Proxy Materials

Our Board of Directors is making these materials available to you over the Internet or delivering paper copies to you by mail in connection with Sempra Energy’s Annual Meeting of Shareholders to be held on Wednesday, May 12, 2010. As a shareholder, you are invited to attend the Annual Meeting and are entitled and requested to vote on the items of business described in this proxy statement. This proxy statement includes information that we are required to provide under Securities and Exchange Commission rules and is designed to assist you in voting your shares.

The proxy materials include:

If you received a paper copy of these materials by mail, the proxy materials also include a proxy or voting instruction card.

The information in this proxy statement relates to the proposals to be voted on at the Annual Meeting, the voting process, our Board of Directors and board committees, the compensation of our directors and certain executive officers and other required information.

We are permitted to furnish proxy materials over the Internet to shareholders who have not requested a paper copy. Accordingly, to conserve paper and reduce costs, we are mailing a notice about the Internet availability of the proxy materials.

All shareholders receiving the notice will have the ability to access the proxy materials over the Internet and to request a paper copy by mail or an electronic copy by e-mail. Instructions on how to do so are contained in the notice. The notice also contains instructions on how you may request proxy materials by mail or e-mail on an ongoing basis.

We are providing some of our shareholders, including those who previously have requested paper copies, with a paper copy of the proxy materials instead of a notice about the Internet availability of the proxy materials.

In addition, we are providing notice of the availability of the proxy materials by e-mail to our shareholders who previously have elected electronic delivery. The e-mail contains a link to the website where the proxy materials are available and a link to the proxy voting website.

Your notice about the Internet availability of the proxy materials, proxy card or voting instruction card contains instructions on how to view our proxy materials on the Internet.

Shareholders receiving a notice in the mail about the Internet availability of the proxy materials will find instructions about how to obtain a paper copy of the materials as part of the notice. Shareholders receiving notice of the availability of the proxy materials by e-mail will find instructions about how to obtain a paper copy of the materials as part of the e-mail. All shareholders who do not receive a notice or an e-mail will receive a paper copy of the proxy materials by mail.

To request that you receive paper copies of future proxy materials, please access www.voteproxy.com on the Internet. Click on Request Paper Copies of Materials, then click on Sempra Energy. You will see an option to elect to receive paper copies each year. You also may request to receive paper copies of future proxy materials by calling (888) 776-9962 from the United States and Canada or (718) 921-8562 from other countries, or by e-mailing info@amstock.com.

If you share an address with another shareholder, you may receive only one set of proxy materials unless you have provided contrary instructions. If you wish to receive a separate set of the materials now, please request the additional copy by contacting our proxy solicitor, Morrow & Co., at:

(800) 607-0088 (U.S. and Canada)

(203) 658-9400 (International)

sempra.info@morrowco.com

A separate set of the materials will be sent promptly following receipt of your request.

If you are a shareholder of record and wish to receive a separate set of proxy materials in the future, please call our transfer agent, American Stock Transfer & Trust Company, at:

(877) 773-6772 (U.S. and Canada)

(718) 921-8356 (International)

If you are the beneficial owner of shares held through a bank, broker or other nominee and you wish to receive a separate set of proxy materials in the future, please call Broadridge Financial Solutions at:

(800) 542-1061

All shareholders also may write to us at the address below to request a separate copy of the proxy materials:

Sempra Energy

Attn: Shareholder Services

101 Ash Street

San Diego, CA 92101-3017

investor@sempra.com

If you are a shareholder of record and wish to request electronic delivery of proxy materials in the future, please access www.amstock.com on the Internet. Click on Shareholder Account Access and enroll. Please enter your account number and tax identification number to log in, then select Receive Company Mailings via E-Mail and provide your e-mail address.

If you choose to access future proxy materials electronically, you will receive an e-mail with instructions containing a link to the website where the materials are

available and a link to the proxy voting website. Your election to access proxy materials electronically will remain in effect until you terminate it.

Sempra Energy is making this solicitation and will pay the entire cost of preparing, assembling, printing, mailing and distributing these proxy materials and of soliciting proxies.

Our directors, officers and employees also may solicit proxies in person, by telephone or by electronic communication. They will not receive any additional compensation for these activities.

We also have hired Morrow & Co. to assist us in distributing proxy materials and soliciting proxies. We will pay a base fee of $13,000 plus customary costs and expenses for these services.

We will reimburse brokerage houses and other custodians, nominees and fiduciaries for forwarding proxy materials to beneficial shareholders.

Proposals To Be Voted On

The items of business to be voted on at the Annual Meeting are:

You may vote “FOR” or “AGAINST” or you may “ABSTAIN” from voting on any or all nominees for election as directors or on any other matter to be voted on at the Annual Meeting.

Our Board of Directors recommends that you vote your shares “FOR” each of its nominees for election to the board; “FOR” the ratification of our independent registered public accounting firm; and “AGAINST” the shareholder proposal.

To conduct business at the Annual Meeting, a quorum consisting of a majority of our shares must be present in person or represented by proxy.

To be elected as a director, a nominee must receive the “approval of shareholders.” This means that the nominee must receive more “FOR” than “AGAINST” votes, and the “FOR” votes must also represent more than 25% of our outstanding shares.

Ratification of our independent registered public accounting firm and approval of the shareholder proposal also require the approval of shareholders.

We are not aware of any item that may be voted on at the Annual Meeting that is not described in this proxy statement. However, the holders of the proxies that we are soliciting will have the discretion to vote them in accordance with their best judgment on any additional matters that may be voted on, including matters incidental to the conduct of the meeting.

Our Employee Savings Plans automatically provide confidential voting. Other shareholders may elect that their identity and individual vote be held confidential by marking the appropriate box on their proxy card or ballot. Confidentiality elections will not apply to the extent that voting disclosure is required by law or is appropriate to assert or defend any claim relating to voting. They also will not apply with respect to any matter for which votes are solicited in opposition to the director nominees or voting recommendations of our Board of Directors, unless the persons engaging in the opposing solicitation provide shareholders with voting confidentiality comparable to that which we provide.

We expect to announce preliminary voting results at the Annual Meeting and to publish final results in a Current Report on Form 8-K that we will file with the Securities and Exchange Commission within four business days following the meeting. The report will be available on our website at www.sempra.com under the “Investor” and “Company SEC Filings” tabs.

How You Can Vote

You are entitled to one vote for each share of our common stock that you owned at the close of business on March 15, 2010, the record date for the Annual Meeting. You may vote all shares owned by you on the record date, including (a) shares held directly in your name as the shareholder of record, and (b) shares held for you as the beneficial owner through a bank, broker or other nominee. On the record date, 247,847,870 shares of our common stock were outstanding.

Most of our shareholders hold their shares through a bank, broker or other nominee rather than having the shares registered directly in their own name. There are some distinctions between shares held of record and those owned beneficially that are summarized below.

Shareholder of Record

If your shares are registered directly in your name with our transfer agent, you are the shareholder of record of the shares. As the shareholder of record, you have the right to grant a proxy to vote your shares to the company or another person, or to vote your shares in person at the Annual Meeting. We have provided a proxy card for you to use in voting your shares.

Beneficial Owner

If your shares are held through a bank, broker or other nominee, it is likely that they are registered in the name of the nominee and you are the beneficial owner of shares held in street name. You are also the beneficial owner of shares that you own through our Employee Savings Plans.

As the beneficial owner of shares held for your account, you have the right to direct the registered holder to vote your shares as you instruct, and you also are invited to attend the Annual Meeting. Your bank, broker, plan trustee or other nominee has provided a voting instruction card for you to use in directing how your shares are to be voted. However, since a beneficial owner is not the shareholder of record, you may not vote your shares in person at the meeting unless you obtain a legal proxy from the registered holder of the shares giving you the right to do so.

You may vote in person at the Annual Meeting those shares that you hold in your name as the shareholder of record. You may vote in person shares for which you are the beneficial owner only by obtaining a legal proxy giving you the right to vote the shares from the bank, broker or other nominee that is the registered holder of your shares.

Even if you plan to attend the Annual Meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend.

Whether you hold your shares as a shareholder of record or as a beneficial owner, you may direct how your shares are to be voted without attending the Annual Meeting. If you

are a shareholder of record, you may vote by submitting a proxy. If you hold shares as a beneficial owner, you may vote by submitting voting instructions to the registered owner of your shares.

