UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 1-2745
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-7410
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1)
has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past
90 days.
Yes X No _
Indicate the number of shares outstanding of each
of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $3.75 PAR VALUE:
1,000 SHARES OUTSTANDING ON JULY 31, 1994
REGISTRANT MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION
H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE
FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
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Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 1994 and December 31, 1993 1
Condensed Consolidated Statements of Income--
Three Months and Six Months Ended
June 30, 1994 and 1993 2
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1994 and 1993 3
Notes to Condensed Consolidated Financial
Statements 4 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11 - 18
PART II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
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[CAPTION]
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1994 1993
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 3,247 $ 4,243
Notes receivable from affiliates 235,198 269,661
Accounts receivable 104,704 128,610
Inventories 23,786 23,646
Gas supply realignment costs 48,556 59,862
Recoverable natural gas purchase contract
settlement costs 175 18,535
Gas imbalance receivables 34,424 43,125
Other 12,905 2,622
Total Current Assets 462,995 550,304
Investments in Joint Venture and Other 46,873 46,429
Plant, Property and Equipment 2,218,788 2,206,672
Less accumulated depreciation and amortization 1,446,222 1,419,771
772,566 786,901
Deferred Charges:
Gas supply realignment costs 115,331 119,724
Other 26,616 27,806
141,947 147,530
$1,424,381 $1,531,164
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,528 $ 107,298
Accounts payable 37,789 70,298
Accrued income taxes 32,349 14,695
Accrued interest 19,349 19,851
Gas imbalance payables 31,185 51,007
Other 18,627 20,147
Total Current Liabilities 145,827 283,296
Long-Term Debt 323,763 329,403
Deferred Credits and Other:
Deferred income taxes 72,938 84,726
Reserves for regulatory matters 143,071 120,771
Operating and other reserves 67,577 69,168
Other 34,537 23,830
318,123 298,495
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 77,605 77,605
Retained earnings 559,063 542,365
Total Stockholder's Equity 636,668 619,970
$1,424,381 $1,531,164
</TABLE>
See accompanying notes.
<TABLE>
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(In Thousands)
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Revenues:
Natural gas sales $ 57,274 $ 65,142 $144,147 $282,001
Transportation and storage 85,661 43,113 183,986 94,447
Other 34,023 13,934 84,356 35,161
176,958 122,189 412,489 411,609
Costs and Expenses:
Natural gas cost 57,484 22,793 139,220 165,023
Transition cost recovery and gas
purchase contract settlement costs27,529 11,471 70,449 28,154
Operating and maintenance 23,521 24,264 46,364 52,001
General and administrative 20,999 22,675 39,259 45,150
Depreciation and amortization 16,096 15,886 32,132 31,720
Taxes, other than income 4,368 4,651 8,989 9,254
149,997 101,740 336,413 331,302
Operating Income 26,961 20,449 76,076 80,307
Other Income, Net:
Equity in earnings of
joint venture 2,214 2,093 4,495 4,513
Other (141) 326 207 400
2,073 2,419 4,702 4,913
Interest Income (Expense):
Interest income, primarily
from affiliates 3,658 5,477 8,497 8,562
Interest expense (11,322) (11,209) (22,400) (29,952)
Interest capitalized 354 43 626 80
(7,310) (5,689) (13,277) (21,310)
Income before Income Taxes 21,724 17,179 67,501 63,910
Income Taxes 8,429 6,522 26,003 24,077
Net Income $ 13,295 $ 10,657 $ 41,498 $ 39,833
</TABLE>
See accompanying notes.
<TABLE>
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1994 1993
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 41,498 $ 39,833
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32,132 31,720
Deferred income taxes (18,083) (14,350)
Equity in earnings of joint
venture, less distributions (494) (513)
Reserves for regulatory matters 22,300 7,151
Gas supply realignment costs 15,699 -
Natural gas purchase contract
settlement costs 18,360 28,274
Change in:
Accounts receivable 23,906 74,542
Inventories (140) (3,217)
Accounts payable (32,509) (18,263)
Accrued interest and income taxes, net 16,984 22,832
Other current assets and liabilities (16,423) 22,490
Other 12,636 5,093
Net cash provided by operating
activities 115,866 195,592
Cash Flows from Investing Activities:
Plant, property and equipment additions (21,142) (18,739)
Notes from affiliates 34,463 (147,822)
Proceeds from disposal of assets and other 1,027 855
Net cash provided by (used in)
investing activities 14,348 (165,706)
Cash Flows from Financing Activities:
Payments of long-term debt (106,410) (5,640)
Dividends paid (24,800) (24,800)
Net cash used in financing
activities (131,210) (30,440)
Net Decrease in Cash (996) (554)
Cash at Beginning of Period 4,243 1,961
Cash at End of Period $ 3,247 $ 1,407
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 19,938 $ 19,681
Income taxes, net 26,471 23,395
</TABLE>
See accompanying notes.
1. Basis of Presentation
Southern Natural Gas Company is a wholly owned
subsidiary of Sonat Inc.
The accompanying condensed consolidated
financial statements of Southern and its subsidiaries
(Southern) have been prepared in accordance with the
instructions to Form 10-Q and include the information
and footnotes required by such instructions. In the
opinion of management, all adjustments including those
of a normal recurring nature have been made that are
necessary for a fair presentation of the results for
the interim periods presented herein.
