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 March 31, 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 APRIL 30, 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.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
March 31, 1994 and December 31, 1993 1
Condensed Consolidated Statements of Income--
Three Months Ended March 31, 1994 and 1993 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 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 - 16
PART I. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1994 1993
(Unaudited)
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 1,574 $ 4,243
Notes receivable from affiliates 305,313 269,661
Accounts receivable 136,892 128,610
Inventories 22,442 23,646
Gas supply realignment costs 46,419 59,862
Recoverable natural gas purchase contract
settlement costs 2,033 18,535
Gas imbalance receivables 27,614 43,125
Other 10,036 2,622
Total Current Assets 552,323 550,304
Investments in Joint Venture and Other 48,710 46,429
Plant, Property and Equipment 2,209,825 2,206,672
Less accumulated depreciation and amortization 1,429,480 1,419,771
780,345 786,901
Deferred Charges:
Gas supply realignment costs 125,608 119,724
Other 26,512 27,806
152,120 147,530
$1,533,498 $1,531,164
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 107,298 $ 107,298
Accounts payable 57,736 70,298
Accrued income taxes 34,772 14,695
Accrued interest 19,976 19,851
Gas imbalance payables 22,919 51,007
Other 13,939 20,147
Total Current Liabilities 256,640 283,296
Long-Term Debt 324,083 329,403
Deferred Credits and Other:
Deferred income taxes 83,914 84,726
Reserves for regulatory matters 132,570 120,771
Operating and other reserves 68,287 69,168
Other 32,231 23,830
317,002 298,495
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 77,605 77,605
Retained earnings 558,168 542,365
Total Stockholder's Equity 635,773 619,970
$1,533,498 $1,531,164
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Revenues:
Natural gas sales $ 86,873 $216,859
Transportation and storage 98,325 51,334
Other 50,333 21,227
235,531 289,420
Costs and Expenses:
Natural gas cost 81,736 142,230
Transition cost recovery and gas
purchase contract settlement costs 42,920 16,683
Operating and maintenance 22,843 27,738
General and administrative 18,260 22,476
Depreciation and amortization 16,036 15,833
Taxes, other than income 4,621 4,602
186,416 229,562
Operating Income 49,115 59,858
Other Income, Net:
Equity in earnings of joint venture 2,281 2,420
Other 348 74
2,629 2,494
Interest Income (Expense):
Interest income, primarily from affiliates 4,839 3,083
Interest expense (11,078) (18,741)
Interest capitalized 272 37
(5,967) (15,621)
Income before Income Taxes 45,777 46,731
Income Taxes 17,574 17,555
Net Income $ 28,203 $ 29,176
</TABLE>
See accompanying notes.<PAGE>
<TABLE>
<CAPTION>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 28,203 $ 29,176
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,036 15,833
Deferred income taxes (2,245) (10,201)
Equity in earnings of joint
venture, less distributions (2,281) (2,420)
Reserves for regulatory matters 11,799 (6)
Gas supply realignment costs 7,559 -
Natural gas purchase contract
settlement costs 16,502 16,683
Change in:
Accounts receivable (8,282) 39,401
Inventories 1,204 62,186
Accounts payable (12,562) (5,395)
Accrued interest and income taxes, net 20,034 33,024
Other current assets and liabilities (24,579) (8,776)
Other 12,020 3,504
Net cash provided by operating
activities 63,408 173,009
Cash Flows from Investing Activities:
Plant, property and equipment additions (12,997) (6,029)
Notes from affiliates (35,652) (149,632)
Proceeds from disposal of assets and other 292 2
Net cash used in investing
activities (48,357) (155,659)
Cash Flows from Financing Activities:
Payments of long-term debt (5,320) (5,320)
Dividends paid (12,400) (12,400)
Net cash used in financing
activities (17,720) (17,720)
Net Decrease in Cash (2,669) (370)
Cash at Beginning of Period 4,243 1,961
Cash at End of Period $ 1,574 $ 1,591
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 10,012 $ 10,100
Income taxes (refunds received), net (238) 2,388
</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.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Revenues $9,030 $9,691
Operating Expenses 1,278 1,511
Depreciation 1,350 1,350
Other Expenses, Net 1,839 1,990
Income Reported $4,563 $4,840
</TABLE>
3. 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 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.
