We provide a description of Sempra Energy and its subsidiaries in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 20112012 Annual Report to Shareholders (Annual Report), which is attached as Exhibit 13.1 to this report and is incorporated by reference.

This report includes information for the following separate registrants:

References in this report to “we,” “our,” “us,” “our company” and “Sempra Energy Consolidated” are to Sempra Energy and its consolidated entities, collectively, unless otherwise indicated by the context.  SDG&E and SoCalGas are collectively referred to as the SempraCalifornia Utilities. They are subsidiaries of Sempra Energy, and Sempra Energy indirectly owns all of the common stock and substantially all of the voting stock of each of the two companies.

Through December 31, 2011, Sempra Energy’s business was organizedprincipal operating units are

During the fourth quarter of 2012, we revised the manner in five separately managedwhich we make resource allocation decisions to our Sempra Mexico segment and assess its performance, as we discuss in Notes 16 and 18 of the Notes to Consolidated Financial Statements in the Annual Report. As a result, we have reclassified certain amounts from Parent and Other, which contains interest and other corporate costs and certain holding company activities, to our Sempra Mexico segment. In accordance with accounting principles generally accepted in the United States (U.S. GAAP), the historical segment disclosures have been restated to be consistent with the current presentation.

All references to “Sempra International,” “Sempra U.S. Gas & Power” and their respective reportable segments consisting of SDG&E, SoCalGas,are not intended to refer to any legal entity with the same or similar name. Sempra Generation, Sempra Pipelines & StorageInternational and Sempra LNG (liquefied natural gas). Our disclosures and financial information in this Form 10-K and Annual Report reflect these five segments. Sempra Generation, Sempra PipelinesU.S. Gas & Storage and Sempra LNG are subsidiaries of Sempra Global. Sempra Global is a holding company for most of our subsidiaries that are not subject to California utility regulation. Sempra Pipelines & StoragePower also ownsown utilities which are not included in our references to the SempraCalifornia Utilities. We provide financial information about eachall of theseour reportable segments and about the geographic areas in which we do business in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 16 of the Notes to Consolidated Financial Statements in the Annual Report.

Company website addresses are:

We make available free of charge on our website our 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 (SEC). The charters of the audit, compensation and corporate governance committees of Sempra Energy’s board of directors (the board), the board’s corporate governance guidelines, and Sempra Energy’s code of business conduct and ethics for directors and officers are posted on Sempra Energy’s website.

SDG&E and SoCalGas make available free of charge via a hyperlink on their websites their annual reports 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 SEC.

Printed copies of all of these materials may be obtained by writing to our Corporate Secretary at Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017.

The information on the websites of Sempra Energy, SDG&E and SoCalGas is not part of this report or any other report that we file with or furnish to the SEC, and is not incorporated herein by reference.

The most significant government regulation affecting Sempra Energy is the regulation of the SempraCalifornia Utilities.

The SempraCalifornia Utilities are regulated in California by the California Public Utilities Commission (CPUC), the California Energy Commission (CEC) and the California Air Resources Board (CARB).

The California Public Utilities Commission:

We provide further discussion in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

SDG&E is also subject to regulation by the CEC, which publishes electric demand forecasts for the state and for specific service territories.  Based upon these forecasts, the CEC:

The CEC conducts a 20-year forecast of available supplies and prices for every market sector that consumes 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 one of many resource materials used to support the SempraCalifornia Utilities’ long-term investment decisions.

In 2010, the State of California required certain California electric retail sellers, including SDG&E, to deliver 20 percent of their retail energy sales from renewable energy sources. The rules governing this requirement, administered by both the CPUC and the CEC, are generally known as the Renewables Portfolio Standard (RPS) Program. In December 2011, California Senate Bill 2(1X) (33% RPS Program) went into effect, superseding the previous RPS program. The 33% RPS Program requires each California utility to procure 33 percent of its annual electric energy requirements from renewable energy sources by 2020, with an average 20 percent required over the three-year period January 1, 2011 through December 31, 2013; 25 percent by December 31, 2016; and 33 percent by December 31, 2020. We discuss this requirement as it applies to SDG&E in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

Certification of a generation project by the CEC as an Eligible Renewable Energy Resource (ERR) allows the purchase of output from such generation facility to be counted towards fulfillment of the RPS Program requirements, if such purchase meets the provisions of California Senate Bill 2(1X). This may affect the demand for output from renewables projects developed by Sempra Generation,Renewables and Sempra Mexico, particularly from California utilities. Final certification as an ERR for Sempra Generation’s El Dorado Solar generation facility was approved in June 2009 and for itsRenewables’ Copper Mountain Solar 1 facility in Nevada, which includes the 10-MW solar facility formerly referred to as El Dorado Solar, is certified as an ERR. Sempra Renewables has also submitted an application for ERR certification for their Copper Mountain Solar 2 facility. We plan to obtain ERR certification for all of our renewable facilities operating in February 2011.and/or providing power to California as they become operational.

The SempraCalifornia Utilities are also regulated by the Federal Energy Regulatory Commission (FERC) and, the Nuclear Regulatory Commission (NRC) and the U.S. Department of Transportation (DOT).

In the case of SDG&E, 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.

In the case of SoCalGas, the FERC regulates the interstate sale and transportation of natural gas and the uniform systems of accounts.

The NRC oversees the licensing, construction and operation of nuclear facilities in the United States, including the San Onofre Nuclear Generating Station (SONGS), in which SDG&E owns a 20-percent interest. 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 reanalyze the design of a nuclear power plant and, as a result, may require plant modifications as a condition of continued operation. We provide further discussion of current SONGS matters involving the NRC in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

The Department of Transportation (DOT)DOT has established regulations regarding engineering standards and operating procedures applicable for the SempraCalifornia Utilities’ natural gas transmission and distribution pipelines. The DOT has certified the CPUC to administer oversight and compliance with these regulations for the entities they regulate in California.

SoCalGas has natural gas franchises with the 12 counties and 233 cities in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. Most of the franchises have indefinite lives with no expiration date. Some franchises have fixed expiration dates, ranging from 20122013 to 2048.2062.

SDG&E has

These franchises allow SDG&E to locate, operate and maintain facilities for the transmission and distribution of electricity and/or natural gas. Most of the franchises have indefinite lives with no expiration dates. Some natural gas franchises have fixed expiration dates, ranging from 2012 to 2035, and some electric franchises have fixed expiration dates that range from 20122015 to 2018.2037.

Sempra Generation, Sempra Pipelines & Storage and Sempra LNG have operations or development projects in Alabama, Arizona, California, Colorado, Hawaii, Indiana, Kansas, Louisiana, Mississippi, Nevada, Pennsylvania and Texas. These entities are subject to state and local laws, and to regulations in the states in which they operate.

Sempra Pipelines & Storage alsoRenewables has operations or development projects in Arizona, California, Colorado, Hawaii, Indiana, Kansas, Nevada and Pennsylvania. Sempra Natural Gas develops and operates natural gas storage and related pipeline facilities in Alabama, Louisiana and Mississippi, operates its Mesquite natural gas generation facility in Arizona and ishas marketing operations in Texas. Sempra Natural Gas also operates Willmut Gas Company (Willmut Gas), a natural gas distribution utility serving Hattiesburg, Mississippi and regulated by the Mississippi Public Service Commission. These entities are subject to regulationstate and local laws, and to regulations in the states in which the storage facilities are located.they operate.

In the United States, the FERC, with ratemaking authority over wholesale sales of wholesale power and the transportation and storage of natural gas in interstate commerce, and siting and permitting authority for LNGliquefied natural gas (LNG) terminals, regulates Sempra Generation’s, Sempra Pipelines & Storage’sRenewables’ and Sempra LNG’sNatural Gas’ operations. Sempra Pipelines & StorageNatural Gas also owns an interest in the Rockies Express Pipeline, a natural gas pipeline whichthat operates in several states in the United States and is subject to regulation by the FERC. We discuss our investment in the pipeline further in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report.

The FERC may regulate rates and terms of service based on a cost-of-service approach or, in geographic and product markets determined by the FERC to be sufficiently competitive, rates may be market-based. Our LNG terminal in the United States is subject to market-based rates and terms of service. FERC-regulated rates at the following businesses are

Sempra Pipelines & StorageNatural Gas is also subject to DOT rules and regulations regarding pipeline safety.