Certain amounts in the 1993 condensed
consolidated financial statements have been
reclassified to conform with the 1994 presentation.
2. Joint Venture
Southern owns 50 percent of Bear Creek Storage
Company (Bear Creek), an underground gas storage
company. The following is summarized income statement
information for Bear Creek. No provision for income
taxes has been included since its income taxes are
paid directly by the joint-venture participants.
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Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(In Thousands)
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Revenues $8,843 $8,894 $17,873 $18,585
Expenses:
Operating Expenses 1,287 1,407 2,565 2,918
Depreciation 1,350 1,349 2,700 2,699
Other Expenses, Net 1,780 1,952 3,619 3,942
Income Reported $4,426 $4,186 $ 8,989 $ 9,026
</TABLE>
3. Long-term Debt and Notes To and From Affiliates
As part of Sonat's cash management program,
Southern regularly loans funds to or borrows funds from
Sonat. Notes receivable and payable are in the form of
demand notes with rates reflecting Sonat's return on
funds loaned to its other subsidiaries, average short-
term investment rates and cost of borrowed funds. In
certain circumstances, these notes are subordinated in
right of payment to amounts payable by Sonat under
certain long-term credit agreements.
On May 30, 1994, Southern renewed its short-term
lines of credit with several banks to provide for
borrowings of up to $50 million. Borrowings are
available through May 29, 1995, in the form of unsecured
promissory notes and bear interest at rates based on the
banks' prevailing prime, international or money market
lending rates.
On June 15, 1994, Southern's 9 5/8 Percent Notes
matured and were redeemed. Funds were obtained by a
partial payment from Sonat of its note payable to
Southern.
Loans outstanding under all short-term credit
facilities are for a duration of less than three months.
4. Commitments and Contingencies
Rate Matters - Periodically, Southern and its
subsidiaries make general rate filings with the Federal
Energy Regulatory Commission (FERC) to provide for the
recovery of cost of service and a return on equity. The
FERC normally allows the filed rates to become
effective, subject to refund, until it rules on the
approved level of rates. Southern and its subsidiaries
provide reserves relating to such amounts collected
subject to refund, as appropriate, and make refunds upon
establishment of the final rates.
On September 1, 1989, Southern implemented new
rates, subject to refund, reflecting a general rate
decrease of $6 million. In January 1991 Southern
implemented new rates, subject to refund, that
restructured its rates consistent with a FERC policy
statement on rate design and increased its sales and
transportation rates by approximately $65 million
annually. These two proceedings have been consolidated
for hearing. On October 7, 1993, the presiding
administrative law judge certified to the FERC a
contested offer of settlement pertaining to the
consolidated rate cases that (1) resolved all
outstanding issues in the rate decrease proceeding,
(2) resolved the cost of service, throughput, billing
determinant and transportation discount issues in the
rate increase proceeding, and (3) provided a method to
resolve all other issues in the latter proceeding,
including the appropriate rate design. Under the
settlement, the FERC will decide the rate design issue
based on written submissions of the parties and the
existing record in the proceeding. By orders issued on
December 16, 1993, and May 5, 1994 (the FERC Orders),
the FERC approved the settlement.
On September 1, 1992, Southern implemented another
general rate change. The rates reflected the continuing
shift in the mix of throughput volumes away from sales
and toward transportation and a $5 million reduction in
annual revenues. On April 30, 1993, Southern submitted
a proposed settlement in the proceeding that, if
approved by the FERC, would resolve the throughput and
certain cost of service issues. The rate design issue
is consolidated with similar issues in Southern's rate
proceeding filed May 1, 1993, which is described below,
and will be resolved in that proceeding. The settlement
was approved by the FERC Orders described above.
On May 1, 1993, Southern implemented a general
rate change, subject to refund, that increased its sales
and transportation rates by approximately $57 million
annually. The filing is designed to recover increased
operating costs and to reflect the impact of competition
on both Southern's level and mix of services. A hearing
regarding various cost allocation and rate design issues
in this proceeding is set for November 29, 1994.
Sea Robin Pipeline Company (Sea Robin), a
subsidiary of Southern, has previously filed under the
provisions of Order No. 500 to recover $83.1 million in
gas purchase contract settlement payments from its
former pipeline sales customers, Koch Gateway Pipeline
Company (Koch), successor to United Gas Pipe Line
Company, and Southern. Those filings remain subject to
refund pending the outcome of any prudence challenges in
the proceedings. Although the eligibility issues have
been resolved, one party has reserved its rights to
challenge prudence until such time as certain take-or-
pay allocation issues are resolved with respect to the
flow-through of costs billed to Koch.
Southern is authorized to flow through to its
jurisdictional customers $38.1 million of the costs
allocated to it by Sea Robin as well as the
$32.7 million in Order No. 500 costs allocated to it by
Koch. Southern's flow-through of Koch and Sea Robin's
costs remains subject to refund pending the outcome of
any challenges to the costs or allocation of the costs
in those pipelines' Order No. 500 proceedings. Southern
does not believe that the outcome of any such challenges
will have a material adverse effect on its financial
position.
On July 2, 1993, the FERC issued an order
reaffirming its approval of the non-take-or-pay aspects
of a settlement filed by Koch in 1988, which included
Southern's phased abandonment of its contract demand
with Koch. The order rejected the take-or-pay aspects
of the settlement, including Koch's proposed Order
No. 528 allocation methodology. As a consequence,
various parties that had originally supported the
settlement began contesting it. Koch evidenced its
intention to honor the non-take-or-pay aspects of the
1988 settlement and induced several of the parties to
withdraw their judicial appeals of the July 2 order. On
April 29, 1994, Koch filed multiple settlements that
settled its outstanding take-or-pay issues with
substantially all of its customers, including Southern.
