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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 1-2745
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SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-7410
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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7.85 percent Notes due 2002 New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1995 -- NONE (ALL VOTING STOCK OF THE REGISTRANT
IS HELD BY ITS PARENT COMPANY, SONAT INC.)
NUMBER OF SHARES OF COMMON STOCK, $3.75 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1995 -- 1,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SOUTHERN NATURAL GAS COMPANY
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
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ITEM PAGE
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PART I
Item 1. Business................................................................... I-1
Order No. 636 Restructuring................................................ I-2
Customer Settlement........................................................ I-3
Markets -- Transportation and Sales........................................ I-4
Gas Supplies............................................................... I-6
Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corp. ............... I-7
Potential Royalty Claims................................................... I-7
Sea Robin Pipeline Company................................................. I-8
Sonat Intrastate-Alabama Inc. ............................................. I-8
Sonat Ventures Inc. ....................................................... I-9
South Georgia Natural Gas Company.......................................... I-9
Southern Energy Company.................................................... I-9
Competition and Current Business Conditions................................ I-9
Governmental Regulation.................................................... I-12
Rate and Regulatory Proceedings............................................ I-12
Environmental Matters...................................................... I-12
Item 2. Properties................................................................. I-13
Item 3. Legal Proceedings.......................................................... I-13
Item 4. Submission of Matters to a Vote of Security Holders......................Omitted*
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... II-1
Item 6. Selected Financial Data.................................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results of II-3
Operations.................................................................
Item 8. Financial Statements and Supplementary Data................................ II-16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial II-41
Disclosure.................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......................Omitted*
Item 11. Executive Compensation...................................................Omitted*
Item 12. Security Ownership of Certain Beneficial Owners and Management...........Omitted*
Item 13. Certain Relationships and Related Transactions...........................Omitted*
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... IV-1
</TABLE>
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* Item Nos. 4, 10, 11, 12 and 13 have been omitted in reliance upon General
Instruction J(1) and (2) of Form 10-K.
<PAGE> 3
PART I
ITEM 1. BUSINESS
The principal business of Southern Natural Gas Company ("Southern"), which
is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the transmission of
natural gas in interstate commerce. Southern, including its subsidiaries, owns
approximately 9,320 miles of interstate pipeline. Its pipeline system has a
certificated daily delivery capacity of approximately 2.4 billion cubic feet
("Bcf") of natural gas. Southern's pipeline system extends from gas fields in
Texas, Louisiana, Mississippi, Alabama, and the Gulf of Mexico to markets in
Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and
Tennessee. Southern also has pipeline facilities offshore Texas connecting gas
supplies to other pipelines that transport such gas to Southern's system. A map
of Southern's pipeline system, including pipelines of its subsidiaries, appears
on page I-11.
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. Based on operating experience, Southern sought to have 21 Bcf of the
certificated working storage capacity of Muldon reclassified to cushion gas,
resulting in a certificated working storage capacity of 31 Bcf of gas. The
Federal Energy Regulatory Commission (the "FERC"), approved Southern's
reclassification application on a limited-term basis for a one-year period
ending November 1, 1994, subject to a further review of engineering and
geophysical data supporting the reclassification and Muldon's operations during
the 1993-94 winter period. On December 30, 1994, Southern filed a comprehensive
study with the FERC containing the data it had requested, which is pending FERC
review. Southern believes the results of the study support the reclassification
of working storage gas to cushion gas requested by Southern. Southern's
limited-term authorization has been extended until the FERC completes its review
of the study.
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is
a 50-percent participant, owns a large underground natural gas storage field
located in Louisiana that is operated by Southern and provides storage service
to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc.,
and their customers. The Bear Creek Storage Field has a total certificated
working storage capacity of approximately 65 Bcf of gas, half of which is
committed to Southern. At December 31, 1994, Bear Creek's gross facilities cost
was approximately $246,902,000, its net facilities cost was approximately
$164,257,000, and its participants' equity was $93,815,000. Southern had an
investment in Bear Creek, including its equity in undistributed earnings, of
$46,907,000 at December 31, 1994.
Under the terms of Order No. 636, discussed below, effective November 1,
1993, Southern commenced providing contract storage services as part of its
unbundled and restructured services. Consequently, most of Southern's working
storage capacity at Muldon and its half of Bear Creek is now used for such
services.
Southern's interstate pipeline business is subject to regulation by the
FERC, the U.S. Department of Energy's Economic Regulatory Administration (the
"ERA"), and the U.S. Department of Transportation under the terms of the Natural
Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act (the "NGA"), and
various pipeline safety and environmental laws. See "Governmental Regulation"
below for information concerning the regulation of natural gas transmission
operations.
Southern's business is subject to the usual operating risks associated with
the transmission of natural gas through a pipeline system, which could result in
property damage and personal injury. Sonat maintains broad insurance coverage on
behalf of Southern limiting financial loss resulting from these operating risks.
Additional business information concerning Southern and its wholly owned
subsidiaries is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to consolidated Financial
Statements in Part II of this report and is incorporated herein by reference.
At March 1, 1995, Southern and its subsidiaries employed approximately 850
people.
Southern's principal executive offices are located at 1900 Fifth Avenue
North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number
is (205) 325-7410.
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Order No. 636 Restructuring
In 1992 the FERC issued its Order No. 636 (the "Order"), which required
interstate natural gas pipeline companies, including Southern and South Georgia
Natural Gas Company ("South Georgia"), a wholly owned interstate pipeline
subsidiary of Southern, to make 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 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 new storage
customers. The Order also resulted in rates that are less seasonal, thereby
shifting revenues and earnings for Southern out of the winter months.
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, or purchasing gas at above-market
prices under, 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 to 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 surcharge designed to collect the remaining ten percent of such costs
from Southern's interruptible transportation customers. This funding 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 surcharge 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 its 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
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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.
As of December 31, 1994, Southern had either paid or accrued $134 million
in GSR costs (including $4 million in interest) either to reduce significantly
the price payable under or to terminate a number of gas supply contracts
providing for payment of above-market prices. In addition, on February 17, 1995,
Southern reached an agreement to resolve its remaining high-cost supply
contracts with Exxon Corporation ("Exxon") by paying an additional $45 million
in GSR costs and foregoing a claim against $19 million in price differential
costs that have been paid to Exxon under an interim agreement entered into
between the parties pending resolution of litigation contesting Southern's
termination on March 1, 1994, of a gas purchase contract with Exxon. This
agreement is conditioned upon the Customer Settlement (described below) becoming
effective. Southern also has an agreement under which another high-cost contract
price is reduced in exchange for monthly payments having a present value of
approximately $44 million. Southern has received permission from the FERC to
purchase an annuity in order to monetize this obligation.
In addition to its GSR costs relating to termination or amendment of its
remaining gas supply contracts, Southern has incurred and expects to continue to
incur certain price differential GSR costs resulting from Southern's continued
purchase of gas under its remaining supply contracts that provide for prices in
excess of current market prices. As of December 31, 1994, Southern had incurred
$69 million in price differential costs.
Beginning in December 1993 Southern has made a number of filings with the
FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative law judge regarding whether such costs were prudently incurred
and are eligible for recovery under the Order. Southern's customers are opposing
its recovery of its GSR costs in these proceedings based on both eligibility and
prudence grounds. These proceedings, which have all been consolidated, are in
the early stages of discovery and Southern cannot predict their outcome at this
time.
Customer Settlement
Southern filed with the FERC on March 15, 1995, a Stipulation and Agreement
that would settle all of Southern's pending rate and GSR cost recovery
proceedings ("Customer Settlement"). As of that date, Southern had been advised
that customers representing more than 90 percent of the firm transportation
capacity on its pipeline system intend to support the Customer Settlement.
Pursuant to the Customer Settlement, which must be approved by the FERC, all
issues in Southern's current and prior rate cases would be settled and Southern
would credit against GSR costs incurred by Southern the full amount of
Southern's rate reserves as of February 28, 1995, which were approximately $155
million. Such amount, less certain amounts withheld for potential rate refunds
to parties, if any, that contest the Customer Settlement, will be credited in
the aggregate to reduce the GSR costs borne by Southern's customers. Southern
has filed with the FERC to implement reduced settlement rates for parties that
support the Customer Settlement on an interim basis effective as of March 1,
1995, subject to reinstatement, pending FERC consideration and approval of the
Customer Settlement. The Customer Settlement provides that, except in certain
limited circumstances, Southern will not file a general rate case to be
effective prior to March 1, 1998. In the fourth quarter of 1994 Southern
recognized a $27 million charge associated with the Customer Settlement, which
includes anticipated amounts for GSR costs that Southern would not recover from
its customers, and a $28 million provision relating to regulatory assets that
will not be recovered as a result of the Customer Settlement, including amounts
for a corporate restructuring undertaken in 1994.
Southern's Customer Settlement would settle as to supporting parties all of
the proceedings pursuant to which Southern is seeking recovery of its GSR costs
as well as all of its other outstanding rate proceedings. If the Customer
Settlement is ultimately approved by the FERC, all challenges to the recovery of
Southern's
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GSR costs would be resolved as to those customers supporting the Customer
Settlement, including all issues related to eligibility and prudence.
Additionally, Southern would absorb an agreed-upon portion of its total GSR
costs, which was reflected in the provision for the Customer Settlement noted
above.
It is possible that the Customer Settlement will be contested by certain of
Southern's customers, in which case the Customer Settlement, if approved by the
FERC, will become effective only as to supporting parties and Southern's rates
and GSR costs applicable to contesting parties would be determined by the
outcome of Southern's pending rate and GSR proceedings, where Southern
anticipates that those contesting customers will continue to challenge both the
eligibility and prudence of such costs. It is also possible that the Customer
Settlement might not be approved by the FERC or, if approved, might be modified
in a way unacceptable to Southern or its customers.
In its Customer 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, recent contract renegotiations, and price differential costs actually
incurred, the total amount of GSR costs is estimated to be approximately $328
million on a present-value basis. This amount includes the payments made or
accrued through December 31, 1994, to amend or to terminate gas purchase
contracts, price differential costs through December 31, 1994, and the $64
million cost that will be incurred under the settlement of existing contracts
with Exxon, which will become effective if the Customer Settlement becomes
effective. These costs collectively total $288 million. Thus, Southern currently
estimates it will ultimately pay an additional $40 million in GSR costs. These
amounts do not include an additional $87 million in GSR costs that would be
incurred if the settlement with Exxon does not become effective and Exxon
prevails in its lawsuit regarding Southern's March 1, 1994, termination of a
contract relating to Exxon's reserves in its Mississippi Canyon blocks. See
"Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corporation" below.
Until the Customer Settlement is approved, Southern plans to make
additional rate filings quarterly to recover its price differential costs and
any other GSR costs. Additionally, Southern will continue 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.
If the Customer Settlement is not approved, Southern cannot predict the
ultimate outcome of its Order No. 636 restructuring proceedings, its rate
filings to recover its GSR costs, or its other outstanding rate proceedings.
Markets -- Transportation and Sales
As described above, effective November 1, 1993, Southern and South Georgia
(collectively "Southern" unless the context indicates otherwise), restructured
their services in compliance with FERC Order No. 636 by separating their
transportation, storage, and merchant services. With the exception of some
limited sales necessary to dispose of its gas supply remaining under contract,
Southern essentially became solely a transporter of natural gas. Effective May
5, 1992, South Georgia had converted all its sales service to
transportation-only service and Southern had begun to provide a gas sales
service to South Georgia's former sales customers.
Southern transports or sells gas at wholesale for distribution for
domestic, commercial, and industrial uses to nine gas distributing companies, to
113 municipalities and gas districts, and to eight connecting interstate
pipeline companies. Southern also transported gas directly to 56 industrial
end-users in 1994. Southern principally transports gas to resale and industrial
customers and to other pipelines and, as indicated, continues to sell some
limited volumes of gas at wholesale for distribution. The principal industries
served directly by Southern's pipeline system and indirectly through its resale
customers' distribution systems include the chemical, pulp and paper, textile,
primary metals, stone, clay, and glass industries.
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Transportation volumes in 1994 for Southern and all of its subsidiaries
were 886 Bcf, which was all of Southern's throughput in 1994, compared with
transportation volumes in 1993 of 763 Bcf, which was 91 percent of Southern's
total 1993 throughput of 836 Bcf. Sales to resale distribution customers,
including municipalities and gas districts, accounted for virtually all of 1994
sales of 103 Bcf and 1993 sales of 73 Bcf (excluding the sale of storage
inventory). The volumes associated with the 1994 sales are included in
transportation volumes because, as required by Order No. 636, all sales are now
made at the receipt points where the gas enters Southern's pipeline system.
Likewise, Southern had sales of 19 Bcf during November and December 1993
(following implementation of its Order No. 636 restructuring) that were made at
the receipt points where the gas entered its pipeline system; consequently,
those volumes are included within the 763 Bcf of transportation volumes for
1993.
Transportation service is rendered by Southern for its resale customers,
direct industrial customers and other end-users, gas producers, other gas
pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. Transportation
service is provided under rate schedules that are subject to FERC regulatory
authority. Rates for transportation service depend on whether such service is on
a firm or interruptible basis and the location of such service on Southern's
pipeline system. Transportation rates for interruptible service (i.e., service
of a lower priority than firm transportation) are charged for actual volumes
transported. Firm transportation service also includes a demand charge designed
so that the customer pays for a significant portion of the service each month
based on a contract demand volume regardless of the actual volume transported.
Rates for transportation service are discounted by Southern in individual
instances to respond to competition in the markets it serves. Continued
discounting could, under certain circumstances, increase the risk that Southern
may not recover all of its costs allocated to transportation services.
In accordance with the September 3 order approving Southern's Order No. 636
compliance plan, 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 that ended October 31, 1994, and 118 million cubic feet per day for a term
extending until April 30, 2007. 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 for terms ranging from one to ten or more years.