For directions on how to vote, please refer to the following instructions and those included on your proxy or voting instruction card.

Voting by Internet – Shareholders who have received a notice of the availability of our proxy materials by mail or e-mail may vote over the Internet by following the instructions in the notice or e-mail. Those who have received a paper copy of the proxy or voting instruction card by mail may vote over the Internet by following the instructions on the card.

Voting by Telephone – Shareholders of record may vote by telephone by calling (800) 776-9437 from the United States or Canada or (718) 921-8500 from other countries and following the instructions. When voting by telephone, shareholders must have available the control number included on their proxy card, notice of availability of proxy materials or e-mail.

Most shareholders who are beneficial owners of their shares and have received a voting instruction card by mail may vote by phone by calling the number specified on the voting instruction card provided by their bank, broker or nominee. These shareholders should check the card for telephone voting availability.

Voting by Mail – Shareholders who have received a paper copy of these proxy materials may vote by mail by signing, dating and returning their proxy or voting instruction card.

Your shares will be voted as you specifically instruct on your proxy or voting instruction card.

If you sign and return your proxy or voting instruction card without giving specific instructions, your shares will be voted in accordance with the recommendations of our Board of Directors and in the discretion of the proxy holders on any other matters that properly come before the meeting.

If you hold shares through our Employee Savings Plans they will be voted as you instruct on the voting instruction card provided by the plan trustee. If you sign and return your card without giving specific instructions, your shares will be voted in accordance with the recommendations of our Board of Directors.

If you do not provide timely instructions as to how your savings plan shares are to be voted, they will be voted in the same manner and proportion as shares for which instructions are timely received from other plan participants. For example, if you own 1,000 shares through the plan and fail to provide timely voting instructions for your shares, the plan trustee would vote them. If the trustee had timely received instructions to vote instructed shares 60% for, 35% against and 5% abstain on a particular item of business, the trustee would, on that item, vote your shares 600 for, 350 against and 50 abstain.

If your shares are held through a brokerage firm, they will be voted as you instruct on the voting instruction card provided by your broker. If you sign and return your card without giving specific instructions, your shares will be voted in accordance with the recommendations of our Board of Directors.

If you do not provide timely instructions as to how your brokerage shares are to be voted, your broker will have the authority to vote them only on the ratification of our independent registered public accounting firm. Your broker will be prohibited from voting your shares on the election of directors or the shareholder proposal. These “broker non-votes” will be counted only for the purpose of determining whether a quorum is present at the meeting and not as votes cast.

Shares that you own as a shareholder of record will be voted as you instruct on your proxy card. If you sign and return your proxy card without giving specific instructions, they will be voted in accordance with the recommendations of our Board of Directors.

If you do not timely return your proxy card, your shares will not be voted unless you or your proxy holder attends the annual meeting and votes in person as described in Question 20.

If you hold shares as the shareholder of record, your vote by proxy must be received before the polls close at the Annual Meeting.

If you hold shares in our Employee Savings Plans, your voting instructions must be received by 9:00 a.m. Eastern time on Monday, May 10, 2010 for the plan trustee to vote your shares.

If you hold shares as a beneficial owner, please follow the voting instructions provided by your bank, broker or other nominee.

Yes. You may change your vote at any time prior to the vote at the Annual Meeting, except that any change to your voting instructions for shares held in our Employee Savings Plans must be received by 9:00 a.m. Eastern time on Monday, May 10, 2010.

If you are a shareholder of record, you may change your vote by granting a new proxy bearing a later date (which automatically revokes the earlier proxy), by providing a written notice of revocation to our Corporate Secretary at the address set forth in Question 30 prior to your shares being voted, or by attending the Annual Meeting and voting in person. Attendance at the meeting will not cause your previously granted proxy to be revoked unless you specifically so request.

For shares you hold as a beneficial owner, you may change your vote by timely submitting new voting instructions to your bank, broker or other nominee, or, if you have obtained a legal proxy from the nominee giving you the right to vote your shares, by attending the Annual Meeting and voting in person.

The inspector of elections will be a representative of American Stock Transfer & Trust Company.

Attending the Annual Meeting

You may attend the Annual Meeting only if you were a Sempra Energy shareholder at the close of business on March 15, 2010 or you hold a valid proxy to vote at the meeting. You should be prepared to present photo identification to be admitted to the meeting.

If you are a shareholder of record or hold shares through our Direct Stock Purchase Plan or Employee Savings Plans, an admission ticket has been included as part of your notice of Internet availability of proxy materials or your proxy card. If you plan to attend the meeting, please bring the admission ticket with you. If you do not bring your admission ticket, your name must be verified against our list of shareholders of record and plan participants.

If you are not a shareholder of record but are the beneficial owner of shares held in street name through a bank, broker or other nominee, you must provide proof of beneficial ownership on the record date, such as your most recent account statement prior to March 15, 2010, a copy of the voting instruction card provided by your nominee, or other similar evidence of share ownership.

The meeting will begin promptly at 10:00 a.m., local time. Check-in will begin at 9:00 a.m., and you should allow ample time for check-in procedures.

Shareholder Proposals and Director Nominations

Shareholder proposals that are intended to be included in our proxy materials for next year’s Annual Meeting must be received by our Corporate Secretary no later than 5:30 p.m. San Diego time on November 29, 2010 and must be submitted to the following address:

Corporate Secretary

Sempra Energy

101 Ash Street

San Diego, CA 92101-3017

Fax: (619) 696-4508

Proposals that are not timely submitted or are submitted to some other address or other than to the attention of our Corporate Secretary may be excluded from our proxy materials.

Shareholder proponents must meet the eligibility requirements of the Securities and Exchange Commission’s Shareholder Proposal Rule (Rule 14a-8), and their proposals must comply with the requirements of the rule to be included in our proxy materials.

Shareholders who wish to nominate director candidates or to present other items of business to be voted on at an Annual Meeting must give written notice of their intention to do so to our Corporate Secretary at the address set forth in Question 30. We must receive the notice at least 90 days but not more than 120 days before the date corresponding to the date of the last annual meeting. The notice also must include the information required by our bylaws, which may be obtained as provided in Question 33.

The time for us to receive notice of items of business for the 2010 Annual Meeting has expired. The period for the receipt from shareholders of notice of items of business for the 2011 Annual Meeting will begin on January 12, 2011 and end on February 11, 2011.

These notice requirements do not apply to shareholder proposals intended for inclusion in our proxy materials under the Securities and Exchange Commission’s Shareholder Proposal Rule. The deadline for receiving those proposals is set forth in Question 30. The notice requirements also do not apply to questions that a shareholder may wish to ask at the Annual Meeting.

Shareholders may recommend director candidates for consideration by the Corporate Governance Committee of our Board of Directors by writing to our Corporate Secretary at the address set forth in Question 30. A recommendation must be accompanied by a statement from the candidate that he or she would give favorable consideration to serving on the board and should include sufficient biographical and other information concerning the candidate and his or her qualifications to permit the committee to make an informed decision as to whether further consideration of the candidate would be warranted.

Obtaining Additional Information

Our consolidated financial statements are included in our Annual Report to Shareholders that is being provided to you together with this proxy statement.

Additional information regarding the company is included in our Annual Report on Form 10-K, which we file with the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. Our Form 10-K and other information that we file with the Securities and Exchange Commission are available on our website at www.sempra.com under the “Investor” and “Company SEC Filings” tabs. We will also furnish a copy of our 2009 Form 10-K (excluding exhibits, except those that are specifically requested) without charge to any shareholder who so requests by writing to us at our address set forth in Question 8.

By writing to us, shareholders also may obtain, without charge, a copy of our bylaws, corporate governance guidelines, codes of conduct and charters of our board committees. You can also view these materials on the Internet by accessing our website at www.sempra.com and clicking on the “Investor” tab, then clicking on the “Governance” tab.

If you have questions concerning share certificates, dividend checks, transfer of ownership or other matters relating to your share account, please contact our transfer agent at the following address or phone numbers:

American Stock Transfer & Trust Company

Operations Center

Attn: Sempra Energy

6201 15^th Avenue

Brooklyn, NY 11219

(877) 773-6772 (U.S. and Canada)

(718) 921-8356 (International)

We have a dividend reinvestment and direct stock purchase program under which you may have all or a portion of your dividends automatically reinvested to purchase our shares. You also may elect to purchase additional shares through optional cash payments. For information about this program, please contact American Stock Transfer & Trust Company at the address or the phone number listed above.