On August 4, 1994, the FERC issued an order approving
the settlements and terminating all take-or-pay
proceedings of Koch. This action should also lead to
the termination of the take-or-pay proceedings of Sea
Robin.
Gas Purchase Contracts - Gas purchase contract
settlement payments (other than the gas supply
realignment payments discussed below) made by Southern
and not previously recovered or expensed are included on
the Condensed Consolidated Balance Sheet at
June 30, 1994, in "Current Assets". Pursuant to a final
and nonappealable FERC order, Southern collected these
amounts from its customers over a five-year period that
ended on April 30, 1994. Southern currently is
incurring no take-or-pay liabilities under its gas
purchase contracts. Southern regularly evaluates its
position relative to gas purchase contract matters,
including the likelihood of loss from asserted or
unasserted take-or-pay claims or above-market prices.
When a loss is probable and the amount can be reasonably
estimated, it is accrued.
Order No. 636 - In 1992 the FERC issued its Order
No. 636 (the Order). The Order required significant
changes in interstate natural gas pipeline services.
Interstate pipeline companies, including Southern, are
incurring certain costs (transition costs) as a result
of the Order, the principal one being costs related to
amendment or termination of existing gas purchase
contracts, which are referred to as gas supply
realignment (GSR) costs. The Order provided for the
recovery of 100 percent of the GSR costs and other
transition costs to the extent the pipeline can prove
that they are eligible, that is, incurred as a result of
customers' service choices in the implementation of the
Order, and were incurred prudently. The prudence review
will extend both to the prudence of the underlying gas
purchase contracts, based on the circumstances that
existed at the time the contracts were executed, and to
the prudence of the amendments or terminations of the
contracts. Numerous parties have appealed the Order to
the Circuit Courts of Appeal.
On September 3, 1993, the FERC generally approved
a compliance plan for Southern and directed Southern to
implement its restructured services pursuant to the
Order on November 1, 1993 (the September 3 order).
Pursuant to Southern's compliance plan, GSR costs that
are eligible for recovery include payments to reform or
terminate gas purchase contracts. Where Southern can
show that it can minimize transition costs by continuing
to purchase gas under the contract (i.e., it is more
economic to continue to perform), eligible GSR costs
would also include the difference between the contract
price and the higher of (a) the sales price for gas
purchased under the contract or (b) a price established
by an objective index of spot-market prices. Recovery
of these "price differential" costs is permitted for an
initial period of two years.
Southern's compliance plan contains two mechanisms
pursuant to which Southern is permitted to recover
100 percent of its GSR costs. The first mechanism is a
monthly fixed charge designed to recover 90 percent of
the GSR costs from Southern's firm transportation
customers. The second mechanism is a volumetric charge
designed to collect the remaining 10 percent of such
costs from Southern's interruptible transportation
customers. These funding mechanisms will continue until
the GSR costs are fully recovered or funded. The FERC
also indicated that Southern could file to recover any
GSR costs not recovered through the volumetric charge
after a period of two years. In addition, Southern's
compliance plan provides for the recovery of other
transition costs as they are incurred and any remaining
transition costs may be recovered through a regular rate
filing.
Southern's customers have generally opposed the
recovery of Southern's GSR costs based on both
eligibility and prudence grounds. The September 3 order
rejected the argument of certain customers that a 1988
take-or-pay recovery settlement bars Southern from
recovering GSR costs under gas purchase contracts
executed before March 31, 1989, which comprise most of
Southern's GSR costs. Those customers subsequently
filed motions urging the FERC to reverse its ruling on
that issue. On December 16, 1993, the FERC affirmed its
September 3 ruling with respect to the 1988 take-or-pay
recovery settlement (the December 16 order). The FERC's
finding that the 1988 settlement is not a bar in general
to the recovery as GSR costs of payments made to amend
or to terminate these contracts does not prevent an
eligibility challenge to specific payments, however, on
the theory that they are actually take-or-pay costs that
would have been unavoidable regardless of the Order.
The December 16 order generally approved Southern's
restructuring tariff submitted pursuant to the
September 3 order. Various parties have sought judicial
review of the September 3 and December 16 orders.
During 1993 Southern reached agreements to reduce
significantly the price payable under a number of above-
market gas purchase contracts in exchange for payments
of approximately $114 million. On December 1, 1993,
Southern filed with the FERC to recover such costs and
approximately $3 million of prefiling interest (the
December 1 filing). On December 30, 1993, the FERC
accepted such filing to become effective
January 1, 1994, subject to refund, and subject to a
determination through a hearing before an administrative
law judge as to whether such costs were prudently
incurred and are eligible for recovery under the Order.
Southern's customers are opposing its recovery of the
GSR costs in this proceeding based on both eligibility
and prudence grounds. The December 30 order rejected
arguments of various parties that, as a matter of law,
a pipeline's payments to affiliates, in this case
Southern's payment to a subsidiary of Sonat Exploration
that represented approximately $34 million of the
December 1 filing, may not be recovered under the Order.
The payment is still subject to challenge on both
eligibility and prudence grounds.