Alabama Gas Corporation ("Alagasco"), Southern's second largest customer,
executed firm transportation contracts for 393 million cubic feet per day under
terms extending through October 31, 2008.
Atlanta elected to renew its firm transportation service agreements with
transportation demands of 582 million cubic feet per day, which expired October
31, 1994, for a one-year term beginning November 1, 1994. In September and
October of 1994 Atlanta Gas Light Company and South Carolina Pipeline
Corporation ("SCPL") executed three-year firm service agreements with
transportation demands of an additional 100 million cubic feet per day and 28
million cubic feet per day, respectively. With these additional subscriptions,
substantially all of Southern's firm market-area capacity currently available
became fully subscribed.
If the Customer Settlement becomes effective, Atlanta will amend its firm
transportation contracts for an aggregate of 682 million cubic feet per day to
extend their primary terms for a period of three years beginning March 1, 1995.
An additional 118 million cubic feet per day would remain under its current term
to April 30, 2007. If the Customer Settlement becomes effective, SCPL will amend
its firm transportation contract for 28 million cubic feet per day to extend its
primary term for a period of three years beginning March 1, 1995. Such extension
will be in addition to the remaining 160 million cubic feet per day of SCPL's
firm transportation services that remain in effect under terms extending from
1997 through 2003.
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated, or are assigned.
As a result of Order No. 636 Southern is attempting to
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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 sold 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. A
portion of these sales agreements were extended for an additional one-year term,
while the sales agreements with Atlanta were extended through March 31, 1995.
Certain customers, including Atlanta, have advised Southern that if the Customer
Settlement becomes effective, they will extend their sales agreements through
November 1997. The remainder of Southern's gas supply will continue to be sold
on a month-to-month basis. Subject to the cost-sharing mechanism in the Customer
Settlement, pursuant to which Southern will absorb an agreed-upon portion of its
total GSR costs, Southern will recover in accordance with the Customer
Settlement or, pending approval of the Customer Settlement, 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 sale
agreements and month-to-month sales as well as any cost previously incurred or
to be incurred as a result of Order No. 636 to terminate or to reduce the price
under Southern's remaining gas supply contracts.
Transportation and sales by Southern to three unaffiliated distribution
customers, Atlanta, Alagasco, and SCPL, accounted for approximately 33 percent,
16 percent, and nine percent, respectively, of Southern's 1994 consolidated
revenues. Atlanta and Alagasco were the only two customers that accounted for
ten percent or more of Southern's consolidated revenues for 1994.
Southern continues to pursue 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, which 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
that have signed ten-year contracts for firm transportation volumes totaling
approximately 11 million cubic feet per day.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
Gas Supplies
During 1994 Southern reduced the number of its existing long-term gas
supply contracts from 60 at the end of 1993 to 31 at the end of 1994. The
following table contains information as to Southern's gas supply and the general
sources from which that supply was purchased during the years 1992 through 1994.
<TABLE>
<CAPTION>
MMcf*
-------------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Purchased from non-affiliates...................... 109,578 102,492 96,992
Purchased from affiliates.......................... 11,003 7,317 5,795
------- ------- -------
Total Purchases.......................... 120,581 109,809 102,787
</TABLE>
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* As used in this report, the term "Mcf" means thousand cubic feet; the term
"MMcf" means million cubic feet; and the term "Bcf" means billion cubic feet.
All volumes of natural gas referred to in this report are stated at a pressure
base of 14.73 pounds per square inch absolute ("psia") and at 60 degrees
Fahrenheit.
Southern entered into no new long-term gas supply agreements in 1994, due
to the cessation of its merchant role because of Order No. 636 as discussed
above. Since Order No. 636 prohibits Southern from providing its traditional
bundled merchant service, Southern does not anticipate at this time that it will
need to contract for the long-term purchase of any additional natural gas
supplies in the future, except for the two contracts entered into with Exxon as
part of the settlement described below, which, if the Exxon settlement
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becomes effective, will replace six above-market-priced contracts with longer
terms. Southern will purchase minimal volumes of gas from time to time as may be
required for system management purposes. Southern does expect, however, that
adequate gas supplies will need to continue to be available to its system;
consequently, Southern has continued its efforts to have new gas supplies
attached to its system.
Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corporation
In an initial decision issued on May 2, 1994, which Southern has appealed,
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 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. Southern has appealed the administrative
law judge's decision to the FERC, but cannot predict the outcome of this appeal.
The Customer Settlement provides that, as to customers supporting the
settlement, the costs of the Mississippi Canyon Facilities will be recovered by
Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not
preclude Southern's recovery of such costs. On February 17, 1995, Southern
reached a settlement with Exxon pursuant to which, in return for an additional
cash payment by Southern of $45 million, plus allowing Exxon to retain $19
million in price differential costs already paid to Exxon, all existing gas
purchase contracts would be terminated, two new gas purchase contracts would be
entered into having three-year terms and providing for market-based index
prices, and a lawsuit regarding Southern's termination of the gas purchase
contract covering gas reserves connected by the Mississippi Canyon Facilities
(the "Mississippi Canyon Contract") would be dismissed. The settlement with
Exxon is contingent on FERC approval of the Customer Settlement.
If this settlement with Exxon does not become effective, total GSR costs
under the Mississippi Canyon Contract through the scheduled renegotiation of its
pricing provisions in 1997 are estimated to be approximately $125 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 Mississippi Canyon Contract
pursuant to certain provisions of the contract. Such termination, if effective,
would reduce GSR costs associated with such contract to $14 million. 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. The court entered a summary judgment order upholding
Southern's termination of this contract, which Exxon has appealed to the Fifth
Circuit Court of Appeals. Southern's customers are challenging the recovery of
GSR costs attributable to such contract on eligibility and prudence grounds and
on the basis that such costs also constitute non-cash consideration for the 1989
take-or-pay settlement with Exxon and thus are not recoverable due to the 1988
take-or-pay cost cap. If the settlement with Exxon does not become effective,
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 Mississippi Canyon Contract.
Potential Royalty Claims
In connection with certain of its settlements of take-or-pay claims made by
producers during the 1980s, Southern indemnified the producers against various
potential claims related to the settlement that might be made by royalty owners.
Southern has thus far been notified by ten producers of potential royalty claims
under
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<PAGE> 10
the indemnity provisions of various settlement agreements. The claims for which
Southern may have to indemnify these producers have been asserted by both
private lessors with respect to onshore leases and the Minerals Management
Service of the U.S. Department of the Interior (the "MMS") with respect to
federal offshore and Indian leases. Southern has spent approximately $1.2
million to date in settlement of claims of this type. Under the terms of a 1988
take-or-pay recovery settlement with Southern's customers, Southern is entitled
to seek recovery of such costs related to federal offshore or Indian leases
under the FERC's Order No. 500 cost-sharing procedures. The customers are
entitled, however, to challenge any effort by Southern to recover those costs.
Southern is unable to state whether any additional royalty claims based on
Southern's indemnification provisions in its take-or-pay settlements will be
asserted or to predict the outcome of any such claims or resulting litigation or
of Southern's efforts to recover from its customers any amounts it may pay, but
believes that these claims will not have a material adverse effect on Southern's
financial condition or results of operations.
Sea Robin Pipeline Company
Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of
Southern, owns and operates a 438-mile pipeline system located in the Gulf of
Mexico through which it gathers natural gas and condensate for others and
delivers those products to shore for condensate removal and gas processing and
redelivery to five downstream transmission pipelines. See the system map on page
I-11. Sea Robin is a transportation-only pipeline that has restructured in
compliance with FERC Order No. 636. During 1994 Sea Robin connected three new
offshore gas fields to its system at a cost of $9 million. Sea Robin has also
executed contracts to connect a new deepwater offshore production area to its
system during 1995 at an expected cost of $1.1 million. Sea Robin transported
approximately 282 Bcf of natural gas in 1994 compared to 287 Bcf in 1993. These
Sea Robin volumes are included within the Southern transportation volumes
discussed earlier.
During the past year the FERC has issued a series of orders in which it has
found that certain facilities operated by interstate natural gas transmission
companies and, in some instances, facilities previously certificated under the
NGA, are exempt from its jurisdiction pursuant to Section 1(b) of the NGA
because they qualify as gathering facilities. Sea Robin began discussions during
the fourth quarter of 1994 with the shippers on its pipeline system regarding
the terms under which it would gather gas supplies for its existing shippers as
a gathering company not subject to the jurisdiction of the FERC. As of March 1,
1995, Sea Robin has executed new gathering contracts with shippers representing
approximately 53 percent of its annual deliveries in 1994. Discussions are
continuing with the remaining shippers. Sea Robin's general proposal to all of
its shippers includes maintenance of Sea Robin's existing rates for five years,
following which the gathering rates will be adjusted on an annual basis by
application of an inflation index. Sea Robin has negotiated gathering contracts
with each shipper on an individual basis, however, and the specific terms and
conditions of each contract may vary.
On January 20, 1995, Sea Robin filed a petition requesting the FERC to
declare that Sea Robin's facilities are exempt from the jurisdiction of the FERC
under Section 1(b) of the NGA. Shippers representing approximately 21 percent of
Sea Robin's annual deliveries in 1994 have filed in opposition to Sea Robin's
petition at the FERC. The new gathering contracts described above are contingent
on the FERC granting Sea Robin's request. If Sea Robin's petition is approved by
the FERC, Sea Robin expects that the FERC will require it to tender to those
shippers with which it has been unable to reach agreement a "default contract"
that will provide for gathering services under Sea Robin's existing rates, as
adjusted for inflation, for a two-year term. In addition to their protests in
the gathering proceeding, on February 16, 1995, several of Sea Robin's shippers
filed with the FERC a complaint against Sea Robin under Section 5 of the NGA
claiming that Sea Robin's rates are unjust and unreasonable. Any reduction in
Sea Robin's rates as a result of this complaint, however, could be implemented
only on a prospective basis. Sea Robin is unable to predict the outcome of
either of these proceedings.
Sonat Intrastate-Alabama Inc.
Sonat Intrastate-Alabama Inc. ("SIA"), a wholly owned subsidiary of
Southern, owns and operates a 454-mile intrastate pipeline system extending from
natural gas fields and coal seam gas production areas in the Black Warrior Basin
in northwest and central Alabama to connections with customers in Alabama, as
well as
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<PAGE> 11
interconnections with three other pipelines, including Southern. See the system
map on page I-11. SIA's throughput in 1994 was approximately 38 Bcf compared to
36 Bcf in 1993.
Sonat Ventures Inc.
Sonat Ventures Inc. ("Ventures"), a wholly owned subsidiary of Southern,
was created in January 1992 for the purpose of commercializing alternative uses
for natural gas and to engage in various activities related to the purchase and
marketing of natural gas. Sonat NGV Technology Inc. ("Sonat NGV"), a wholly
owned subsidiary of Ventures, was created in July 1992. Sonat NGV, along with
Georgia Energy Company, a wholly owned subsidiary of Atlanta Gas Light Company,
and Natural Gas Vehicles Development Company Southeast, Inc., formed a joint
venture in 1992 to convert vehicles to natural gas. In 1994 this joint venture
was reorganized into a Georgia limited liability company, NGV Southeast
Technologies Center, L.L.C. ("NGV Southeast"). The conversion facility near
Atlanta, Georgia, opened in February 1993. In addition to the conversion of
vehicles, NGV Southeast has constructed a mobile source emissions testing
laboratory, which is scheduled for completion during the second quarter of 1995.
NGV Southeast intends to seek certification by the U. S. Environmental
Protection Agency to perform vehicular emissions tests. During 1993 Ventures
also entered into two joint ventures with affiliates of local distribution
companies in Alabama and Florida to construct, own, and operate natural gas
vehicle refueling stations as well as finance the conversion of fleet vehicles.
The first station in Alabama began operating in March of 1994 and the first
station in Florida is expected to begin operating in the second quarter of 1995.
A Florida limited partnership, in which Ventures is a 50-percent general partner
and an affiliate of a Florida local distribution company is a 50-percent general
partner, entered into a joint venture in January 1995 with Amoco Oil Company to
develop a public fueling infrastructure for vehicular natural gas in Dade,
Broward, and Palm Beach Counties, Florida.
South Georgia Natural Gas Company
South Georgia, a wholly owned subsidiary of Southern, owns and operates a
909-mile interstate natural gas transmission system located in eastern Alabama,
southern Georgia, and the Florida Panhandle. See the system map on page I-11. As
described above, South Georgia has restructured pursuant to Order No. 636 and is
a transportation-only pipeline. South Georgia transported approximately 34 Bcf
of natural gas in 1994 compared to 32 Bcf in 1993. These South Georgia volumes
are included within the Southern transportation volumes discussed earlier.
Southern Energy Company
Southern Energy Company ("Southern Energy"), a wholly owned subsidiary of
Southern, owns a liquefied natural gas ("LNG") receiving terminal near Savannah,
Georgia, which was constructed for a project, now terminated, to import LNG from
Algeria. The terminal has been inactive since the early 1980s. On July 22, 1992,
the FERC issued an order approving a settlement relating to Southern Energy's
LNG facilities. The settlement resolved a number of outstanding rate and
accounting issues and preserved an option for customers of Southern Energy to
obtain LNG through this facility at least through the year 1999.
Competition and Current Business Conditions
The natural gas transmission industry, although regulated, is very
competitive. Since the mid-1980s customers have switched their volumes from a
bundled merchant service to transportation service, acquiring 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. Southern continues to
provide a limited merchant service with gas supply remaining under contract and,
in this capacity, competes with other suppliers, pipelines, gas producers,
marketers, and alternate fuels.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, electricity, and heavy crude oil. An important
consideration in Southern's markets is the ability of natural gas to compete
with alternate fuels. Residual fuel oil, the principal competitive alternate
fuel in Southern's market area, was at certain times in 1994, and may be at
times in the future, priced at or below the comparable price of natural gas
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<PAGE> 12
in industrial and electric generation markets. Some parts of Southern's market
area are also served by one or more other pipeline systems that can provide
transportation as well as sales service in competition with Southern. Southern's
two largest customers are both able to obtain a portion of their natural gas
requirements through transportation by other pipelines.