If you have any additional questions about the Annual Meeting or how to vote or revoke your vote, you should contact our proxy solicitor:

Morrow & Co.

470 West Avenue

Stamford, CT 06902

Shareholders Call:

(800) 607-0088 (U.S. and Canada)

(203) 658-9400 (International)

Banks and Brokers Call Collect:

(203) 658-9400

If you need additional copies of this proxy statement or voting materials, please contact Morrow & Co. as described above or send an e-mail to sempra.info@morrowco.com.

Our business and affairs are managed and all corporate powers are exercised under the direction of our Board of Directors. The board establishes fundamental corporate policies and oversees the performance of the company and our chief executive officer and the other officers to whom the board has delegated day-to-day business operations.

The board has adopted Corporate Governance Guidelines that set forth expectations for directors, director independence standards, board committee structure and functions, and other policies for the governance of the company. It has also adopted a Code of Business Conduct and Ethics for Directors and Officers, and officers are also subject to Business Conduct Guidelines that apply to all employees.

Several standing committees assist the board in carrying out its responsibilities. Each operates under a written charter adopted by the board.

Our governance guidelines, committee charters and codes of conduct are posted on our website at www.sempra.com under the “Investor” and “Governance” tabs. Paper copies may be obtained upon request by writing to: Corporate Secretary, Sempra Energy, 101 Ash Street, San Diego, California 92101-3017.

Board of Directors

Functions

In addition to its oversight role, our Board of Directors performs a number of specific functions, including:

Leadership Structure

The Board of Directors retains the flexibility to determine on a case-by-case basis whether the Chief Executive Officer, or an independent director, should serve as Chairman of the Board. This flexibility permits the board to organize its functions and conduct its business in a manner it deems most effective in then prevailing circumstances.

The Board of Directors believes that the company and its shareholders currently are best served by having Donald E. Felsinger serve as Chairman of Board as well as Chief Executive Officer. By combining these positions, Mr. Felsinger serves as a bridge between the board and the operating organization and provides critical leadership for the strategic initiatives and challenges of the future. Mr. Felsinger’s performance is evaluated annually by the board’s Compensation Committee, which is composed entirely of independent directors.

During those periods in which the positions of Chairman of the Board and Chief Executive Officer are combined, the independent directors appoint an independent director as a Lead Director. William C. Rusnack currently serves as the Lead Director.

The position and role of the Lead Director is intended to expand lines of communication between the board and the Chairman of the Board and Chief Executive Officer and other members of management. It is not intended to reduce the free and open access and communications that each independent board member has with other board members and members of management. The Lead Director has the following duties:

The Board of Directors believes that its independence and oversight of management is maintained effectively through this leadership structure, the composition of the board and sound corporate governance policies and practices.

Director Independence

The Board of Directors determines the independence of our directors by applying the independence principles and standards established by the New York Stock Exchange. These provide that a director is independent only if the board affirmatively determines that the director has no direct or indirect material relationship with the company. They also specify various relationships that preclude a determination of director independence. Material relationships may include commercial, industrial, consulting, legal, accounting, charitable, family and other business, professional and personal relationships.

Applying these standards, the board annually reviews the independence of the company’s directors. In its most recent review, the board considered, among other things, the absence of any employment relationships between the company and its directors (other than Donald E. Felsinger and Neal E. Schmale who are also executive officers of the company) and their families; the absence of any of the other specific relationships that would preclude a determination of independence under New York Stock Exchange independence rules; the absence of any affiliation of the company’s directors and their families with the company’s independent registered public accounting firm, compensation consultants, legal counsel and other consultants and advisors; the absence of any transactions with directors and members of their families that would require disclosure in this proxy statement under Securities and Exchange Commission rules regarding related person transactions; and the insubstantial amount of goods and services that we purchase in the ordinary course of business from companies and the modest amount of our discretionary contributions to non-profit organizations of which some of our directors or members of their families are associated.

Based upon this review, the board has affirmatively determined that each of the company’s non-officer directors is independent. The independent directors are:

Director Share Ownership Guidelines

The board has established share ownership guidelines for directors and officers to further strengthen the link between company performance and compensation. For non-employee directors, the guideline is ownership of a number of our shares having a value of four times the directors’ annual base retainer and is expected to be attained within five years of becoming a director. For these purposes, share ownership includes phantom shares into

which compensation has been deferred and the vested portion of certain in-the-money stock options as well as shares owned directly. All of our non-employee directors who have served as directors for five or more years meet or exceed the guideline. For information regarding executive officer share ownership guidelines, please see “Executive Compensation — Compensation Discussion and Analysis — Share Ownership Guidelines.”

Board and Committee Meetings; Executive Sessions; Annual Meetings of Shareholders

At regularly scheduled board and committee meetings, directors review and discuss management reports regarding the company’s performance, prospects and plans, as well as immediate issues facing the company. At least once a year, the board also reviews management’s long-term strategic and financial plans.

The Chairman of the Board establishes the agenda for each board meeting. Committee agendas are set by or in consultation with the committee chair. Directors are encouraged to suggest agenda items, and any director also may raise at any meeting subjects that are not on the agenda.

Information and other materials important to understanding the business to be conducted at board and committee meetings are distributed in writing to the directors in advance of the meeting. Additional information may be presented at the meeting.

An executive session of non-management board members is held at each regularly scheduled board meeting, and any director may call for an executive session at any special meeting. Executive sessions are presided over by the Lead Director. During 2009, the board held six executive sessions.

During 2009, the board held six meetings and committees of the board held 19 meetings. Directors, on an aggregate basis, attended over 99% of the combined number of these meetings. Each director attended at least 93% of the combined number of meetings of the board and each committee of which the director was a member.

The board encourages all nominees for election as directors to attend the Annual Meeting of Shareholders. Last year, all of the nominees attended the meeting except Mr. Ruiz, who did not attend due to travel restrictions from Mexico associated with the H1N1 pandemic.

Evaluation of Board and Director Performance

The Corporate Governance Committee annually reviews and evaluates the performance of the Board of Directors. The committee assesses the board’s contribution as a whole and identifies areas in which the board or senior

management believes a better contribution may be made. The purpose of the review is to increase the effectiveness of the board, and the results are reviewed with the board and its committees.

Our board annually reviews the individual performance and qualifications of each director who may wish to be considered for nomination to an additional term. The evaluations are reviewed by the Corporate Governance Committee, which makes recommendations to the board regarding nominees for election as directors.

Risk Oversight

Our Corporate Governance Guidelines provide that the specific functions of the Board of Directors include assessing and monitoring risks and risk management. The board reviews and oversees strategic, financial and operating plans that are intended to provide sustainable long-term growth with moderate risk. Each of our business units is responsible for identifying and moderating risk in a manner consistent with these goals. The board fulfills its risk oversight function through reports both directly to the board and appropriate board committees.

The board and its committees mitigate risk through policies that include:

We also have substantial investments in non-subsidiary companies engaged in commodities trading, interstate natural gas pipeline, electric generation and non-United States utility operations. Although we have representation on the boards of these companies, we do not operate or control them and we have limited influence over their businesses and management.

The risks inherent in our interstate pipeline, electric generation and utility investments are similar to those of our subsidiaries and are reviewed and monitored by the boards of these companies and reported to and reviewed by our board.

The risks inherent in and volatility of our commodities marketing joint venture, RBS Sempra Commodities, differ substantially in kind and magnitude from those of our subsidiaries. Also unlike our other businesses but consistent with industry and competitive practices, the

compensation of commodities traders consists primarily of annual cash bonuses. These annual bonuses are based upon and constitute a substantial portion of the annual mark-to-market profits attributable to the trading books of the individual traders, although the ultimate realization of income and the risk from these trades may extend into subsequent years. To reduce the likelihood that these compensation practices may encourage excessive risk taking, a significant portion of each annual bonus in excess of certain amounts is deferred for payment in installments over a succeeding one or two year period. The unpaid deferred bonus amounts are subject to discretionary reductions if there are subsequent losses in the trader’s book and are also subject to forfeiture if the trader’s employment is terminated. Tendencies for excessive risk-taking, as well as the general risks presented by commodity price fluctuations, are also mitigated by:

These and other risks and risk management practices are reviewed and monitored by the RBS Sempra Commodities board (consisting of seven members, including three of our senior officers) and reported to and reviewed by our board. Our risks associated with RBS Sempra Commodities are further mitigated by provisions of our joint venture agreement that provide us with a preferential share of the venture’s earnings and require that our joint venture partner provide all additional capital and all liquidity and credit support required by the joint venture.