In December 1993 Southern reached agreement to
reduce the price under another contract in exchange for
payments having a present value of approximately
$52 million, which is included in "Deferred Credits and
Other" in the Consolidated Balance Sheet. Payments will
be made in equal monthly installments over an eight-year
period ending December 31, 2001. On February 14, 1994,
Southern made a rate filing to recover those costs as
well as approximately $3 million of other settlement
costs and prefiling interest. In an order issued on
March 16, 1994, the FERC accepted such filing to become
effective on April 1, 1994, subject to refund, and
subject to a hearing before an administrative law judge
as to whether such costs were prudently incurred and are
eligible for recovery under the Order. In its order the
FERC directed that the monthly installment payments be
recovered over the eight-year period during which they
will be incurred. Southern's customers are opposing, on
grounds of both eligibility and prudence, its recovery
of the GSR costs in this proceeding, which has been
consolidated with the proceeding on the December 1
filing.
Since November 1, 1993, Southern has also incurred
"price differential" costs while continuing to purchase
gas under contracts that are in excess of current market
prices. On March 1, 1994, Southern made a rate filing
to recover $17.5 million of these costs that had been
incurred through January 31, 1994. In an order issued on
March 31, 1994, the FERC accepted such filing to become
effective on April 1, 1994, subject to refund, and
subject to a hearing before an administrative law judge
as to whether such costs were prudently incurred and are
eligible for recovery under the Order. On May 31, 1994,
Southern made a rate filing to recover an additional
$15.4 million of these costs that had been incurred
through April 30, 1994. In an order issued on
June 30, 1994, the FERC accepted such filing to become
effective on July 1, 1994, subject to refund, and
subject to a hearing before an administrative law judge
as to whether such costs were prudently incurred and are
eligible for recovery under the Order. Southern's
customers are opposing, on grounds of both eligibility
and prudence, its recovery of the GSR costs in these
proceedings which have been consolidated with the
proceedings on the December 1 filing and the February 14
filing.
On May 27, 1994, the FERC issued an order dealing
with compliance filings and rehearing requests that had
been filed in response to its earlier orders permitting
the recovery, subject to refund, of GSR costs sought to
be collected by Southern. In that order, the FERC
accepted revised tariff sheets that provide for the
recovery of GSR costs related to the termination or
amendment of gas purchase contracts over 36 months,
rather than through a direct bill or over a 15-month
period as earlier proposed by Southern, and permitted on
rehearing the amortization of price differential GSR
costs allocated to interruptible transportation
customers over 12 months, as originally proposed by
Southern, rather than over three months as required by
the FERC in its order of March 16, 1994. The FERC
further ordered that Southern remove certain
"transaction costs" that had been included in its
quarterly GSR filings, noting that they were more
properly included as administrative costs in the next
general rate filing of Southern. Finally, the FERC
ordered that Southern recompute on the basis of actual
prices rather than average prices, and authenticate
through supporting documentation, its claimed price
differential costs that had been included in its
quarterly GSR filings.
In compliance with the May 27 Order, Southern
filed revised tariff sheets that reduced its claimed GSR
costs by approximately $700,000. These revised tariff
sheets were accepted by the FERC in an order issued
June 30, 1994.
Southern plans to make additional rate filings
quarterly to recover its "price differential" costs and
any other GSR costs. Additionally, Southern continues
to make monthly filings designed to adjust the billing
determinants and associated surcharges for its firm
transportation customers to reflect changes in the level
of systemwide contract demands and effective carrying
charges that occur from time to time. The total GSR
costs of $164 million, net of recoveries, accrued
through June 30, 1994, are included in current and long-
term gas supply realignment costs in the Condensed
Consolidated Balance Sheet.
Administrative Law Judge Ruling Concerning
Recoverability of Investment in Offshore Gas Supply
Facilities - In an initial decision issued on
May 2, 1994, an administrative law judge ruled, in a
rate case Southern had filed before the FERC, that
Southern could not include in its rates the
approximately $45 million cost of certain pipeline
facilities placed in service by Southern in 1992 to
connect to its interstate pipeline system extensive new
gas reserves being developed by Exxon Corporation
(Exxon) in the Mississippi Canyon and Ewing Bank Area
Blocks, offshore Louisiana (the Mississippi Canyon
Facilities). The judge ruled that Southern's recovery
of these costs was precluded by the 1988 settlement with
Southern's customers that limits the amount of take-or-
pay payments Southern may recover in its rates. The
judge found that the cost of the facilities constitutes
non-cash consideration to Exxon for a 1989 take-or-pay
settlement and is therefore subject to the dollar "cap"
on these payments contained in the 1988 settlement.
Southern has previously recovered the maximum amount
permitted by the 1988 settlement in its rates.
The judge found alternatively that the Mississippi
Canyon Facilities were underutilized for purposes of
certain "at-risk" conditions contained in the FERC
certificate authorizing the construction of the
facilities and that, in the event his decision that the
cost of the facilities is subject to the take-or-pay
settlement cap were to be overturned on appeal, Southern
should recover only the amount of the annual cost of
service of the facilities proportional to their level of
utilization during the period of time under review,
November 1, 1992, through April 30, 1993. He calculated
the utilization level at 32 percent, and when this
factor is applied to the $11.9 million cost of service
attributable to the facilities accepted by the judge,
Southern would be permitted to include only $3.8 million
of that amount in its rates for this period.
