The following discussion should be read in conjunction with the financial statements contained in this Form 10-Q and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" contained in the company's 2007 Annual Report on Form 10-K (Annual Report).

OVERVIEW

Sempra Energy

Sempra Energy is a Fortune 500 energy services holding company. Its business units provide electric, natural gas and other energy products and services to its customers. Operations are divided into the Sempra Utilities and Sempra Global. The Sempra Utilities are Southern California Gas Company (SoCalGas) and San Diego Gas & Electric Company (SDG&E), which serve consumers from California's Central Valley to the Mexican border. Sempra Global is a holding company for most of the subsidiaries and investments of Sempra Energy that are not subject to California utility regulation. Sempra Global's principal subsidiaries and holdings provide the following energy-related products and services:

·

Sempra Commodities holds the company's investment in RBS Sempra Commodities LLP (RBS Sempra Commodities), a joint-venture partnership with The Royal Bank of Scotland (RBS). The partnership was formed on April 1, 2008 from the company's commodity-marketing businesses previously reported in this segment. The partnership's commodity trading businesses serve customers in natural gas, natural gas liquids, power, petroleum and petroleum products, coal, emissions, ethanol and base metals. Further discussion is provided in Note 3 of the Notes to Condensed Consolidated Financial Statements herein. Sempra Commodities also includes the operating results of Sempra Marketing, which holds firm service capacity on the Rockies Express Pipeline.

·

Sempra Generation develops, owns and operates electric generation facilities.

·

Sempra LNG develops, owns and operates receipt terminals for the importation of liquefied natural gas (LNG), and has supply and marketing agreements to provide natural gas.

·

Sempra Pipelines & Storage develops and owns or holds interests in natural gas pipelines and storage facilities in the United States and Mexico, and in companies that provide natural gas or electricity services in Argentina, Chile, Mexico and Peru. The company is currently pursuing the sale of its interests in the Argentine utilities, as discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

RESULTS OF OPERATIONS

Net income decreased by $19 million (4%) to $486 million for the six months ended June 30, 2008, and by $33 million (12%) to $244 million for the three months ended June 30, 2008, compared to the corresponding period of 2007, primarily resulting from lower earnings at Sempra Commodities and higher net losses at Sempra LNG and Parent and Other, partially offset by improved results at SDG&E, Sempra Generation and Sempra Pipelines & Storage, as discussed in "Business Unit Results" below.

Net Income (Loss) by Business Unit


                                                         Six months ended June 30,
      (Dollars in millions)                               2008                2007
      Sempra Utilities
      Southern California Gas Company *             $  113        23 %   $ 109      22 %
      San Diego Gas & Electric Company *               135        28       113      22
      Total Sempra Utilities                           248        51       222      44

      Sempra Global
      Sempra Commodities                               189        39       226      45
      Sempra Generation                                 68        14        64      13
      Sempra Pipelines & Storage                        50        10        33       6
      Sempra LNG                                       (37 )      (8 )     (23 )    (5 )
      Total Sempra Global                              270        55       300      59

      Parent and other **                              (32 )      (6 )     (15 )    (3 )
      Income from continuing operations                486       100       507     100
      Discontinued operations, net of income tax        --        --        (2 )    --
      Net income                                    $  486       100 %   $ 505     100 %



                                                             Three months ended June 30,
(Dollars in millions)                                      2008                         2007
Sempra Utilities
Southern California Gas Company *                 $     56          23 %         $    54        19 %
San Diego Gas & Electric Company *                      61          25                51        18
Total Sempra Utilities                                 117          48               105        37

Sempra Global
Sempra Commodities                                     130          53               155        56
Sempra Generation                                       23           9                10         4
Sempra Pipelines & Storage                              24          10                17         6
Sempra LNG                                             (28 )       (11 )             (13 )      (4 )
Total Sempra Global                                    149          61               169        62

Parent and other **                                    (22 )        (9 )               6         2
Income from continuing operations                      244         100               280       101
Discontinued operations, net of income tax              --          --                (3 )      (1 )
Net income                                        $    244         100 %         $   277       100 %

Sempra Utilities Revenues and Cost of Sales

During the three months and six months ended June 30, 2008, natural gas revenues and the cost of natural gas increased compared to the corresponding periods in 2007, primarily as a result of higher natural gas prices and volumes. Electric revenues increased for the three months and six months ended June 30, 2008 compared to the corresponding periods in 2007 primarily due to higher cost of electric fuel and purchased power and higher volumes.