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. The rate design
issue will be resolved on briefs based on the existing
record in this proceeding. On December 16, 1993, the
FERC issued an order (December 16 Order) approving the
settlement, but with modifications. On
December 22, 1993, Southern filed a letter with the FERC
that outlined certain objections with respect to the
FERC's modifications to the terms and conditions of the
settlement. Southern advised the FERC that the
December 16 Order undercut the economic compromise
achieved in the settlement. Southern also filed a
request for rehearing of the December 16 Order. On
May 5, 1994, the FERC issued an order on rehearing
substantially reversing, in all material respects, the
modifications to which Southern objected.
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. On
June 4, 1993, the presiding administrative law judge
certified the settlement to the FERC. In another order
issued on December 16, 1993, the FERC also approved this
settlement, but with modifications. Southern objected
to these modifications and also requested rehearing of
this order. In another order on rehearing issued on
May 5, 1994, the FERC also substantially reversed these
modifications in all material respects.
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, successor to United Gas Pipe Line Company
(Koch), 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.
Southern cannot predict whether these settlements will
be approved by the FERC, but does not believe that the
final resolution of this matter will have a material
adverse effect on its financial position.
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
March 31, 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 essentially 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 contract, based
on the circumstances that existed at the time the
contract was executed, and to the prudence of the
amendment or termination of the contract. 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 latter 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 filed motions
urging the FERC to modify the December 16 order and have
sought judicial review of the September 3 order.
During 1993 Southern reached agreements to reduce
significantly the price payable under a number of high
cost 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 that such costs were prudently incurred and
eligible 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 December 30 order
may be appealed, however, and 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
that such costs were prudently incurred and eligible
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.
Southern has also incurred approximately
$26.2 million of GSR costs, plus prefiling interest,
from November 1, 1993, through March 31, 1994, from
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 that such
costs were prudently incurred and eligible under the
Order. Southern's customers are opposing, on grounds of
both eligibility and prudence, its recovery of the GSR
costs in this proceeding as well, which has also been
consolidated with the proceeding on the December 1
filing.
Southern plans to make additional rate filings
quarterly to recover its "price differential" costs and
any other GSR costs. The total GSR costs of $172
million, net of recoveries, accrued through
March 31, 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.
Southern intends to file 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 oil and
gas market prices) are not known today with certainty
and there is a wide range of possible outcomes for each
assumption. Southern has given notice to Exxon that it
has terminated the gas purchase contract covering gas
reserves connected by the Mississippi Canyon Facilities
pursuant to certain provisions of the contract and 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 or settlement
discussions with Exxon regarding Southern's notice of
termination of the gas supply contract.
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 provide a
limited merchant service 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. Southern and South Georgia
Natural Gas Company (South Georgia), a wholly owned
subsidiary of Southern, received approval from the FERC
on May 13, 1993, for an expansion of South Georgia's
pipeline system into northern Florida and southwestern
Georgia that increased firm daily capacity by 40 million
cubic feet per day. Construction on this project has
been completed and it was placed in service on
May 1, 1994. In January 1994 Southern reached tentative
agreement with a group of new customers to expand its
service in the growing eastern Tennessee area. The
proposed project entails a 23-mile pipeline extension
that would deliver approximately nine million cubic feet
of natural gas per day to a delivery point near
Chattanooga.
<TABLE>
<CAPTION>
Operations
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Revenues:
Gas sold $ 87 $217
Market transportation and storage 88 39
Supply transportation 11 12
Other 50 21
Total Revenues $236 $289
Natural Gas Cost:
Purchased from others $ 78 $136
Purchased from affiliates 4 6
Total Natural Gas Cost $ 82 $142
Transition Cost Recovery and Gas
Purchase Contract Settlement Costs $ 43 $ 17
Depreciation and Amortization $ 16 $ 16
Operating Income $ 49 $ 60
Equity in Earnings of
Joint Venture $ 2 $ 2
(Billion Cubic Feet)
Volumes:
Gas sold - 54
Market transportation 159 102
Total Market Throughput 159 156
Supply transportation 79 84
Total Volumes 238 240
Transition gas sales 33 -
</TABLE>
Quarter-to-Quarter Analysis
Southern's operating results for the first quarter
of 1994 were down due primarily to a change in rate
design implemented under Order No. 636, which shifts
earnings out of the first quarter and into the remainder
of the year. The decrease in operating results was also
due to the reduction in rate base resulting from the
sale of working gas storage to customers as part of the
implementation of 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 by lower general and administrative
expenses due to a $4 million reduction in stock-based
employee compensation.
