VI. Preferred Stock

SDG&E proposes to issue new preferred or preference stock through an offering and sale to the public with either negotiated underwritings or by private placements with institutional or other investors. SDG&E has not yet determined the precise amount and timing of each placement, and the securities' features have not been finally determined. They will be established by SDG&E prior to the offering with due regards for its funding requirements and the prevailing and anticipated market conditions.

SDG&E anticipates that the terms and conditions of such securities may include, but not be limited to, preference, dividends, redemption provisions, capital replacement, and trust structures.

Preference stock. SDG&E's preference stock is junior to its preferred stock and senior to its common equity. Preference stock rights to dividends - and to a redemption payment if the corporation is dissolved - generally will be subordinated to the rights of the preferred stock, but will rank superior to the claims of common stock.

Dividends. SDG&E proposes to pay preferred and preference dividends at the discretion of its Board of Directors; the dividends can be either cumulative or non-cumulative in nature. New issues may feature dividend rates which are fixed, floating, or set through remarketing or Dutch auction procedures. SDG&E may include a dividend deferral provision that may allow for optional deferral of payments of dividends.

Redemption. Some preferred and preference stocks are perpetual in nature, as is common stock. Others have a specified redemption date on which the issuer must redeem the shares at a stated value. There are preferred and preference stocks that, like debt instruments, feature sinking funds. Finally, some preferred or preference securities can be callable anytime at SDG&E's option, in whole or in part, at a preset price plus accrued and unpaid dividends up to the call date.

Capital Replacement. SDG&E proposes that it may specify that it intends to replace the preferred stock when redeemed with replacement securities having similar or greater equity characteristics.

Special-purpose entity transactions. In some instances it may be advantageous for SDG&E to guarantee the preferred securities of a special-purpose entity. A special-purpose entity would be a subsidiary or other affiliate of the company (including a limited partnership, a limited liability company or a business trust) that would issue preferred securities and loan the proceeds from the issuance to SDG&E in exchange for debt securities featuring terms and conditions specified at the time of issuance. The special-function entity's securities may be guaranteed by SDG&E. SDG&E asserts that it can obtain external capital which qualifies as having preferred characteristics for the credit rating agencies but which the company can treat as debt for tax purposes. The Commission has previously authorized guarantees of preferred securities issued by special-purpose entities in D.94-07-062 (SDG&E) and D.05-08-008 (SCE).

The Commission has previously authorized SDG&E to issue preferred or preference stock and we will approve this request. As already noted, this approval does not affect the separate determination of the capital structure or cost of capital deemed reasonable for recovery in rates.