As a final decision in the 2008 General Rate Case (GRC) was not issued by the California Public Utilities Commission (CPUC) by June 30, 2008, revenues for the first six months of 2008 associated with CPUC-regulated operations were consistent with the 2007 CPUC-authorized revenue established by the 2004 Cost of Service decision. Further discussion is provided in Note 7 of the Notes to Condensed Consolidated Financial Statements herein.

Although the current regulatory framework provides that the cost of natural gas purchased for core customers be passed through to the customers on a substantially concurrent basis, SoCalGas' Gas Cost Incentive Mechanism (GCIM) and SDG&E's natural gas procurement Performance-Based Regulation (PBR) mechanism, which was in effect through March 31, 2008, allow them to share in the savings or costs from buying natural gas for their customers below or above market-based monthly benchmarks. The mechanisms permit full recovery of commodity procurement costs within a tolerance band around the benchmark price. The costs or savings outside the tolerance band are shared between customers and shareholders. Further discussion is provided in Notes 1 and 15 of the Notes to Consolidated Financial Statements in the Annual Report.

The tables below summarize the Sempra Utilities' natural gas and electric volumes and revenues by customer class for the six-month periods ended June 30.

Natural Gas Sales, Transportation and Exchange

(Volumes in billion cubic feet, dollars in millions)


                                  Natural Gas Sales          Transportation and Exchange              Total
                                Volumes       Revenue        Volumes            Revenue       Volumes      Revenue
2008:
Residential                       160        $  2,095             1           $         2        161      $  2,097
Commercial and industrial          65             768           140                    83        205           851
Electric generation plants         --              --           122                    44        122            44
Wholesale                          --              --            11                     4         11             4
                                  225        $  2,863           274           $       133        499         2,996
Balancing accounts and other                                                                                   102
Total                                                                                                     $  3,098
2007:
Residential                       158        $  1,787             1           $         2        159      $  1,789
Commercial and industrial          67             642           136                   104        203           746
Electric generation plants         --               1            95                    42         95            43
Wholesale                          --              --            11                     4         11             4
                                  225        $  2,430           243           $       152        468         2,582
Balancing accounts and other                                                                                   115
Total                                                                                                     $  2,697

Electric Distribution and Transmission

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


                                                2008                   2007
                                        Volumes     Revenue    Volumes    Revenue
         Residential                     3,715     $   415      3,592      $   461
         Commercial                      3,416         353      3,353          396
         Industrial                      1,114          86      1,062          105
         Direct access                   1,515          47      1,494           54
         Street and highway lighting        51           5         52            6
                                         9,811         906      9,553        1,022
         Balancing accounts and other                  173                     (40 )
         Total                                     $ 1,079                 $   982

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, the associated volumes and distribution revenues are included in the above table.

Sempra Global and Parent Revenues

Sempra Global and Parent revenues decreased by $390 million (20%) in the six months ended June 30, 2008 to $1.6 billion, and by $425 million (41%) in the three months ended June 30, 2008 to $616 million. The decrease in the six months included $749 million lower revenues from Sempra Commodities. Revenues for the six months ended June 30, 2008 and 2007 included $473 million and $1.2 billion, respectively, for Sempra Commodities. These revenues were primarily for periods prior to the formation of RBS Sempra Commodities. The decrease was partially offset by $254 million higher revenues at Sempra Generation, primarily due to increased power sales and favorable natural gas and power prices, and $50 million higher revenues at Sempra Pipelines & Storage, primarily from Mexican pipeline operations.

The three months ended June 30, 2008 and 2007 included $16 million and $710 million, respectively, for Sempra Commodities. This decrease was partially offset by higher revenues at Sempra Generation and Sempra Pipelines & Storage as for the six-month period.

Sempra Global and Parent Cost of Natural Gas, Electric Fuel and Purchased Power

Sempra Global and Parent cost of natural gas, electric fuel and purchased power increased by $308 million (50%) in the six months ended June 30, 2008 to $922 million, and by $235 million (85%) in the three months ended June 30, 2008 to $513 million. The increases were primarily associated with the higher revenues at Sempra Generation and Sempra Pipelines & Storage.

