and equipment necessary in the conduct of its business.

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ITEM 3. LEGAL PROCEEDINGS

Except for the matters described in Note 1112 of the notesNotes to Consolidated Financial Statements or referred to elsewhere in this Annual Report,"Management's Discussion and Analysis of Financial Condition and Results of Operations" herein, neither the company nor its subsidiary is party to, nor is their property the subject of, any material pending legal proceedings.

Sempra Energy

On July 13, 2007, SDG&E, one of its employees, and an SDG&E are defendantscontractor were convicted in a lawsuit filed by the County of San Diego seeking civil penalties for alleged violationsfederal jury trial on criminal charges of environmental standards applicable toviolations in connection with the abatement, handling and disposal of asbestos-containing materials during the demolition2000 - 2001 dismantlement of a natural gas storage facility in 2001. Infacility. SDG&E was also convicted of a federal criminal indictment,related charge of making a false statement to a government agency. SDG&E is subject to a maximum fine of $2 million. On December 7, 2007, the trial court set aside all of the convictions and two employees have also been charged with having violated these standards and with conspiracy and making false statements to governmental authorities in connection with these matters. Sempra Energy and SDG&E believe thatgranted all of the maximum fines and penalties that could reasonably be assessed against them with respect to these matters would not exceed $750,000.defendants a new trial on all counts. The company believes that the claims and charges are without merit and is vigorously contesting them.government has filed a notice of appeal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

None.

PART II

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

All of the issued and outstanding common stock of SDG&E is owned by Enova Corporation, a wholly owned subsidiary of Sempra Energy. The information required by Item 5 concerning dividend declarations is included in the "Statements of Consolidated Comprehensive Income and Changes in Shareholders' Equity" set forth in Item 8 herein.

Dividend Restrictions

The payment and amount of future dividends are within the discretion of the 2005 Annual Reportcompany's board of directors. The CPUC's regulation of SDG&E'scapital structure limits the amounts that are available for loans and dividends to ShareholdersSempra Energy from SDG&E. Additional information regarding these restrictions is provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Capital Resources and Liquidity--Dividends" herein.

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ITEM 6. SELECTED FINANCIAL DATA

Since SDG&E is a wholly owned subsidiary of Enova Corporation, per shareper-share data is not provided.

This data should be read in conjunction with the Consolidated Financial Statements and the notesNotes to Consolidated Financial Statements contained herein.

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ITEM 7.

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

INTRODUCTION

This section of the 20052007 Annual Report includes management's discussion and analysis of operating results from 20032005 through 2005,2007, and provides information about the capital resources, liquidity and financial performance of San Diego Gas & Electric Company (SDG&E or the company). ""This section also focuses on the major factors expected to influence future operating results and discusses investment and financing activities and plans. It should be read in conjunction with the Consolidated Financial Statements included in this Annual Report.

The company is an operating public utility engaged in the electric business, serving 3.4 million consumers, and in the natural gas business, serving 3.1 million consumers. It distributes electric energy, purchased from others or generated from its 20 percentPalomar and Miramar generating facilities and its 20-percent ownership interest in a nuclear facility,the San Onofre Nuclear Generating Station (SONGS), through 1.31.4 million electric meters in San Diego County and an adjacent portion of southern Orange County, California. It also purchases and distributes natural gas through 825,000840,000 meters in San Diego County and transports electricity and natural gas for others. SDG&E's service territory encompasses 4,100 square miles. SDG&E's only subsidiary is SDG&E Funding LLC, which was formed to facilitate the issuance of SDG&E's rate reductionrate-reduction bonds describeddiscussed in Note 23 of the notesNotes to Consolidated Financial Statements. The company's financial statements include a variable interest entity, Otay Mesa Energy Center LLC (OMEC LLC), as discussed in Note 1 of the Notes to Consolidated Financial Statements. SDG&E is a substantially wholly owned indirect subsidiary of Sempra Energy. SDG&E and its sister utility, Southern California Gas Company (SoCalGas), which distributes natural gas throughou tthroughout most of Southern California and a portion of central California, are collectively referred to herein as "the CaliforniaSempra Utilities."

RESULTS OF OPERATIONS

The following table shows net income for each of the last five years.

Comparison of Earnings

To assist the reader in understanding the trend of earnings, the following table summarizes the major unusual factors affecting net income and operating income in 2005, 2004 and 2003. The numbers in parentheses are the page numbers where each 2005 item is discussed therein.

1Demand side management (DSM)
² San Onofre Nuclear Generating Station (SONGS)

The company issubject to regulation by federal, state and local governmental agencies. The primary regulatory agency is the California Public UtilitiesUtility Commission (CPUC), which regulates utility rates and operations. Theoperations in California, except for SDG&E's electric transmission operations, which are regulated by the Federal Energy Regulatory Commission (FERC). The FERC also regulates interstate transportation of natural gas and electricity and various related matters. The Nuclear Regulatory Commission regulates nuclear generating plants. Municipalities and other local authorities regulate the location of utility assets, including natural gas pipelines and electric lines.