Succession Planning and Management Development

Our Compensation Committee annually reports to the Board of Directors on succession planning, including policies and principles for executive officer selection.

Review of Related Person Transactions

Securities and Exchange Commission rules require us to disclose certain transactions involving more than $120,000 in which we are a participant and any of our directors, nominees as directors or executive officers, or any member of their immediate families, has or will have a direct or indirect material interest. The charter of our Corporate Governance Committee requires the committee to review any such “related person transaction” before we enter into the transaction. There have been no transactions or proposed transactions requiring review during 2009 or 2010.

Director Orientation and Education Programs

Every new director participates in an orientation program and receives materials and briefings to acquaint him or her with our business, industry, management and corporate governance policies and practices. Continuing education is provided for all directors through board materials and presentations, discussions with management, visits to corporate facilities and other sources.

Board Access to Senior Management, Independent Accountants and Counsel

Directors have complete access to our independent registered public accounting firm, and to senior management and other employees. They also have complete access to counsel, advisors and experts of their choice with respect to any issues relating to the board’s discharge of its duties.

Board Committees

Audit Committee

James G. Brocksmith Jr., Chair

Wilford D. Godbold Jr.

William D. Jones

Richard G. Newman

Carlos Ruiz

Lynn Schenk

Compensation Committee

William C. Rusnack, Chair

William G. Ouchi

William P. Rutledge

Corporate Governance Committee

William G. Ouchi, Chair

James G. Brocksmith Jr.

Richard A. Collato

Richard G. Newman

William C. Rusnack

Environmental and Technology Committee

William P. Rutledge, Chair

Wilford D. Godbold Jr.

William D. Jones

Carlos Ruiz

Lynn Schenk

Executive Committee

Donald E. Felsinger, Chair

James G. Brocksmith Jr.

William G. Ouchi

William C. Rusnack

William P. Rutledge

Audit Committee

Our Audit Committee is composed entirely of independent directors. It is directly responsible and has sole authority for selecting, appointing, retaining and overseeing the work and approving the compensation of our independent registered public accounting firm, which reports directly to the committee. The committee pre-approves all services provided by the accounting firm and prepares the report reprinted under the caption “Audit Committee Report.” It also assists the Board of Directors in fulfilling oversight responsibilities regarding:

The board has determined that each member of the Audit Committee is financially literate. It has also determined that Mr. Brocksmith, who chairs the committee, is an audit committee financial expert as defined by the rules of the Securities and Exchange Commission.

During 2009, the Audit Committee held seven meetings.

Compensation Committee

Our Compensation Committee is composed entirely of independent directors. It assists the Board of Directors in the evaluation and compensation of executives. It establishes our compensation principles and policies and oversees our executive compensation program. The committee has direct responsibility for:

During 2009, the Compensation Committee held four meetings.

For additional information regarding the Compensation Committee’s principles, policies and practices please see the discussion under “Executive Compensation — Compensation Discussion and Analysis.”

Corporate Governance Committee

Our Corporate Governance Committee is composed entirely of independent directors. The committee’s responsibilities include:

The committee reviews with the board the skills and characteristics required of directors in the context of current board membership, and develops and maintains a pool of qualified director candidates. It seeks a group of individuals who bring to the board a variety of complementary skills and a range of viewpoints, backgrounds, experiences and individual qualities and attributes that contribute to board diversity. It solicits the names of director candidates from a variety of sources, including search firms advised of these policies, and also considers candidates submitted by shareholders. The committee assesses the effectiveness of its policies as part of its annual review of board composition and board, committee and individual director performance and in its recommendations of nominees for election as directors at the next annual meeting.

The committee reviews biographical data and other relevant information regarding potential board candidates, may request additional information from the candidates or other sources and, if the committee deems it appropriate, may interview candidates and consult references and others who may assist in candidate evaluation. The committee evaluates all candidates in the same manner whether identified by shareholders or through other sources.

In considering potential director candidates, the committee evaluates each candidate’s integrity, independence, judgment, knowledge, experience and other relevant factors to develop an informed opinion of his or her qualifications and ability and commitment to meet the board’s expectations for directors set forth in our Corporate Governance Guidelines.

The committee’s deliberations reflect the board’s requirement that substantially all directors (other than current or former company officers) should be independent and that all director nominees must be financially literate or must become financially literate within a reasonable time after becoming a director. They also reflect the board’s view regarding the appropriate number of directors and the composition of the board.

The committee in recommending nominees for election as directors at the 2010 annual meeting and the board in approving the nominees considered the individual experience, qualifications, attributes and skills of each nominee (including his or her prior contributions to the board), with a view to constituting a board that, as whole, is well-qualified to oversee our businesses.

With respect to Mr. Rutledge and Dr. Ouchi, the committee and the board also considered that they are directors of FirstFed Financial Corp. and during 2009 and prior years they also served as directors of First Fed’s subsidiary First Federal Bank of California. In January 2009, First Federal Bank consented to an order by the Office of Thrift Supervision that First Federal Bank and its directors and employees cease and desist engaging in unsafe or unsound banking practices. In December 2009, First Federal Bank was closed by the Office of Thrift Supervision and in January 2010, FirstFed Financial filed for liquidation under the Bankruptcy Code. The committee and the board concluded that these events do not reflect upon the integrity of Mr. Rutledge or Dr. Ouchi or, in view of the national and international financial crisis that resulted in the insolvency of numerous financial institutions, their ability and qualifications to serve on our board.

During 2009, the Corporate Governance Committee held four meetings.

Executive Committee

Our Executive Committee meets on call by the Chairman of the Board during the intervals between meetings of the Board of Directors when scheduling or other requirements make it difficult to convene the full board. The committee did not meet during 2009.

Environmental and Technology Committee

Our Environmental and Technology Committee is responsible for:

During 2009, the Environmental and Technology Committee held four meetings.

Communications with the Board

Shareholders and interested parties who wish to communicate with the board, non-management directors as a group, a committee of the board or a specific director may do so by letters addressed to the attention of our Corporate Secretary. All communications regarding executive compensation will be relayed on to the chair of the Compensation Committee, William C. Rusnack, for appropriate evaluation and consideration.

All other communications are reviewed by the Corporate Secretary and provided to the directors consistent with a screening policy providing that unsolicited items, sales materials, and other routine items and items unrelated to the duties and responsibilities of the board not be relayed on to directors. Any communication that is not relayed is recorded in a log and made available to the directors.

The address for these communications is:

Corporate Secretary

Sempra Energy

101 Ash Street

San Diego, CA 92101-3017

Director Compensation

Directors who are not employees of Sempra Energy receive an annual base retainer of $50,000. The Chair of the Audit Committee receives an additional $20,000; the chairs of other board committees receive an additional $10,000; and the Lead Director receives an additional $15,000.

Each quarter, non-employee directors also are credited with a number of phantom shares of our common stock having a market value of $12,500. Upon the director’s retirement as a director, the then market value of the shares credited to the director’s account (together with reinvested dividend equivalents) is paid to the director in cash. Directors may also elect to receive their other fees in shares of our common stock or to defer them into an interest-bearing account, phantom investment funds or phantom shares of our common stock.

During 2009, each non-employee director also received meeting fees of $1,000 for each board meeting attended and each meeting attended of the board committees ($1,500 in the case of the Audit Committee) of which they were members. Beginning in 2010, the board meeting attendance fee has been increased to $2,000 and the committee meeting attendance fees have been increased to $2,000 for the Audit Committee and $1,500 for other board committees.

Upon first becoming a director, each non-employee director was granted a ten-year option to purchase 15,000 shares of our common stock. Thereafter at each annual meeting (other than the annual meeting that coincides with or first follows the director’s election to the board), each non-employee director who continued to serve as a director was granted an additional ten-year option for 5,000 shares. Each option was granted with an exercise price at the closing price of our common stock on the date of grant and became exercisable commencing with the first annual meeting following that date.