On July 29, 1994, Southern filed a brief on
exceptions with the FERC seeking to overturn the initial
decision of the administrative law judge as it relates
to the recoverability of its Mississippi Canyon
Facilities investment, but Southern cannot predict the
action that may be taken by the FERC or the outcome of
any subsequent appeal concerning the rate treatment of
the $45 million cost of these facilities.
With respect to the recoverability by Southern
under the Order of GSR costs associated with Southern's
gas supply contract with Exxon relating to the reserves
connected by the Mississippi Canyon Facilities,
Southern's customers have asserted in a separate
proceeding before the FERC that the gas supply contract
was non-cash consideration for the Exxon take-or-pay
settlement and that recovery by Southern of GSR costs
incurred with respect to such contract is also precluded
by the 1988 take-or-pay settlement. Estimated GSR costs
under this contract through the scheduled renegotiation
of its pricing provisions in 1997 are estimated to be in
the range of $65 million to $75 million on a present
value basis, although such estimate is subject to
significant uncertainty since the assumptions inherent
in the estimate (including underlying reserves, future
deliverability, and a range of estimated future gas
market prices) are not known today with certainty and
there is a wide range of possible outcomes for each
assumption. In addition, Southern has given notice to
Exxon that effective March 1, 1994, it has terminated
the gas purchase contract covering gas reserves
connected by the Mississippi Canyon Facilities pursuant
to certain provisions of the contract. Exxon has filed
suit against Southern seeking a declaratory judgment
that Southern does not have the right to terminate the
contract or alternatively for damages of an unspecified
amount arising out of the alleged repudiation or breach
of the contract by Southern. Southern cannot predict
the outcome of pending or future proceedings for the
recovery of GSR costs related to the gas supplies
connected by the Mississippi Canyon Facilities or its
pending litigation with Exxon regarding Southern's
notice of termination of the gas supply contract.
Settlement Discussions - Southern has continued to
have settlement discussions with its major customers in
an effort to resolve all of Southern's outstanding rate
and service agreement issues and its Order No. 636
transition cost recovery. Southern cannot predict the
outcome of those discussions or whether any settlement
will be reached with its customers. Southern is also
unable to predict all of the elements of the outcome of
its Order No. 636 restructuring proceeding or its rate
filings to recover its transition costs.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
SOUTHERN NATURAL GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Southern Natural Gas Company and its subsidiaries
(Southern) participate principally in the interstate
transmission of natural gas in the southeastern United
States and are regulated by the Federal Energy
Regulatory Commission (FERC). The natural gas
transmission industry, although regulated, is very
competitive. Effective November 1, 1993, Southern
separated its transportation, storage, and merchant
services to comply with Order No. 636 (see following
discussion) and essentially became solely a gas
transporter. Even before the Order No. 636
restructuring, customers had switched much of their
volumes from a bundled merchant service to
transportation service, reflecting an increased
willingness to rely on gas supply under unregulated
arrangements. Southern competes with several pipelines
for the transportation business of its customers and at
times discounts its transportation rates in order to
maintain market share. Although it is now predominantly
a transporter of gas, Southern continues to make limited
sales pending the expiration, termination or assignment
of its remaining gas supply contracts and, in this
capacity, competes with other suppliers, gas producers,
marketers and alternate fuels.
Southern is pursuing growth opportunities to
expand the level of services in its traditional market
area and to connect new gas supplies. On May 1, 1994,
Southern completed its second pipeline expansion into
northern Florida and southwestern Georgia that increased
firm daily capacity by 40 million cubic feet per day.
On July 22, 1994, Southern filed an application with the
FERC for authorization to construct a 21-mile pipeline
extension to a delivery point near Chattanooga that will
deliver natural gas to a group of new customers who have
agreed to sign ten-year contracts for firm
transportation volumes totaling over 11 million cubic
feet per day.
<TABLE>
<CAPTION>
Operations
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(In Millions)
<S> <C> <C> <C> <C>
Revenues:
Gas sold $ 57 $ 65 $144 $282
Market transportation and
storage 76 32 164 72
Supply transportation 10 11 20 23
Other 34 14 84 35
Total Revenues $177 $122 $412 $412
Natural Gas Cost:
Purchased from others $ 52 $ 18 $130 $154
Purchased from affiliates 5 5 9 11
Total Natural Gas Cost $ 57 $ 23 $139 $165
Transition Cost Recovery and
Gas Purchase Contract
Settlement Costs $ 28 $ 11 $ 70 $ 28
Depreciation and Amortization $ 16 $ 16 $ 32 $ 32
Operating Income $ 27 $ 20 $ 76 $ 80
Equity in Earnings of
Joint Venture $ 2 $ 2 $ 4 $ 5
(Billion Cubic Feet)
Volumes:
Gas sold - 8 - 61
Market transportation 113 98 269 201
Total Market Throughput 113 106 269 262
Supply transportation 83 84 161 167
Total Volumes 196 190 430 429
Transition gas sales 24 - 56 -
</TABLE>
Quarter-to-Quarter Analysis
Southern's operating results for the second
quarter were up due primarily to a change to a less
seasonal rate design under Order No. 636. Operating
results were also favorably affected by lower general
and administrative expenses due to a $3 million
reduction in employee related benefit expenses. These
increases were partially offset by a reduction in rate
base resulting from the sale of working gas storage to
customers as part of the implementation of Order
No. 636.