Several of our segments operateOur Sempra Mexico segment owns and operates the following in Mexico as follows:Mexico:

These operations are subject to regulation by the Energy Regulatory Commission (Comisión Reguladora de Energía, or CRE) and by the labor and environmental agencies of city, state and federal governments in Mexico.

The SempraCalifornia Utilities obtain numerous permits, authorizations and licenses in connection with the transmission and distribution of natural gas and electricity and the operation and construction of related assets, some of which may require periodic renewal.

Our other subsidiaries are also required to obtain numerous permits, authorizations and licenses in the normal course of business. Some of these permits, authorizations and licenses require periodic renewal.

Most of the permits and licenses associated with construction and operations within the Sempra LNG obtainsRenewables and Sempra Natural Gas businesses are for periods generally in alignment with the construction cycle or life of the asset and in many cases greater than 20 years. We do not anticipate that our ongoing requirement to renew or extend shorter duration permits and licenses and permits forwould have a material impact to the operation and expansionongoing operations of LNG facilities, and the import and export of LNG and natural gas.these businesses.

We describe other regulatory matters in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

SoCalGas and SDG&E sell, distribute and transport natural gas. SoCalGas purchases and stores natural gas for itselfits core customers and SDG&E&E’s core customers on a combined portfolio basis and provides natural gas storage services for others. The SempraCalifornia Utilities’ resource planning, natural gas procurement, contractual commitments, and related regulatory matters are discussed below. We also provide further discussion in the Annual Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 14 of the Notes to Consolidated Financial Statements.Statements in the Annual Report.

For regulatory purposes, end-use customers are classified as either core or noncore customers. Core customers are primarily residential and small commercial and industrial customers. Noncore customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and enhanced oil recovery customers. WholesaleSoCalGas’ wholesale customers are primarily other investor-owned utilities (IOUs), including SDG&E, or municipally owned natural gas distribution systems. Noncore customers at SDG&E consist primarily of electric generation and large commercial and industrial customers.

Most core customers purchase natural gas directly from SoCalGas or SDG&E. While core customers are permitted to purchase directly from producers, marketers or brokers, the SempraCalifornia Utilities are obligated to provide reliable supplies of natural gas to serve the requirements of their core customers. Noncore customers are responsible for the procurement of their natural gas requirements.

In 2011,2012, SoCalGas added 15,000approximately 18,000 new connected natural gas customer meters, at arepresenting an annual growth rate of 0.3 percent; in 2010,2011, it added 24,000approximately 15,000 new connected meters, at arepresenting an annual growth rate of 0.40.3 percent. SDG&E’s activeconnected natural gas customer meters increased by approximately 5,000 in both 2012 and 4,300 in 2011, and 2010, respectively, representing increasesan annual growth rate of 0.6 percent and 0.5 percent, respectively.in both years. Based on forecasts of new housing starts, SoCalGas and SDG&E each expects that its new meter annual growth rates in 20122013 will be slightly higher than those in 2011.2012.

To ensure the delivery of the natural gas supplies to its distribution system and to meet the seasonal and annual needs of customers, SoCalGas has entered into firm interstate pipeline capacity contracts that require the payment of fixed reservation charges to reserve firm transportation rights. Pipeline companies, primarily El Paso Natural Gas Company, Transwestern Pipeline Company, Gas Transmission Northwest, Pacific Gas &and Electric Company, and Kern River Gas Transmission Company, provide transportation services into SoCalGas’ intrastate transmission system for supplies purchased by SoCalGas or its transportation customers from outside of California. These contracts expire on various dates between 2013 and 2028. The FERC regulates the rates that interstate pipeline companies may charge for natural gas and transportation services.

SoCalGas provides natural gas storage services for core, noncore and non-end-use customers. The SempraCalifornia Utilities’ core customers are allocated a portion of SoCalGas’ storage capacity. SoCalGas offers the remaining storage capacity for sale to others, including SDG&E for its non-core customer requirements, through an open bid process. The storage service program provides opportunities for these customers to purchase and store natural gas when natural gas costs are low, usually during the summer, thereby reducing purchases when natural gas costs are expected to be higher. This program allows customers to better manage their natural gas procurement and transportation needs.

Growth in the demand for natural gas largely depends on the health and expansion of the Southern California economy, prices of alternative energy products, environmental regulations, renewable energy, legislation, and the effectiveness of energy efficiency programs. 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 also result in significant shifts in market price, which may in turn impact demand.

The SempraCalifornia Utilities face competition in the residential and commercial customer markets based on customers’ preferences for natural gas compared with other energy products. In the noncore industrial market, some customers are capable of securing alternate fuel supplies from other suppliers which can affect the demand for natural gas. The SempraCalifornia Utilities’ ability to maintain their respective industrial market shares is largely dependent on the relative spread between delivered energy prices.

Natural gas demand for electric generation within Southern California competes with electric power generated throughout the western U.S. Natural gas transported for electric generating plant customers may be affected by the growth in renewable generation, the addition of more efficient gas technologies and to the extent that regulatory changes and electric transmission infrastructure investment divert electric generation from the SempraCalifornia Utilities’ respective service areas. The demand may also fluctuate due to volatility in the demand for electricity and the availability of competing supplies of electricity such as hydro-electrichydroelectric generation and other renewable energy sources. We provide additional information regarding the electric industry in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

The natural gas distribution business is seasonal, and revenues generally are greater during the winter heating months. As is prevalent in the industry, SoCalGas 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.

SDG&E’s service area covers 4,100 square miles. At December 31, 2011,2012, SDG&E had 1.4 million customer meters consisting of:of approximately:

SDG&E’s active electric customer meters increased by approximately 7,000 and 8,000 in 2012 and 7,000 in 2011, and 2010, respectively, representing increasesannual growth rates of 0.5 percent and 0.6 percent, and 0.5 percent, respectively. Based on forecasting of new housing starts, SDG&E expects the number of active meters to increase in 20122013 by approximately 9,700,11,000, representing an increasea growth rate of 0.70.8 percent.

SDG&E’s resource planning, power procurement and related regulatory matters are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report.

The supply of electric power available to SDG&E for resale is based on CPUC-approved purchased-power contracts currently in place with its various suppliers, its fullywholly owned generating facilities, its 20-percent ownership interest in SONGS (when SONGS returns to service) and purchases on a spot basis. This supply as of December 31, 20112012 is as follows:

Under the contract with PGE,Portland General Electric Company (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-availableas-generated energy, and are based on the amount of energy received or are tolls based on available capacity. The prices under these contracts are based on the market value at the time the contracts were negotiated.

SDG&E buys natural gas under short-term contracts for its Palomar, Miramar, Desert Star and Cuyamaca Peak generating facilities and for the Otay Mesa Energy Center LLC, Orange Grove Energy L.P., and El Cajon Energy, LLC tolling contracts. Purchases are from various southwestern U.S. suppliers and are primarily priced based on published monthly bid-week indices. SDG&E’s natural gas is typically delivered from southernSouthern California border receipt points to the SoCal CityGate pool via backbone transmission system rights which expire on September 30, 2014.  The natural gas is then delivered from the SoCal CityGate pool to the generating facilities through SoCalGas’ pipelinesand SDG&E’s pipeline systems in accordance with a transportation agreement that expires on May 31, 2012.2013. SDG&E will be executing a new two-year transportation agreement that will be effective June 1, 2013. SDG&E has also contracted with SoCalGas for natural gas storage from April 1, 20112012 to March 31, 2012.

SDG&E has a 20-percent ownership interest in SONGS, which is located south of San Clemente, California. SONGS consists of two operating nuclear generating units. The city of Riverside owns 1.79 percent and Southern California Edison Company (Edison), the operator of SONGS, owns the remaining interest.interest of 78.21 percent.