FERC's Order No. 636 mandates a rate design, known as straight
fixed-variable ("SFV"), that is designed to allow pipelines to recover
substantially all fixed costs, a return on equity, and income taxes in the
capacity reservation component of their rates. The firm transportation customers
of Southern (with the exception of certain small customers) must pay these
reservation charges regardless of the volumes shipped. Accordingly, the SFV rate
design should result in greater stability in the earnings and cash flows of
interstate pipelines, including Southern.
I-10
<PAGE> 13
[SOUTHERN NATURAL PIPELINE MAP GOES HERE]
I-11
<PAGE> 14
Governmental Regulation
Southern is subject to regulation by the FERC and by the Secretary of
Energy under the NGA, the NGPA, and the Department of Energy Organization Act of
1977 (the "DOE Act"). Southern's interstate transmission subsidiaries are also
subject to such regulation.
The NGA, modified by the DOE Act, grants to the FERC authority to regulate
the construction and operation of pipeline and related facilities utilized in
the transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities. Southern and its
interstate transmission subsidiaries hold required certificates of public
convenience and necessity issued by the FERC authorizing them to construct and
operate all pipelines, facilities, and properties now in operation for which
certificates are required, and to transport and sell natural gas in interstate
commerce.
The FERC also has authority to regulate the transportation of natural gas
in interstate commerce and the sale of natural gas in interstate commerce for
resale. Although the FERC still retains jurisdiction over their resale rates,
following the implementation of Order No. 636, Southern and other interstate
pipeline companies are now permitted to charge market-based rates for gas sold
in interstate commerce for resale. Transportation rates remain fully regulated.
As necessary, Southern and its interstate transmission subsidiaries file with
the FERC applications for changes in their transportation rates and charges
designed to allow them to recover fully their costs of providing such service to
their customers, including a reasonable rate of return. These rates are normally
allowed to become effective, subject to refund, until such time as the FERC
rules on the actual level of rates. See "Rate and Regulatory Proceedings" below.
Regulation of the importation of natural gas is vested in the Secretary of
Energy, who has delegated various aspects of this import jurisdiction to the
FERC and the ERA.
Southern and its natural gas transmission subsidiaries are subject to the
Natural Gas Pipeline Safety Act of 1968, as amended, which regulates pipeline
and LNG plant safety requirements, and to the National Environmental Policy Act
and other environmental legislation. Southern and its natural gas transmission
subsidiaries have a continuing program of inspection designed to keep all of
their facilities in compliance with pollution control and pipeline safety
requirements and believe that they are in substantial compliance with applicable
requirements. Southern's capital expenditures to comply with environmental and
pipeline safety regulations were approximately $13 million in 1994 compared to
$14 million in 1993. It is anticipated that such expenditures will be
approximately $20 million in 1995.
Rate and Regulatory Proceedings. Various matters pending before the FERC,
or before the courts on appeal from the FERC, relating to, or that could affect,
Southern or one or more of its subsidiaries are described in Part II of this
report in Note 8 of the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Rate Matters," which are incorporated herein by
reference. As described in Note 8, several general rate changes have been
implemented by Southern and remain subject to refund and Southern filed with the
FERC on March 15, 1995, a Customer Settlement (described above) that, if it is
approved by the FERC and becomes effective, would resolve all outstanding rates
and GSR cost recovery proceedings as to supporting customers.
Environmental Matters
Various environmental matters relating to, or that could affect, Southern
or one or more of its subsidiaries are described in Part II of this report in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Environmental Issues," which is incorporated
herein by reference.
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<PAGE> 15
ITEM 2. PROPERTIES
A description of Southern's and its subsidiaries' properties is included
under Item 1. Business above and is incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding certain proceedings pending before federal
regulatory agencies, see Note 8 of the Notes to Consolidated Financial
Statements in Part II of this report. For information regarding various
environmental matters relating to, or that could affect, Southern or one or more
of its subsidiaries, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this report under the caption
"Environmental Issues."
Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light
Company was filed in January 1992 in the U.S. District Court for the Southern
District of Georgia. This lawsuit was filed against Southern and Atlanta Gas
Light Company ("Atlanta") for alleged violation of the antitrust laws in
connection with Southern's refusal to provide direct service to the Plaintiff,
Arcadian Corporation ("Arcadian"). Arcadian claims actual damages of at least
$15 million, which could be trebled under the antitrust laws. Southern and
Arcadian executed an agreement settling this lawsuit on November 30, 1993. The
settlement provides that the lawsuit will be dismissed with prejudice upon
final, nonappealable approval by the FERC of the direct connection and
transportation service requested by Arcadian. Pending such approval the lawsuit
has been stayed. On May 12, 1994, the FERC issued an order granting such
approval. Atlanta and others sought rehearing on 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. While management believes it has meritorious
defenses and intends to defend the suit vigorously if the stay were to be
lifted, given the inherently unpredictable nature of litigation and the
relatively early state of discovery in the case, management is unable to predict
the ultimate outcome of the proceeding if it were to go forward.
Exxon Corporation v. Southern Natural Gas Company was filed in February
1994 in the U.S. District Court for the Southern District of Texas. Exxon
Corporation ("Exxon"), the plaintiff in this suit, asked the court to declare
that Southern has no right to terminate a gas purchase contract with Exxon
providing for the sale and purchase of gas produced from Mississippi Canyon and
Ewing Bank Area Blocks, offshore Louisiana (the "Contract"), which Southern gave
notice of termination effective March 1, 1994. In the alternative, Exxon alleged
that Southern has repudiated and breached the Contract and asked for an
unspecified amount of monetary damages. Southern's customers are challenging the
recovery of GSR costs attributable to the Contract. See the discussion above in
Item 1 under the caption "Administrative Law Judge Ruling Concerning
Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with
Exxon Corporation." The U.S. District Court for the Southern District of Texas
entered a summary judgment order on August 29, 1994, upholding Southern's
termination of the Contract. On September 6, 1994, Exxon filed an appeal of the
summary judgment order with the U.S. Court of Appeals for the Fifth Circuit,
which remains pending. On February 17, 1995, Southern reached a settlement with
Exxon pursuant to which this lawsuit would be dismissed. The settlement with
Exxon, however, will not become effective until the Customer Settlement
(described above in Item 1) is effective. Pending the settlement becoming
effective, therefore, Exxon's appeal has been stayed. If it were to go forward,
management is unable to predict the outcome of this litigation or whether its
position that it has the right to terminate the Contract would be sustained.
Southern Natural Gas Company v. ARCO Oil and Gas Company, d/b/a Vastar
Resources, Inc., was filed in January 1994 in Civil District Court for the
Parish of Orleans, Louisiana, and Vastar Resources, Inc. v. Southern Natural Gas
Company was filed in April 1994 in the 125th Judicial Court of Harris County,
Texas. Vastar Resources, Inc. ("Vastar") and Southern filed separate actions to
petition these respective state courts to determine the price of gas under a
1949 contract between Vastar and Southern, providing for the purchase
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<PAGE> 16
and sale of gas from the Logansport and Joaquin Fields located in Louisiana and
Texas. Southern maintains that a provision of the contract provides for a market
price, while Vastar maintains that the contract price is based upon the last
regulated price in effect,adjusted for escalation. The parties have deferred the
matter to arbitration and the two lawsuits have been stayed pending the outcome
of that proceeding, which is scheduled to begin April 3, 1995, in New Orleans,
Louisiana. Southern has recorded its reasonably estimable losses in connection
with these proceedings, but will seek to recover as a GSR cost any amounts for
gas purchases at prices above spot-market that may ultimately be determined it
owes to Vastar as a result of these proceedings.
Southern and its subsidiaries are involved in several other lawsuits, all
of which have arisen in the ordinary course of business. Southern does not
believe that any ultimate liability resulting from any of these other pending
lawsuits will have a material adverse effect on it.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
All of the common stock of Southern is held by its parent company,
Sonat Inc.; accordingly, there is no market for the stock. The following table
shows the quarterly cash dividends paid on Southern's common stock during the
past two years.
<TABLE>
<CAPTION>
QUARTER TOTAL DIVIDENDS PAID
------- --------------------
1994
----
<S> <C>
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth (1) 12,400,000
-----------
$49,600,000
===========
1993
----
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth 12,400,000
-----------
$49,600,000
===========
</TABLE>
(1) Excludes a special noncash dividend declared by Southern of $100
million to Sonat, which was satisfied by forgiveness of an intercompany loan to
Sonat.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
Shown below is selected consolidated financial data for Southern and
its subsidiaries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Millions)
Revenues $ 765.1 $ 832.6 $ 728.6 $ 760.4 $ 703.3
Costs and Expenses 672.3 686.0 578.0 623.9 594.3
-------- -------- -------- -------- --------
Operating Income 92.8 146.6 150.6 136.5 109.0
Other Income, Net 9.5 9.4 8.9 10.4 26.0
Interest Expense, Net (26.2) (28.4) (32.8) (27.6) (31.2)
-------- -------- -------- -------- --------
Income Before Income Taxes 76.1 127.6 126.7 119.3 103.8
Income Taxes 28.3 43.5 47.3 45.9 36.5
-------- -------- -------- -------- --------
Net Income (1) $ 47.8 $ 84.1 $ 79.4 $ 73.4 $ 67.3
======== ======== ======== ======== ========
Assets $1,375.2 $1,531.2 $1,425.7 $1,426.5 $1,424.1
Debt Maturing Within One Year $ 7.0 $ 107.3 $ 6.8 $ 6.1 $ 9.3
Long-Term Debt 323.9 329.4 435.5 340.1 341.6
Stockholder's Equity 519.2 620.0 585.5 655.7 631.7
-------- -------- -------- -------- --------
Total Capitalization $ 850.1 $1,056.7 $1,027.8 $1,001.9 $ 982.6
======== ======== ======== ======== ========
</TABLE>
(1) Net income in 1994 includes a charge of $33.5 million related to
the recognition of significant unusual items. See Customer Settlement
discussion in Note 8 of the Notes to Consolidated Financial Statements.
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<PAGE> 19
ITEM 7. 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
The principal business of Southern Natural Gas Company and its
subsidiaries (Southern) is the interstate transmission of natural gas in the
southeastern United States, which is regulated by the Federal Energy Regulatory
Commission (FERC). In the future, Southern will have some operations that are
not regulated. Southern's parent, Sonat Inc., transferred to Southern its
investments in three small unregulated companies effective January 1, 1995 (see
Note 3 of the Notes to Consolidated Financial Statements). In addition, Sea
Robin Pipeline Company, a wholly owned subsidiary of Southern, has filed a
petition with the FERC requesting it be declared an unregulated gas gathering
system.
In November 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, acquiring 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
predominately a transporter of natural gas, Southern continues to provide a
limited merchant service with gas supply remaining under contract.
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, which 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, Tennessee, that will deliver natural gas to a
group of new customers who have signed 10-year contracts for firm
transportation volumes totaling approximately 11 million cubic feet per day.
Also, Florida Gas Transmission Company, a subsidiary of Citrus Corp. (50
percent-owned by Sonat), contracted in February 1995 for 100 million cubic feet
per day of new firm transportation to be delivered from Southern's system.
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<PAGE> 20
OPERATIONS
- ----------
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Natural gas sales $234 $541 $489
Market transportation and storage 321 170 124
Supply transportation 37 50 51
Other 173 72 65
---- ---- ----
Total Revenues $765 $833 $729
==== ==== ====
Natural Gas Cost:
Purchased from others $213 $342 $247
Purchased from affiliates 16 23 23
---- ---- ----
Total Natural Gas Cost $229 $365 $270
==== ==== ====
Transition Cost Recovery and
Gas Purchase Contract
Settlement Costs $116 $ 52 $ 52
==== ==== ====
Depreciation and Amortization $ 47 $ 64 $ 74
==== ==== ====
Operating Income $ 93 $147 $151
==== ==== ====
Equity in Earnings of Joint Venture $ 9 $ 9 $ 8
==== ==== ====
(Billion Cubic Feet)
Volumes:
Natural gas sales (excludes storage gas) - 73 109
Market transportation 551 435 391
---- ---- ----
Total Market Throughput 551 508 500
Supply transportation 335 328 342
---- ---- ----
Total Volumes 886 836 842
==== ==== ====
Transition gas sales 103 19 -
==== ==== ====
</TABLE>
1994 Versus 1993. Excluding the effect of a $27 million charge made in
the fourth quarter of 1994 associated with a comprehensive customer rate
settlement that was filed by Southern with the FERC in March 1995 (the Customer
Settlement) and a $28 million provision relating to regulatory assets that will
not be recovered as a result of the Customer Settlement, including amounts for
a corporate restructuring undertaken in 1994 (see Corporate Restructuring),
Southern's operating income for 1994 increased slightly compared with 1993.
(See Rate Matters for a discussion of the Customer Settlement.) Both of these
provisions were reflected in operating and maintenance expense. The increase
was primarily attributable to higher transportation revenue resulting from the
sale of unsubscribed firm transportation capacity and lower general and
administrative costs.
Southern's gas sales revenues and gas costs were down significantly in
1994 as a result of implementing Order No. 636 and primarily represent
recognition of gas sales made from supply remaining under contract after the
implementation of Order No. 636 (see Order No. 636 discussion below). The
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<PAGE> 21
volumes associated with these sales are included in transportation volumes
because, as required by Order No. 636, all sales are now made at the wellhead.