Southern's gas sales revenues and gas costs
include $46 million of transition gas sales. Higher
market transportation revenues and volumes reflect the
implementation of Order No. 636.
Other revenue increased during the quarter due
primarily to the recovery of transition costs.
Year-to-Date Analysis
Southern's operating results for the six-month
period were down slightly from last year due to the
change to a less seasonal rate design and the rate base
reduction under Order No. 636. These declines were
partially offset by lower operating and maintenance
expense resulting from a $4 million reduction in fuel
gas liability and lower general and administrative
expenses due to a $7 million reduction in employee
related benefit expenses.
Southern's gas sales revenues and gas costs were
down significantly for the six-month period as a result
of implementing Order No. 636, but still include
$118 million of transition gas sales from supply
remaining under contract (see Order No. 636 discussion
below). Total market throughput increased three percent
for the six-month period; however, Order No. 636
resulted in a shift in volumes from sales to market
transportation.
Other revenue increased for the six-month period
due primarily to the recovery of transition costs.
Order No. 636
In 1992 the FERC issued its Order No. 636 (the
Order). As required by the Order, interstate natural
gas pipeline companies have made significant changes in
the way they operate. The Order required pipelines,
among other things, to: (1) separate (unbundle) their
sales, transportation, and storage services; (2) provide
a variety of transportation services, including a "no-
notice" service pursuant to which the customer is
entitled to receive gas from the pipeline to meet
fluctuating requirements without having previously
scheduled delivery of that gas; (3) adopt a straight-
fixed-variable (SFV) method for rate design (which
assigns more costs to the demand component of the rates
than do other rate design methodologies previously
utilized by pipelines); and (4) implement a pipeline
capacity release program under which firm customers have
the ability to "broker" the pipeline capacity for which
they have contracted. The Order also authorized
pipelines to offer unbundled sales services at market-
based rates and allowed for pregranted abandonment of
some services.
In requiring that Southern provide unbundled
storage service, the Order resulted in a substantial
reduction of Southern's working storage gas inventory
and consequently a reduction in its rate base. This
reduction was effective on November 1, 1993, when
Southern restructured pursuant to the Order and sold, at
its cost, $123 million of its working storage gas
inventory to its customers. The Order also resulted in
rates that are less seasonal, thereby shifting revenues
and earnings for Southern out of the winter months.
The FERC issued an order on September 3, 1993 (the
September 3 order), that generally approved a compliance
plan for Southern and directed it to implement
restructured services on November 1, 1993. In
accordance with the September 3 order, Southern
solicited service elections from its customers in order
to implement its restructured services on
November 1, 1993. Southern's largest customer, Atlanta
Gas Light Company and its subsidiary, Chattanooga Gas
Company (collectively Atlanta) signed firm
transportation service agreements with transportation
demands of 582 million cubic feet per day for a one-year
term ending October 31, 1994, and 118 million cubic feet
per day for a term extending until April 30, 2007, at
the maximum FERC-approved rates. This represented an
aggregate reduction of 100 million cubic feet per day
from Atlanta's level of service prior to
November 1, 1993. Southern's other customers elected in
aggregate to obtain an amount of firm transportation
services that represented a slight increase from their
level of firm sales and transportation services from
Southern prior to Southern's implementation of Order
No. 636, at the maximum FERC-approved tariff rates, for
terms ranging from one to ten or more years.
Southern's discussions are continuing with Atlanta
and its other distribution customers regarding their
elections for firm transportation service on Southern's
system. It is possible that these discussions could
result in a rate reduction by Southern as part of an
overall settlement. Although management believes that
most of Southern's distribution customers ultimately
will commit to some type of new firm transportation
agreements with Southern under its restructuring program
beyond those described above, it is unable to predict at
what total contract level or for what duration such
commitments will be made.
Natural Gas Sales and Supply
As discussed in Note 4 of the Notes to Condensed
Consolidated Financial Statements, Southern is incurring
certain transition costs as a result of implementing
Order No. 636, and for Southern, those are primarily gas
supply realignment (GSR) costs relating to amendment or
termination of existing gas purchase contracts. In its
restructuring settlement discussions, Southern has
advised its customers that the amount of GSR costs that
it actually incurs will depend on a number of variables,
including future natural gas and fuel oil prices, future
deliverability under Southern's existing gas purchase
contracts, and Southern's ability to renegotiate certain
of these contracts. While the level of GSR costs is
impossible to predict with certainty because of these
numerous variables and the outcome of the lawsuit with
Exxon discussed in Note 4, based on current spot-market
prices, a range of estimates of future oil and gas
prices, recent contract renegotiations and "price
differential" costs actually incurred, the amount of GSR
costs are estimated to be in the range of approximately
$300-$325 million on a present value basis (including
the Exxon contract discussed in Note 4). This amount
includes the payments made to amend or terminate gas
purchase contracts described in Note 4.
Sales by Southern are anticipated to continue only
until Southern's remaining supply contracts expire, are
terminated, or are assigned. Southern is attempting to
terminate its remaining gas purchase contracts through
which it had traditionally obtained its long-term gas
supply. Some of these contracts contain clauses
requiring Southern either to purchase minimum volumes of
gas under the contract or to pay for it (take-or-pay
clauses). Although Southern currently is incurring no
take-or-pay liabilities under these contracts, the
annual weighted average cost of gas under these
contracts is in excess of current spot-market prices.
