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

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 their 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 Notes 3 and 5 of the Notes to Condensed Consolidated Financial Statements herein. Sempra Commodities also includes the operating results of Sempra Rockies 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, owns and operates, 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. On October 1, 2008, the company acquired EnergySouth, Inc. (EnergySouth), as discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements herein. EnergySouth will be included in the Sempra Pipelines & Storage segment.

RESULTS OF OPERATIONS

Net income decreased by $16 million (2%) to $794 million for the nine months ended September 30, 2008, but increased by $3 million (1%) to $308 million for the three months ended September 30, 2008, compared to the corresponding periods of 2007. The decrease in the nine-month period was primarily due to reduced earnings at Sempra Commodities and higher net losses at Parent and Other and Sempra LNG, partially offset by improved results at the Sempra Utilities, Sempra Generation and Sempra Pipelines & Storage. The increase in net income in the three-month period resulted from improved earnings at SoCalGas and the Sempra Global business units, with the exception of Sempra Commodities. Results for 2007 included losses from discontinued operations of $27 million and $25 million for the nine-month and three-month periods, respectively. Additional information is provided in "Business Unit Results" below.

Net Income (Loss) by Business Unit


                                                      Nine months ended September 30,
   (Dollars in millions)                                 2008                    2007
   Sempra Utilities:
   Southern California Gas Company *             $   190          24 %      $ 172      21 %
   San Diego Gas & Electric Company *                258          32          236      29
   Total Sempra Utilities                            448          56          408      50

   Sempra Global:
   Sempra Commodities **                             181          23          313      39
   Sempra Generation                                 162          20          122      15
   Sempra Pipelines & Storage                         84          11           50       6
   Sempra LNG                                        (33 )        (4 )        (27 )    (3 )
   Total Sempra Global                               394          50          458      57

   Parent and other ***                              (48 )        (6 )        (29 )    (4 )
   Income from continuing operations                 794         100          837     103
   Discontinued operations, net of income tax         --          --          (27 )    (3 )
   Net income                                    $   794         100 %      $ 810     100 %



                                                           Three months ended September 30,
(Dollars in millions)                                      2008                         2007
Sempra Utilities:
Southern California Gas Company *                 $     77          25 %         $    63        21 %
San Diego Gas & Electric Company *                     123          40               123        40
Total Sempra Utilities                                 200          65               186        61

Sempra Global:
Sempra Commodities **                                   (8 )        (3 )              87        28
Sempra Generation                                       94          31                58        19
Sempra Pipelines & Storage                              34          11                17         6
Sempra LNG                                               4           1                (4 )      (1 )
Total Sempra Global                                    124          40               158        52

Parent and other ***                                   (16 )        (5 )             (14 )      (5 )
Income from continuing operations                      308         100               330       108
Discontinued operations, net of income tax              --          --               (25 )      (8 )
Net income                                        $    308         100 %         $   305       100 %

Sempra Utilities Revenues and Cost of Sales

During the three months and nine months ended September 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 nine months ended September 30, 2008 compared to the corresponding periods in 2007 primarily due to higher cost of electric fuel and purchased power and higher volumes, authorized revenues and refundable costs. Electric revenues for the three months ended September 30, 2008 also included a favorable adjustment from the retroactive application of the 2008 General Rate Case (GRC) decision for the period of January 1 through June 30, 2008.

Since the final decision in the 2008 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 based on the 2007 CPUC-authorized revenue established by the 2004 Cost of Service decision. An adjustment was made at both utilities in the third quarter of 2008 to reflect the authorized revenue established in the 2008 GRC for the period of January 1 through June 30, 2008. 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 Note 7 of the Notes to Condensed Consolidated Financial Statements herein and 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 nine-month periods ended September 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                       199        $  2,662             1           $         3        200      $  2,665
Commercial and industrial          89           1,066           213                   137        302         1,203
Electric generation plants         --              --           218                    80        218            80
Wholesale                          --              --            13                     5         13             5
                                  288        $  3,728           445           $       225        733         3,953
Balancing accounts and other                                                                                   344
Total                                                                                                     $  4,297
2007:
Residential                       198        $  2,234             1           $         3        199      $  2,237
Commercial and industrial          92             856           207                   155        299         1,011
Electric generation plants         --              --           199                    85        199            85
Wholesale                          --              --            14                     6         14             6
                                  290        $  3,090           421           $       249        711         3,339
Balancing accounts and other                                                                                   261
Total                                                                                                     $  3,600