Sempra Global and Parent Other Cost of Sales

Sempra Global and Parent other cost of sales for the six months ended June 30, 2008 and 2007 included $153 million and $540 million, respectively, for Sempra Commodities. This other cost of sales was primarily for periods prior to the formation of RBS Sempra Commodities. The three months ended June 30, 2008 and 2007 included $17 million and $221 million, respectively, for Sempra Commodities.

Gains on Sale of Assets

The gains in the three months and six months ended June 30, 2008 include $109 million related to the RBS Sempra Commodities transaction as discussed in Note 3 of the Condensed Consolidated Financial Statements herein.

Operation and Maintenance

Operation and maintenance expenses decreased by $130 million (9%) in the six months ended June 30, 2008 to $1.3 billion, and by $198 million (27%) in the three months ended June 30, 2008 to $549 million. The six months ended June 30, 2008 and 2007 included $240 million and $391 million, respectively, for Sempra Commodities. These operation and maintenance expenses were primarily for periods prior to the formation of RBS Sempra Commodities. The three months ended June 30, 2008 and 2007 included $26 million and $236 million, respectively, for Sempra Commodities. Excluding amounts for Sempra Commodities, operation and maintenance expenses were comparable year-to-year.

Equity Earnings - RBS Sempra Commodities LLP

Earnings from the company's investment in the newly-formed RBS Sempra Commodities were $146 million in both periods in 2008. Additional information is provided in the Sempra Commodities discussion in "Business Unit Results" below.

Other Income, Net

Other income, net, decreased by $32 million (47%) in the six months ended June 30, 2008 to $36 million, and by $34 million (67%) in the three months ended June 30, 2008 to $17 million. The decrease in the six-month period ended June 30, 2008 was primarily attributable to a $30 million gain from an interest-rate swap in 2007, $12 million higher losses from investments related to the company's executive retirement and deferred compensation plans in 2008 and $9 million lower earnings from the sale of tax credits at Sempra Financial, offset by a $16 million cash payment received for the early termination of a capacity agreement for the Cameron LNG receipt terminal in 2008. The losses associated with the company's executive retirement and deferred compensation plans were offset by a $7 million reduction in deferred compensation expense in Operation and Maintenance.

The decrease in the three-month period ended June 30, 2008 was primarily attributable to the $30 million gain from an interest-rate swap in 2007, $4 million higher losses from investments related to the company's executive retirement and deferred compensation plans in 2008 and $4 million lower earnings from the sale of tax credits at Sempra Financial.

Interest Income

Interest income decreased by $26 million (52%) in the six months ended June 30, 2008 to $24 million, and by $14 million (58%) in the three months ended June 30, 2008 to $10 million. The decreases were primarily attributable to lower average short-term investment balances in 2008. Short-term investment balances were higher in 2007 due to asset sales in 2006.

Interest Expense

Interest expense decreased by $38 million (28%) in the six months ended June 30, 2008 to $98 million, and by $28 million (42%) in the three months ended June 30, 2008 to $38 million. The decrease in the six months was due to the effect of repayment of long-term debt in 2007 and lower interest rates and higher capitalized interest in 2008, partially offset by higher short-term borrowings in 2008. In addition, the three months and six months ended June 30, 2008 included $16 million reduced interest expense related to energy crisis litigation reserves.

The decrease in the three months ended June 30, 2008 was primarily due to lower long-term debt interest expense and the reduced amounts related to the litigation reserves, as discussed above.

Income Taxes

Income tax expense was $329 million and $206 million for the six months ended June 30, 2008 and 2007, respectively, and the effective income tax rates were 42 percent and 32 percent, respectively. Income tax expense was $202 million and $143 million for the three months ended June 30, 2008 and 2007, respectively, and the effective income tax rates were 47 percent and 35 percent, respectively.

The increase in income tax expense for the three months and six months ended June 30, 2008 was primarily due to higher effective income tax rates and in the six-month period, higher pretax earnings. The increase in the 2008 effective tax rate was due primarily to the phase-out of the synthetic fuels credits in 2007, unfavorable effects from prior years' income tax issues and higher income tax expense related to Mexican currency translation and inflation adjustments.