Pending the termination of these remaining supply
contracts, Southern has agreed to sell a portion of its
remaining gas supply to a number of its firm
transportation customers for a one-year term that began
November 1, 1993. The sales agreements with Atlanta
were extended through March 31, 1995. The remainder of
Southern's gas supply will be sold on a month-to-month
basis. Southern will file to recover as a GSR cost
pursuant to Order No. 636 the difference between the
cost associated with the gas supply contracts and the
revenue from the sales agreements and month-to-month
sales as well as any cost previously incurred or
incurred in the future as a result of Order No. 636 to
terminate or reduce the price under Southern's remaining
contracts.
Through June 30, 1994, Southern has paid
$125 million to reduce or terminate the price payable
under a number of above-market gas purchase contracts.
In addition, Southern has paid $43 million in excess of
current spot-market prices under its remaining gas
purchase contracts since implementing Order No. 636 on
November 1, 1993. Southern's rate filings to recover
these payments as GSR costs are described in Note 4.
Southern's purchase commitments under its
remaining gas supply contracts for the years 1994
through 1998 (which exclude those under the Exxon
contract related to the Mississippi Canyon Facilities
discussed in Note 4) are estimated as follows:
<TABLE>
<CAPTION>
Estimated
Purchase
Commitments
(In Millions)
<S> <C>
1994 $200
1995 150
1996 85
1997 70
1998 65
Total $570
</TABLE>
These estimates are subject to significant
uncertainty due both to the number of assumptions
inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the
three major factors that determine purchase commitments
(underlying reserves, future deliverability, and future
price) is known today with certainty.
Rate Matters
Several general rate changes have been implemented
by Southern and remain subject to refund. See Note 4 of
the Notes to Condensed Consolidated Financial Statements
for a discussion of rate matters.
Settlement Discussions
As discussed in Note 4, Southern's customers are
challenging its recovery of GSR costs and Southern is
subject to other litigation. Southern has continued to
have settlement discussions with its major customers in
an effort to resolve all of Southern's outstanding rate
and service agreement issues and its Order No. 636
transition cost recovery. Southern cannot predict the
outcome of those discussions or whether any settlement
will be reached with its customers. Southern is also
unable to predict all of the elements of the outcome of
its Order No. 636 restructuring proceeding or its rate
filings to recover its transition costs.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(In Millions)
<S> <C> <C> <C> <C>
Interest Income (Expense), Net$(7) $(6) $(13) $(21)
</TABLE>
The increase in interest expense in the second
quarter is mainly attributable to a decrease in interest
income resulting from lower levels of notes from
affiliates. The decrease in interest expense for the
six-month period is due primarily to $8 million of
accrued interest expense provided on certain income tax
issues in 1993.
<TABLE>
<S> <C> <C> <C> <C>
Income Taxes $ 8 $ 7 $ 26 $ 24
</TABLE>
Income taxes increased for both 1994 periods due
primarily to higher pretax earnings and to the increase
in the federal income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
CASH FLOWS
Six Months
Ended June 30,
1994 1993
(In Millions)
<S> <C> <C>
Operating Activities $116 $ 196
</TABLE>
Net cash provided by operating activities
decreased due to the implementation of Order No. 636 by
Southern. In previous periods Southern's merchant role
resulted in significant gas and inventory sales in the
winter months. Under Order No. 636 Southern's rates are
less seasonal and Southern no longer has to replace
significant quantities of inventory in the warm weather
months. These factors should result in a more uniform
cash flow for Southern.
<TABLE>
<S> <C> <C>
Investing Activities $ 14 $(166)
</TABLE>
The change in cash flows from investing activities
is due to fluctuations in loans to Southern's parent.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1994 1993
(In Millions)
<S> <C> <C>
Financing Activities $(131) $ (30)
</TABLE>
Net cash used in financing activities increased
due to the maturity and redemption of Southern's
9 5/8 Percent Notes.
Capital Resources
At June 30, 1994, Southern had available
$50 million under lines of credit. Southern also has a
shelf registration with the Securities and Exchange
Commission for up to $200 million in debt securities of
which $100 million has been issued. Southern expects to
continue to use cash from operations and borrowings in
the public or private markets or loans from affiliates
to finance its capital and other corporate expenditures.
<TABLE>
<CAPTION>
June 30, December 31,
Capitalization Information 1994 1993
<S> <C> <C>
Debt to Capitalization 34% 41%
The debt to capitalization ratio decreased for the
1994 period due to scheduled repayments of long-term
debt.
ENVIRONMENTAL MATTERS
The Company provides the following information as
an update of the discussion of "Environmental Matters"
provided in Part I of its Report on Form 10-K for the
year ended December 31, 1993. Please refer to that
Form 10-K for a complete discussion of environmental
matters affecting the Company.
Southern has been named by the EPA as a
potentially responsible party (PRP) at Superfund site
known as the Fuels and Chemicals Site, at which a joint
defense group of PRPs had earlier advised Southern they
might seek to add it as a PRP. Southern and the other
named PRPs at the site are required to remediate any
contaminated soil and equipment pursuant to the terms of
a unilateral order issued by the EPA. The costs of this
remediation have not been quantified at this time.
Based on the estimated relative volume of material
contributed to this site by Southern (less than one
percent based on the EPA's lists of contributors),
Southern believes that its status at this site is that
of a de minimis contributor and that its potential share
of these remediation costs will not be significant.