Gas sales revenue and gas cost at Southern
decreased significantly from the 1993 quarter as a
result of implementing Order No. 636, but still include
$73 million of transition gas sales from supply
remaining under contract (see Order No. 636 discussion
below). Total market throughput increased 2 percent
during the quarter although Order No. 636 resulted in a
shift in volumes from sales to market transportation.
Supply transportation decreased due to a decline in
deliverability.
Other revenue increased in the 1994 period due
primarily to the recovery of transition costs at
Southern.
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 volume 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, based on current spot-market prices,
a range of estimates of future oil and gas prices, and
recent contract renegotiations, the amount of GSR costs
are estimated to be in the range of approximately $275-
$325 million on a present value basis. 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
essentially 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 March 31, 1994, Southern reached agreements
to reduce significantly the price payable under a number
of high-cost gas purchase contracts in exchange for
payments with a present value of approximately
$174 million. 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
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Interest Income (Expense), Net $(6) $(16)
</TABLE>
The decrease in interest expense is due primarily
to $8 million of accrued interest expense provided on
certain income tax issues in 1993, partially offset by
an increase in interest income.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Income Taxes $ 18 $ 18
</TABLE>
Income taxes were flat when compared to the prior
year with the effect of the increase in the federal
income tax rate offset by lower pretax earnings.
FINANCIAL CONDITION
Cash Flows
<TABLE>
<S> <C> <C>
Operating Activities $ 63 $ 173
</TABLE>
Net cash provided by operating activities decreased
due to the implementation of Order No. 636 by Southern.
Under the Order, Southern currently maintains a limited
merchant role and accordingly does not have significant
quantities of inventory to sell in the winter months.
The reduced gas and inventory sales in the current
period resulted in a much lower cash flow for Southern
when compared to the 1993 period. Conversely, in the
summer months Southern will not have to incur
expenditures to replace inventory levels as it has in
prior years.
<TABLE>
<S> <C> <C>
Investing Activities $(48) $(156)
</TABLE>
Net cash used in investing activities was lower due
to decreased loans to its parent slightly offset by
increased capital expenditures.
Liquidity and Capital Resources
At March 31, 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>
March 31, December 31,
Capitalization Information 1994 1993
<S> <C> <C>
Debt to Capitalization 40% 41%
</TABLE>
The debt to capitalization ratio decreased slightly
for the 1994 period due to increased stockholder's
equity and to scheduled repayments of long-term debt.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Vastar Resources, Inc. v. Southern Natural Gas
Company was filed in April 1994 in state court in Harris
County, Texas. Vastar Resources, Inc. ("Vastar") filed
suit against Southern Natural Gas Company (the
"Company") regarding a pricing dispute over the amount
owed by the Company for gas purchased from Vastar that
was produced from the Logansport Field in Louisiana and
Texas. Vastar asked for an unspecified amount of
monetary damages, specific performance, and attorneys
fees. The Company is seeking to have the Texas
proceeding stayed on the basis of a petition for
declaratory judgment styled Southern Natural Gas Company
v. Arco Oil and Gas Company, d/b/a Vastar Resources,
Inc. it filed in state court in Orleans Parish,
Louisiana, regarding this same pricing dispute. The
Company is unable to predict the outcome of either
proceeding, but will file to seek to recover as a GSR
cost any additional amounts for gas purchases that may
ultimately be determined it owes to Vastar as a result
of these 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. At its meeting on May 11, 1994,
the FERC approved an order granting such approval.
Pursuant to the settlement, the lawsuit will be
dismissed with prejudice when the order becomes final
and nonappealable.
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits
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 March 31, 1994.
<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: May 13, 1994 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Treasurer
Date: May 13, 1994 By: /s/ G. Layne Finlay
G. Layne Finlay
Vice President & Controller
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Three Months Ended March 31, 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$45,777 $46,731 $127,618 $126,691 $119,326 $103,797 $152,925
Fixed charges
(see computation below) 12,678 20,412 59,171 49,131 46,596 49,899 51,211
Total Earnings Available for
Fixed Charges $58,455 $67,143 $186,789 $175,822 $165,922 $153,696 $204,136
Fixed Charges:
Interest expense before deducting
interest capitalized $12,015 $19,755 $ 56,599 $ 46,298 $ 42,957 $ 47,323 $ 49,832
Rentals(b) 663 657 2,572 2,833 3,639 2,576 1,379
$12,678 $20,412 $ 59,171 $ 49,131 $ 46,596 $ 49,899 $ 51,211
Ratio of Earnings to Fixed Charges 4.6 3.3 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.