Equity Earnings, Net of Income Tax

Equity earnings, net of income tax, decreased by $28 million (42%) in the six months ended June 30, 2008 to $39 million, and increased by $9 million (100%) in the three months ended June 30, 2008 to $18 million. The decrease for the six-month period was primarily due to an after-tax gain of $30 million in 2007 at Sempra Commodities from the sale of investments. The three months ended June 30, 2007 included $6 million of equity losses, net of income tax, at Sempra Commodities.

Net Income

Variations in net income are discussed below in "Business Unit Results."

Business Unit Results

Southern California Gas Company

Net income for SoCalGas increased by $4 million (4%) in the six months ended June 30, 2008 to $113 million, and by $2 million (4%) in the three months ended June 30, 2008 to $56 million. The increase in the six months was primarily attributable to $7 million in regulatory awards in 2008 and $3 million as a result of a lower effective tax rate, partially offset by $8 million lower earnings from non-core natural gas storage in accordance with the Omnibus Gas Settlements, as discussed in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

The increase in the three months ended June 30, 2008 was primarily due to $3 million as a result of a lower effective tax rate and $2 million in higher natural gas margins due to the elimination of revenue-sharing in 2008, net of higher operating expenses, offset by $5 million in lower earnings from non-core

natural gas storage. The lower effective tax rate was due mainly to larger tax deductions in 2008 allowed for regulatory purposes.

San Diego Gas & Electric Company

Net income increased by $22 million (19%) in the six months ended June 30, 2008 to $135 million and by $10 million (20%) in the three months ended June 30, 2008 to $61 million. The increase in the six months ended June 30, 2008 was primarily attributable to $12 million due to a lower effective income tax rate, $5 million higher regulatory awards and $2 million higher electric transmission margin. The lower effective income tax rate was primarily due to $7 million from the favorable resolution of prior years' income tax issues in 2008 compared to $2 million unfavorable in 2007.

The increase in the three months ended June 30, 2008 was due to $5 million higher regulatory awards and $4 million from a lower effective income tax rate due to increased tax deductions for internally developed software and for removal costs.

Sempra Commodities

Net income for Sempra Commodities decreased by $37 million (16%) in the six months ended June 30, 2008 to $189 million, and by $25 million (16%) in the three months ended June 30, 2008 to $130 million. Recorded results for the second quarter of 2008 represent the company's equity earnings from RBS Sempra Commodities, formed on April 1, 2008, and other items discussed below. Recorded results for 2007 and the first quarter of 2008 represent 100% of this business' earnings until the formation of the partnership.

Net income for the three months and six months ended June 30, 2008 included $93 million in equity earnings from RBS Sempra Commodities and a $67 million gain on the transaction with RBS. These results were partially offset by expenses of $30 million, primarily charges for litigation and unfavorable effects from prior years' income tax issues.

Sempra Generation

Sempra Generation's net income increased by $4 million (6%) in the six months ended June 30, 2008 to $68 million, and by $13 million (130%) in the three months ended June 30, 2008 to $23 million. The increase for the six months ended June 30, 2008 was primarily due to $22 million higher earnings at the plants due to scheduled major maintenance and associated down time in 2007 and $11 million higher earnings due to increased contractual deliveries to the DWR, offset by an unfavorable change of $15 million in mark-to-market earnings on long-term forward contracts with RBS Sempra Commodities and other counterparties, $8 million of lower interest income and $4 million of higher income tax expense related to Mexican currency translation and inflation adjustments.

The increase for the three months ended June 30, 2008 was primarily due to $17 million higher earnings due to the scheduled maintenance at the plants in 2007 and $9 million higher earnings due to increased contractual deliveries to the DWR, offset by an unfavorable change of $8 million in mark-to-market earnings on long-term forward contracts with RBS Sempra Commodities and other counterparties, $3 million of higher income tax expense related to Mexican currency translation and inflation adjustments and $2 million of lower interest income.

Sempra Pipelines & Storage

Net income for Sempra Pipelines & Storage increased by $17 million (52%) in the six months ended June 30, 2008 to $50 million, and by $7 million (41%) in the three months ended June 30, 2008 to $24 million. The increase for the six months ended June 30, 2008 was primarily due to $14 million from the start-up of Rockies Express-West during the first quarter of 2008, $6 million from improved operations and $4 million from increased favorable foreign currency exchange-rate effects from its investments in Chile and Peru, offset by $7 million of higher taxes on foreign income.

The increase for the three months ended June 30, 2008 was primarily due to $9 million from the start-up of Rockies Express-West, $3 million from improved operations and $2 million from increased favorable foreign currency exchange-rate effects from its investments in Chile and Peru, offset by $7 million of higher taxes on foreign income.

Sempra LNG

The net loss for Sempra LNG increased by $14 million (61%) in the six months ended June 30, 2008 to $37 million, and by $15 million (115%) in the three months ended June 30, 2008 to $28 million. The increased loss in the six months ended June 30, 2008 was primarily due to $14 million of higher income tax expense related to Mexican currency translation and inflation adjustments and $10 million of increased mark-to-market loss related to a natural gas marketing agreement with RBS Sempra Commodities, partially offset by a $10 million after-tax cash payment received for the early termination of a capacity agreement with Merrill Lynch Commodities Inc. for the Cameron LNG receipt terminal. On May 31, 2008, Sempra LNG repaid $690 million of outstanding intercompany debt, which will reduce future Mexican currency translation gains and losses from Sempra LNG. In May 2008, Sempra LNG began earning capacity revenues for Energía Costa Azul.

The increased loss in the three months ended June 30, 2008 was primarily due to $8 million of increased mark-to-market loss related to the natural gas marketing agreement with RBS Sempra Commodities and $8 million of higher income tax expense related to Mexican currency translation and inflation adjustments.

Parent and Other

The net loss for Parent and Other increased by $17 million (113%) in the six months ended June 30, 2008 to $32 million, and by $28 million (467%) in the three months ended June 30, 2008 to $22 million. The increased net losses were primarily attributable to an $18 million gain from an interest-rate swap in 2007 and higher income tax expense in 2008, offset by $9 million lower interest expense in 2008 related to litigation reserves. In addition, the higher net loss in the six months ended June 30, 2008 was due to lower net interest expense overall, excluding the amounts related to litigation reserves.

CAPITAL RESOURCES AND LIQUIDITY

The company expects its cash flows from operations to provide a substantial portion of the funding of the company's capital expenditures and dividends. The company's expansion also requires the issuance of securities from time to time. In July 2008, the company announced its acquisition of EnergySouth, Inc. (EnergySouth) for $510 million. The transaction is expected to close by year-end and will be funded by operating cash flow and debt.

On April 1, 2008, the company completed the formation of their previously announced partnership, RBS Sempra Commodities, to own and operate Sempra Energy's commodity-marketing businesses, which generally comprised the Sempra Commodities segment. RBS is to provide the joint venture with all growth capital, working-capital requirements and credit support. The company's initial equity contribution to the partnership was $1.6 billion, and RBS made an initial equity contribution of $1.665 billion. As a result of the transaction, the company received cash of approximately $1.2 billion, net of its contribution. The company accounts for its investment in the partnership under the equity method. The company and RBS intend that RBS Sempra Commodities will distribute all of its net income on an annual basis, although the distributions are within the discretion of the board of directors of the partnership. In limited cases, earnings allocable to the partnership may be retained by the partnership to replenish capital depleted through losses. Additional information concerning the transaction with RBS is provided in Notes 3 and 5 of the Notes to Condensed Consolidated Financial Statements herein.

On April 1, 2008, the company entered into a share repurchase program and prepaid $1 billion on April 7, 2008 for shares of the company's common stock to be purchased in a share forward transaction as discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements herein. The company expects to purchase an additional $500 million of common shares in 2009, which may require additional borrowings, including a hybrid capital issuance.

On May 22, 2008, the company's board of directors approved an increase to the company's quarterly common stock dividend to $0.35 per share ($1.40 annually), an increase of $0.03 per share ($0.12 annually) from the $0.32 per share ($1.28 annually) authorized in February 2008, and targets an annual dividend payout ratio of 35 percent to 40 percent of net income.

At June 30, 2008, the company had $230 million in unrestricted cash and cash equivalents, and $4.1 billion in available unused, committed lines of credit to provide liquidity and support commercial paper. Management believes that these amounts and cash flows from operations, distributions from equity method investments and security issuances, combined with current cash balances, will be adequate to finance capital expenditures and meet liquidity requirements and to . . .