Another company named as a PRP at this site, in which a
subsidiary of Sonat Exploration is a 50-percent
shareholder, contributed a significantly larger amount
of material to this site than Southern. Based on the
number of other financially responsible PRPs at this
site, however, and other information that it currently
possesses, Sonat currently estimates that neither
Southern nor the subsidiary of Sonat Exploration will
incur liabilities related to this site in an amount
material to Sonat.
Southern has now completed the characterization
and clean-up of all thirteen of its sites that evidenced
some level of PCB contamination for a total cost of
approximately $9 million.
Southern has determined that its pipeline meters
may in the past have been the source of small releases
of elemental mercury. Southern is soliciting bids from
several environmental contractors for site
characterization and intends to take appropriate
remedial action upon completion of site
characterization. Southern is unable to estimate the
cost of mercury remediation, because costs will vary
based on a number of factors particular to each site and
because regulatory standards for elemental mercury
clean-up are uncertain at this time. Neither the EPA
nor any state in which Southern operates has yet issued
clean-up levels or guidelines with respect to
contamination from past releases or spills of mercury.
Based on its experience with other remediation projects,
industry experience to date with remediation of mercury,
and its preliminary analysis of the possible extent of
the contamination, Southern believes that its
remediation of any mercury contamination will not have
a material adverse effect on its financial condition or
results of operations.
Sonat generally considers environmental assessment
and remediation costs and costs associated with
compliance with environmental standards incurred by
Southern to be recoverable through rates since they are
prudent costs incurred in the ordinary course of
business and, accordingly, Southern would expect to seek
recovery of such costs through rate filings, although no
assurance can be given with regard to their ultimate
recovery.
Southern operates three compressor stations in
areas that do not meet the National Ambient Air Quality
Standards (NAAQS) established under the federal Clean
Air Act for ozone. Two of these stations are located in
Louisiana, and one is located in Alabama. Title I of
the Clean Air Act Amendments of 1990 and the state
regulations promulgated thereunder require Southern to
submit an emissions control plan for each of these
stations that may require the addition of emissions
control technology.
The Louisiana Department of Environmental Quality
has instructed Southern to suspend the implementation of
its Louisiana emissions control plans until
September 1, 1994, because of the possibility that the
emissions of nitrogen oxides are not the cause of the
area's failure to meet NAAQS. Alabama Regulators have
not yet published specific emissions control
requirements for nitrogen oxides. Further, Alabama
regulators have undertaken to have the area in which
Southern's station is located recharacterized as meeting
the NAAQS for nitrogen oxides. Based on these actions,
Southern does not currently know whether it will be
required to implement emissions control plans for these
stations.
Based on Southern's projected cost of implementing
its emissions control plans in Louisiana, its estimate
of the possible cost of implementing a similar emissions
control plan in Alabama, and its projected cost of
complying with other applicable provisions of the
1990 Amendments, Southern currently estimates that the
maximum costs that it may incur to implement such plans
and to comply with the 1990 Amendments is approximately
$13 million.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Arcadian Corporation v. Southern Natural Gas
Company and Atlanta Gas Light Company, an antitrust
lawsuit described in Item 3. Legal Proceedings of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, had been settled pending final,
nonappealable approval by the FERC of the direct
connection and transportation service requested by
Arcadian Corporation. On May 12, 1994, the FERC issued
an order granting such approval. Atlanta Gas Light
Company ("Atlanta") and others sought rehearing of the
May 12 order. Atlanta also filed a petition for review of
such order in the Court of Appeals. The FERC has not
acted upon the rehearing requests other than to give itself
more time to consider the rehearing petition. Pursuant to
the settlement, the lawsuit will be dismissed with prejudice
when the FERC order becomes final and nonappealable.
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits (1)
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings
to Fixed Charges
* Filed with this Report
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K
during the quarter ended June 30, 1994.
(1) The Company will furnish to requesting security holders
the exhibits on this list upon the payment of a fee of 10 cents
per page up to a maximum of $5.00 per exhibit. Requests
must be in writing and should be addressed to R. David
Hendrickson, Secretary, Southern Natural Gas Company, P.
O. Box 2563, Birmingham, Alabama 35202-2563.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date: August 12, 1994 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Treasurer
Date: August 12, 1994 By: /s/ G. Layne Finlay
G. Layne Finlay
Vice President & Controller
</TABLE>
<TABLE> EXHIBIT 12-(1)
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1994 1993 1993 1992 1991 1990 1989
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income (loss) before income taxes $67,501 $63,910 $127,617 $126,691 $119,326 $103,797 $152,925
Fixed charges (see computation below) 25,808 33,327 59,171 49,131 46,596 49,899 51,211
Total Earnings Available for Fixed Charges $93,309 $97,237 $186,788 $175,822 $165,922 $153,696 $204,136
Fixed Charges:
Interest expense before deducting
interest capitalized $24,273 $31,978 $ 56,599 $ 46,298 $ 42,957 $ 47,323 $ 49,832
Rentals(b) 1,535 1,349 2,572 2,833 3,639 2,576 1,379
$25,808 $33,327 $ 59,171 $ 49,131 $ 46,596 $ 49,899 $ 51,211
Ratio of Earnings to Fixed Charges 3.6 2.9 3.2 3.6 3.6 3.1 4.0
</TABLE>
________________
(a) Amounts include the Company's portion of the captions as they relate
to persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the
interest factor applicable to such rentals of the
Company and its subsidiaries and continuing unconsolidated
affiliates.