Electric RevenueRevenues and Cost of Electric Fuel and Purchased Power.ElectricPower.Electric revenues increased by $125$47 million (7%(2%) to $1.8$2.2 billion, in 2005, and the cost of electric fuel and purchased power increaseddecreased by $48$22 million (8%(3%) to $624$699 million in 2005.2007. The increased revenue in 2007 was primarily due to $33 million from higher authorized transmission and electric generation margins, $22 million

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from the resolution of a regulatory matter, a $24 million increase in revenue was due to $41authorized base margin on electric distribution and $12 million of higher revenues for recoverable expenses, which are fully offset in other operating expenses. The increases were offset by $20 million from the favorable resolution of a prior year cost recovery issue in 2006 and $22 million lower recovery of electric fuel and purchased power costs in 2007.

Electric revenues increased by $344 million (19%) to $2.1 billion, and the cost of electric fuel and purchased power increased by $97 million (16%) to $721 million in 2006 compared to 2005. The increase in revenue was due to $206 million of increased authorized distribution, generation and transmission base margins, $60 million of higher revenues for recoverable expenses, and the $20 million favorable resolution of a DSM awardprior year cost recovery issue. The increases were offset by a $28 million demand-side management (DSM) awards settlement in 2005 of $28 million and $23 million related tofrom the 2005 Internal Revenue Service (IRS) decision relating to the sale of SDG&E's former South Bay power plant. In addition, revenues and costs increased $48 million due to higher purchased power costs.

Electric revenues decreased by $123 million (7%) to $1.7 billion in 2004 compared to 2003, and the cost of electric fuel and purchased power increased by $35 million (6%) to $576 million in 2004 compared to 2003. The decrease in revenues was due to the recognition of $116 million related to the approved settlement that allocated between SDG&E's customers and shareholders the profits from certain intermediate-term purchase power contracts in the third quarter of 2003, and higher 2003 earnings of $25 million from Performance-Based Regulation (PBR) awards. Performance awards are discussed in Note 10 of the notes to Consolidated Financial Statements. In addition, electric revenues and costs increased $35 million due to higher electric commoditythe commencement of commercial operations of the Palomar generating facility in 2006, which contributed $112 million to both 2006 revenues and costs, and volumes.offset by lower purchased power costs.

Natural Gas RevenueRevenues and Cost of Natural Gas.NaturalGas.Natural gas revenues increased by $113$20 million (19%(3%) to $709$658 million, in 2005, and the cost of natural gas increased by $109$12 million (31%(3%) to $456$392 million in2005.in 2007. The increasescompany's weighted average cost (including transportation charges) per million British thermal units (MMBtu) of natural gas was $7.17 in 20052007, $6.94 in 2006 and $8.67 in 2005.

Natural gas revenues decreased by $71 million (10%) to $638 million, and the cost of natural gas decreased by $76 million (17%) to $380 million in 2006 compared to 2005. The decreases in 2006 were due to higherlower overall average costs of natural gas, prices, which are passed on to customers, offset by a small decrease in volume. In addition,natural gas revenuesincreased due to $7 million in DSM awards in 2005. The company's weighted average cost per million British thermal units (mmbtu) of natural gas was $8.67in 2005, $6.11in 2004 and $5.14in 2003.higher volumes.

Although the current regulatory framework provides that the cost of natural gas purchased for customers and the variations in that cost are passed through to the customers on a substantially concurrent basis, SDG&E's natural gas procurement PBRPerformance-Based Regulation (PBR) mechanism provides an incentive mechanism by measuring SDG&E's procurement ofallows the company to share in the savings or costs from buying natural gas againstfor its customers below or above market-based monthly benchmarks. The mechanism permits full recovery of all costs within a benchmark price comprised of monthly natural gas indices, resulting in shareholder rewards for costs achieved belowtolerance band around the benchmark price. The costs or savings outside the tolerance band are shared between customers and shareholder penalties when costs exceed the benchmark.shareholders. Further discussion is provided in Notes 1 and 1011 of the notesNotes to Consolidated Financial Statements.

Natural gas revenues increased by $89 million (18%) to $596 million in 2004 compared to 2003, and the cost of natural gas increased by $73 million (27%) to $347 million in 2004 compared to 2003. The increase in 2004 was primarily attributable to natural gas price increases.

The tables below summarize the electric and natural gas volumes and revenues by customer class for the years ended December 31, 2005, 20042007, 2006 and 2003.2005.

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Electric Distribution and Transmission

(Volumes in millions of kWhs,kilowatt-hours, dollars in millions)

Although commodity costs associated with long-term contracts allocated to SDG&E from the California Department of Water Resources (DWR) (and the revenues to recover those costs) are not included in the Statements of Consolidated Income, as discussed in Note 1 of the notesNotes to Consolidated Financial Statements, the associated volumes and distribution revenues are included in the above table.

Natural Gas Sales, Transportation and Exchange

(Volumes in billion cubic feet, dollars in millions)