Another factor in the decrease in revenues was the recovery of $42 million of
Order No. 500 costs in 1993 gas sales and transportation revenues. Higher
transportation revenues and volumes are a result of the shift from sales to
transportation due to the implementation of Order No. 636. Southern's
transportation revenues and depreciation and amortization expense in 1994
include a $16 million decrease reflecting a retroactive reduction in certain
depreciation rates. Other revenue increased in 1994 compared with 1993
primarily due to the recovery of $108 million of transition costs related to
the implementation of Order No. 636. Included in other revenue and operating
and maintenance expense in 1994 is a $38 million adjustment related to the
recognition of fuel revenue and expense.
General and administrative costs decreased primarily due to lower
employee costs, including stock-based compensation expense.
1993 Versus 1992. Excluding the $9.6 million favorable effect of
recognizing a settlement in 1992 relating to Southern Energy Company's (a
subsidiary of Southern) idle liquefied natural gas facility, Southern's
operating results were up 4 percent in 1993.
Gas sales revenue and gas costs were abnormally high at Southern due to
the sale, at cost, of $123 million of storage gas inventory pursuant to the
implementation of Order No. 636 on November 1, 1993. Other revenue increased
in 1993 compared to 1992 due to lower excess royalty reserves and higher
take-or-pay revenues. Total market throughput increased 2 percent; however,
Order No. 636 resulted in a shift in volumes from sales to market
transportation. Supply transportation volumes decreased due to competition
from other pipelines.
The decrease in depreciation and amortization expense in 1993 compared
with 1992 was due to the inclusion of $12 million of depreciation expense in
1992 from Southern Energy's settlement related to its idle liquefied natural
gas facility. Operating and maintenance expense increased in 1993 due to
reversal of $22 million of operating and maintenance expense in 1992 related to
Southern Energy's settlement. General and administrative expense was up in
1993 due to a $4 million increase in health insurance expense and an increase
in stock-based employee compensation expense.
ORDER NO. 636
In 1992 the FERC issued its Order No. 636 (the Order), which required
interstate natural gas pipeline companies to make significant changes in the
way they operate, including 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
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<PAGE> 22
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. 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. 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 for terms ranging from one to 10 or
more years. Alabama Gas Corporation, Southern's second largest customer,
executed firm transportation contracts for 393 million cubic feet per day under
terms extending through October 31, 2008.
Atlanta elected to renew its firm transportation service agreements
with transportation demands of 582 million cubic feet per day, which expired
October 31, 1994, for a one-year term beginning November 1, 1994. In September
and October of 1994, Atlanta and South Carolina Pipeline Corporation (SCPL)
executed three-year firm service agreements with transportation demands of an
additional 100 million cubic feet per day and 28 million cubic feet per day,
respectively. With these additional subscriptions, substantially all of
Southern's firm market-area capacity currently available became fully
subscribed.
If the Customer Settlement (described in Note 8 of the Notes to
Consolidated Financial Statements) becomes effective, Atlanta will amend its
firm transportation contracts for an aggregate of 682 million cubic feet per
day to extend the primary term for a period of three years beginning as of the
date an interim rate reduction becomes effective, which will occur as of March
1, 1995. (See Note 8 of the Notes to Consolidated Financial Statements.) An
additional 118 million cubic feet per day would remain under its current term
to April 30, 2007.
II-6
<PAGE> 23
NATURAL GAS SALES AND SUPPLY
Sales by Southern of natural gas are anticipated to continue until
Southern's remaining gas supply contracts expire, are terminated, or are
assigned. Southern is attempting to terminate its remaining gas supply
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 gas supply contracts, Southern sold 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. A portion of these sales agreements
were extended for an additional one-year term, while the sales agreements with
Atlanta were extended through March 31, 1995. Certain customers, including
Atlanta, have advised Southern that if the Customer Settlement becomes
effective, they will extend their sales agreements through November 30, 1997.
The remainder of Southern's gas supply will continue to be sold on a month-to-
month basis.
As discussed in Note 8 of the Notes to Consolidated Financial
Statements, Southern is incurring certain transition costs under the Order,
primarily gas supply realignment (GSR) costs relating to existing gas purchase
contracts. Southern's customers are contesting Southern's proceedings to
recover its GSR costs on eligibility and prudence grounds and on the basis that
Southern is precluded from recovering certain of such costs under a 1988
take-or- pay settlement that limited the amount of such costs that Southern
could recover. In its Customer 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, recent contract renegotiations, and price differential
costs actually incurred, the total amount of GSR costs are estimated to be
approximately $328 million on a present-value basis. This amount includes the
payments made or accrued through December 31, 1994, to amend or to terminate
gas purchase contracts and price differential costs, and the $64 million cost
that will be incurred under a settlement of existing contracts with Exxon
Corporation (Exxon), which will become effective if the Customer Settlement
becomes effective. These costs collectively total $288 million. Thus,
Southern currently estimates it will ultimately pay an additional $40 million
in GSR costs. These amounts do not include an additional $87 million in GSR
costs that would be incurred if the settlement with Exxon does not become
effective and Exxon prevails on its lawsuit regarding Southern's March 1, 1994,
termination of a contract relating to Exxon's reserves in its Mississippi
Canyon blocks.
Subject to the cost-sharing mechanism in the Customer Settlement,
pursuant to which Southern will absorb an agreed-upon portion of its total GSR
costs, Southern will recover in accordance with the Customer Settlement or,
II-7
<PAGE> 24
pending approval of the Customer Settlement, 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 to be incurred
as a result of Order No. 636 to terminate or reduce the price under Southern's
remaining contracts. If the Customer Settlement is not approved, Southern
cannot predict the ultimate outcome of its Order No. 636 restructuring
proceedings and its limited rate filings to recover its GSR costs. (See Rate
Matters and Note 8 of the Notes to Consolidated Financial Statements.)
Southern's purchase commitments under its remaining gas supply
contracts for the years 1995 through 1999 are estimated as follows:
<TABLE>
<CAPTION>
Estimated
Purchase
Commitments
-------------
(In Millions)
<S> <C>
1995 $67
1996 69
1997 69
1998 68
1999 53
</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. These estimates also exclude
estimated purchase commitments under certain contracts with Exxon that will be
terminated if the Customer Settlement becomes effective. If the Customer
Settlement does not become effective and Southern were therefore required to
perform these contracts, and further assuming that Exxon were to prevail on its
appeal of a summary judgment upholding Southern's termination of the
Mississippi Canyon Contract, which is currently the subject of litigation
between Exxon and Southern as described in Note 8 of the Notes to Consolidated
Financial Statements, these estimates would increase by $170 million in 1995,
$144 million in 1996, $57 million in 1997, $5 million in 1998, and $2 million
in 1999. Of these amounts, $126 million in 1995 and 1996 and $49 million in
1997 is attributable to the Mississippi Canyon Contract. In addition, as part
of its settlement with Exxon, which as noted is contingent on the effectiveness
of the Customer Settlement, Southern and Exxon have agreed to terminate all
their existing gas purchase contracts and to enter into two new gas purchase
contracts having three-year terms and providing for market-based index prices
(which would not constitute GSR costs). Therefore, if the Customer Settlement
becomes effective, these estimates could increase by $108 million in 1995, $94
million in 1996, and $35 million 1997 to include these two new contracts with
Exxon.
RATE MATTERS
Several general rate changes have been implemented by Southern and
remain subject to refund. If the Customer Settlement is approved by the FERC
II-8
<PAGE> 25
and becomes effective, all outstanding rate and Order No. 636 transition cost
recovery proceedings would be resolved. The settlement would result in
reducing Southern's filed rates to more competitive levels, would reduce
somewhat reported revenues, and would reduce depreciation expense to
approximately $40 million in 1995. Although Southern has been advised by
customers representing more than 80 percent of its firm capacity that they
intend to support the settlement, there is no assurance that the settlement
will be approved by the FERC. (See Note 8 of the Notes to Consolidated
Financial Statements for a discussion of the Customer Settlement and other rate
matters.)
------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Interest Income (Expense), Net $(26) $(28) $(33)
</TABLE>
1994 Versus 1993. Excluding the effect of the accrual in 1993 of $8
million of interest expense relating to certain income tax issues, net interest
expense increased due to lower interest income, partially offset by lower
interest expense. Interest income was lower due to lower average rates on
notes from affiliates. Interest expense was lower primarily due to the
redemption of the $100 million 9 5/8 Percent Notes in 1994, which was financed
by Sonat's partial repayment of its intercompany loan from Southern.
The special noncash dividend in December 1994 of $100 million declared
by Southern to Sonat, which was satisfied by forgiveness of an intercompany
loan to Sonat, did not impact interest income in 1994. Southern's interest
income in 1995 will be lower by the amount of interest that would have accrued
on this portion of the note balance. The average interest rate charged on the
intercompany loan in 1994 was 4.88 percent.
1993 Versus 1992. Interest income was higher in 1993 due to an
increase in average levels and rates on notes from affiliates. The increase in
interest income was largely offset by an increase in accrued interest expense
of $8 million provided on certain income tax issues and to higher average debt
levels.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Income Taxes $ 28 $ 44 $ 47
</TABLE>
1994 Versus 1993. Income tax expense decreased in 1994 compared to
1993 due to lower pretax income. 1993 included $4 million (federal and state)
of positive tax adjustments, including the settlement of the 1983-1985 federal
income tax returns and certain other tax issues.
1993 Versus 1992. Income taxes were lower in 1993 due to the positive
tax adjustments mentioned above.
II-9
<PAGE> 26
FINANCIAL CONDITION
CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating Activities $199 $ 197 $ 166
</TABLE>
1994 Versus 1993. Net cash provided by operating activities in 1994
was relatively even with 1993. The decrease in depreciation expense reflects
the change in depreciation rates, which was discussed earlier. The increase in
the change in regulatory reserves reflects the continued collection of revenues
in 1994 subject to refund. Deferred taxes are provided on these revenue
reserves, which resulted in the increase in the balance of deferred tax assets
(see Note 7 of the Notes to Consolidated Financial Statements). The $147
million change in gas supply realignment costs was a result of net recoveries
of $19 million in 1994 compared with net payments of $128 million in 1993. In
1994 Southern completed recovery of its take-or-pay costs, resulting in the $33
million decrease in the change in natural gas purchase contract settlement
costs compared with 1993. The $49 million decrease in the change in
inventories reflects the sale, pursuant to Order No. 636, of storage gas that
was in inventory at December 31, 1992. The $40 million decrease in the change
in accounts payable is the result of the change in Southern's business under
Order No. 636, which reduced purchased gas volumes. The primary reason for the
$44 million change in other current assets and liabilities was the settlement
of gas imbalances in 1994 allowed under Order No. 636. Southern anticipates
that by the end of 1995 it will have substantially settled the remainder of its
gas imbalances, which are not settled monthly (see Note 1 of the Notes to
Consolidated Financial Statements). The amount in Other in 1994 includes a $55
million provision for the Customer Settlement discussed in Note 8 of the Notes
to Consolidated Financial Statements.
1993 Versus 1992. Net cash provided by operating activities increased
$31 million in 1993 compared with 1992. The decrease in depreciation expense
includes the effect of the 1992 settlement of Southern Energy's liquid natural
gas facilities discussed earlier. The $49 million increase in the change in
inventories reflects the sale of storage gas inventory pursuant to Order No.
636. The $59 million net change in other current assets and liabilities
reflects lower cash outflows in 1993 relating to gas imbalances. There was a
total of $128 million in GSR payments in 1993.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Investing Activities $ (46) $(140) $(112)
</TABLE>
1994 Versus 1993. Net cash used in investing activities in 1994
reflects loan repayments from Southern's parent while 1993 reflects increased
loans to its parent. Loan repayments by Sonat to Southern in 1994 were used to
retire $100 million of debt that matured in 1994. The increase in proceeds
from disposal of assets reflects receipt in 1994 of insurance proceeds of
II-10
<PAGE> 27
$7.1 million related to damages from Hurricane Andrew. This increase is
offset, however, by a $9 million decrease in capital expenditures.
1993 Versus 1992. Net cash used in investing activities was higher due
to a $17 million increase in capital expenditures and increased loans to
Southern's parent.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing Activities $(157) $ (55) $ (54)
</TABLE>
1994 Versus 1993. Net cash used in financing activities in 1994
reflects the maturity and redemption of Southern's $100 million 9 5/8 Percent
Notes.
1993 Versus 1992. Net cash used in financing activities increased
slightly due to scheduled loan repayments. Southern did not refinance any debt
during 1993.
CAPITAL EXPENDITURES
Capital expenditures for 1995, including joint ventures, are expected
to be approximately $65 million, primarily for pipeline additions and
replacements and other projects, some of which have not yet received regulatory
approval.
LIQUIDITY AND CAPITAL RESOURCES
At December 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 use cash from operations,
borrowing in the public or private markets or loans from affiliates to finance
future capital or other corporate expenditures.
CAPITALIZATION INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow from Operating Activities
to Weighted Average Debt 52% 45% 40%
Debt to Capitalization -
End of Year 39% 41% 43%
===========================================================================================================
</TABLE>
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
Although the rate of inflation in the United States has been moderate
over the past several years, its potential impact should be considered when
analyzing historical financial information. In past times of high general
inflation, gas prices have increased at comparable, and at times, higher rates.
The pending customer settlement filed by Southern in March 1995, if approved,
provides that, in certain limited circumstances, Southern will not file a
general rate case to be effective prior to March 1, 1998 (see Note 8
II-11
<PAGE> 28
of the Notes to Consolidated Financial Statements). Southern's results of
operations will continue to be affected by future changes in gas prices and the
interrelationship between oil, gas, and other energy prices.
CORPORATE RESTRUCTURING
In late 1994 and early 1995 Southern completed a reduction in staffing
levels through a combination of special early retirement options (SERO) and
involuntary terminations. The SEROs and terminations, which involved 302
employees, or approximately 27 percent of Southern's work force, occurred
primarily in field locations, but also included significant reductions in
office employees. The total cost of the program amounted to $19 million. The
majority of the charge represented accelerated retirement costs, with the
remainder being primarily cash severance payments. Southern anticipates the
savings in 1995 from this program will approximate $10 million.