Beginning in 2010, directors will receive forfeitable grants of restricted or phantom shares of our common stock in lieu of grants of stock options. Upon first becoming a director, each non-employee director will receive a number of restricted or phantom shares having a then market value of $180,000 and vesting in equal annual installments of one-third of the original grant (together with related reinvested dividends or dividend equivalents) on each of the first three anniversaries of the grant date. Thereafter at each annual meeting (other than the annual meeting that coincides with or first follows the director’s election to the board), each non-employee director who continues to serve as a director will receive an additional number of restricted or phantom shares having a then fair market value of $60,000 and vesting on the first anniversary of the grant date. Unvested shares will be forfeited if the director’s service on the board terminates for any reason other than death, retirement, disability or removal without cause, in which event all unvested shares would immediately vest.

The Audit Committee of the Board of Directors is composed of the six directors named below, all of whom have been determined by the board to be independent directors. The board also has determined that all members of the committee are financially literate and the chair of the committee is an audit committee financial expert as defined by the rules of the Securities and Exchange Commission. The committee’s charter, adopted by the board, is posted on the company’s website at www.sempra.com under the “Investor” and “Governance” tabs.

The committee’s responsibilities include appointing the company’s independent registered public accounting firm, pre-approving both audit and non-audit services to be provided by the firm, and assisting the board in providing oversight to the company’s financial reporting process. In fulfilling its oversight responsibilities, the committee meets with the company’s independent registered public accounting firm, internal auditors and management to review accounting, auditing, internal controls and financial reporting matters.

It is not the committee’s responsibility to plan or conduct audits or to determine that the company’s financial statements and disclosures are complete, accurate and in accordance with accounting principles generally accepted in the United States and applicable laws, rules and regulations. Management is responsible for the company’s financial statements, including the estimates and judgments on which they are based, as well as the company’s financial reporting process, accounting policies, internal audit function, internal accounting controls, and disclosure controls and procedures. The company’s independent registered public accounting firm, Deloitte & Touche LLP, is responsible for performing an audit of the company’s annual financial statements, expressing an opinion as to the conformity of the annual financial statements with accounting principles generally accepted in the United States, expressing an opinion as to the effectiveness of the company’s internal control over financial reporting, and reviewing the company’s quarterly financial statements.

The committee has discussed with Deloitte & Touche the matters required to be discussed by Statement of Auditing Standards No. 61 (Communications with Audit Committees), as amended and adopted by the Public Company Accounting Oversight Board, which requires the independent registered public accounting firm to provide the committee with information regarding the scope and results of its audit of the company’s financial statements, including information with respect to the firm’s responsibilities under auditing standards generally accepted in the United States, significant accounting policies, management judgments and estimates, any significant audit

adjustments, any disagreements with management and any difficulties encountered in performing the audit.

The committee also has received from Deloitte & Touche a letter providing the disclosures required by the applicable requirements of the Public Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence. Deloitte & Touche has also discussed its independence with the committee and confirmed in the letter that, in its professional judgment, it is independent of the company within the meaning of the federal securities laws. The committee also considered whether Deloitte & Touche’s provision of non-audit services to the company and its affiliates is compatible with its independence.

The committee also has reviewed and discussed with the company’s senior management the audited financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2009 and management’s reports on the financial statements and internal controls. Management has confirmed to the committee that the financial statements have been prepared with integrity and objectivity and that management has maintained an effective system of internal controls. Deloitte & Touche has expressed its professional opinions that the financial statements conform with accounting principles generally accepted in the United States and that management has maintained an effective system of internal controls. In addition, the company’s Chief Executive Officer and Chief Financial Officer have reviewed with the committee the certifications that each will file with the Securities and Exchange Commission pursuant to the requirements of the Sarbanes-Oxley Act of 2002 and the policies and procedures management has adopted to support the certifications.

Based on these considerations, the Audit Committee has recommended to the Board of Directors that the company’s audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2009.

Sempra Energy has approximately 215,000 shareholders.

The only person known to us to own beneficially more than 5% of our outstanding shares is BlackRock, Inc., 40 East 52^nd Street, New York, New York. BlackRock has reported that at December 31, 2009, it and related entities beneficially owned 20,017,555 shares for which they had sole voting and dispositive power. These shares represent approximately 8% of our outstanding shares.

Our employee savings and stock ownership plans hold 17,182,813 shares of our common stock (approximately 7% of our outstanding shares) for the benefit of employees.

Our directors and executive officers are required to file reports with the Securities and Exchange Commission regarding their ownership of our shares. Based on our review of the reports filed and representations from directors and officers that no other reports were required, we believe that all filing requirements were timely met during 2009.

For information regarding share ownership guidelines applicable to our directors and officers, please see “Corporate Governance — Board of Directors — Director Share Ownership Guidelines” and “Executive Compensation — Compensation Discussion and Analysis — Share Ownership Guidelines.”

Proposal 1: Election of Directors

Directors are elected at each annual meeting for terms expiring at the next annual meeting.

The Corporate Governance Committee has recommended and the Board of Directors has nominated the following ten individuals, all of whom currently are directors, for election as directors:

James G. Brocksmith Jr.

Donald E. Felsinger

Wilford D. Godbold Jr.

William D. Jones

William G. Ouchi

Carlos Ruiz

William C. Rusnack

William P. Rutledge

Lynn Schenk

Neal E. Schmale

The proxies and voting instructions solicited by the board will be voted for these ten nominees unless other instructions are specified. If any nominee should become unavailable to serve, the proxies may be voted for a substitute nominee designated by the board, or the board may reduce the authorized number of directors.

We have not received notice of any additional candidates to be nominated for election as directors at the 2010 Annual Meeting and the deadline for notice of additional candidates has passed. Consequently, the election of directors will be an uncontested election and our bylaw providing for majority voting in uncontested elections will apply. Under majority voting, a nominee must receive more votes “FOR” than “AGAINST” his or her election to be elected as a director. In addition, the “FOR” votes must represent more than 25% of our outstanding shares. If a nominee who currently is serving as a director does not receive sufficient “FOR” votes to be re-elected, the director will cease to be a director not later than 90 days following the certification of the election results, and the resulting vacancy in the board may be filled by the remaining directors.

The board has determined that each non-officer nominee is an independent director. Information concerning the board’s independence standards is contained under the caption “Corporate Governance — Board of Directors — Director Independence.”

Biographical information regarding each director nominee and his or her qualifications to serve as a director is set forth below. The year shown as election as a director is the year that the director was first elected as a director of Sempra Energy or a predecessor corporation. Unless otherwise indicated, each director has held his or her principal occupation or other positions with the same or predecessor organizations for at least the last five years.

The Audit Committee is directly responsible and has sole authority for selecting, appointing, retaining and overseeing the work and approving the compensation of our independent registered public accounting firm. The committee also pre-approves all audit and permissible non-audit services provided by Deloitte & Touche. The committee’s pre-approval policies and procedures provide for the general pre-approval of specific types of services, give detailed guidance to management as to the specific services that are eligible for general pre-approval and provide specific cost limits for each service on an annual basis. They require specific pre-approval of all other permitted services. For both types of pre-approval, the committee considers whether the services to be provided are consistent with maintaining the firm’s independence.

The policies and procedures also delegate authority to the chair of the committee to address any requests for pre-approval of services between committee meetings, with any pre-approval decisions to be reported to the committee at its next scheduled meeting.

We are asking our shareholders to ratify the appointment of Deloitte & Touche as our independent registered public accounting firm for 2010. Ratification would be advisory only, but the Audit Committee would reconsider the appointment if it were not ratified. Ratification requires the favorable vote of a majority of the votes cast, and the approving majority also must represent more than 25% of our outstanding shares.

The following proposal has been submitted by a shareholder and is included in this proxy statement in accordance with the Securities and Exchange Commission’s Shareholder Proposal Rule. It is presented as submitted by the shareholder proponent, whose name and address will be provided promptly to any shareholder who orally or in writing requests that information from our Corporate Secretary.

The proposal will be voted on at the Annual Meeting only if it is properly presented by the shareholder proponent or the proponent’s qualified representative. To be approved by shareholders, the proposal must receive the favorable vote of a majority of the votes cast on the proposal, and the approving majority must also represent more than 25% of our outstanding shares.