Electric Distribution and Transmission

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


                                                2008                   2007
                                        Volumes     Revenue    Volumes    Revenue
         Residential                     5,782     $   700      5,678      $   755
         Commercial                      5,399         610      5,391          659
         Industrial                      1,752         151      1,699          175
         Direct access                   2,296          72      2,401           88
         Street and highway lighting        79           8         79            9
                                        15,308       1,541     15,248        1,686
         Balancing accounts and other                  352                     (92 )
         Total                                     $ 1,893                 $ 1,594

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 $859 million (27%) in the nine months ended September 30, 2008 to $2.3 billion, and by $469 million (41%) in the three months ended September 30, 2008 to $679 million. The decrease in the nine months included $1.4 billion lower revenues from Sempra Commodities. Revenues for the nine months ended September 30, 2008 and 2007 included $486 million and $1.9 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 $362 million higher revenues at Sempra Generation, primarily due to increased power sales and favorable mark-to-market activity on natural gas and power contracts, $96 million higher revenues at Sempra Pipelines & Storage, primarily from Mexican pipeline operations, and $55 million higher revenues at Sempra LNG, primarily from the commencement of commercial operations at its Energía Costa Azul LNG receipt terminal in May 2008.

The three months ended September 30, 2008 and 2007 included $13 million and $679 million, respectively, for Sempra Commodities. This decrease was partially offset by higher revenues at Sempra Generation, Sempra Pipelines & Storage and Sempra LNG, as for the nine-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 $408 million (43%) in the nine months ended September 30, 2008 to $1.4 billion, and by $100 million (30%) in the three months ended September 30, 2008 to $431 million. The increases were primarily associated with the higher revenues at Sempra Generation, Sempra Pipelines & Storage and Sempra LNG.

Sempra Global and Parent Other Cost of Sales

Sempra Global and Parent other cost of sales for the nine months ended September 30, 2008 and 2007 included $165 million and $796 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 September 30, 2008 and 2007 included $12 million and $256 million, respectively, for Sempra Commodities.

Gains on Sale of Assets

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

Operation and Maintenance

Operation and maintenance expenses decreased by $324 million (15%) in the nine months ended September 30, 2008 to $1.8 billion, and by $194 million (26%) in the three months ended September 30, 2008 to $564 million. The nine months ended September 30, 2008 and 2007 included $243 million and $640 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 September 30, 2008 and 2007 included $3 million and $249 million, respectively, for Sempra Commodities. Excluding amounts for Sempra Commodities, operation and maintenance expenses increased $52 million and $73 million for the

three-month and nine-month periods ended September 30, 2008, respectively. The increases, primarily at SDG&E, were due to higher refundable costs and litigation expense.

Equity Earnings - RBS Sempra Commodities LLP

Earnings (losses) from the company's investment in the newly-formed RBS Sempra Commodities were $(4) million and $142 million in the three months and nine months ended September 30, 2008, respectively. Additional information is provided in the Sempra Commodities discussion in "Business Unit Results" below.

Equity Earnings (Losses) - Other

Equity earnings from other investments recorded before taxes increased by $40 million (364%) in the nine months ended September 30, 2008 to $29 million, and by $13 million in the three months ended September 30, 2008 to $14 million. The increases were primarily due to the start of operations of Rockies Express-West in the first quarter of 2008.

Other Income (Expense), Net

Other income, net, decreased by $49 million (68%) in the nine months ended September 30, 2008 to $23 million. In the three months ended September 30, 2008, other expense, net, was $13 million compared to other income, net, of $4 million in the three months ended September 30, 2007. The decrease in the nine months ended September 30, 2008 was primarily attributable to a $23 million gain from interest-rate swaps in 2007, $23 million higher losses from investments related to the company's executive retirement and deferred compensation plans in 2008, $13 million in Mexican peso exchange losses in 2008 and $8 million lower earnings from the sale of tax credits at Sempra Financial. The decreases were 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 decrease in the three-month period ended September 30, 2008 was primarily attributable to the $13 million in Mexican peso exchange losses, $11 million higher losses from investments related to the company's executive retirement and deferred compensation plans in 2008, offset by a $7 million net loss from interest-rate swaps in 2007.

Interest Income

Interest income decreased by $26 million (42%) in the nine months ended September 30, 2008 to $36 million. The decrease was 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 $39 million (19%) in the nine months ended September 30, 2008 to $165 million, but was comparable for the quarter-to-quarter period. The decrease in the nine months was due to the effect of the repayment of long-term debt in 2007 and lower interest rates, partially offset by higher interest expense primarily from long-term debt issued in September 2007 and June 2008. In addition, the nine months ended September 30, 2008 included $18 million reduced interest expense related to energy crisis litigation reserves.

Income Taxes

Income tax expense was $423 million and $341 million for the nine months ended September 30, 2008 and 2007, respectively, and the effective income tax rates were 36 percent and 31 percent, respectively. Income tax expense was $94 million and $135 million for the three months ended September 30, 2008 and 2007, respectively, and the effective income tax rates were 24 percent and 30 percent, respectively.

The increase in income tax expense for the nine months ended September 30, 2008 was due to higher pretax earnings and a higher effective income tax rate. The increase in the 2008 effective income tax rate was due primarily to the phase-out of synthetic fuels credits in 2007 and higher income tax expense related to Mexican currency translation and inflation adjustments, offset partially by higher favorable resolution of prior years' income tax issues.

The decrease in income tax expense for the three months ended September 30, 2008 was due primarily to lower pretax earnings and a lower effective income tax rate. The decrease in the effective income tax rate was due primarily to higher favorable resolution of prior years' income tax issues.

Equity Earnings, Net of Income Tax

Equity earnings, net of income tax, decreased by $29 million (34%) in the nine months ended September 30, 2008 to $57 million. The decrease for the nine-month period was primarily due to an after-tax gain of $30 million in 2007 at Sempra Commodities from the sale of investments. Equity earnings for the three months ended September 30, 2008 were comparable to the corresponding period in 2007.

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 $18 million (10%) in the nine months ended September 30, 2008 to $190 million and by $14 million (22%) in the three months ended September 30, 2008 to $77 million. The increase in the nine months was primarily attributable to $11 million in higher authorized margin in 2008, net of higher operating expenses, associated with CPUC-regulated operations, $6 million in higher regulatory awards ($7 million in 2008 compared to $1 million in 2007) and $5 million as a result of a lower effective tax rate (excluding the effect of the resolution of prior years' income tax matters), offset by $12 million lower earnings from non-core natural gas storage in accordance with the Omnibus Gas Settlements, as discussed in Note 7 of the Notes to Condensed Consolidated Financial Statements herein and Note 15 of the Notes to Consolidated Financial Statements in the Annual Report. In addition to these factors, the comparative nine-month results were favorably impacted by $7 million from the favorable resolution of a regulatory matter in 2008 and $5 million from the higher favorable resolution of prior years' income tax issues ($4 million favorable in 2008 compared to $1 million unfavorable in 2007), partially offset by $5 million higher expense in 2008 for potential uncollectible customer receivables.

The increase in the three months ended September 30, 2008 included a benefit of $3 million as a result of a lower effective income tax rate (excluding the effect of the resolution of prior years' income tax issues), offset by $4 million in lower earnings from non-core natural gas storage. In addition to these factors, the three-month comparative net income was favorably impacted by $7 million from the favorable resolution of a regulatory matter in 2008, $7 million retroactive impact of the 2008 GRC decision for January 1 through June 30, 2008, and a $5 million increase from the favorable resolution of prior years' income tax issues ($4 million favorable in 2008 compared to $1 million unfavorable in 2007), partially offset by $4 million higher expense in 2008 associated with potential uncollectible customer receivables.