ENVIRONMENTAL ISSUES
Southern and its subsidiaries are subject to extensive federal, state,
and local environmental laws and regulations that affect their operations.
Governmental authorities may enforce these laws and regulations with a variety
of civil and criminal enforcement measures, including monetary penalties,
assessment and remediation requirements, and injunctions as to future
activities. The use and disposal by Southern and its subsidiaries of hazardous
materials and toxic substances are subject to the requirements of the federal
Toxic Substances Control Act (TSCA) and the federal Resource Conservation and
Recovery Act (RCRA), among others, and comparable state and local statutes.
The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as "Superfund," imposes liability, without regard to fault
or the legality of the original act, for release of a "hazardous substance"
into the environment.
Southern was named by the Environmental Protection Agency (EPA) in
October 1994 as a potentially responsible party (PRP) at a Superfund site in
Mississippi known as the Pike County Drum Site. In response to a request from
the EPA, Southern provided the EPA with information concerning materials
shipped to the site. The EPA advised Southern and the other PRPs in January
1995 that the cost to date of the response actions related to this site through
EPA funding was approximately $330,000, and the EPA made demand on Southern and
the other PRPs for payment of such amount plus applicable interest. In
accordance with the procedures prescribed by the EPA, Southern has indicated to
the EPA Southern's intent to participate in settlement negotiations relating to
the allocation of such cost among all of the PRPs. Southern believes that,
based on the nature and volume of materials that it shipped to this site and
the information currently available to it, Southern should be a de minimis
contributor to any settlement of such cost.
In connection with the Superfund site in Alabama known as the Fuels and
Chemicals Site, Southern was named among the PRPs at this site, and has signed
an Administrative Order on Consent for Removal Action (AOC) with the EPA for
removal actions at the site. To satisfy their obligations under the AOC, all
of the signatory PRPs to the AOC have entered into an Indemnification, Reopener
and Settlement Bank Fund Agreement (Indemnification Agreement) with
II-12
<PAGE> 29
one of the largest PRPs, who has agreed to undertake to perform all remedial
actions required by the AOC and any additional response obligation required by
EPA or the Alabama Department of Environmental Management. In return for
payments not material to Southern, this PRP has agreed to indemnify Southern
against any further liability related to the AOC and a prior AOC dated July 20,
1993, (Phase I AOC) unless costs of complying with the AOC and the Phase I AOC
exceed a specified amount. Based on the information that it currently
possesses, Southern does not expect the specified amount to be exceeded unless
tests that are being conducted indicate the presence of groundwater
contamination at this site.
Southern has settled its potential liability at three other Superfund
sites, at two of which it had been named as a PRP, in exchange for payments not
material to it and, barring unexpected events, does not expect to have any
further liability with regard to any of the three sites.
Liability for PRPs under CERCLA (and applicable state law) is joint and
several among all PRPs. Although volumetric allocation is a factor in
assessing liability, it is not necessarily determinative; thus, the ultimate
liability at any of these sites could be substantially greater than the amounts
described above.
In the operation of their natural gas pipeline systems, Southern and
its wholly owned subsidiary South Georgia Natural Gas Company (South Georgia)
have used, and continue to use at several locations, gas meters containing
elemental mercury. Southern and South Georgia plan to remove all remaining
mercury meters during the course of regularly scheduled facilities upgrades.
Mercury and mercury meters are handled pursuant to procedures that are designed
to protect employees and comply with Occupational Safety and Health
Administration standards. It is generally believed in the natural gas pipeline
industry that, in the course of normal maintenance and replacement operations,
elemental mercury may have been released from mercury meters. Southern believes
that its mercury meters may in the past have been the sources of small releases
of elemental mercury. Southern intends to commence site characterization and,
as appropriate, remediation of mercury-contaminated soil located in Louisiana
during the first quarter of 1995. Southern expects to undertake the
characterization and remediation of mercury-contaminated soil in its other
states of operation beginning in 1996, subject to completion of work in
Louisiana. Southern is unable to estimate with precision the cost of the
characterization and remediation of mercury-contaminated soil at this time,
because costs will vary based on a number of factors particular to each site
and because regulatory standards for elemental mercury cleanup are uncertain at
this time. Neither the EPA nor any state in which Southern operates has issued
standards with respect to cleanup of mercury- contaminated soil; however,
Southern has received informal guidance from the State of Louisiana with
respect to cleanup standards in that state. Southern has budgeted the amount
of $500,000 in 1995 for the characterization and remediation of
mercury-contaminated soil in Louisiana and, based on the information that it
currently possesses, believes that this amount may be sufficient to complete
such characterization and remediation, subject to the actual extent of
contamination discovered at any site.
II-13
<PAGE> 30
During the course of retirement and removal of certain field
compressors, Southern discovered soil and groundwater contamination in the
Logansport and Joaquin Fields, respectively, in the states of Louisiana and
Texas. Although no link between Southern's operations and the groundwater
contamination has been established, Southern notified the Louisiana Department
of Environmental Quality (LDEQ) of this discovery because of a possibility that
the groundwater contamination may be associated to some extent with Southern's
past operations in the area. In November 1994 Southern received a request from
the LDEQ for an Assessment Work Plan (the Plan) designed to determine the
extent, source, and magnitude of soil and groundwater contamination discovered
under Southern's field compressor locations, including evaluation procedures
used to determine recommendations for remediation of soil and groundwater.
Southern filed the Plan in December 1994. Southern expects that work under the
Plan will commence during the first quarter of 1995, subject to review and
approval of the Plan by the LDEQ. Southern believes that the cost to clean up
any soil contamination at its field compressors will not be material. To date,
Southern does not have in its possession sufficient information reasonably to
estimate the cost, if any, that it may be required to bear for any cleanup of
groundwater contamination. No reporting was required in Texas.
Southern generally considers environmental assessment and remediation
costs and costs associated with compliance with environmental standards
incurred by Southern and South Georgia to be recoverable through rates since
they are prudent costs incurred in the ordinary course of business and,
accordingly, generally will seek recovery of such costs through rate filings,
although no assurance can be given with regard to their ultimate recovery. As
described in Note 8 of the Notes to Consolidated Financial Statements, however,
Southern's proposed Customer Settlement, if approved, would prevent Southern
from filing a general rate case to be effective prior to March 1, 1998.
Southern and its subsidiaries are subject to the federal Clean Air Act
(Clean Air Act), the federal Clean Air Act Amendments of 1990 (1990
Amendments), which added significantly to the existing requirements established
by the Clean Air Act and the state regulations and requirements promulgated
thereunder (together the Clean Air Rules). The 1990 Amendments require that
the EPA issue new regulations, mainly related to mobile sources, air toxicants,
ozone non- attainment areas, acid rain, permitting, and enhanced monitoring.
Southern operates three compressor stations in areas that do not meet the
National Ambient Air Quality Standards (NAAQS) established under the Clean Air
Act for ozone. Two of these stations are located in Louisiana and one is
located in Alabama. The Clean Air Rules require Southern to submit an
emissions control plan for nitrogen oxides (NOX) that may require the addition
of emissions control technology at each of these stations.
The LDEQ had previously instructed Southern to suspend the
implementation of its Louisiana emissions control plans for NOX until September
1, 1994, because of the possibility that the emissions of NOX are not the cause
of the area's failure to meet NAAQS. In a subsequent letter dated November 22,
1994, the LDEQ instructed Southern to suspend such implementation indefinitely
pending the resolution of the LDEQ's request of the EPA for an exemption from
the NOX Reasonably Available Control Technology
II-14
<PAGE> 31
(NOX RACT) requirements. The letter further advised that, upon receipt of such
exemption, LDEQ intends to rescind the NOX RACT rules for this area entirely,
in which case Southern would no longer be required to add emissions control
technology for NOX for the affected facilities. Alabama regulators have not
yet published specific emissions control requirements for NOX. Further,
Alabama regulators have undertaken to have the area in which Southern's station
is located recharacterized as meeting the NAAQS for NOX. 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 Clean Air Rules, Southern currently
estimates that the capital costs that it may incur to implement such plans and
to comply with the Clean Air Rules could approximate $15 million.
Based on information currently available, management believes that it
is not reasonably likely that Southern or any of its subsidiaries will incur
liabilities as a result of the presently identified environmental contingencies
in excess of the amounts specifically identified above in amounts material to
Southern. While the nature of environmental contingencies makes complete
evaluation impractical, Southern is currently aware of no other environmental
matter that could reasonably be expected to be material. Southern has an
active and ongoing environmental program at all levels of its organization and
believes responsible environmental management is integral to its business.
Southern believes that its subsidiaries have conducted their operations in
substantial compliance with applicable environmental laws and regulations
governing their activities.
II-15
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Southern Natural Gas Company
We have audited the accompanying consolidated balance sheets of Southern
Natural Gas Company and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in retained earnings and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Natural
Gas Company and Subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
January 19, 1995
II-16
<PAGE> 33
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 975 $ 4,243
Notes receivable from affiliates 173,060 269,661
Accounts receivable, including $13,358,000 in
1994 and $14,461,000 in 1993 from affiliates 122,514 128,610
Inventories 20,930 23,646
Gas imbalance receivables 35,053 43,125
Other 8,511 2,622
---------- ----------
Total Current Assets 361,043 471,907
---------- ----------
Investments:
Joint venture (Note 4) 46,908 45,454
Other investments 1,044 975
---------- ----------
47,952 46,429
---------- ----------
Plant, Property and Equipment (Note 5) 2,241,972 2,206,672
Less accumulated depreciation
and amortization 1,460,649 1,419,771
---------- ----------
781,323 786,901
---------- ----------
Deferred Charges:
Gas supply realignment costs (Note 8) 160,850 179,586
Recoverable natural gas purchase contract
settlement costs (Note 8) - 18,535
Other 24,042 27,806
---------- ----------
184,892 225,927
---------- ----------
$1,375,210 $1,531,164
========== ==========
</TABLE>
See accompanying notes.
II-17
<PAGE> 34
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
(In Thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Long-term debt due within one year (Note 6) $ 6,964 $ 107,298
Accounts payable, including $9,615,000 in 1994
and $9,418,000 in 1993 to affiliates 42,356 70,298
Accrued income taxes 14,271 14,695
Accrued interest 19,505 19,851
Gas imbalance payables 35,112 51,007
Other 19,892 18,695
---------- ----------
Total Current Liabilities 138,100 281,844
---------- ----------
Long-Term Debt (Note 6) 323,907 329,403
---------- ----------
Deferred Credits and Other:
Deferred income taxes (Note 7) 43,812 86,178
Reserves for regulatory matters (Note 8) 183,343 120,771
Operating and other reserves 79,610 69,168
Other 87,214 23,830
---------- ----------
393,979 299,947
---------- ----------
Commitments and Contingencies (Note 8)
Stockholder's Equity:
Common stock, $3.75 par value; 1,000 shares
authorized and outstanding 4 4
Capital in excess of par value 78,631 77,601
Retained earnings 440,589 542,365
---------- ----------
519,224 619,970
---------- ----------
$1,375,210 $1,531,164
========== ==========
</TABLE>
See accompanying notes.
II-18
<PAGE> 35
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues (Note 9):
Natural gas sales $233,667 $540,623 $488,549
Transportation and storage 357,826 219,742 174,556
Other 173,646 72,284 65,523
-------- -------- --------
765,139 832,649 728,628
--------- -------- --------
Costs and Expenses:
Natural gas cost 229,137 364,551 270,218
Transition cost recovery and gas
purchase contract settlement costs 116,159 51,827 52,314
Operating and maintenance 189,692 102,666 87,806
General and administrative 71,988 85,256 78,587
Depreciation and amortization 46,576 63,611 73,713
Taxes, other than income 18,748 18,120 15,392
-------- -------- --------
672,300 686,031 578,030
--------- -------- --------
Operating Income 92,839 146,618 150,598
-------- -------- --------
Other Income, Net:
Equity in earnings of joint venture
(Note 4) 8,954 8,638 8,002
Other 576 810 866
-------- -------- --------
9,530 9,448 8,868
-------- -------- --------
Interest Income (Expense):
Interest income from affiliates 13,234 20,204 7,825
Interest income 1,947 3,621 395
Interest expense (42,203) (52,598) (41,167)
Interest capitalized 751 324 172
-------- -------- --------
(26,271) (28,449) (32,775)
-------- -------- --------
Income Before Income Taxes 76,098 127,617 126,691
Income Taxes (Note 7) 28,274 43,548 47,284
-------- -------- --------
Net Income $ 47,824 $ 84,069 $ 79,407
======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $542,365 $507,896 $578,089
Add:
Net income 47,824 84,069 79,407
Deduct:
Dividends 149,600 49,600 149,600
-------- -------- --------
Balance at End of Year $440,589 $542,365 $507,896
======== ======== ========
</TABLE>
See accompanying notes.
II-19
<PAGE> 36
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 47,824 $ 84,069 $ 79,407
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 46,576 63,611 73,713
Deferred income taxes (43,315) (21,241) (14,403)
Equity in earnings of joint
venture, less distributions (1,454) (638) (1,002)
Reserves for regulatory matters 62,572 20,554 23,649
Gas supply realignment costs 18,736 (127,986) -
Natural gas purchase
contract settlement costs 18,535 51,947 52,619
Change in:
Accounts receivable 6,096 6,687 (5,227)
Inventories 2,716 51,446 2,572
Accounts payable (27,942) 11,583 1,557
Accrued interest and
income taxes, net (956) 1,085 4,295
Other current assets 2,289 35,263 (12,152)
Other current liabilities (14,441) (3,522) (14,748)
Other 81,834 24,523 (23,783)
--------- --------- ---------
Net cash provided by
operating activities 199,070 197,381 166,497
--------- --------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (51,206) (59,907) (43,053)
Notes receivable from affiliates (3,399) (82,151) (71,586)
Proceeds from disposal of assets 8,986 2,360 2,831
Other, net (69) (166) (79)
--------- --------- ---------
Net cash used in
investing activities (45,688) (139,864) (111,887)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of
long-term debt - 675 201,881
Payments of long-term debt (107,050) (6,310) (105,895)
--------- --------- ---------
Net changes in debt (107,050) (5,635) 95,986
Dividends paid (49,600) (49,600) (149,600)
--------- --------- ---------
Net cash used in
financing activities (156,650) (55,235) (53,614)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents (3,268) 2,282 996
Cash and Cash Equivalents at Beginning
of Year 4,243 1,961 965
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 975 $ 4,243 $ 1,961
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 35,170 $ 37,521 $ 30,814
Income taxes, net 71,079 73,591 62,872
</TABLE>
See accompanying notes.