FOR THE REASONS STATED BELOW, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “AGAINST” THIS PROPOSAL

The Proposal

3. Shareholder Say on Executive Pay

RESOLVED — the shareholders of our company recommend that our board of directors adopt a policy requiring that the proxy statement for each annual meeting contain a proposal, submitted by and supported by Company Management, seeking an advisory vote of shareholders to ratify and approve the board Compensation’s Committee Report and the executive compensation policies and practices set forth in the Company’s Compensation Discussion and Analysis.

This proposal topic won our 49% support at our 2009 annual meeting. Votes on 2009 “Say on Pay” resolutions averaged more than 46% in favor. More than 20 companies had votes over 50%, demonstrating strong shareholder support for this reform.

“There should be no doubt that executive compensation lies at the root of the current financial crisis,” wrote Paul Hodgson, a senior research associate with The Corporate Library http://www.thecorporatelibrary.com, an independent research firm. “There is a direct link between the behaviors that led to this financial collapse and the short-term compensation programs so common in financial services companies that rewarded short-term gains and short-term stock price increases with extremely generous pay levels.”

Nell Minow said, “If the board can’t get executive compensation right, it’s been shown it won’t get anything else right either.”

A Los Angeles Times article was titled, “Sempra CEO’s pay in fine print; The firm’s disclosures on compensation lack clarity despite new rules to boost transparency,” March 16, 2007.

Donald Felsinger, our CEO, has a potential payment of $35 million for change in control termination. Mr. Felsinger had an aggregate total accumulated benefit of $22 million for all of his retirement and pension plans. This was substantial, considering that he also has an aggregate balance of $15 million in non-qualified deferred compensation plans. This may be an indicator that compensation practices were not well-aligned with shareholder interests. Source: The Corporate Library.

The equity ownership guideline for Mr. Felsinger was only four times his base salary. Our company provided tax gross-ups for executives as well as accelerated vesting of all stock awards.

The merits of this Executive Pay proposal should also be considered in the context of the need for improvements in our company’s corporate governance. In 2009 the following governance issues were identified:

Our directors had 13 seats on boards rated “D” by The Corporate Library. Our company is probably in the worst 10% of Fortune 500 companies for having the highest number of directors on D-rated boards.

The Corporate Library downgraded our company’s rating from “B” to “D.” Our directors still had a retirement plan – independence concern. We had no shareholder right to an independent board chairman, an independent lead director, cumulative voting or to act by written consent.

The above concerns shows there is need for improvement. Please encourage our board to respond positively to this proposal: Shareholder Say on Executive Pay — Yes on 3.

The Board of Directors Position

The Board of Directors and its Compensation Committee appreciate the underlying goal of the shareholder proposal to provide shareholders with a mechanism to convey their views regarding executive compensation policies and practices.

However, there are legislative proposals pending in Congress that would require a more comprehensive shareholder advisory vote than that sought by the shareholder proposal. The legislative proposals are supported by President Obama, have been approved in the House of Representatives and are pending in the Senate. We believe a requirement for an advisory vote on executive

compensation is likely to be enacted and applicable to us for next year’s Annual Meeting of Shareholders.

The legislative proposals call for an annual shareholder advisory vote “to approve the compensation of executives” as disclosed in the proxy statement. In contrast, the shareholder proposal does call not for approval of our executive compensation itself but merely approval of “the Compensation’s Committee Report and the executive compensation policies and practices set forth in the Company’s Compensation Discussion and Analysis.” Implementing the shareholder proposal would not satisfy expected legislative mandates.

In view of the pending legislative proposals, the board and the committee believe that it would be premature to implement a shareholder advisory vote regarding executive compensation. They believe that shareholders should not approve a proposal recommending an advisory vote that would not satisfy expected legislative mandates.

In addition, shareholders already have multiple mechanisms by which they can provide input regarding executive compensation and our compensation processes. Direct communications are an effective means of expressing specific observations on compensation matters. Shareholders may express their views and have them considered through writing to the board, to the compensation committee, to individual directors or committee members, or to company management. These communications should be sent to the attention of our Corporate Secretary, Sempra Energy, 101 Ash Street, San Diego, CA 92101-3017. For additional information regarding these communications, please see the discussion under “Corporate Governance — Communications with the Board.”

Shareholders may also express their views at annual meetings of shareholders that are attended not only by management but also by directors. They also have the opportunity to vote on the approval of equity compensation plans and may express their views in electing directors who, in uncontested elections, must receive a majority of the votes cast to be elected.

During the last several months, we have also requested the views of our large institutional investors regarding our corporate governance practices, including our executive compensation. They generally viewed our compensation levels, polices and practices favorably and appropriate to support our pay-for-performance philosophy.

The board and the compensation committee believe these existing mechanisms provide appropriate and effective opportunities for communication both from and to shareholders. They permit shareholders to express their individual and collective views in a comprehensive and thoughtful manner that permits an appropriate company response.

Accordingly, in light of the likelihood that legislation will be enacted requiring a different and more comprehensive shareholder advisory vote on executive compensation than that contemplated by the shareholder proposal and our continuing commitment to corporate governance, executive compensation transparency and direct communications with shareholders, the board and the compensation committee believe that the adoption of the shareholder proposal would be premature and not in the best interests of shareholders.

Executive Summary

What information is provided in this section?

In this Compensation Discussion and Analysis, we discuss the roles and responsibilities of the Compensation Committee of the Sempra Energy Board of Directors. We outline our compensation philosophy and discuss how the Compensation Committee determines executive pay. We describe each element of executive pay, including base salaries, short- and long-term incentives and executive benefits. We also describe how we manage risk in our incentive compensation plans.

What is our Compensation Philosophy?

The Compensation Committee of our Board of Directors sets the company’s executive pay philosophy.

Our pay programs align pay with short- and long-term company performance. We believe this is the best way to attract, motivate and retain key executive talent and promote strong, sustainable long-term performance.

Company performance is the key indicator of whether our programs are effective. We use earnings as the primary measure of company performance in our annual incentive

plans. In contrast, stock price appreciation and total return to shareholders are the key measures for long-term performance.

How has the company performed compared to general industry and our peers?

Sempra’s 2009 performance, as measured by earnings, was solid.

Our Total Shareholder Return continues to outpace the market. Both our short- and long-term total return significantly exceed the market.

As shown in Figure 1, earnings results have been consistently strong. Table 1 shows the company’s total return to shareholders has substantially exceeded the returns of both the S&P Utilities Index and the S&P 500 Index. Performance-based incentive compensation for our executive officers reflects the company’s superior performance.

Compensation Committee Roles and Responsibilities

Overview

The Compensation Committee’s primary role is to determine all aspects of compensation for our executive officers. The committee reviews all components of pay for the Chief Executive Officer and other executive officers.

The committee holds four regularly scheduled meetings each year, with additional meetings scheduled when required. The committee’s chair approves the agenda prior to each meeting. Three directors currently sit on the committee. Each director is:

The committee:

The most recent charter review was held in June 2009. The charter is on our website at www.sempra.com under the “Investor” and “Governance” tabs.

Responsibilities of the Compensation Committee

The Compensation Committee’s major responsibilities include:

Key Deliberations in 2009

Under a policy recommended by the committee and adopted by the board in 2009, change in control benefits for new officers will not include tax gross-ups.

In June 2009, the committee reviewed market practices related to executive stock ownership guidelines. Based on this review, the committee increased the CEO’s ownership guideline from 4x base salary to 5x base salary.

Tally Sheets for Committee and Board

The Compensation Committee uses tally sheets, along with information prepared annually for the proxy statement, to provide:

Tally sheets provide the committee with an understanding of the company’s total executive compensation and benefit program. However, the committee does not rely on tally sheets to establish specific pay levels, which are instead based primarily on external market data, and other considerations described elsewhere in this discussion.

In addition, board members receive a Compensation Program Summary. The summary provides an overview of the Company’s executive compensation philosophy, information on each executive compensation plan, and officer and employee demographic data.

The Compensation Committee’s Advisors

The Compensation Committee retains advisors to assist it on matters affecting executive compensation. It has the sole authority to select, compensate and terminate its external advisors.

In 2009, Hewitt Associates was the committee’s primary compensation consultant. A Hewitt representative attended all committee meetings. He met in executive session with the committee members several times during 2009.