The two units began commercial operation in August 1983 and April 1984, respectively. SDG&E’s share of the capacity from the two units is 430 MW. In 2005, the CPUC authorized a project to install four new steam generators in Units 2 and 3 at SONGS and remove and dispose of their predecessor generators. Edison completed the installation of these steam generators in 2010 and 2011 for Units 2 and 3, respectively. In January 2012, a water leak occurred in the Unit 3 steam generator which caused it to be shut down. Edison conducted inspection testing and determined that the water leak was the result of excessive wear from tube-to-tube contact. During a planned maintenance and refueling outage on the Unit 2 steam generators in February 2012, inspections found high levels of unexpected wear in some heat transfer tubes of the Unit 2 steam generators. As of December 31, 2012, both Units 2 and 3 remain offline. The units cannot be restarted until plans have been approved by the NRC. In October 2012, Edison submitted a restart plan for Unit 2 to the NRC. Unit 3 will remain offline while Edison continues to study the potential solutions that are unique to that unit. We discuss the current SONGS outage, inspection and repair issues and related regulatory matters in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

A third unit was removed from service in November 1992. Decommissioning of that unit is largely complete, with the remaining work to be done in the future when the remaining two units are decommissioned. Its spent nuclear fuel is being stored on site in an independent spent fuel storage installation (ISFSI) licensed by the NRC.

SDG&E has fully recovered the capital it invested in SONGS through December 31, 2003 in SONGS and earns a return only on subsequent capital additions, including SDG&E’s share of costs associated with the steam generator replacement project, completed in 2011.

As we discuss in “Item 1A. Risk Factors” herein, our influence may be limited over businesses in which we do not have a controlling interest, including SONGS. We provide additional information concerning the SONGS units and nuclear decommissioning below in “Environmental Matters” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 6, 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report.

The nuclear fuel supply cycle includes materials and services performed by others under various contracts that extend through 2020. Fuel supply contracts are index-priced and provide nuclear fuel through 2022, the expiration of SONGS’ NRC license.

Spent fuel from SONGS is being stored on site in both the ISFSI and spent fuel pools. With the completion of the current phase of decommissioning, the site has adequate space to build ISFSI storage capacity through 2022. 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 approximately $3 million per year.year when SONGS is operating at normal capacity. It is uncertain when the DOE will begin accepting spent fuel from any nuclear generation facility.

We provide additional information concerning nuclear fuel costs and the storage and movement of spent fuel in Notes 6 and 15, respectively, of the Notes to Consolidated Financial Statements in the Annual Report.

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 300 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, including market-based rates, preapproved by the FERC.

SDG&E’s 500-kilovolt (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, California. SDG&E’s share of the line is 1,162 MW, although it can be less under certain system conditions.

Mexico’s Baja California system is connected to SDG&E’s system via two 230-kV interconnections with combined capacity ofup to 408 MW in the north to south direction and 800 MW in the south to north direction, although it can be less under certain system conditions.

Edison’s transmission is connected to SDG&E’s system at SONGS via five 230-kV interconnectionstransmission lines with a total firm capacity ofup to 2,500 MW into SDG&E’s system, although it can be less under certain system conditions.

The National Energy Policy Act governs procedures for requests for transmission service. The FERC approved the California IOUsIOUs’ transfer of operation and control of their transmission facilities to the Independent System Operator in 1998. We provide additional information regarding transmission issues in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

Chilquinta Energía is an electric distribution utility serving approximately 600,000620,000 customers in the cities of Valparaiso and Viña del Mar in central Chile, with a main service area covering 4,400 square miles. At December 31, 2011,2012, its customers consisted of:of approximately:

In Chile, customers are also classified as regulated and non-regulated customers dependingbased on consumption.installed capacity. Regulated customers are those whose consumptioninstalled capacity is less than 500 kW.kilowatts (kW). Non-regulated customers are those whose consumptioninstalled capacity is greater than 2,000 kW. Customers with consumptioninstalled capacity between 500 kW and 2,000 kW may choose to be classified as regulated or non-regulated. Non-regulated customers can buy power from other sources, such as directly from the generator.

In 2011,2012, Chilquinta Energía added 16,000approximately 14,000 new customers at a growth rate of three2.3 percent. Chilquinta Energía expects that its customer growth rate in 20122013 will be comparable to that in 2011.2012.

The supply of electric power available to Chilquinta Energía comes from power purchase contracts currently in place with its various suppliers and its generating facilities. This supply as of December 31, 20112012 is as follows:

The Centers for Economic Load Dispatch (Centros de Despacho Económico de Carga, or CDEC) are private organizations in charge of coordinating the operation of the electricity system.  Each interconnected system is subject to its own CDEC, henceCDEC; there is a CDEC-SIC (Sistema Interconectado Central, Central Interconnected System) and CDEC-SING (Sistema Interconectado del Norte Grande, Northern Interconnected System) for the central and the northern interconnected system, respectively.  Chilquinta Energía operates within CDEC-SIC.

Chile’s transmission system is divided into two parts, main transmission (sistema de transmisión troncal) and the sub-transmission (sistema de subtransmisión). In Chile, main transmission lines must be greater than or equal to 220 kV. Chilquinta Energía uses the company Transelec, a third party, for all of its main transmission. In general, sub-transmission systems operate at voltage levels greater than 23 kV and lower than or equal to 110 kV. Sub-transmission systems, including those owned by Chilquinta Energía, are comprised of infrastructure that is interconnected to the electricity system and geared exclusively toward supplyingto supply non-regulated or regulated end-users located in the distribution service area.

Luz del Sur is an electric distribution utility serving approximately 900,000950,000 customers in the southern zone of metropolitan Lima, Peru, with a main service area covering 1,160 square miles. At December 31, 2011,2012, its customers consisted of:of approximately:

In Peru, customers are also classified as regulated and non-regulated customers dependingbased on consumption.capacity demand. Regulated customers are those whose consumptioncapacity demand is less than 200 kW and their energy supply is considered public service. Customers with consumptioncapacity demand between 200 kW and 2,500 kW may choose to be classified as regulated or non-regulated.

In 2011,2012, Luz del Sur added 35,000approximately 33,000 new customers at a growth rate of four3.6 percent. Luz del Sur expects that its customer growth rate in 20122013 will be comparable to that in 2011.2012.

The supply of electric power available to Luz del Sur comes from power purchase contracts currently in place with various suppliers, as well as purchases made on a spot basis. This supply as of December 31, 20112012 is as follows:

The Sistema Eléctrico Interconectado Nacional (SEIN) is the Peruvian national interconnected system.  Peru also has several isolated regional and smaller systems that provide electricity to specific areas. The OSINERGMIN is an autonomous public regulatory entity that controls and enforces compliance with legal and technical regulations related to electricalelectric activities, sets tariffs and supervises the bidding processes required by distribution companies to purchase energy from generators.  

Transmission lines in Peru are divided into principal and secondary systems. The principal system lines are accessible by all generators and allow the flow of energy through the national grid. The secondary system lines connect principal transmission with the network of distribution companies or connect directly to certain final customers. The transmission company receives tariff revenues and collects tolls based on a charge per unit of electricity.

We provide information concerning rates and regulation applicable to the Sempra Utilities and Sempra Pipelines & Storage’sour utilities in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 1 and 14 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra Global is a holding company forInternational and Sempra U.S. Gas & Power contain most of our subsidiaries that are not subject to California utility regulation. Sempra Global includes Sempra Generation, Sempra Pipelines & Storage and Sempra LNG. In addition to the discussion of Sempra Pipelines and Storage’sour South American utilities above, we provide descriptions of these business unitsoperating units’ segments and information concerning their operations underin “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 1, 3, 4, 15 and 16 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra Energy’s non-utility businesses are among many others in the energy industry providing similar products and services. They are engaged in highly competitive activities that require significant capital investments and highly skilled and experienced personnel. Many of theirAmong these competitors there may have significantly greaterbe significant variation in financial, personnel and other resources thancompared to Sempra Global.International and Sempra U.S. Gas & Power.

Sempra Renewables primarily competes for wholesale contracts for the generation and sale of electricity through its development of and investments in wind and solar generation facilities. For sales of non-contracted renewable energy, Sempra Renewables competes with other non-utility generators, regulated utilities, unregulated subsidiaries of regulated utilities, and other energy service companies. The number and type of competitors may vary based on location, generation type and project size. Also, recently enacted regulatory initiatives designed to enhance energy consumption from renewable resources for regulated utility companies may increase competition from these types of institutions. These utilities may have a lower cost of capital than most independent renewable power producers and often are able to recover fixed costs through rate base mechanisms. This recovery allows them to build, buy and upgrade renewable generation projects without relying exclusively on market clearing prices to recover their investments.  Additionally, generation from Sempra Renewables’ renewable energy assets is exposed to fluctuations in naturally occurring conditions such as wind, inclement weather and hours of sunlight.

For sales of non-contracted power, Sempra GenerationNatural Gas is subject to competition from energy marketers, utilities, industrial companies and other independent power producers. For a number of years, natural gas has been the fuel of choice for new power generation facilities for economic, operational and environmental reasons. While natural gas-fired facilities will continue to be an important part of the nation’s generation portfolio, some regulated utilities are now constructing units powered by renewable resources, often with subsidies or under legislative mandate. These utilities may have a lower cost of capital than most independent power producers and often are able to recover fixed costs through rate base mechanisms. This recovery allowsmay allow them to build, buy and upgrade generation without relying exclusively on market clearing prices to recover their investments.

When Sempra GenerationNatural Gas sells power not subject to long-term contract commitments, it is exposed to market fluctuations in prices based on a number of factors, including the amount of capacity available to meet demand, the price and availability of fuel, and the presence of transmission constraints. Additionally, generation from Sempra Generation’s renewable energy assets is exposed to fluctuations in naturally occurring conditions such as wind, weather and hours of sunlight. Some of Sempra Generation’sour competitors, such as electric utilities and generation companies, have their own generation capacity, including natural gas, coal and nuclear generation.  These companies, generally larger than Sempra Generation,our segments engaged in the natural gas business, may have a lower cost of capital and may have competitive advantages as a result of their scale and the location of their generation facilities.

Sempra Generation’sOur natural gas generation competitors include, among others:

Within its market area, Sempra Pipelines & Storage’s natural gasNatural Gas’ and Sempra Mexico’s pipelines businesses and Sempra Natural Gas’ storage facilities and pipelinesbusinesses compete with other regulated and unregulated storage facilities and pipelines. It competesThey compete primarily on the basis of price (in terms of storage and transportation fees), available capacity and connectionsinterconnections to downstream markets.

Sempra Pipelines & Storage’sNatural Gas’ competitors include, among others:

New supplies to meet North America’s natural gas demand may be developed from a combination of the following sources:

In addition, the demand for energy currently met by natural gas could be met by other energy forms such as coal, hydroelectric, oil, wind, solar, geothermal, biomass and nuclear energy. SempraOur LNG businesses will, therefore, face competition from companies that supply each of these energy sources.

SempraFrom time to time, our LNG currently competesbusinesses compete with other companies that operate LNG receiving terminals, purchase and sell LNG and purchase and sell LNG.natural gas. As of December 31, 2011,2012, there were 1416 existing and operating LNG receipt terminals in North America. There is one additional LNG receipt terminal currently under construction in North America. Worldwide, there are 8794 existing and operating LNG receipt terminals in 2526 countries. There are also other proposed LNG receipt terminals worldwide with which, if developed, Sempraour LNG businesses would compete to be the most economical delivery point for LNG supply of both long-term contracted and spot volumes.

Sempra LNG’sOur current LNG businesses’ major domestic and international competitors include, among others, the following companies and their related LNG affiliates:

We discuss environmental issues affecting us in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report. You should read the following additional information in conjunction with those discussions.

In 1994, the CPUC approved the Hazardous Waste Collaborative mechanism, allowing California’s IOUs to recover hazardous waste cleanup costs for certain sites, including those related to certain Superfund sites. This mechanism permits the SempraCalifornia Utilities to recover in rates 90 percent of hazardous waste cleanup costs and related third-party litigation costs, and 70 percent of the related insurance-litigation expenses. In addition, the SempraCalifornia Utilities have the opportunity to retain a percentage of any recoveries from insurance carriers and other third parties to offset the cleanup and associated litigation costs not recovered in rates.

At December 31, 2011,2012, we had accrued estimated remaining investigation and remediation liabilities of $0.6$0.7 million at SDG&E and $23.4$15.9 million at SoCalGas, both related to hazardous waste sites for which the Hazardous Waste Collaborative mechanism authorizes us to recover 90 percent of the costs.applies, as described above. The accruals include costs for numerous locations, most of which had been manufactured-gas plants.plants at SoCalGas. This estimated cost excludes remediation costs of $1$0.2 million associated with SDG&E’s former fossil-fuel power plants and other locations for which the cleanup costs are not being recovered in rates. We believe that any costs not ultimately recovered through rates, insurance or other means will not have a material adverse effect on the consolidated results of operations, cash flows or financial condition of Sempra Energy, SDG&E or SoCalGas.

We record estimated liabilities for environmental remediation when amounts are probable and estimable. In addition, we record amounts authorized to be recovered in rates under the Hazardous Waste Collaborative mechanism as regulatory assets.

The electric and natural gas industries are subject to increasingly stringent air-quality and greenhouse gas standards, such as those established by the United States Environmental Protection Agency (EPA) and the CARB. We discuss these standards in “Government Regulation – California Utility Regulation” above. The SempraCalifornia Utilities generally recover in rates the costs to comply with these standards.

In connection with the issuance of operating permits, SDG&E and the other owners of SONGS have an agreement with the California Coastal Commission to mitigate environmental impacts to the marine environment attributed to the cooling-water discharge from SONGS. SDG&E’s share of the mitigation costs is estimated to be $55$48 million, of which $38 million had been incurred through December 31, 2011,2012, and $17$10 million is accrued for the remaining costs through 2050. In 2008, an artificialArtificial kelp reef, project was completed.fish hatchery and wetlands restoration projects are complete, but continue to be studied until the California Coastal Commission accepts the projects. The remaining costs are to complete a wetlands project and maintain boththe projects through 2050.

EachWith the exception of Mr. Mihalik, each executive officer has been an officer of Sempra Energy or its subsidiaries for more than the last five years. Before joining Sempra Energy in July 2012, Mr. Mihalik served as Senior Vice President of Finance for the past two years and as Vice President—Controller for the prior four years, in each case at Iberdrola Renewables Holdings, Inc., a diversified renewables and natural gas company.

EachWith the exception of Mr. Arriola, each executive officer of SDG&E and SoCalGas has been an officer or employee of Sempra Energy or its subsidiaries for more thanat least the last five years. Mr. Arriola was a Senior Vice President and the Chief Financial Officer of SDG&E and SoCalGas from September 2006 to November 2008, and held numerous management positions with Sempra Energy or its subsidiaries prior to that.  In November 2008, Mr. Arriola became a Senior Vice President and the Chief Financial Officer of SunPower Corporation.  From April 2010 to March 2012, he was the Executive Vice President and Chief Financial Officer of SunPower.  In August 2012, he rejoined SoCalGas as President and Chief Operating Officer, and in December 2012 also joined the SoCalGas Board of Directors.

As of December 31, each company had the following number of employees:

Field, technical and most clerical employees at SoCalGas are represented by the Utility Workers Union of America or the International Chemical Workers Union Council (collectively “Union”) under a single collective bargaining agreement. The collective bargaining agreement for these employees covering wages, hours, working conditions and medical and other benefit plans expiredwas ratified on October 14, 2011, with SoCalGasMarch 1, 2012, and the Union agreeing to continue operating under the terms and conditions of the expired contract while negotiating a new agreement. A tentative agreement was reached between SoCalGas and Union leadership onis effective January 29,1, 2012 which is subject to ratification by the membership of the Union. SoCalGas anticipates this ratification may occur either late first or early second quarter of 2012.through September 30, 2015.

Field employees and some clerical and technical employees at SDG&E are represented by the International Brotherhood of Electrical Workers. Provisions of the collective bargaining agreement for these employees covering wages are in effect through August 31, 2014 and through August 31, 2015, for hours and working conditions. For these same employees, the agreement covering pension and savings plan benefits is in effect through December 4, 2012,October 1, 2015, and the agreement covering health and welfare benefits is in effect through December 31, 2013.

Field, technical and administrative employees at Luz del Sur representing 3937 percent of the total workforce are represented by the Unified Trade Union of Electricity Workers of Lima and Callao, and the Trade Union of Employees of Electrolima. TheA collective bargaining agreement coveringsigned on December 13, 2012 covers these employees and is also extended to 118 nonrepresented125 non-represented employees. It covers wages, working conditions and medical and other benefit plans and is in effect from January 1, 2013 through December 31, 2012.2013.

Field, technical and administrative employees at Chilquinta Energía and its subsidiaries are represented by Labor Union Number 1 Chilquinta Energía, Litoral Labor Union and Tecnored Labor Union Number 1. The collective bargaining agreements for employees represented by these unions cover wages, hours, working conditions and medical and other benefit plans and are in effect through various dates in 2013.

Professional employees at Chilquinta Energía are represented by Group of University Graduates of Chilquinta Energía. The collective bargaining agreement for these employees covers wages, hours, working conditions and medical and other benefit plans and is in effect through August 31, 2013.

Sempra Energy’s ability to pay dividends and meet its debt obligations depends almost entirely on cash flows from its subsidiaries and, in the short term, its ability to raise capital from external sources. In the long term, cash flows from the subsidiaries depend on their ability to generate operating cash flows in excess of their own capital expenditures and long-term debt obligations. In addition, the subsidiaries are separate and distinct legal entities and could be precluded from making such distributions under certain circumstances, including, without limitation, as a result of legislation, regulation, court order, contractual restrictions or in times of financial distress.

Our businesses are capital intensive and we rely significantly on long-term debt to fund a portion of our capital expenditures and refund outstanding debt, and on short-term borrowings to fund a portion of day-to-day business operations.

The credit markets and financial services industry have experienced a period of extreme world-wide turmoil characterized by the bankruptcy, failure, collapse or sale of many financial institutions and by extraordinary levels of government intervention and proposals for further intervention and additional regulation.

Limitations on the availability of credit and increases in interest rates or credit spreads may materially adversely affect our liquidity,businesses, cash flows, results of operations, and financial condition and/or prospects, as well as our ability to meet contractual and other commitments. In difficult credit markets, we may find it necessary to fund our operations and capital expenditures at a higher cost or we may be unable to raise as much funding as we need to support business activities. This could cause us to reduce capital expenditures and could increase our cost of funding, both of which could significantly reduce our short-term and long-term profitability.

The availability and cost of credit for our businesses may be greatly affected by credit ratings. If the credit ratings of SoCalGas or SDG&E were to be reduced, their businessescash flows and results of operations could be materially adversely affected and any reduction in Sempra Energy’s ratings could materially adversely affect the cash flows and results of operations of Sempra Energy and its non-utility subsidiaries.

In recent years, the regulatory environment that applies to the electric power and natural gas industries has undergone significant changes, on both federal and state levels. These changes have affected the nature of these industries and the manner in which their participants conduct their businesses. These changes are ongoing, and we cannot predict the future course of changes in this regulatory environment or the ultimate effect that this changing regulatory environment will have on our businesses. Moreover, existing regulations, laws and tariffs may be revised or reinterpreted, and new regulations, laws and tariffs may be adopted or become applicable to us and our facilities. Special tariffs may also be imposed on components used in our businesses that could increase costs if applicable. Our businesses are subject to increasingly complex accounting and tax requirements, and the regulations, laws and tariffs that affect us may change in response to economic or political conditions. Compliance with these requirements could increase our operating costs, and new tax legislation, regulations or other interpretations could materially adversely affect our tax expense. Changes in regulations, laws and tariffs and changes in the way regulations, laws and tariffs are implemented and interpreted may have a material adverse effect on our businesses, cash flows, financial condition, and results of operations.operations and/or prospects. 

Our operations are subject to rules relating to transactions among the SempraCalifornia Utilities and other Sempra Energy operations. These rules are commonly referred to as the Affiliate Transaction Rules. These businesses could be materially adversely affected by changes in these rules or by additional CPUC or FERC rules that further restrict our ability to sell electricity or natural gas, or to trade with the SempraCalifornia Utilities and with each other. Affiliate Transaction Rules also could require us to obtain prior approval from the CPUC before entering into any such transactions with the SempraCalifornia Utilities. Any such restrictions or approval requirements could materially adversely affect the LNG terminals, natural gas pipelines, electric generation facilities, or other operations of our subsidiaries, which could have a material adverse effect on our cash flows, financial condition andbusinesses, results of operations.operations and/or prospects.

All of our existing and planned development projects require multiple approvals. The acquisition, construction, ownership and operation of LNG terminals, natural gas pipelines and storage facilities, and electric generation and transmission facilities require numerous permits, licenses, certificates and other approvals from federal, state, local and foreign governmental agencies. Once received, approvals may be subject to litigation, and projects may be delayed or approvals reversed in litigation. In addition, permits, licenses, certificates, and other approvals may be modified or rescinded by one or more of the governmental agencies and authorities that oversee our businesses. If there is a delay in obtaining any required regulatory approvals or if we fail to obtain or maintain any required approvals or to comply with any applicable laws or regulations, we may not be able to construct or operate our facilities, or we may be forced to incur additional costs. Any such delay or failure to obtain or maintain the necessary permits, licenses, certificates and other approvals could cause our sales to materially decline, and/or our costs to increase, and otherwise materially adversely affect our businesses.businesses, cash flows, financial condition, results of operations and/or prospects.

The scope and effect of new environmental laws and regulations, including their effects on our 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 negative effects on our operations, operating costs, and the scope and economics of proposed expansion.expansion, which could have a material adverse effect on our results of operations, cash flows and/or prospects. In particular, state-level laws and regulations, as well as proposed national and international legislation and regulation relating to the control and reduction of GHG emissions (including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride), may materially limit or otherwise materially adversely affect our operations. The implementation of recent and proposed California and federal legislation and regulation may materially adversely affect our unregulated businesses by imposing, among other things, additional costs associated with emission limits, controls and the possible requirement of carbon taxes or the purchase of emissions credits. Similarly, the SempraCalifornia Utilities may be materially adversely affected if these additional costs are not recoverable in rates. TheEven if recoverable, the effects of existing and proposed greenhouse gas emission reduction standards may cause rates to increase to levels that substantially reduce customer demand and growth. SDG&E may also be subject to significant penalties and fines if certain mandated renewable energy goals are not met.

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 materially adversely affect our businesses and profitability.results of operations and/or cash flows. Moreover, existing rules and regulations may be interpreted or revised in ways that may materially adversely affect our facilities,results of operations and profitability.and/or cash flows. 

We provide further discussion of these matters in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report. 

Like other major industrial facilities, ours may be damaged by natural disasters, catastrophic accidents, or acts of terrorism. Because we are in the business of using, storing, transporting and disposing of highly flammable and explosive materials, as well as radioactive materials, and operating highly energized equipment, the risk to our facilities and infrastructure, as well as the risks to the surrounding communities is substantially greater than a typical business. Such facilities and infrastructure include, but are not limited to:

Such incidents could result in severe business disruptions, significant decreases in revenues, and/or significant additional costs to us. Any such incident could have a material adverse effect on our businesses, financial condition, results of operations, and cash flows.flows and/or prospects.

Depending on the nature and location of the facilities and infrastructure affected, any such incident also could cause catastrophic fires, leaks, radioactive releases, explosions, spills or other significant damage to natural resources or property belonging to third parties, or cause personal injuries or fatalities. Any of these consequences could lead to significant claims against us. In some cases, we may be liable for damages even though we are not at fault, and in cases where the concept of inverse condemnation applies, we may be liable for damages without being found to be at fault or to have been negligent. Insurance coverage may significantly increase in cost or become unavailable for certain of these risks, and any insurance proceeds we receive may be insufficient to cover our losses or liabilities, which could materially adversely affect our businesses, financial condition, results of operations, and cash flows.flows and/or prospects.

Sempra Energy and its subsidiaries are defendants in numerous lawsuits. We have spent, and continue to spend, substantial amounts of money and time defending these lawsuits, and in related investigations and regulatory proceedings. In particular, SDG&E is subject to numerous lawsuits arising out of San Diego County wildfires in 2007. We discuss this and other litigationthese proceedings in Note 15 of the Notes to Consolidated Financial Statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. The uncertainties inherent in legal proceedings make it difficult to estimate with any degree of certainty the costs and effects of resolving these matters. In addition, California juries have demonstrated a willingness to grant large awards, including punitive damages, in personal injury, product liability, property damage and other claims. Accordingly, actual costs incurred may differ materially from insured or reserved amounts and may not be recoverable in whole or in part from our customers, which in each case could materially adversely affect our business,businesses, cash flows, results of operations andand/or financial condition.

In addition, certain of the Notescontracts we use for hedging purposes are subject to Consolidated Financial Statementsfair value accounting. Such accounting may result in gains or losses in earnings for that contract. In certain cases, these gains or losses may not reflect the associated losses or gains of the underlying position being hedged.

Although we have in place risk management systems and control systems that use advanced methodologies to quantify and manage risk, these systems may not always prevent material losses. Risk management procedures may not always be followed as required by the companies or may not always work as planned. In addition, daily value-at-risk and loss limits are based on historic price movements. If prices significantly or persistently deviate from historic prices, the limits may not protect us from significant losses. As a result of these and other factors, there is no assurance that our risk management procedures will prevent losses that would materially adversely affect our results of operations, cash flows and/or financial condition.

Several of our businesses have entered into and have in “Management’s Discussionplace collective bargaining agreements with different labor unions. Our collective bargaining agreements are generally negotiated on a facility-by-facility basis.

Any failure to reach an agreement on new labor contracts or to negotiate these labor contracts might result in strikes, boycotts or other labor disruptions. These potential labor disruptions could have a material adverse effect on our businesses, results of operations and/or cash flows. Labor disruptions, strikes or significant negotiated wage and Analysisbenefit increases, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our businesses, results of Financial Condition and Results of Operations” in the Annual Report.operations and/or cash flows.

Cybersecurity and the protection of our operations and activities are a priority at Sempra Energy, SDG&E and SoCalGas. TheWe believe that the most significant cybersecurity risks to our businesses reside within the operations of our utilities. In addition to general information and cyber risks that all Fortune 500 corporations face (e.g. malware, malicious intent by insiders and inadvertent disclosure of sensitive information), the utility industry faces new cybersecurity risks associated with automated metering (virtually all of our SDG&E customers have such metering and SoCalGas is beginning the process of converting its customers to such metering) and with Smart Grid infrastructure. Deployment of these new business technologies represents a new and large-scale opportunity for attacks on the utilities’ information systems and, more importantly, on the integrity of the energy grid. While addressing these risks is the subject of significant ongoing activities across Sempra Energy’s businesses, we cannot ensure that a successful attack will not occur. Such an attack to our information systems, the integrity of the energy grid, or one of our facilities could have a material adverse effect on our businesses, cash flows, financial condition, and results of operations.operations and/or prospects.

The CPUC regulates the SempraCalifornia Utilities’ rates, except SDG&E’s electric transmission rates which are regulated by the FERC. The CPUC also regulates the SempraCalifornia Utilities’:

The CPUC conducts various reviews and audits of utility performance, compliance with CPUC regulations and standards, affiliate relationships and other matters. These reviews and audits may result in disallowances, fines and penalties that could materially adversely affect our financial condition, results of operations andand/or cash flows. SoCalGas and SDG&E may be subject to penalties or fines related to their operation of natural gas pipelines under new regulations concerning natural gas pipeline safety, which could have a material adverse effect on their results of operations, financial condition andand/or cash flows. We discuss various CPUC proceedings relating to the SempraCalifornia Utilities’ rates, costs, incentive mechanisms, and performance-based regulation in Note 14 of the Notes to Consolidated Financial Statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

The SempraCalifornia Utilities may spend significant amounts of money related to a major capital project prior to receiving regulatory approval. If the project does not receive regulatory approval, if the regulatory approval is conditioned on major changes, or if management decides not to proceed with the project, they may be unable to recover all amounts spent for that project, which could materially adversely affect their businesses, financial condition, results of operations, and cash flows.flows and/or prospects.

The CPUC periodically approves the SempraCalifornia Utilities’ rates based on authorized capital expenditures, operating costs and an authorized rate of return on investment. If actual capital expenditures andand/or operating costs were to exceed the amountamounts approved by the CPUC, results of operations, andfinancial condition, cash flows and/or prospects could be materially adversely affected. ChangesReductions in key benchmark interest rates may trigger automatic adjustment mechanisms which determinewould reduce the SempraCalifornia Utilities’ authorized rates of return, changes in which could materially adversely affect results of operations, andfinancial condition, cash flows and/or prospects, as we discuss under “Cost of Capital” in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

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

The construction and expansion of the SempraCalifornia Utilities’ natural gas pipelines, SoCalGas’ storage facilities, and SDG&E’s electric transmission and distribution facilities require numerous permits, licenses and other approvals from federal, state and local governmental agencies. If there are delays in obtaining these approvals, or failure to obtain or maintain these approvals, or to comply with applicable laws or regulations, the SempraCalifornia Utilities’ business,businesses, cash flows, results of operations, and financial condition and/or prospects could be materially adversely affected. Coordinating these projects so that they are on time and within budget requires superior execution from our employees and contractors, cooperation of third parties and the absence of litigation and regulatory delay. In the event that one or more of these major projects is delayed or experiences significant cost overruns, this could have a material adverse effect on the Sempra Utilities’ businesses, financial condition, results of operations and cash flows.California Utilities.

SDG&E is subject to numerous lawsuits arising out of the San Diego County wildfires in 2007. It expects that substantially allThrough December 31, 2012, SDG&E’s costs to settle these claims and its estimated future settlement costs and defense costs are approximately $2.4 billion, exceeding its $1.1 billion of liability insurance coverage and the approximately $824 million recovered from third parties. SDG&E is seeking to recover in rates its reasonably incurred costs of resolving 2007 wildfire claims that exceedin excess of its liability insurance coverage and any amounts recovered from other potentially responsible partiesthird parties. SDG&E has concluded that it is probable that SDG&E will be recovered from utility customers. Atpermitted to recover a substantial portion of these excess costs in rates, and at December 31, 2011,2012, Sempra Energy’s and SDG&E’s Consolidated Balance Sheet includes a regulatory assetSheets include assets of $594$364 million associatedin Regulatory Assets Arising From Wildfire Litigation Costs, of which $317 million is related to CPUC-regulated operations and $47 million is related to FERC-regulated operations, with respect to these excess costs. However, recovery from customersof these amounts in rates will require future regulatory actions,approval.

As noted above, recovery of excess wildfire costs in rates will require future regulatory approval, and a failure to obtain all or a significant portion of the expected recovery, or any negative assessment of the likelihood ofa conclusion that recovery in rates is no longer probable, would likely have a material adverse effect on Sempra Energy’s and SDG&E’s cash flows, financial condition andand/or results of operations. In addition, if recovery is permitted, the collection process may extend over a number of years and Sempra Energy’s and SDG&E’s cash flows may be materially adversely affected due to the timing differences between resolution of claims and the recoveries from other potentially responsible parties and utility customers, which may extend over a numberrecovery in rates. We discuss how we assess the probability of years.recovery of our regulatory assets in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

SDG&E has a 20-percent ownership interest in SONGS, a 2,150-MW nuclear generating facility near San Clemente, California, operated by Southern California Edison Company. The 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

The occurrence of any of these events could have a material adverse effect on SDG&E’s and Sempra Energy’s businesses, cash flows, financial condition, and results of operations.operations and/or prospects.

Sempra Generation generatesMexico, Sempra Renewables and Sempra Natural Gas generate electricity that it sellsthey sell under long-term contracts and into the spot market or other competitive markets. It purchasesSempra Mexico and Sempra Natural Gas purchase natural gas to fuel itstheir power plants and may also purchase electricity in the open market to satisfy itstheir contractual obligations. As part of itstheir risk management strategy, Sempra Generationthey may hedge a substantial portion of itstheir electricity sales and natural gas purchases to manage its portfolio,their portfolios, which subjects us to the risk that the counterparty to such hedge may be unable to fulfill its obligations. Such a failure could materially adversely affect our businesses, cash flows, financial condition andand/or results of operations.

We buy energy-related commodities from time to time, for power plants or for LNG terminals to satisfy contractual obligations with customers, in regional markets and other competitive markets in which we compete. Our revenues and results of operations could be materially adversely affected if the prevailing market prices for electricity, natural gas, LNG or other commodities that we buy change in a direction or manner not anticipated and for which we had not provided adequately through purchase or sale commitments or other hedging transactions.

Unanticipated changes in market prices for energy-related commodities result from multiple factors, including:

Sempra Generation,Mexico, Sempra Pipelines & StorageRenewables and Sempra LNGNatural Gas generally endeavor to secure long-term contracts with customers for services and commodities to optimize the use of their facilities, reduce volatility in earnings, and support the construction of new infrastructure. However, if these contracts are at fixed prices, the profitability of the contract may be materially adversely affected by inflationary pressures, including rising operational costs, costs of labor, materials, equipment and commodities, and rising interest rates that affect financing costs. We may try to mitigate these risks by using variable pricing tied to market indices, anticipating an escalation in costs when bidding on projects, providing for cost escalation or entering into hedges. However, these measures, if implemented, may not ensure that the increase in revenues they provide will fully offset increases in operating expenses and/or financing costs. The failure to so fully or substantially offset these increases could have a material adverse effect on our businesses, financial condition, cash flows andand/or results of operations.

The acquisition, development, construction and expansion of LNG terminals, natural gas, propane and ethane pipelines and storage facilities, electric generation and transmission facilities, and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, fuel supply, resource exploration, legal, and other expenses before we can determine whether a project is feasible, economically attractive, or capable of being built.

Success in developing a particular project is contingent upon, among other things:

Successful completion of a particular project may be materially adversely affected by:

If we are unable to complete the development of a facility or if we have substantial delays or cost overruns, we may not be able to recover all this could have a material adverse effect on our businesses, financial condition, cash flows, results of operations and/or any part of our investment in the project.prospects.

The electric generation and wholesale power sales industries have becomeare highly competitive. As more plants are built and competitive pressures increase, wholesale electricity prices may become more volatile. Without the benefit of long-term power sales agreements, our revenues may be subject to increased price volatility. The 10-year power sales agreement between Sempra GenerationNatural Gas and the DWR, which comprised 6 percent of our revenues in 2011 and 8 percent of our revenues in 2010, and 9 percent in 2009, expired on September 30, 2011. As a result, we may be unable to sell the power that Sempra Generation’sNatural Gas’ and Sempra Mexico’s facilities are capable of producing or to sell it at favorable prices, which could materially adversely affect our businesses, financial condition, results of operations, and cash flows.flows and/or prospects.

Sempra Mexico and Sempra Natural Gas utilize their LNG utilizes its terminals by entering into long-term capacity agreements. Under these agreements, customers pay Sempra LNGus capacity reservation and usage fees to receive, store and regasify the customer’s LNG. Sempra LNGThese segments also may enter into short-term and/or long-term supply agreements to purchase LNG to be received, stored and regasified at itstheir terminals for sale to other parties. The long-term supply agreement contracts are expected to reduce our exposure to changes in natural gas prices through corresponding natural gas sales agreements or by tying LNG supply prices to prevailing natural gas market price indices. However, if Sempraour LNG isoperations are unable to obtain sufficient long-term agreements or if the counterparties, customers or suppliers to one or more of the key agreements for the LNG facilities were to fail to perform or become unable to meet their contractual obligations on a timely basis, it could have a material adverse effect on our business, results of operations, cash flows and financial condition. In addition, reduced availability of LNG to the United States and Mexico due to inadequate supplies, increased demand and higher prices in other countries, abundant domestic supplies of natural gas and/or delays in the development of liquefaction capability at our own receipt terminals, or worldwide, are likely to delay attainment of full-capacity utilization at our facilities.prospects. Our potential LNG suppliers also may be subject to international political and economic pressures and risks, which may also affect the supply of LNG.

Sempra Pipelines & Storage’sMexico’s and Sempra Natural Gas’ natural gas pipeline operations are dependent on demand for and supply of LNG and/or natural gas from their transportation customers, which may include Sempraour LNG facilities.

We provide information about these matters in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

We are exposed to the risk that counterparties, business partners, customers, and suppliers that owe money or commodities as a result of market transactions or other long-term agreements will not perform their obligations in accordance with such agreements. Should they fail to so perform, we may be required to acquire alternative hedging arrangements or to honor the underlying commitment at then-current market prices. In such event, we may incur additional losses to the extent of amounts already paid to such counterparties or suppliers. In addition, many of our agreements are essential to the conduct and growth of our businesses. The failure of any of the parties to perform in accordance with these agreements could materially adversely affect our businesses, results of operations, cash flows, and financial condition.condition and/or prospects. Finally, we often extend credit to counterparties and customers. While we perform significant credit analyses prior to extending credit, we are exposed to the risk that we may not be able to collect amounts owed to us.

Sempra LNG’sMexico’s and Sempra Natural Gas’ obligations and those of itstheir suppliers for LNG supplies are contractually subject to (1) suspension or termination for “force majeure” events beyond the control of the parties; and (2) substantial limitations of remedies for other failures to perform, including limitations on damages to amounts that could be substantially less than those necessary to provide full recovery of costs for breach of the agreements.agreements, which in either event could have a material adverse effect on our results of operations, cash flows, financial condition and/or prospects.

We depend on electric transmission lines, natural gas pipelines, and other transportation facilities owned and operated by third parties to:

Sempra Pipelines & StorageMexico and Sempra Natural Gas also dependsdepend on natural gas pipelines to interconnect with their ultimate source or customers of the commodities they are transporting. Sempra LNGMexico and Sempra Natural Gas also reliesrely on specialized ships to transport LNG to itstheir facilities and on natural gas pipelines to transport natural gas for customers of the facilities. Sempra Generation reliesNatural Gas, Sempra Renewables, Sempra South American Utilities and Sempra Mexico rely on transmission lines to sell electricity to itstheir customers. If transportation is disrupted, or if capacity is inadequate, we may be unable to sell and deliver our commodities, electricity and other services to some or all of our customers. As a result, we may be responsible for damages incurred by our customers, such as the additional cost of acquiring alternative natural gas supplies at then-current spot market rates, which could have a material adverse effect on our businesses, financial condition, cash flows, and results of operations.

We own or have interests in electricity generation and transmission, natural gas distribution and transportation, and LNG terminal projects in Mexico, and electricity and natural gas distribution businesses in Argentina, Chile and Peru. Developing infrastructure projects, owning energy assets, and operating businesses in foreign jurisdictions subject us to significant political, legal, regulatory and financial risks that vary by country, including:

Our international businesses also are subject to foreign currency risks. These risks arise from both volatility in foreign currency exchange and inflation rates and devaluations of foreign currencies. In such cases, an appreciation of the U.S. dollar against a local currency could materially reduce the amount of cash and income received from those foreign subsidiaries. Fluctuations in foreign currency exchange and inflation rates may result in significantly increased taxes in foreign countries and materially adversely affect our businesses, cash flows, andfinancial condition, results of operations.operations and/or prospects.

We discuss litigation related to Sempra LNG’sMexico’s Energía Costa Azul LNG terminal, Termoeléctrica de Mexicali power generation facility and other international energy projects in Note 15 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra Energy is a partner with RBSThe Royal Bank of Scotland plc in RBS Sempra Commodities LLP (RBS Sempra Commodities), a commodities-marketing firm, which divested substantially all of its businesses and assets in 2010 and early 2011, as we discuss above under “Descriptionin Note 4 of Business – RBS Sempra Commodities LLP.” Our remaining investmentthe Notes to Consolidated Financial Statements in the partnership isAnnual Report. The investment balance of $126 million at December 31, 2011. We expect2012 reflects remaining distributions expected to be received from the partnership as it is dissolved. The timing and amount of distributions may be impacted by the matters we discuss related to distribute substantially allRBS Sempra Commodities in Note 15 of this amountthe Notes to usConsolidated Financial Statements in the first half of 2012. MinorAnnual Report. In addition, amounts may be retained by the partnership beyond 2012for an extended period of time to help offset unanticipated future general and administrative costs necessary to complete the dissolution of the partnership. We have guaranteed various obligations of businesses previously owned and operated by RBS Sempra Commodities, as we discuss in Note 5 of the Notes to Consolidated Financial Statements in the Annual Report. The failure to collect all or a substantial portion of our remaining investment in the partnership could have a corresponding effect on our cash flows, financial condition and results of operations.

As described above, SDG&E holds a 20-percent ownership interest in SONGS, which is operated by Edison. We also ownAlso, Sempra Natural Gas owns a 25-percent interest in Rockies Express Pipeline LLC (Rockies Express), a joint venture which completed construction in 2009 ofthat operates a 1,679-mile natural gas pipeline at a cost of $6.8 billion.pipeline. Our investment in Rockies Express is $800$361 million at December 31, 2011.2012. Rockies Express is controlled by Kinder MorganTallgrass Energy Partners, which holds a 50-percent interest. At December 31, 2012, Sempra GenerationRenewables has investments totaling $592 million in several joint ventures to develop and operate renewable generation facilities. Sempra Mexico owns a 50-percent interest in a joint venture with PEMEX that operates two natural gas pipelines and a propane system in northern Mexico. At December 31, 2012, this investment is $340 million. We also have smaller investments in other entities that we do not control or manage, or in which we share control, totaling $713$97 million at December 31, 2011.2012. We continue to make such investments. We discuss these investments further in Notes 3, 4 and 11 of the Notes to Consolidated Financial Statements in the Annual Report.

We have limited influence over these and other businesses in which we do not have a controlling interest. In addition to the other risks inherent in these businesses, if their management were to fail to perform adequately or the other investors in the businesses were unable or otherwise failed to perform their obligations to provide capital and credit support for these businesses, it could have a material adverse effect on our results of operations, financial position andcondition, cash flows.flows and/or prospects.

None.

At December 31, 2011,2012, SDG&E owns and operates fourfive natural gas-fired power plants:

SDG&E’s interest in SONGS is described above in Item 1 under “Electric Utility Operations – SDG&E.” We also discuss matters related to a current outage and inspection and repair issues at SONGS in Note 14 of the Notes to Consolidated Financial Statements in the Annual Report.

At December 31, 2011,2012, SDG&E’s electric transmission and distribution facilities included substations, and overhead and underground lines. These electric facilities are located in San Diego, Imperial and Orange counties of California, and in Arizona and Nevada. The facilities consist of 1,8962,063 miles of transmission lines and 22,44922,940 miles of distribution lines. Periodically, various areas of the service territory require expansion to accommodate customer growth.

SDG&E expects to completecompleted construction of and placed in service the Sunrise Powerlink electric transmission line in the second half ofJune 2012.  The Sunrise Powerlink is a new 117-mile, 500-kV electric transmission line that is designeddelivers up to deliver up800 MW of energy, with plans to eventually carry 1,000 MW of energy, from the Imperial Valley to the San Diego region.

At December 31, 2011,2012, SDG&E’s natural gas facilities consisted of the Moreno and Rainbowtwo compressor stations, 168 miles of transmission pipelines, 8,4908,524 miles of distribution mainspipelines and 6,3886,402 miles of service lines.pipelines.

At December 31, 2011,2012, SoCalGas’ natural gas facilities included 2,9602,964 miles of transmission and storage pipelines, 49,77349,874 miles of distribution pipelines and 48,57247,413 miles of service pipelines. They also included 11 transmission compressor stations and 4four underground natural gas storage reservoirs with a combined working capacity of 134 billion cubic feet (Bcf).138 Bcf.

At December 31, 2011,2012, Sempra Generation operatesMexico, Sempra Renewables and Sempra Natural Gas operate or ownsown interests in power plants and renewable generation facilities in North America with a total capacity of 2,2003,257 MW. Our share of this capacity is 2,717 MW. In December 2012, Sempra Natural Gas entered into a definitive agreement to sell one 625-MW block of Mesquite Power to the Salt River Project Agricultural Improvement and Power District. We expect the transaction to close in the first quarter of 2013. We provide additional information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report.

Sempra GenerationSouth American Utilities operates Chilquinta Energía located in Valparaiso, Chile. Its property consists of 9,737 miles of distribution lines, 339 miles of transmission lines and 46 substations.

Sempra Renewables leases orproperties in Arizona and Nevada for currently operating solar electric generation facilities with the potential to develop additional solar electric generation facilities on these properties. Sempra Renewables also owns property in Arizona, California Nevada, and Mexico for potential development of solar and wind electric generation facilities.

In 2006, Sempra Pipelines & StorageNatural Gas and ProLiance Transportation and Storage, LLC acquired three existing salt caverns representing 10 Bcf to 12 Bcf of potential natural gas storage capacity in Cameron Parish, Louisiana, with plans for development of a natural gas storage facility.

Sempra Pipelines & StorageNatural Gas owns and operates Mobile Gas, a natural gas distribution utility located in Mobile and Baldwin counties in Alabama. Its property consists of distribution mains, service lines and regulating equipment.

Sempra Pipelines & StorageNatural Gas also owns and operates Chilquinta EnergíWillmut Gas, a natural gas distribution utility located in Valparaiso, Chile.Forrest County, Mississippi, serving Forrest, Simpson, Lamar, Jones, Covington and Rankin counties. Its property consists of 9,622 miles of distribution lines, 339 miles of transmissionmains, service lines and 45 substations.

In Washington County, Alabama, Sempra Pipelines & StorageNatural Gas operates a 15.5 Bcf natural gas storage facility under a land lease, with current plans to expand total working capacity to 21 Bcf to be in-service in 2013. Sempra Pipelines & StorageNatural Gas also owns land in Simpson County, Mississippi, on which it operates a 7.515 Bcf natural gas storage facility, with current plans to develop natural gas storage with additionalexpand total working capacity of 15to 22 Bcf to be in-service in 2012 and 2013. Portions of both these properties are currently under construction.

Sempra LNG operates its Energía Costa Azul LNG terminal on land it owns in Baja California, Mexico andNatural Gas has a land lease and owns land in Hackberry, Louisiana, where it operates its Cameron LNG terminal. Sempra LNGNatural Gas also owns land in Port Arthur, Texas, for potential development.

Sempra Energy occupies its 19-story corporate headquarters building in San Diego, California, pursuant to an operating lease that expires in 2015. The lease has two five-year renewal options.

SoCalGas leases approximately one-fourth of a 52-story office building in downtown Los Angeles, California, pursuant to an operating lease expiring in 2026. The lease has four five-year renewal options.

SDG&E occupies a six-building office complex in San Diego pursuant to two separate operating leases, both ending in December 2017. One lease has four five-year renewal options and the other lease has three five-year renewal options.

Sempra Global leasesInternational and Sempra U.S. Gas & Power own or lease office facilities at various locations in the U.S., Mexico, Chile and Peru, with the leases ending from 20122013 to 2035.2020.

Sempra Energy, SDG&E and SoCalGas own or lease other land, easements, rights of way, warehouses, offices, operating and maintenance centers, shops, service facilities and equipment necessary to conduct their businesses.

We are not party to, and our property is not the subject of, any material pending legal proceedings (other than ordinary routine litigation incidental to our businesses) except for the matters (1) described in Notes 14 and 15 of the Notes to Consolidated Financial Statements in the Annual Report, or (2) referred to in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

Not applicable.

We provide additional discussion of share-based compensation in Note 9 of the Notes to Consolidated Financial Statements in the Annual Report.

On September 11, 2007, the Sempra Energy board of directors authorized the repurchase of Sempra Energy common stock provided that the amounts spent for such purpose do not exceed the greater of $2 billion or amounts spent to purchase no more than 40 million shares.

During 2008, we expended $1 billion to purchase a total of 18,416,241 shares. No shares were repurchased under this authorization during 2009.

In 2010, we entered into a Collared Accelerated Share Acquisition Program with JPMorgan Chase Bank, National Association, under which we prepaid $500 million to repurchase shares of our common stock. We received 8,078,000 shares in 2010 and 1,496,435 shares in March 2011.  We discuss this program, which was completed in March 2011, in Note 13 of the Notes to Consolidated Financial Statements in the Annual Report.

Therefore, approximately $500 million remains authorized by the board for the purchase of additional shares, not to exceed approximately 12 million shares. We also may, from time to time, purchase shares of our common stock from restricted stock plan participants who elect to sell a sufficient number of vesting restricted shares to meet minimum statutory tax withholding requirements.

The information required by Item 6 is included in “Five-Year Summaries” in the Annual Report.

The information required by Item 7 is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report, on pages 2 through 63.71.

The information required by Item 7A is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk” in the Annual Report.

The information required by Item 8 is set forth on pages 7583 through 203223 of the Annual Report. Item 15(a)1 of Part IV of this report includes a listing of financial statements included.

Not applicable.

The information required by Item 9A is provided in “Controls and Procedures” in the Annual Report.

None.