II-20
<PAGE> 37
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Business Description - The principal business of Southern Natural Gas
Company, which is a wholly owned subsidiary of Sonat Inc., is the transmission
of natural gas in interstate commerce. For information concerning major
customers, see Note 9. For a description of financial instruments, credit risk
and contingencies, see Notes 2 and 8.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of Southern Natural Gas Company and its subsidiaries.
Intercompany transactions and accounts have been eliminated in consolidation.
The equity method of accounting is used for investments in joint ventures owned
50 percent or less.
Certain amounts in the 1993 and 1992 Consolidated Financial Statements
have been reclassified to conform with the 1994 presentation.
Inventories - At December 31, 1994, inventories consist primarily of
materials and supplies that are carried at cost. Southern sold its inventory
of gas stored underground pursuant to the implementation of Order No. 636 in
1993. (See Note 8.)
Gas Imbalance Receivables and Payables - Gas imbalances represent the
difference between gas receipts from and gas deliveries to Southern's
transportation and storage customers. Gas imbalances arise when these
customers deliver more or less gas into the pipeline than they take out.
Imbalances incurred prior to implementation of Order No. 636 are settled
through exchange of gas. Imbalances incurred after implementation of Order No.
636 are settled monthly.
Plant, Property and Equipment, and Depreciation - Plant, property and
equipment is carried at cost. Southern generally provides for depreciation on
a composite basis. (See Note 5.)
Revenue Recognition - Southern recognizes revenue from both natural gas
sales and transportation in the period the product is delivered or the service
is provided. Reserves are provided on revenues collected subject to refund
when appropriate.
Environmental Expenditures - Southern and its subsidiaries accrue for
environmental liabilities when environmental assessments and/or remediation are
probable and such costs can be reasonably estimated.
Income Taxes - Southern and its subsidiaries file federal income tax
returns on a consolidated basis with its parent and other members of its
affiliated group. For financial statement purposes, income taxes are provided
as though Southern and its subsidiaries file separate income tax returns;
however, those companies incurring losses are allocated the tax benefit of such
losses due to the consolidated return.
Southern and its subsidiaries follow a liability and asset approach in
accounting for income taxes. Deferred tax liabilities and assets are
determined using the tax rate for the period in which those amounts are
expected to be paid or received.
II-21
<PAGE> 38
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Financial Instruments
The carrying amounts and fair values of Southern's financial instruments
are as follows:
<TABLE>
<CAPTION>
Carrying Amounts Fair Value
---------------- ----------
(In Thousands)
<S> <C> <C>
DECEMBER 31, 1994
Notes Receivable from Affiliates $173,060 $173,060
Gas Supply Realignment Costs 160,850 160,850
Long-Term Debt 330,871 330,287
DECEMBER 31, 1993
Notes Receivable from Affiliates $269,661 $269,661
Gas Supply Realignment Costs 179,586 179,586
Recoverable Natural Gas Purchase
Contract Settlement Costs 18,535 18,535
Long-Term Debt 436,701 481,934
</TABLE>
The following methods and assumptions were used by Southern in
estimating its fair value disclosures for financial instruments:
Notes receivable from affiliates, gas supply realignment (GSR) costs and
recoverable natural gas purchase contract settlement costs: The carrying
amount reported in the balance sheets approximates its fair value.
Long-term debt: The fair values of Southern's long-term debt are based
on quoted market values.
All Southern's financial instruments are held for purposes other than
trading.
Southern's financial instruments from unaffiliated parties that are
exposed to concentrations of credit risk consist primarily of accounts
receivable and GSR costs which Southern expects to recover from its customers.
(See Note 8.)
Accounts receivable of Southern relate to business conducted with gas
distribution companies, municipalities, gas districts, industrial customers,
gas marketers, and interstate pipeline companies in the Southeast.
Southern performs ongoing credit evaluations of its customers' financial
condition and, in some circumstances, requires collateral from its customers.
II-22
<PAGE> 39
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Changes in Operations
On January 1, 1995, Sonat transferred its investment in Sonat
Intrastate-Alabama Inc., Sonat Gathering Company and Sonat Ventures Inc. to
Southern. They had combined revenues of $19,562,000, $17,946,000, and
$16,243,000 and combined net income of $76,300, $174,000, and $221,000 for the
years ended December 31, 1994, 1993, and 1992, respectively. Their combined
net book value was $21,981,000 at December 31, 1994.
4. Joint Venture
Southern owns 50 percent of Bear Creek Storage Company, an underground
gas storage company. At December 31, 1994, Southern's investment in Bear Creek,
accounted for by the equity method, equaled its share of underlying equity in
net assets of the investee. Through December 31, 1994, Southern's cumulative
equity in earnings of its joint venture was $135.2 million and cumulative
dividends received from it totaled $124.8 million.
The following is summarized financial 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>
Years Ended December 31,
-------------------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues $35,655 $36,566 $36,528
Expenses:
Operating expenses 5,303 6,137 5,156
Depreciation 5,396 5,397 5,397
Other expenses, net 7,048 7,756 9,971
------- ------- -------
Income Reported $17,908 $17,276 $16,004
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Current $ 6,968 $ 5,916
Net plant and property 164,257 169,521
Other 533 594
-------- --------
$171,758 $176,031
======== ========
LIABILITIES AND EQUITY
Current $ 8,356 $ 8,607
Long-term debt and other liabilities 69,587 76,517
Participants' equity 93,815 90,907
-------- --------
$171,758 $176,031
======== ========
</TABLE>
II-23
<PAGE> 40
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Plant, Property and Equipment and Depreciation
A summary of plant, property and equipment by classification follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $1,216,931 $ 994,774
Gas Supply 532,607 705,889
Gas Gathering 18,827 19,364
Underground Storage Facilities 57,961 57,924
Liquefied Natural Gas Facilities 154,050 154,090
Gas Stored Underground and Other 261,596 274,631
---------- ----------
$2,241,972 $2,206,672
========== ==========
</TABLE>
Other plant, property and equipment includes construction work in
progress of $8.8 million and $23.3 million at December 31, 1994 and 1993,
respectively.
The accumulated depreciation and amortization amounts by classification
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $ 793,964 $ 615,945
Gas Supply 458,309 605,428
Gas Gathering 15,703 16,571
Underground Storage Facilities 40,291 38,437
Liquefied Natural Gas Facilities 104,538 99,733
Other 47,844 43,657
---------- ----------
$1,460,649 $1,419,771
========== ==========
</TABLE>
The annual depreciation rates by classification are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Mainline Transmission Property 2.8% 2.8% 2.8%
Gas Supply 4.4% 5.1% 5.1%
Gas Gathering 2.8% 6.25% 6.25%
Underground Storage Facilities 3.3% 3.3% 3.3%
Liquefied Natural Gas Facilities 3.2% 3.2% 3.2%
Other 2.8 - 24% 2.8 - 24% 2.8 - 24%
</TABLE>
In the third quarter of 1994, Southern adjusted its transportation
revenue reserve and depreciation expense by $16 million reflecting a
retroactive reduction in certain depreciation rates. The entry had no effect
on net income.
II-24
<PAGE> 41
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt and Lines of Credit
Long-Term Debt - Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Southern Natural Gas Company
7.85% Notes due January 15, 2002 $100,000 $100,000
8-5/8% Notes due May 2, 2002 100,000 100,000
9-5/8% Notes due June 15, 1994 - 100,000
8-7/8% Notes due February 15, 2001 100,000 100,000
Capital Leases 2,031 1,581
Southern Energy Company
Promissory Note (an effective rate of
6.75% at December 31, 1994) due
through April 1999 25,000 30,000
South Georgia Natural Gas Company
9.85% Term Loan due through December 31, 1997 2,640 3,520
7.80% Term Loan due through December 31, 1997 1,200 1,600
-------- --------
Total Outstanding 330,871 436,701
Less Long-Term Debt Due Within One Year 6,964 107,298
-------- --------
$323,907 $329,403
======== ========
</TABLE>
Southern had no restrictions on the payment of dividends at December 31,
1994.
Annual maturities of long-term debt at December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Years (In Thousands)
-----
<S> <C>
1995 $ 6,964
1996 6,667
1997 6,383
1998 5,113
1999 5,124
2000-2002 300,620
--------
$330,871
========
</TABLE>
II-25
<PAGE> 42
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt and Lines of Credit (Cont'd)
On June 15, 1994, Southern's $100 million 9 5/8 Percent Notes matured
and were redeemed. Funds were obtained by Sonat's partial repayment of its
intercompany loan from Southern.
Lines of Credit and Credit Agreement - 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. In December 1994,
Southern declared a special noncash dividend of $100 million to Sonat, which
was satisfied by forgiveness of an intercompany loan to Sonat.
On May 30, 1994, Southern renewed its short-term lines of credit of $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. At December 31,
1994 and 1993, no amounts were outstanding under this agreement.
7. Income Taxes
An analysis of Southern's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 61,483 $ 58,995 $ 52,701
State 10,106 5,794 8,986
-------- -------- --------
71,589 64,789 61,687
-------- -------- --------
Deferred:
Federal (30,383) (21,427) (10,775)
State (12,932) 186 (3,628)
-------- -------- --------
(43,315) (21,241) (14,403)
-------- -------- --------
$ 28,274 $ 43,548 $ 47,284
======== ======== ========
</TABLE>
II-26
<PAGE> 43
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes (Cont'd)
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $134,582 $132,344
Inventories 11,573 10,513
Other 4,320 4,881
-------- --------
Total deferred tax liabilities 150,475 147,738
-------- --------
Deferred Tax Assets:
Revenue reserves 76,818 45,986
Other accounting accruals 20,608 1,284
Interest on income taxes 3,745 3,821
Employee benefits 2,414 5,600
Other 3,078 4,869
-------- --------
Total deferred tax assets 106,663 61,560
-------- --------
Net Deferred Tax Liabilities $ 43,812 $ 86,178
======== ========
</TABLE>
Southern and its subsidiaries have not provided a valuation allowance to
offset deferred tax assets because, based on the weight of available evidence,
it is more likely than not that all deferred tax assets will be realized.
Consolidated income tax expense is different from the amount computed by
applying the U.S. federal income tax rate to income before income tax. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income Tax Expense at Statutory
Federal Income Tax Rates $26,634 $44,666 $43,075
Increases (Decreases) in Tax
Resulting From:
State income taxes, net of
federal income tax benefit (4,174) 4,147 4,099
Refunds and adjustment of
accrued tax position 5,949 (5,645) 8
Effect of change in statutory
rate on deferred taxes - 199 -
Other (135) 181 102
------- ------- -------
Income Tax Expense $28,274 $43,548 $47,284
======= ======= =======
</TABLE>
II-27
<PAGE> 44
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 cost classification, cost allocation, and
rate design issues 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 approved the settlement. One party has sought judicial review
of the FERC orders. Southern cannot predict the outcome of this appeal.
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 cost allocation and rate design issues
were consolidated with similar issues in Southern's rate proceeding filed May
1, 1993, which is described below, and will be resolved in that proceeding.
This settlement was also approved by the FERC orders issued on December 16,
1993, and May 5, 1994. One party has sought judicial review of these FERC
orders as well. Southern also cannot predict the outcome of this appeal.
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 January 9, 1995, Southern filed a
trial stipulation that resolved certain cost of service issues with the FERC
staff in this proceeding. A hearing regarding all other outstanding issues
concluded in February 1995. Southern cannot predict the outcome of this
hearing.
Southern filed with the FERC in March 1995 a Stipulation and Agreement
that would settle all of Southern's pending rate (described above) and GSR cost
recovery proceedings as described below (Customer Settlement). Southern has
been advised that customers representing more than 80 percent of the pipeline's
firm capacity intend to support the Customer Settlement. Pursuant to the
Customer
II-28
<PAGE> 45
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
Settlement, which must be approved by the FERC, all issues in Southern's
current and prior rate cases would be settled and Southern would credit against
GSR costs incurred by Southern the full amount of Southern's rate reserves at
February 28, 1995, which, as of December 31, 1994, were approximately $148
million. Such amount, less certain amounts withheld for potential rate refunds
to parties, if any, that contest the Customer Settlement and certain amounts
related to one specific contesting customer, will be credited in the aggregate
to reduce the GSR costs borne by Southern's customers. Southern implemented
the settlement rates for supporting parties on an interim basis, subject to
reinstatement effective March 1, 1995, pending FERC consideration and approval
of the Customer Settlement. The Customer Settlement provides that, except in
certain limited circumstances, Southern will not file a general rate case to be
effective prior to March 1, 1998. Southern's GSR costs are discussed below
(see Order No. 636).
Southern recognized a $27 million charge associated with the anticipated
customer rate settlement, which includes anticipated amounts for GSR costs that
Southern would not recover from its customers, and a $28 million provision
relating to regulatory assets that will not be recovered as a result of the
Customer Settlement, including amounts for a corporate restructuring undertaken
in 1994. These charges resulted in the increase in "Other" in the Deferred
Credits and Other section of the 1994 Consolidated Balance Sheet.
It is possible that the Customer Settlement will be contested by certain
of Southern's customers, in which case the Customer Settlement, if approved by
the FERC, will become effective only as to supporting parties and Southern's
rates and GSR costs applicable to the contesting parties would be determined by
the outcome of Southern's pending rate and GSR proceedings. It is also
possible that the Customer Settlement might not be approved by the FERC or, if
approved, might be modified in a way unacceptable to Southern or its customers.
Gas Purchase Contracts - Pursuant to a final and nonappealable FERC
order, Southern has collected substantially all of its gas purchase contract
settlement payments 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
transition cost is related to amendment or termination of existing gas purchase
contracts, which are referred to as gas supply realignment 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
II-29
<PAGE> 46
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
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.
As of December 31, 1994, Southern had either paid or accrued $134
million in GSR costs (including $4 million in interest) either to reduce
significantly the price payable under or to terminate a number of gas supply
contracts providing for payment of above-market prices. In addition, on
February 17, 1995, Southern reached an agreement to incur $64 million in GSR
costs to resolve its remaining high-cost supply contracts with Exxon
Corporation (Exxon) that is
II-30
<PAGE> 47
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
conditioned upon the effectiveness of the Customer Settlement described above.
Southern also has an agreement under which another high-cost contract price is
reduced in exchange for monthly payments having a present value of
approximately $44 million. Southern has received permission from the FERC to
purchase an annuity in order to monetize this obligation.
In addition to its GSR costs relating to termination or amendment of its
remaining gas purchase contracts, Southern has incurred and expects to continue
to incur certain "price differential" GSR costs resulting from Southern's
continued purchase of gas under its remaining supply contracts that provide for
prices in excess of current market prices. As of December 31, 1994, Southern
had incurred $69 million in price differential costs.
Beginning in December 1993, Southern has made a number of filings with
the FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative law judge regarding whether such costs were prudently incurred
and are eligible for recovery under the Order. Southern's customers are
opposing its recovery of its GSR costs in these proceedings based on both
eligibility and prudence grounds. These proceedings, which have all been
consolidated, are in the early stages of discovery and Southern cannot predict
their outcome at this time.
As described above, Southern's Customer Settlement would settle all of
the proceedings pursuant to which Southern is seeking recovery of its GSR costs
as well as all of its other outstanding rate proceedings. If the Customer
Settlement is ultimately approved by the FERC, all challenges to the recovery
of Southern's GSR costs would be resolved as to those customers supporting the
Customer Settlement, including all issues related to eligibility and prudence.
Additionally, Southern would absorb an agreed-upon portion of its total GSR
costs, which was reflected in the provision for the Customer Settlement. As
indicated above, it is possible that the Customer Settlement will be contested
by certain of the customers on Southern's system and the possibility exists
that the FERC may not approve the Customer Settlement or may modify it in a way
unacceptable to Southern or its customers. In addition, Southern's GSR costs
allocated to those customers who contest the Customer Settlement will remain
subject to Southern's pending GSR cost recovery proceedings, where Southern
anticipates that those customers will continue to challenge both the
eligibility and prudence of such costs.
In its Customer 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, recent contract renegotiations, and price differential
costs actually incurred, the amount of GSR costs are estimated to be
approximately $328 million. This amount includes the payments already made or
accrued to amend or to terminate gas purchase contracts and price differential
costs, and the
II-31
<PAGE> 48
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
$64 million cost that will be incurred under a settlement of existing contracts
with Exxon, which will become effective if the Customer Settlement becomes
effective. These costs collectively total $288 million. Thus, Southern
currently estimates it will ultimately pay an additional $40 million in GSR
costs.
Until the Customer Settlement is approved, Southern plans to make
additional rate filings quarterly to recover its price differential costs and
any other GSR costs. Additionally, Southern will continue 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.
Administrative Law Judge Ruling Concerning Recoverability of Investment
in Offshore Gas Supply Facilities; Settlement with Exxon Corporation - In an
initial decision issued on May 2, 1994, which Southern has appealed, 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 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. Southern has appealed the
administrative law judge's decision to the FERC but cannot predict the outcome
of this appeal.
The Customer Settlement provides that, as to customers supporting the
settlement, the costs of the Mississippi Canyon Facilities will be recovered by
Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not
preclude Southern's recovery of such costs. On February 17, 1995, Southern
reached a settlement with Exxon pursuant to which, in return for an additional
cash payment by Southern of $45 million, plus allowing Exxon to retain $19
million in price differential costs already paid to Exxon, all existing gas
purchase contracts would be terminated, two new gas purchase contracts would be
entered into having three-year terms and providing for market-based index
prices, and a lawsuit regarding Southern's termination of the gas purchase
contract covering gas reserves connected by the Mississippi Canyon Facilities
(Mississippi Canyon Contract) would be dismissed. The settlement with Exxon is
contingent on FERC approval of the Customer Settlement.
If this settlement with Exxon does not become effective, total GSR costs
under the Mississippi Canyon Contract through the scheduled renegotiation of
its pricing provisions in 1997 are estimated to be approximately $125 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
II-32
<PAGE> 49
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
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 Mississippi Canyon Contract
pursuant to certain provisions of the contract. Such termination, if
effective, would reduce GSR costs associated with such contract to $14 million.
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. The court entered a summary judgment order
upholding Southern's termination of this contract, which Exxon has appealed to
the Fifth Circuit Court of Appeals. Southern's customers are challenging the
recovery of GSR cost attributable to such contract on eligibility and prudence
grounds and on the basis that such costs also constitute non-cash consideration
for the 1989 take-or-pay settlement with Exxon and thus are not recoverable due
to the 1988 take-or-pay cost cap. If the settlement with Exxon does not become
effective, 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 Mississippi Canyon Contract.
Leases - Southern has operating lease commitments expiring at various
dates, principally for office space and equipment. Southern has no significant
capital leases.
Rental expense for all operating leases is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Non-Affiliated Operating Leases $1,296 $1,081 $1,154
Affiliated Operating Leases 6,157 6,634 7,345
------ ------ ------
Total $7,453 $7,715 $8,499
====== ====== ======
</TABLE>
At December 31, 1994, future minimum payments for non-cancelable
operating leases for the years 1995 through 1999 are less than $4 million per
year.
II-33
<PAGE> 50
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Transactions with Major Customers and Affiliates
The following table shows revenues from major unaffiliated customers.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Atlanta Gas Light Company $250,932 $329,040 $294,429
Alabama Gas Corporation 118,975 147,210 118,243
South Carolina Pipeline Corporation 69,348 75,040 69,650
</TABLE>
Southern and its subsidiaries enter into transactions with other Sonat
subsidiaries and unconsolidated affiliates to transport, sell and purchase
natural gas. Services provided by these affiliates for the benefit of Southern
and its subsidiaries are billed accordingly.
The following table shows revenues and charges from Southern's
affiliates.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues from Affiliates $80,394 $39,912 $31,717
Charges from Affiliates 39,060 42,666 46,871
</TABLE>
II-34
<PAGE> 51
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans
Retirement Plans - Sonat has a trusteed, non-contributory, tax qualified
defined benefit retirement plan (the Retirement Plan) covering substantially
all employees of Southern. A supplemental benefit plan (the Supplemental Plan)
that provides retirement benefits in excess of those allowed under Sonat's tax
qualified retirement plan is also in effect. Benefits under the plans are
based on a combination of years of service and a percentage of compensation.
Benefits vest after a period of five years.
Sonat determines the amount of funding to the Retirement Plan on a
year-to-year basis, with amounts consistent with minimum and maximum funding
requirements established by various governmental bodies.
Southern's net periodic pension (income) cost consists of the following
components:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service Cost - Benefits Earned
during the Period $ 3,022 $ 4,563 $ 5,198
Interest Cost on Projected
Benefit Obligation 17,492 16,874 17,391
Loss (Gain) on Assets 8,609 (39,181) (14,420)
Net Amortization and Deferral (35,581) 18,564 (5,043)
-------- -------- --------
$ (6,458) $ 820 $ 3,126
======== ======== ========
</TABLE>
The change in the discount rate assumption in 1994 to 8.5 percent from
7.0 percent was the primary reason for the change in net pension cost.
II-35
<PAGE> 52
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
The following table sets forth Southern's allocated portion of the
assets and liabilities of Sonat's plans and the amount of the net pension asset
or liability recognized in Southern's Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Plans with Obligations Plans with Obligations
Less than Assets (1) in Excess of Assets(2)
December 31, December 31,
------------------------- ----------------------
(In Thousands)
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial Present Value of
Benefit Obligations:
Vested benefit obligations $182,037 $191,626 $ 4,888 $ 6,195
Non-vested benefit obligations 4,127 7,425 80 199
-------- -------- ------- --------
Accumulated benefit obligations 186,164 199,051 4,968 6,394
Effect of projected future
salary increases 22,846 48,680 3,625 1,602
-------- -------- ------- --------
Projected benefit obligations 209,010 247,731 8,593 7,996
Plan Assets at Fair Value (3) 254,019 276,370 - -
-------- -------- ------- --------
Projected Benefit Obligations
(in Excess of) or Less Than
Plan Assets 45,009 28,639 (8,593) (7,996)
Unrecognized Net (Assets) or
Obligations at Transition (4) (10,210) (11,413) 102 116
Unrecognized Net (Gain) Loss (41,291) (29,880) 31 711
Unrecognized Prior Service Cost 5,759 7,681 1,274 762
Net Unamortized Deferred Charge
from Early Retirement
Termination Benefits (5) 9,381 6,089 2,523 3,831
-------- -------- ------- --------
Net Pension Asset (Liability)
Recognized in the
Consolidated Balance Sheets $ 8,648 $ 1,116 $(4,663) $ (2,576)
======== ======== ======= ========
</TABLE>
(1) The Retirement Plan.
(2) The Supplemental Plan.
(3) Plan assets consist primarily of debt and equity securities and
investments in equity index and foreign index funds.
(4) Amortization periods for unrecognized net (asset) or obligation are
16.5 years for the Retirement Plan and 15 years for the Supplemental
Plan.
(5) Amortization periods for early retirement termination benefits are 10
years for the Retirement Plan and five years for the Supplemental
Plan.
II-36
<PAGE> 53
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Until July 1993, Sonat set aside assets in fixed income securities such
that values of those assets equaled or exceeded the present value of benefit
obligations to current retirees (immunized obligations). After that date, a
separate immunized portfolio has not been maintained. The assumed rates used
to measure the projected benefit obligations and the expected earnings of plan
assets are:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted Average Discount Rate:
Non-immunized obligations 8.5% 7.0% 7.0%
Immunized obligations - - 7.4%
Long-Term Rate of Return:
Non-immunized assets 8.5% 9.0% 9.0%
Immunized assets - - 7.4%
Increase in Future Compensation Levels
(Composite Rate) 5.5% 6.0% 6.0%
</TABLE>
Other Post Employment Benefits - Southern participates in plans of Sonat
that provide for postretirement health care and life insurance benefits to its
employees when they retire. Southern adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," for all plans as of January 1, 1993. SFAS No. 106
requires companies to accrue the cost of postretirement health care and life
insurance benefits within the employees' active service periods. Southern has
elected to amortize the transition obligation over a 20-year period. Southern
previously expensed the cost of its retiree medical benefits as they were paid.
Expense for retiree life insurance benefits was recognized as Southern funded
its Retiree Life Insurance Plan.
The annual net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1994 1993
---- ----
(In Thousands)
<S> <C> <C>
Service Cost $ 910 $1,026
Interest Cost 5,682 5,778
Return on Plan Assets (378) (319)
Net Amortization and Deferral 2,631 3,237
------ ------
$8,845 $9,722
====== ======
</TABLE>
Prior to the adoption of SFAS No. 106, the cost of providing health care
and life insurance benefits was $3.9 million in 1992.
II-37
<PAGE> 54
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Southern funds its Retiree Life Insurance Plan with the amount of
funding determined on a year-to-year basis with the objective of having assets
equal plan liabilities. In addition, during 1993 Southern initiated funding of
postretirement health care benefits in an amount generally equal to its SFAS
No. 106 expense. Southern implemented rates effective May 1, 1993, which
provide for the recovery of its SFAS No. 106 costs.
The following table sets forth the funded status at December 31, 1994
and 1993, for Southern's postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
------------ ------------
(In Thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 53,176 $59,061
Fully eligible active plan participants 6,988 11,731
Other active plan participants 15,307 16,222
-------- -------
75,471 87,014
Plan Assets at Fair Value (1) 14,857 9,358
-------- -------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets (60,614) (77,656)
Unrecognized Transition Obligation 52,351 64,095
Unrecognized Net (Gain) Loss (4,486) 10,981
Net Unamortized Deferred Charge from
Early Retirement Termination Benefits 10,232 -
-------- -------
Accrued Postretirement Benefit Cost $ (2,517) $(2,580)
======== =======
</TABLE>
(1) Plan assets are held in a life insurance reserve account which consists
primarily of fixed income securities, and in equity securities,
municipal tax exempt bonds, and short-term investment funds.
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Discount Rate 8.5% 7.0%
Long-Term Rate of Return:
Medical assets 5.5% 5.5%
Life insurance assets 8.5% 7.0%
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 11.6 percent in 1995, decreasing gradually to 6
percent by the year 2003. Increasing the assumed health care cost trend rate
by 1 percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1994, by approximately $4.5 million and increase
the service cost and interest cost components of the net periodic
postretirement benefit cost by approximately $.4 million.
II-38
<PAGE> 55
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Southern participates in plans of Sonat that provide disability benefits
to former or inactive employees, their beneficiaries, and covered dependents
after employment but before retirement. Southern adopted SFAS No. 112,
"Employers' Accounting for Postretirement Benefits" as of January 1, 1994.
SFAS No. 112 requires companies to accrue a liability for employees'
compensation for future absences if certain conditions are met. For the year
ended December 31, 1994, $.7 million of expense was recognized for this
employee benefit plan.
Corporate Restructuring - In late 1994 and early 1995 Sonat completed a
reduction in staffing levels in the office and field locations through a
combination of special early retirement options (SERO) and involuntary
terminations involving 302 employees. The total cost of the program amounted
to $19.1 million, which included $3.4 million related to the qualified
retirement plan, $10.2 million related to the postretirement plans, and $5.0
million of cash severance payments. Included in the cash severance amount was
$2.0 million paid during 1994. All of the terminations, voluntary and
involuntary, were completed by the end of January 1995.
Executive Award Plan - Sonat has an Executive Award Plan that provides
awards to certain key employees in the form of stock options, restricted stock,
and stock appreciation rights (SARs) in tandem with any or all stock options.
In years prior to 1991, tax offset payments were also generally provided in
conjunction with these awards. SARs permit the holder of an exercisable option
to surrender that option for an amount equal to the excess of the market price
of the common stock on the date of exercise over the option price
(appreciation). The appreciation is payable in cash, common stock, or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. No SARs have been issued since 1990. At
December 31, 1994, 7,400 SARs were outstanding to employees of Southern. Sonat
issued 10,700 shares of restricted stock to employees of Southern during 1994.
The shares generally vest 10 years from the date of grant, unless the closing
price of Sonat's common stock achieves certain specified levels. At December
31, 1994, 13,932 of the 40,100 cumulative restricted shares issued have vested.
Stock-based employee compensation increased Southern's pretax income by $.5
million in 1994, and decreased pretax income by $5.1 million and $1.8 million
in 1993 and 1992, respectively.
II-39
<PAGE> 56
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Quarterly Results (Unaudited)
Shown below are selected unaudited quarterly data.
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
1994 (1)
----
Revenues $235,531 $176,958 $147,394 $205,256
Operating Income (Loss) 49,115 26,961 29,307 (12,544)
Net Income (Loss) 28,203 13,295 15,818 (9,492)
1993
----
Revenues $289,420 $122,189 $121,138 $299,902
Operating Income 59,858 20,449 28,657 37,654
Net Income 29,176 10,657 21,294 22,942
</TABLE>
(1) Net income in the 4th Quarter of 1994 includes a charge of $33.5
million related to the recognition of significant unusual items. See Customer
Settlement discussion in Note 8.
II-40
<PAGE> 57
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has not had a change in accountants within twenty-four
months prior to the date of its most recent consolidated financial statements
or in any period subsequent to such date.
II-41
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors................................ II-16
Consolidated Balance Sheets at December 31, 1994 and 1993........................ II-17
Consolidated Statements of Income for the years ended December 31, 1994, 1993,
and 1992...................................................................... II-19
Consolidated Statements of Changes in Retained Earnings for the years ended
December 31, 1994, 1993, and 1992............................................. II-19
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1993,
and 1992...................................................................... II-20
Notes to Consolidated Financial Statements....................................... II-21
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or because the subject matter is either not present or is not present
in amounts sufficient to require submission of the schedule, in accordance with
the instructions contained in Regulation S-X, or the required information is
included in the financial statements or notes thereto.
Financial statements of 50-percent-or-less-owned companies and joint
ventures are not presented herein because such companies and joint ventures do
not meet the significance test.
3. EXHIBITS(1)
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------------------------------------------------- ------------------------------
<S> <C> <C>
RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Southern Filed as Exhibit 3-(a) to Form
Natural Gas Company dated as of March 1, 1994 10-K of Southern Natural Gas
Company for the year 1993
3-(b) By-Laws of Southern Natural Gas Company as amended Filed as Exhibit 3-(b) to Form
and in effect October 1, 1982 10-K of Southern Natural Gas
Company for the year 1993
INSTRUMENTS DEFINING THE RIGHTS
OF SECURITY HOLDERS
4 Form of Indenture dated June 1, 1987 from Southern Filed as Exhibit 4-(1) to
Natural Gas Company to Hanover Trust Company, Trustee Registration No. 33-47266 for
Southern Natural Gas Company
dated July 31, 1987
</TABLE>
- ---------------
(1) Southern will furnish to requesting security holders any exhibit on this
list upon the payment of a fee of $.10 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.
IV-1
<PAGE> 59
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------------------------------------------------- ------------------------------
<S> <C> <C>
PRINCIPAL SERVICE AGREEMENTS
OF SOUTHERN NATURAL GAS COMPANY
10.1 Form of Service Agreements, Nos. 866940, 866941 and Filed as Exhibit 10-(2) to
S10710, between Southern Natural Gas Company and Form 10-Q of Sonat Inc. for
Alabama Gas Corporation, effective November 1, 1993 the quarter ended September
30, 1993
10.2 Service Agreements Nos. 901710 and 901711, effective Filed as Exhibit 10.5 to Form
June 1, 1994, and No. 902516, effective October 1, 10-Q of Sonat Inc. for the
1994, between Southern Natural Gas Company and South quarter ended September 30,
Carolina Pipeline Corporation 1994
10.3(a) Service Agreement No. 902470, effective September 1, Filed as Exhibit 10.6 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(b) Service Agreement No. 904460, effective November 1, Filed as Exhibit 10.7 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(c) Service Agreement No. 904461, effective November 1, Filed as Exhibit 10.8 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(d) Service Agreement No. 904480, effective November 1, Filed as Exhibit 10.9 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(e) Service Agreement No. 904481, effective November 1, Filed as Exhibit 10.10 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(f) Service Agreement No. S20150, effective November 1, Filed as Exhibit 10.11 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(g) Service Agreement No. S20140, effective November 1, Filed as Exhibit 10.12 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
OTHER MATERIAL CONTRACTS
10.4 Restated and Amended Joint Venture Agreement dated Filed as Exhibit 10-(22) to
September 1, 1981 between Tennessee Storage Company Form 10-K of Sonat Inc. for
and Southern Gas Storage Company forming Bear Creek the year 1991
Storage Company (with Appendices A-G)
10.5 Service Agreement dated June 1, 1981 with Bear Creek Filed as Exhibit 10-(23) to
Storage Company, and FERC Gas Tariff of Bear Creek Form 10-K of Sonat Inc. for
Storage Company, effective July 1, 1981 the year 1991
10.6 Parents Agreement dated September 15, 1981 from Filed as Exhibit 10-(25) to
Southern Natural Gas Company and Tenneco Inc. in Form 10-K of Sonat Inc. for
favor of Manufacturers Hanover Trust Company and T. the year 1991
C. Crane
12 Computation of Ratio of Earnings to Fixed Charges Filed herewith
23 Consent of Ernst & Young LLP, Independent Auditors, Filed herewith
dated March 24, 1995
</TABLE>
IV-2
<PAGE> 60
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------------------------------------------------- ------------------------------
<S> <C> <C>
24 Powers of Attorney authorizing James E. Moylan, Jr.; Filed herewith
Thomas W. Barker, Jr.; James A. Rubright; G. Layne
Finlay; R. David Hendrickson; and John C. Griffin to
sign the Southern Natural Gas Company Annual Report
on Form 10-K for the fiscal year ended December 31,
1994 on behalf of certain directors and officers of
the registrant
27 Financial Data Schedule for the period ended December Filed electronically with the
31, 1994 Securities and Exchange
Commission
</TABLE>
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance
upon Instruction J(2)(b) of Form 10-K.
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Southern and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of Southern and its subsidiaries on a consolidated basis.
Southern agrees to furnish a copy of each such instrument to the Commission upon
request.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1994.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K and filed with this report
on Form 10-K accompany this report in a separate exhibit volume.
IV-3
<PAGE> 61
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
BY: /S/ JAMES E. MOYLAN, JR.
------------------------------------
JAMES E. MOYLAN, JR.
PRESIDENT
Dated: March 28, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
(i) Principal Executive Officer:
/s/ JAMES E. MOYLAN, President March 28, 1995
JR.
- ---------------------------------------------
JAMES E. MOYLAN, JR.
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Treasurer March 28, 1995
- ---------------------------------------------
THOMAS W. BARKER, JR.
Principal Accounting Officer:
/s/ G. LAYNE FINLAY Vice President and March 28, 1995
- --------------------------------------------- Controller
G. LAYNE FINLAY
(iii) Directors:*
RONALD L. KUEHN, JR.
L. DAVID MATHEWS
JAMES E. MOYLAN, JR.
LARRY E. POWELL
JAMES A. RUBRIGHT
JAMES C. YARDLEY
*Signed on behalf of each of these persons:
By /s/ R. DAVID HENDRICKSON
R. DAVID HENDRICKSON
SECRETARY, AS AUTHORIZED
BY CERTAIN POWERS OF
ATTORNEY DATED MARCH 13, 1995,
AND ONE DATED MARCH 23, 1995,
ALL OF WHICH ARE
FILED HEREWITH AS
EXHIBIT 24-(1)
</TABLE>
IV-4
<PAGE> 62
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NATURAL GAS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1994
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
- ---- --------------------------------------------------------------------------------------
<C> <S>
I-11 Map of the Southeastern United States showing the approximate location of the pipeline
systems of Southern and its subsidiaries and the underground storage facilities of
Southern (each described on pages I-1, I-8, and I-9); and the approximate location of
Southern Energy's LNG terminal, as discussed on page I-9.
</TABLE>
<PAGE> 1
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS
FROM CONTINUING OPERATIONS TO FIXED CHARGES
TOTAL ENTERPRISE (A)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
(In Thousands)
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $ 76,098 $127,617 $126,691 $119,326 $103,797
Fixed charges (see computation below) 48,385 59,171 49,131 46,596 49,899
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $124,483 $186,788 $175,822 $165,922 $153,696
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 45,900 $ 56,599 $ 46,298 $ 42,957 $ 47,323
Rentals(b) 2,485 2,572 2,833 3,639 2,576
-------- -------- -------- -------- --------
$ 48,385 $ 59,171 $ 49,131 $ 46,596 $ 49,899
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.6 3.2 3.6 3.6 3.1
======== ======== ======== ======== ========
</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.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3, No. 33-16190 and Form S-3, No. 33-47266) of Southern Natural Gas
Company and in the related Prospectus and Prospectus Supplement of our report
dated January 19, 1995, with respect to the consolidated financial statements
of Southern Natural Gas Company included in the Annual Report (Form 10-K) for
the year ended December 31, 1994.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
March 24, 1995
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint G.
Layne Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr. R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as an officer or director of Southern Natural Gas Company) the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and any and all amendments thereto to be filed with
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission. The undersigned does hereby ratify and confirm all
that said attorneys and agents, and each of them, shall do or cause to be done
by virtue hereof. Each of such attorneys shall have and may exercise all
powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 13th day of March, 1995.
/s/ Larry E. Powell
-------------------
Larry E. Powell
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Southern Natural Gas Company, does hereby constitute and appoint G. Layne
Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as a director of Southern Natural Gas Company) the Southern Natural
Gas Company Annual Report on Form 10-K for the fiscal year ended December 31,
1994, and any and all amendments thereto to be filed with the Securities and
Exchange Commission pursuant to Section 13 and 15(d) of the Securities Exchange
Act of 1934 and to file the same, with all exhibits thereto, and any other
documents in connection therewith, with the Securities and Exchange Commission.
The undersigned does hereby ratify and confirm all that said attorneys and
agents, and each of them, shall do or cause to be done by virtue hereof. Each
of such attorneys shall have and may exercise all power to act hereunder with
or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 13th day of March, 1995.
/s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint G.
Layne Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr. R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as an officer or director of Southern Natural Gas Company) the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and any and all amendments thereto to be filed with
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission. The undersigned does hereby ratify and confirm all
that said attorneys and agents, and each of them, shall do or cause to be done
by virtue hereof. Each of such attorneys shall have and may exercise all
powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 13th day of March, 1995.
/s/ L. David Mathews
--------------------
L. David Mathews
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint G.
Layne Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr. R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as an officer or director of Southern Natural Gas Company) the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and any and all amendments thereto to be filed with
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission. The undersigned does hereby ratify and confirm all
that said attorneys and agents, and each of them, shall do or cause to be done
by virtue hereof. Each of such attorneys shall have and may exercise all
powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 13th day of March, 1995.
/s/ James E. Moylan, Jr.
------------------------
James E. Moylan, Jr.
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint G.
Layne Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr. R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as an officer or director of Southern Natural Gas Company) the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and any and all amendments thereto to be filed with
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission. The undersigned does hereby ratify and confirm all
that said attorneys and agents, and each of them, shall do or cause to be done
by virtue hereof. Each of such attorneys shall have and may exercise all
powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of March, 1995.
/s/ James A. Rubright
---------------------
James A. Rubright
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint G.
Layne Finlay, James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr. R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as an officer or director of Southern Natural Gas Company) the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and any and all amendments thereto to be filed with
the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission. The undersigned does hereby ratify and confirm all
that said attorneys and agents, and each of them, shall do or cause to be done
by virtue hereof. Each of such attorneys shall have and may exercise all
powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 13th day of March, 1995.
/s/ James C. Yardley
--------------------
James C. Yardley
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 975
<SECURITIES> 0
<RECEIVABLES> 173060
<ALLOWANCES> 0
<INVENTORY> 20930
<CURRENT-ASSETS> 361043
<PP&E> 2241972
<DEPRECIATION> 1460649
<TOTAL-ASSETS> 1375210
<CURRENT-LIABILITIES> 138100
<BONDS> 323907
<COMMON> 4
0
0
<OTHER-SE> 519220
<TOTAL-LIABILITY-AND-EQUITY> 1375210
<SALES> 233667
<TOTAL-REVENUES> 765139
<CGS> 229137
<TOTAL-COSTS> 534988
<OTHER-EXPENSES> 46576
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41452
<INCOME-PRETAX> 76098
<INCOME-TAX> 28274
<INCOME-CONTINUING> 47824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47824
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