Hewitt Associates supported the committee by:

Total fees paid in 2009 for Hewitt’s consulting services were $228,096. The committee must pre-approve any work done by Hewitt for the company.

In 2010, the Hewitt consulting team that served the Committee joined Exequity and the Committee selected Exequity as its independent compensation consultant. Exequity is a nationally recognized independent provider of executive compensation advisory services with no legal or financial connection to any other service provider.

Our Chief Executive Officer attends the non-executive session of each committee meeting, as does our Senior Vice President of Human Resources. Our human resources department assists the committee by preparing tally sheets and other compensation information and analyses for consideration by the committee. Both the committee and the independent consultant receive all presentation materials well in advance of committee meetings.

Our accounting, finance and law departments also support the committee with respect to compensation-related matters, including issues related to broad-based benefit plans and regulatory reporting and compliance.

Management’s Role

Our Chief Executive Officer does not determine or approve any element or component of his own pay. Our other executive officers also do not determine or approve their own pay. This includes base salary, annual bonus, long-term incentives, or other aspects of compensation. Our

CEO does not meet separately with the committee’s compensation consultants.

The Compensation Committee does seek our CEO’s views on the performance of our other executive officers and he makes pay recommendations for these officers. In addition, the committee frequently requests input from the CEO on what programs and goals he believes might be most appropriate given the strategic direction of the company.

Labor Market Benchmarking

How does the committee use external market data in determining pay?

The Compensation Committee uses external pay data to help align executive compensation levels, in total and by component, with the labor market. The committee views the labor market for our most senior positions as a nationwide, broad cross-section of companies in various industries.

During this benchmarking process, the committee:

Table 2.

How does the committee use internal equity in determining pay?

The committee uses internal equity to determine the compensation for positions that are unique or difficult to benchmark against market data. Internal equity is also considered in establishing compensation for positions considered to be equivalent in responsibilities and importance.

Compensation Components

The primary components of our compensation program are:

Additional benefits include health and welfare programs, retirement and savings plans, personal benefits and severance pay.

All of our executive officers participate in the same compensation programs. However, market compensation levels vary substantially based upon the roles and responsibilities of individual officers. Thus, appropriately, the pay of our Chief Executive Officer is substantially higher than that of our other executive officers.

Managing Risk in Compensation Plans

The committee manages the risk inherent in incentive compensation plans by balancing short- and long-term incentives and linking a higher proportion of total compensation to long-term incentives. Risk is also managed through the incentive plan design and selection of the performance measures.

Our long-term incentive awards:

Our annual bonus plans:

Pay Mix

What is “Pay Mix”?

Pay mix is the relative value of each of the primary compensation components as a percentage of total compensation. Figure 2 shows each component of our CEO’s total pay at target company performance.

Figure 2.

Why is pay mix important?

Our pay mix helps to align the interests of executives with the interests of shareholders. It does this by providing a much greater portion of pay through performance-based annual and long-term incentives than base salary. This means that most pay is variable and will go up or down in value based on company performance. Approximately 85% of our CEO’s total pay is delivered through performance-based incentives.

Table 3 shows the percent of total pay at company target performance that comes from each major pay component for each of our named executive officers.

Table 3.

Actual pay mix may vary substantially from that shown in the table. This may occur as a result of corporate performance, which greatly affects annual bonuses and the value of long-term incentives.

Our executive compensation programs emphasize performance-based pay. This includes annual bonuses and equity-based long-term incentive awards. However, base salaries remain a necessary and typical part of compensation for attracting and retaining outstanding employees at all levels.

Salaries for our executive officers approximate the median of those for Fortune 500 companies. Using national general industry comparisons helps us attract and retain top-quality executive talent from a broad range of backgrounds.

The Compensation Committee annually reviews base salaries for executive officers.

Base Salary Adjustments for 2009

In November 2008, Hewitt Associates presented its most current executive pay benchmarking data. Based on the Compensation Committee’s consideration of market data, and other factors described above, base salary adjustments were made on January 1, 2009.

The committee approved a 3% salary increase for the CEO from $1,150,000 to $1,184,300. Increases for the other executive officers named in the Summary Compensation Table ranged from 2.9% to 3.5%.

2. Performance-Based Annual Bonuses

Incentive Compensation Pool

Executive officers may receive annual performance-based bonuses under our shareholder-approved Executive Incentive Plan. Under the terms of the plan, a compensation pool based on operating earnings is established for each year. The plan is intended to preserve the deductibility of the bonuses under Section 162(m) of the Internal Revenue Code while providing flexibility to the Compensation Committee in administering the plan.

Please see “Executive Compensation — Compensation Tables — Grants of Plan-Based Awards” for additional details regarding the plan.

Performance Guidelines and Bonus Payments

Each year the Compensation Committee establishes performance guidelines for bonus payments. These guidelines are substantially lower than the shareholder-approved incentive plan maximums.

Consistent with our pay-for-performance philosophy, the guidelines do not provide for any bonus payment unless the company attains a threshold (minimum) performance level for the year. Bonus opportunities increase from 0% for performance at the threshold level to 200% of target for performance at maximum.

Potential bonuses at threshold, target and maximum company performance are expressed as a percentage of each executive officer’s base salary. Table 4 illustrates how these percentages vary with the individual officer’s position and attainment of goals.

In 2009, bonus opportunities were as follows:

Table 4.

Performance at target is intended to result in bonuses at the mid-point of those for executives with comparable levels of responsibility at Fortune 500 companies. Target bonus potentials and percentages are consistent with the leverage typically found in bonus plans at Fortune 500 companies. Bonus payouts at our maximums are intended to approximate the 75^th percentile of bonus payouts among peer companies.

Because our performance was strong while bonuses decreased in the external market, our actual payments exceeded the 75^th percentile of the external market data.

Extraordinary corporate or individual performance may result in the payment of bonuses above the guidelines but not to exceed plan maximums.

What were the annual bonus performance goals for the named executive officers?

For 2009, the committee selected earnings for the measurement of annual corporate performance. For incentive plan purposes, “earnings” means Sempra Energy Net Income excluding earnings attributable to non-controlling interests.

Why is only one performance measure used for the annual bonus plan?

The committee selected earnings as the annual bonus performance measure because it believes this measure provides an accurate and comprehensive picture of annual company performance that plan participants, shareholders, analysts and other parties clearly understand. While one financial measure is used for the short-term incentive plan, other measures are considered within the overall compensation program:

How was the 2009 earnings goal determined?

Table 5 shows the earnings criteria for 2009 bonuses:

Table 5.

The committee set 2009 bonus guidelines, with the target of $750 million in earnings, based on anticipated business unit earnings. The 2009 earnings guidelines exclude earnings from the RBS Sempra Commodities joint venture.

This was due to the volatility of the joint venture’s earnings and the difficulty in predicting the company’s share of the earnings.

Consistent with the approach taken in prior years, the committee also determined at the beginning of the year that the following items would be excluded from the calculation of earnings for bonus purposes:

Earnings for bonus purposes include 10% of the value of any gains or losses for the sale of assets or write-down of assets in connection with a sale. This is because the committee believes that the impact of asset sales should be measured primarily through stock price. Most of the impact would, then, be reflected in the long-term incentive plan.

2009 Performance-Based Annual Bonus Payments

Earnings for 2009 bonus purposes were $798 million, between the $750 million earnings target and $825 million maximum under the committee’s guidelines. This results in a performance result, prior to any discretionary adjustments by the committee, of 164% of target. Based on this performance and its consideration of the contributions of each executive officer, the Compensation Committee approved the payment of the annual bonuses shown in Table 6:

Table 6.

Long-term equity-based incentives are the largest single component of each executive officer’s compensation package. (See Table 3 for these percentages.)

We measure our performance over a four-year performance period. Competitive benchmarking suggests that a three-year performance period is the most common measurement period in the external market. However, the committee believes at this time that using a four-year performance period for our equity-based incentives promotes a long-term strategic focus.

What type of equity is granted?

In 2009, the grant date fair value of long-term incentive plan awards was 80% in performance-based restricted stock units (performance-based RSUs) and 20% in non-qualified stock options.

Why is this mix of equity used?

The Compensation Committee approved this mix after considering many variables. These included alignment with shareholder interests, plan expense, share usage and market trends.