San Diego Gas & Electric Company

Net income increased by $22 million (9%) in the nine months ended September 30, 2008 to $258 million but remained consistent for the quarter-to-quarter periods at $123 million. The increase in the nine months ended September 30, 2008 was primarily attributable to $46 million due to higher authorized margin in 2008, net of higher operating costs, associated with CPUC-regulated operations and $4 million from higher electric transmission margin. In addition to these positive factors, the comparative nine-month results were adversely impacted by $19 million of lower favorable resolution of regulatory matters ($7 million in 2008 compared to $26 million in 2007) and a $16 million higher increase in litigation reserves ($22 million in 2008 compared to $6 million in 2007). Net income also included $19 million and $17 million for the nine-month periods ended September 30, 2008 and 2007, respectively, from the favorable resolution of prior year's income tax issues.

Although net income for the three-month period in 2008 was comparable to the 2007 period, it included $17 million higher CPUC-authorized margin, net of higher operating costs, and $2 million from higher electric transmission margin. Offsetting these positive items for the comparative three-month results were $26 million from the favorable resolution of a regulatory matter in 2007, $16 million due to a higher increase in litigation reserves ($17 million in 2008 compared to $1 million in 2007) and $8 million lower favorable resolution of prior years' income tax issues ($12 million in 2008 compared to $20 million in 2007). The three-month 2008 results also included $33 million for the retroactive impact of the 2008 GRC decision for January 1 through June 30, 2008.

Sempra Commodities

Net income for Sempra Commodities decreased by $132 million (42%) in the nine months ended September 30, 2008 to $181 million and by $95 million (109%) in the three months ended September 30, 2008 to a net loss of $8 million. Recorded results for the second and third quarters of 2008 primarily 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.

The results for the three months and nine months ended September 30, 2008 included $3 million loss and $90 million income, respectively, in equity earnings from RBS Sempra Commodities. The nine-month period in 2008 included a $67 million gain on the transaction with RBS, partially offset by expenses of $36 million, primarily charges for litigation and unfavorable effects from prior years' income tax issues. RBS Sempra Commodities' loss in the third quarter of 2008 was primarily a result of losses in the U.S. power markets, which were related to declining prices and reduced liquidity associated with fewer market participants. The joint venture's other product

lines all generated positive earnings for the quarter, however, they were also adversely impacted by declining prices and reduced market liquidity.

Sempra Generation

Sempra Generation's net income increased by $40 million (33%) in the nine months ended September 30, 2008 to $162 million, and by $36 million (62%) in the three months ended September 30, 2008 to $94 million. The increase for the nine months ended September 30, 2008 was due to $22 million higher earnings primarily due to plant scheduled major maintenance and associated down time in 2007, $16 million higher earnings from favorable prices and merchant sales activities, and a favorable change of $10 million in mark-to-market earnings on long-term forward contracts with RBS Sempra Commodities and other counterparties, partially offset by $9 million of lower net interest income.

The increase for the three months ended September 30, 2008 was primarily due to a favorable change of $25 million in mark-to-market earnings on long-term forward contracts with RBS Sempra Commodities and other counterparties and $8 million lower income tax expense as a result of Sempra Generation's solar investments.

Sempra Pipelines & Storage

Net income for Sempra Pipelines & Storage increased by $34 million (68%) in the nine months ended September 30, 2008 to $84 million, and by $17 million (100%) in the three months ended September 30, 2008 to $34 million. The increase for the nine months ended September 30, 2008 was primarily due to $21 million from Rockies Express-West, which began operations in the first quarter of 2008, $7 million of higher earnings primarily from the commencement of LNG-related pipeline operations in Mexico in the second quarter of 2008, and $7 million from improved operations and $5 million from favorable foreign currency exchange-rate effects from its investments in Chile and Peru, partially offset by $7 million higher taxes related to foreign income.

The increase for the three months ended September 30, 2008 was primarily due to $8 million from the commencement of LNG-related pipeline operations in Mexico, $7 million from Rockies Express-West, and $2 million from improved operations . . .