The committee believes that the combination of stock options and performance-based restricted stock units appropriately rewards both absolute stock price growth and stock price growth relative to the company’s industry peers. This creates a strong link between executive pay and shareholder returns over a multi-year performance period.

What are general practices with respect to equity grants?

The following equity award practices have been in place for many years:

In making the annual grants, the committee:

On the annual January grant date:

Equity awards also may be granted upon the hiring or promotion of executive officers or to award extraordinary performance with the approval of the committee.

What is the value of the equity grants?

The estimated grant date fair values of our annual awards have generally been between the median and the 75^th percentile of market data. However, the actual amounts realized by equity award recipients will depend on future stock price performance. These amounts will not necessarily track with the grant date value targets.

Table 7 illustrates the estimated grant date fair value of 2009 annual awards as a percentage of base salary. These percentages are unchanged from 2008.

Table 7.

Why does the company grant performance-based restricted stock units?

Stock options are an important component of shareholder-aligned executive compensation. However, the Compensation Committee sought a more direct link to performance in comparison to indices and peers. To achieve this result, the committee uses performance-based restricted stock units as the major component of our equity grants. An additional advantage of performance-based restricted stock units is that, in comparison to stock options, fewer shares are required to deliver the same economic value. This results in lower dilution.

What are the performance goals for restricted stock units?

Each performance-based restricted stock unit represents the right to receive between zero and 1.5 shares of Sempra Energy common stock based on the company’s four-year cumulative total shareholder return compared to the S&P 500 Utilities Index as shown in Table 8. The plan pays out performance-based dividend equivalents at the end of the performance period based on the number of shares earned.

Table 8.

What were the results for the four-year performance period ending December 31, 2009?

Our relative total shareholder return from 2006 to 2009 met the 94^th percentile of the S&P 500 Utilities Index. As a result, all of the performance-based restricted stock for the 2006-2009 Long-Term Incentive Plan cycle was released to plan participants after the committee certified performance results.

Why does the company grant stock options?

While playing a lesser role in our current pay program, stock options remain an appropriate and highly motivating vehicle for delivering long-term incentives. Our stock options become exercisable in equal annual installments over a four-year period.

Options provide a direct link with shareholder interests, as they have no compensation value unless our stock price increases above the grant date price.

Were any special equity awards granted in 2009?

On February 19, 2009, the committee awarded Mr. Snell and Mr. Householder a special grant of performance-based restricted stock. This was in recognition of their contributions to the creation of the RBS Sempra Commodities joint venture. The award vests in three ratable installments. The committee has the discretion to reduce the unvested portion of the award.

Benefit Plans

Our executive officers also participate in other benefit programs including: 1) Health, Life Insurance and Disability Plans; 2) Retirement Plans; 3) Savings and Deferred Compensation Plans; and 4) Other Benefit Programs.

Our executive officers participate in life, disability, medical and dental insurance group plans that are available to virtually all employees. These are common benefits essential to attracting a high-quality workforce.

Do executives receive any benefits in addition the basic group plans?

In addition to the basic group plans, our executive officers participate in the following:

Our executive officers participate in our Cash Balance Plan and a Supplemental Executive Retirement Plan.

What is the Cash Balance Plan?

The Cash Balance Plan is a tax-qualified pension plan available to most company employees.

Why does the company offer a supplemental retirement plan?

The committee believes that retirement, savings and deferred compensation plans, in general, and the Supplemental Executive Retirement Plan in particular, are important elements of an overall compensation package. This package is designed to recruit and retain executive talent, especially mid-career executives, and to retain longer-term executive participants.

How are benefits calculated?

Our Supplemental Executive Retirement Plan (SERP) provides executive officers with retirement benefits based on the executive’s final average pay,¹ actual years of service, and age at retirement. SERP benefits are reduced by benefits payable under the broad-based Cash Balance Plan.

Both the Cash Balance Plan and the Supplemental Executive Retirement Plan use only base salary and annual incentive bonuses in calculating benefits. The value of long-term incentive awards is not included.

Benefits under both plans use the same interest rates for calculating lump sum distributions.

Our executive officers, together with most other company employees, participate in a broad-based, tax-qualified 401(k) Savings Plan. Officers may also participate in a deferred compensation plan.

What is the 401(k) Savings Plan?

Employees may contribute a portion of their pay to a tax-qualified 401(k) savings plan. Contributions to the plan are invested on a tax-deferred basis.

The company matches one-half of the first 6% of the employee’s contributions. We then make an additional company contribution of up to 1% of base pay if we meet or exceed annual earnings targets. The Internal Revenue Code limits the amount of compensation eligible for deferral under tax-qualified plans.

What is the deferred compensation plan?

Our executive officers and other key management employees also may defer up to 100% of their base salary and bonus under a Deferred Compensation Plan. Participants can direct these deferrals into:

Deferred compensation plan participants receive company matching contributions identical to the matching contributions that would have been provided under the 401(k) savings plan, but for maximum dollar limitations on amounts that may be deferred under tax-qualified plans.

All employee contributions, matching company contributions, and investment earnings in both the 401(k) savings plan and deferred compensation plan vest immediately.

We provide certain other typical benefits to our executive officers. The Compensation Committee reviews the level and types of these benefits each year. The committee

believes that these benefits are reasonable and important in attracting and retaining executive talent.

These benefits include financial planning services and excess personal liability insurance. Our Chief Executive Officer has an executive security specialist for personal and business driving in the context of an overall security plan.

Severance Pay and Change in Control Arrangements

Our executive officers have severance pay agreements that include change in control features. The agreements were updated in 2008 to comply with Section 409A of the Internal Revenue Code.

Why does the company provide severance agreements?

Severance arrangements are a prevalent market practice. The Compensation Committee believes that they are effective in attracting executives who are leaving an existing employer, in mitigating legal issues upon a separation of employment and in retaining talent during uncertain times. By mitigating the effects of potential job loss, our severance agreements reinforce management continuity, objectivity and focus on shareholder value, particularly in actual or potential change in control situations.

What benefits do severance agreements provide?

The severance agreements provide for cash payments and the continuation of certain other benefits for a limited period when the company terminates an executive’s employment other than for cause, death or disability or when the executive terminates for “good reason.”

What does termination for “Good Reason” mean?

A termination for “good reason” may occur if there is an adverse change in scope of duties or in compensation and benefit opportunities or, following a change in control, changes in employment location.

These provisions provide safeguards against arbitrary actions that effectively force an executive to resign. In order to receive some of the benefits in the agreement, the executive must comply with contractual confidentiality, non-solicitation and non-disparagement obligations.

Does the agreement provide for additional benefits to offset any excise taxes incurred by the executive as a result of the severance payment?

To the extent that our executive officers would incur excise taxes in connection with severance payments, their severance agreements provide that they will be made whole for these taxes. These are taxes above and beyond regular income taxes.

Under a policy adopted in 2009 by the Sempra Energy Board of Directors, severance agreements for new officers will not provide for excise tax gross-ups.

What happens to outstanding equity awards upon a change in control?

Under our shareholder-approved long-term incentive plan, upon a change in control of the company, all previously granted stock options vest and become immediately exercisable. All performance and time restrictions lift for outstanding restricted stock and restricted stock unit grants.

Acceleration of equity awards is the predominant industry practice for existing equity plans. This approach creates a clean slate for the emerging organization and allows for alignment with metrics that are forward looking and appropriate to a newly created company and management team.

Evaluating and Compensating the CEO

The Compensation Committee annually reviews and approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer. These goals and objectives are based primarily upon objective criteria, including business performance; accomplishment of strategic and financial objectives; development of management; and other matters relevant to the short-term and long-term success of the company and the creation of shareholder value.

How does the board evaluate the CEO’s performance?

All independent directors provide input for the CEO’s performance evaluation. The committee leads the process and reports the consolidated results back to the independent directors. The chair of the committee discusses the board’s evaluation with the CEO. Based upon this evaluation and subject to ratification by the board acting solely through the independent directors, the committee determines the CEO’s compensation level. This includes base salary and awards under annual and long-term incentive plans.

In determining the long-term component of our CEO’s compensation, the committee considers the company’s performance and relative shareholder return, the value of incentive awards to chief executive officers at comparable companies, and the awards granted in past years.

What were the CEO’s 2009 goals?

Our CEO, Donald E. Felsinger, met or exceeded his 2009 objectives, which included: