UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-2745
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-7410
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $3.75 PAR VALUE:
1,000 SHARES OUTSTANDING ON JULY 31, 1995
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
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Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 1995 and December 31, 1994 1
Condensed Consolidated Statements of Income--
Three Months and Six Months Ended
June 30, 1995 and 1994 2
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1995 and 1994 3
Notes to Condensed Consolidated Financial
Statements 4 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11 - 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1995 1994
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 874 $ 975
Notes receivable, primarily from affiliates 133,937 173,060
Accounts receivable 85,499 122,514
Inventories 24,516 20,930
Gas imbalance receivables 16,700 35,053
Other 19,011 8,511
Total Current Assets 280,537 361,043
Investments in Joint Ventures and Other 48,931 47,952
Plant, Property and Equipment 2,300,976 2,241,972
Less accumulated depreciation and amortization 1,503,918 1,460,649
797,058 781,323
Deferred Charges:
Gas supply realignment costs 231,332 160,850
Other 38,487 24,042
269,819 184,892
$1,396,345 $1,375,210
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,964 $ 6,964
Accounts payable 38,060 42,356
Accrued income taxes 6,589 14,271
Accrued interest 20,108 19,505
Gas imbalance payables 16,673 35,112
Other 15,646 19,892
Total Current Liabilities 104,040 138,100
Long-Term Debt 318,267 323,907
Deferred Credits and Other:
Deferred income taxes 77,637 43,812
Reserves for regulatory matters 173,856 183,343
Operating and other reserves 77,381 79,610
Other 79,658 87,214
408,532 393,979
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 100,617 78,635
Retained earnings 464,889 440,589
Total Stockholder's Equity 565,506 519,224
$1,396,345 $1,375,210
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See accompanying notes.
1
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Natural gas sales $ 47,257 $ 57,274 $ 93,936 $144,147
Transportation and storage 88,230 85,661 194,451 183,986
Other (522) 41,767 32,013 101,538
134,965 184,702 320,400 429,671
Costs and Expenses:
Natural gas cost 47,193 57,484 92,399 139,220
Transition cost recovery and
gas purchase contract
settlement costs (12,480) 27,529 8,406 70,449
Operating and maintenance 25,077 31,265 50,546 63,546
General and administrative 19,771 20,999 40,582 39,259
Depreciation and amortization 12,666 16,096 27,524 32,132
Taxes, other than income 4,543 4,368 10,134 8,989
96,770 157,741 229,591 353,595
Operating Income 38,195 26,961 90,809 76,076
Other Income (Loss), Net:
Equity in earnings of
joint venture 2,341 2,214 4,842 4,495
Other (39) (141) 102 207
2,302 2,073 4,944 4,702
Interest:
Interest income, primarily
from affiliates 2,864 3,658 4,924 8,497
Interest expense (10,637) (11,322) (20,961) (22,400)
Interest capitalized 61 354 101 626
(7,712) (7,310) (15,936) (13,277)
Income before Income Taxes 32,785 21,724 79,817 67,501
Income Taxes 12,604 8,429 30,717 26,003
Net Income $ 20,181 $ 13,295 $ 49,100 $ 41,498
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See accompanying notes.
2
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 49,100 $ 41,498
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,524 32,132
Deferred income taxes 27,671 (18,083)
Equity in earnings of joint
ventures, less distributions (592) (494)
Loss on disposal of asset 253 -
Reserves for regulatory matters (9,487) 22,300
Gas supply realignment costs (70,482) 15,699
Natural gas purchase contract
settlement costs - 18,360
Change in:
Accounts receivable 39,392 23,906
Inventories (3,249) (140)
Accounts payable (5,294) (32,509)
Accrued interest and income taxes, net (7,026) 16,984
Other current assets and liabilities (15,619) (16,423)
Other (18,048) 12,636
Net cash provided by operating
activities 14,143 115,866
Cash Flows from Investing Activities:
Plant, property and equipment additions (16,825) (21,142)
Notes receivable, primarily from affiliates 32,913 34,463
Proceeds from disposal of assets and other 35 1,027
Net cash provided by investing activities 16,123 14,348
Cash Flows from Financing Activities:
Payments of long-term debt (5,640) (106,410)
Dividends paid (24,800) (24,800)
Other 73 -
Net cash used in financing
activities (30,367) (131,210)
Net Decrease in Cash (101) (996)
Cash at Beginning of Period 975 4,243
Cash at End of Period $ 874 $ 3,247
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 15,104 $ 19,938
Income taxes (refunds received), net 10,742 26,471
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See accompanying notes.
3
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Southern Natural Gas Company is a wholly owned subsidiary of Sonat Inc.
The accompanying condensed consolidated financial statements of
Southern and its subsidiaries (Southern) have been prepared in accordance with
the instructions to Form 10-Q and include the information and footnotes required
by such instructions. In the opinion of management, all adjustments including
those of a normal recurring nature have been made that are necessary for a fair
presentation of the results for the interim periods presented herein.
On January 1, 1995, Sonat transferred its investments in Sonat
Intrastate- Alabama Inc., Sonat Gathering Company and Sonat Ventures Inc. to
Southern. They had combined revenues of $10,755,000 and combined net income of
$81,750 for the six-month period ended June 30, 1994. The combined net book
value that was transferred was $21,981,000 and the companies had cash on hand of
$73,000 at January 1, 1995.
Certain amounts in the 1994 condensed consolidated financial statements
have been reclassified to conform with the 1995 presentation.
2. Joint Venture
Southern owns 50 percent of Bear Creek Storage Company (Bear Creek), an
underground gas storage company. The following is summarized income statement
information for Bear Creek. No provision for income taxes has been included
since its income taxes are paid directly by the joint-venture participants.
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Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,906 $8,843 $18,228 $17,873
Expenses:
Operating expenses 1,251 1,287 2,526 2,565
Depreciation 1,349 1,350 2,699 2,700
Other expenses, net 1,525 1,780 3,158 3,619
Income Reported $4,781 $4,426 $ 9,845 $ 8,989
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3. Long-term Debt and Notes To and From Affiliates
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.
4
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Long-term Debt and Notes To and From Affiliates (Cont'd)
Short-Term Credit Facilities - On May 29, 1995, Southern renewed its
short-term lines of credit with several banks to provide for borrowings of $50
million. Borrowings are available through May 28, 1996, 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 June 30, 1995, no amounts
were outstanding.
4. Commitments and Contingencies
Rate Matters - Periodically, Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (FERC) to provide for
the recovery of cost of service and a return on equity. The FERC normally allows
the filed rates to become effective, subject to refund, until it rules on the
approved level of rates. Southern and its subsidiaries provide reserves relating
to such amounts collected subject to refund, as appropriate, and make refunds
upon establishment of the final rates.
On September 1, 1989, Southern implemented new rates, subject to
refund, reflecting a general rate decrease of $6 million. In January 1991
Southern implemented new rates, subject to refund, that restructured its rates
consistent with a FERC policy statement on rate design and increased its sales
and transportation rates by approximately $65 million annually. These two
proceedings have been consolidated for hearing. On October 7, 1993, the
presiding administrative law judge certified to the FERC a contested offer of
settlement pertaining to the consolidated rate cases that (1) resolved all
outstanding issues in the rate decrease proceeding, (2) resolved the cost of
service, throughput, billing determinants, 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 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 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
5
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments and Contingencies (Cont'd)
and to reflect the impact of competition. On January 9, 1995, Southern filed
with the presiding administrative law judge a trial stipulation that resolved
certain cost of service issues with the FERC staff in this proceeding. This
trial stipulation was not opposed by any party to the 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 on March 15, 1995, a proposed settlement
(the Customer Settlement) that would resolve all of Southern's pending rate
(described above) and gas supply realignment (GSR) cost recovery (described
below) proceedings. The FERC staff and customers representing more than 95
percent of the firm transportation capacity on Southern's pipeline system are in
support of 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 as to the supporting parties. Southern would credit in
the aggregate the full amount of Southern's rate reserves as of February 28,
1995 (approximately $155 million), less certain amounts withheld for potential
rate refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. Southern implemented reduced settlement rates for parties that
support the Customer Settlement on an interim basis effective 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. Southern's GSR costs are discussed below (see
Order No. 636).
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 may not be recovered as a result of
the Customer Settlement, including amounts for a corporate restructuring
undertaken in 1994.
The Customer Settlement has been contested by certain of Southern's
firm customers representing approximately five percent of Southern's firm
contract demand and by certain interruptible customers. If approved by the FERC,
the Customer Settlement will become effective only as to supporting parties and
any contesting parties the FERC determines will be bound by it. Southern's rates
and GSR costs applicable to the contesting parties not bound by the Customer
Settlement will be determined by the outcome of Southern's pending rate and GSR
proceedings, where Southern believes it is likely that those contesting
customers will continue to challenge both the eligibility and prudence of
Southern's GSR 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.
Several of the shippers on the pipeline system of Sea Robin Pipeline
Company, a subsidiary of Southern, filed with the FERC in February 1995 a
complaint against Sea Robin under Section 5 of the Natural Gas Act claiming that
Sea Robin's rates were unjust and unreasonable. Any reduction in Sea Robin's
rates as a result of this complaint could be implemented only on a prospective
basis. In its answer, Sea Robin asked the FERC to dismiss the complaint or to
find that its rates
6
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments and Contingencies (Cont'd)
continue to be just and reasonable based on the data it presented. Sea Robin is
unable to predict the outcome of this proceeding.
Gas Purchase Contracts - Southern currently is incurring no take-or-pay
liabilities under its gas purchase contracts. Southern regularly evaluates its
position relative to gas purchase contract matters, including the likelihood of
loss from asserted or unasserted take-or-pay claims or above-market prices. When
a loss is probable and the amount can be reasonably estimated, it is accrued.
Order No. 636 - In 1992 the FERC issued its Order No. 636 (the Order).
The Order required significant changes in interstate natural gas pipeline
services. Interstate pipeline companies, including Southern, are incurring
certain costs (transition costs) as a result of the Order, the principal one
being costs related to amendment or termination of, or purchasing gas at
above-market prices under, existing gas purchase contracts, which are referred
to as GSR costs. The Order provided for the recovery of 100 percent of the GSR
costs and other transition costs to the extent the pipeline can prove that they
are eligible, that is, incurred as a result of customers' service choices in the
implementation of the Order, and were incurred prudently. The prudence review
will extend both to the prudence of the underlying gas purchase contracts, based
on the circumstances that existed at the time the contracts were executed, and
to the prudence of the amendments or terminations of the contracts. Numerous
parties have appealed the Order to the Circuit Courts of Appeal.
On September 3, 1993, the FERC generally approved a compliance plan for
Southern and directed Southern to implement its restructured services pursuant
to the Order on November 1, 1993 (the September 3 order). Pursuant to Southern's
compliance plan, GSR costs that are eligible for recovery include payments to
reform or terminate gas purchase contracts. Where Southern can show that it can
minimize transition costs by continuing to purchase gas under the contract
(i.e., it is more economic to continue to perform), eligible GSR costs would
also include the difference between the contract price and the higher of (a) the
sales price for gas purchased under the contract or (b) a price established by
an objective index of spot-market prices. Recovery of these "price differential"
costs is permitted for an initial period of two years ending October 31, 1995.
Southern filed with the FERC on July 31, 1995, for a two-year extension of this
period. The Customer Settlement, which provides that price differential costs
can be recovered for an indefinite period, would, if approved, supersede this
filing as to the supporting parties.
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
7
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments and Contingencies (Cont'd)
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 June 30, 1995, Southern had either paid or accrued $192 million
in GSR costs (including 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. 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 becoming effective. These Exxon amounts are included in
the amount for June 30, 1995, above. In addition to the above amounts, 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 $43
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 June 30, 1995, Southern had
incurred $98 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
prudency grounds.
8
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments and Contingencies (Cont'd)
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 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 GSR costs would be resolved as to those
customers supporting the Customer Settlement, including all issues related to
eligibility and prudency. 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.
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, contract renegotiations that have occurred, and price differential costs
actually incurred, the amount of GSR costs was estimated at June 30, 1995, to be
approximately $341 million on a present-value basis. This amount includes 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 amounts do not include an additional $90 million in
projected GSR costs that may 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 (described 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.
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 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 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
9
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Commitments and Contingencies (Cont'd)
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 were estimated at June 30, 1995, to be
approximately $129 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
gave notice to Exxon that effective March 1, 1994, it 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 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 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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SOUTHERN NATURAL GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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). Southern also has 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 1 of the Notes
to Condensed Consolidated Financial Statements).
In addition, Sea Robin Pipeline Company, a wholly owned subsidiary of
Southern, filed a petition with the FERC requesting it be declared an
unregulated gas gathering system. The FERC denied Sea Robin's petition in an
order issued on June 16, 1995. Sea Robin filed for rehearing of this denial on
July 17, 1995, but cannot predict the outcome of this proceeding. (See Note 4 of
the Notes to Condensed Consolidated Financial Statements.)
Southern continues to pursue growth opportunities to expand the level
of services in its traditional market area and to connect new gas supplies. On
April 26, 1995, Southern received authorization from the FERC 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. Southern also sought approval in a filing with the FERC made
on May 19, 1995, to expand its north main pipeline system to provide
approximately 26 million cubic feet per day of additional firm transportation.
This increase in capacity is supported by 10-year firm transportation agreements
with 15 customers in Alabama, Georgia, and Tennessee. If FERC approval is
received, the in-service date is expected to be November 1996.
Southern has also initiated an open season to obtain customer
commitments to expand its system in order to meet the growing demand for natural
gas in the Southeast. In the open season, Southern is seeking requests for
additional firm transportation services and for a new liquefied natural gas
(LNG) service. The facilities to provide the firm transportation service will be
determined based on the service levels requested. The LNG service would be
provided at the existing LNG storage terminal near Savannah, Georgia, that is
owned by Southern Energy Company, a subsidiary of Southern. If sufficient
commitments are obtained and the necessary regulatory approvals are received,
the in-service date for both services is expected to be November 1997. The open
season will continue through October 31, 1995.
In addition, on May 15, 1995, Southern requested FERC approval for a
production area expansion project. Southern proposes to install 9,400 horsepower
of additional compression at its Toca, Louisiana compressor station south of New
11
<PAGE>
Orleans and to install certain receipt and delivery point facilities in order to
increase its capacity to transport gas supplies on the east leg of its offshore
Louisiana supply system through Toca by 140 million cubic feet per day. Southern
requested that the FERC issue an initial determination on the proposed project,
which would become final upon Southern's filing of 10-year firm transportation
agreements for 100 percent of the increased capacity within 120 days from the
initial determination. Southern presently is in discussion with potential
customers regarding such commitments although there is no assurance that such
commitments will be obtained.
<TABLE>
<CAPTION>
Operations
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Gas sales $ 47 $ 57 $ 94 $144
Market transportation and
storage 75 76 168 164
Supply transportation 13 10 26 20
Other - 42 32 102
Total Revenues $135 $185 $320 $430
Natural Gas Cost:
Purchased from others $ 44 $ 52 $ 85 $130
Purchased from affiliates 3 5 7 9
Total Natural Gas Cost $ 47 $ 57 $ 92 $139
Transition Cost Recovery and
Gas Purchase Contract
Settlement Costs $(12) $ 28 $ 8 $ 71
Depreciation and Amortization $ 13 $ 16 $ 28 $ 32
Operating Income $ 38 $ 27 $ 91 $ 76
Equity in Earnings of
Joint Venture $ 2 $ 2 $ 5 $ 4
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 - 4 -
Market transportation 127 113 305 269
Total Market Throughput 129 113 309 269
Supply transportation 100 83 187 161
Total Volumes 229 196 496 430
Transition gas sales 23 24 49 56
</TABLE>
12
<PAGE>
Quarter-to-Quarter Analysis
Operating results for the second quarter of 1995 were up primarily due
to the sale of previously unsubscribed firm transportation capacity and lower
operating expenses.
Gas sales revenue and gas cost at Southern decreased 18 percent
compared with the second quarter of 1994, reflecting lower gas prices (see
Natural Gas Sales and Supply below). Market transportation and storage revenues
decreased slightly in the 1995 period due to lower rates, partially offset by
the sale of firm transportation capacity. Supply transportation increased 20
percent due to increased volumes under existing contracts at Sea Robin Pipeline
Company and a new transportation contract at Southern. Other Revenue and
Transition Cost Recovery and Gas Purchase Contract Settlement Costs have been
reduced by an adjustment of approximately $25 million to reflect the terms of
the Customer Settlement. The adjustment did not impact operating income. Lower
recovery rates for GSR cost billings during the 1995 period also reduced Other
Revenue and Transition Cost Recovery and Gas Purchase Contract Settlement Costs
from 1994 levels.
Operating and Maintenance Expense decreased in the 1995 period
reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring, which reduced Southern's staffing level. Depreciation and
Amortization decreased in the 1995 period due to lower depreciation rates as a
result of the Customer Settlement.
Year-to-Date Analysis
Operating results for the six-month period were up primarily due to the
sale of previously unsubscribed firm transportation capacity and lower operating
expenses. The 1995 period also reflected the positive effect on revenue of a $6
million adjustment to reflect actual interruptible transportation revenue and
cost recovery in the first year of post-Order No. 636 operations and the
reduction of a take-or-pay liability. The 1994 period included a favorable $6
million reduction in fuel gas liability.
Gas sales revenue and gas cost at Southern decreased significantly
compared with the 1994 period as transition gas sales made from supply remaining
under contract declined, reflecting lower sales volumes and prices (see Natural
Gas Sales and Supply below). Market transportation and storage revenues
increased two percent in the 1995 period due to the sale of firm transportation
capacity, partially offset by lower rates. Supply transportation increased 30
percent due to increased volumes under existing contracts at Sea Robin Pipeline
Company and a new transportation contract at Southern. Other revenue and
Transition Cost Recovery and Gas Purchase Contract Settlement Costs have been
reduced by an adjustment of approximately $25 million to reflect the terms of
the Customer Settlement. The adjustment did not impact operating income.
Declining billings and lower recovery rates for GSR cost during the 1995 period
also reduced Other Revenue and Transition Cost Recovery and Gas Purchase
Contract Settlement Costs from 1994 levels.
Operating and Maintenance Expense decreased in the 1995 period,
reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring, which
13
<PAGE>
reduced Southern's staffing levels. Depreciation and Amortization decreased in
the 1995 period due to lower depreciation rates as a result of the Customer
Settlement.
Transportation Contracts
If the Customer Settlement (described in Note 4 of the Notes to
Condensed Consolidated Financial Statements) becomes effective, Southern's
largest customer, Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas
Company (collectively "Atlanta") will amend their firm transportation contracts
for an aggregate of 682 million cubic feet per day, 582 million cubic feet of
which currently expires on November 1, 1995, and 100 million cubic feet of which
currently expires on June 30, 1997, 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. Also, if the Customer
Settlement becomes effective, South Carolina Pipeline Corporation (SCPL) will
amend its firm transportation contract for 28 million cubic feet per day, which
currently expires on July 31, 1997, 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. Alabama Gas
Corporation, Southern's second largest customer, had earlier executed firm
transportation contracts for 393 million cubic feet per day under terms
extending through October 31, 2008. Southern's other customers have contracted
for firm transportation services for terms ranging from one to ten or more
years. As a result, substantially all of the firm transportation capacity
currently available in Southern's largest market area is fully subscribed.
Natural Gas Sales and Supply
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 terminate its remaining
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 supply contracts, Southern has sold a portion of its remaining
gas supply to a number of its firm transportation customers under contracts of
varying duration. Several of these customers have extended their contracts
through October 31, 1995. These and other customers, including Atlanta, have
advised Southern that if the Customer Settlement becomes effective, they will
extend the sales agreements with them through November 30, 1997. The remainder
of Southern's gas supply will continue to be sold on a month-to-month basis.
14
<PAGE>
Southern's purchase commitments under its remaining gas supply
contracts for the remainder of 1995 and the years 1996 through 1999 are
estimated as follows:
<TABLE>
<CAPTION>
Estimated
Purchase
Commitments
(In Millions)
<C> <C>
1995 $19
1996 39
1997 40
1998 40
1999 36
</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 Corporation
(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 in its lawsuit contesting the Company's termination of the Mississippi
Canyon Contract, which litigation is described in Note 4 of the Notes to
Condensed Consolidated Financial Statements, these estimates would increase by
$85 million in 1995, $182 million in 1996, $91 million in 1997, $29 million in
1998, and $21 million in 1999. Of these amounts, $56 million in 1995, $126
million in 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 gas supply
realignment (GSR) costs). Therefore, if the Customer Settlement becomes
effective, these estimates could increase by $63 million in 1995, $114 million
in 1996, and $117 million in 1997 to include these two new contracts with Exxon.
See Note 4 of the Notes to Condensed Consolidated Financial Statements
for a discussion regarding Southern's rate proceedings to recover its GSR costs.
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 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 the FERC staff and customers representing more than 95
percent of Southern's firm capacity are in support of the Customer Settlement,
there is no assurance that the settlement will be approved by the FERC. Southern
implemented reduced settlement rates for parties that support the Customer
Settlement on an interim basis effective March 1, 1995, subject to
reinstatement, pending FERC consideration and approval of the Customer
Settlement. (See Note 4 of the Notes to Condensed Consolidated Financial
Statements for a discussion of the Customer Settlement and other rate matters.)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Interest
<S> <C> <C> <C> <C>
Interest income $ 3 $ 4 $ 5 $ 8
Interest expense (11) (11) (21) (22)
Interest capitalized - - - 1
$ (8) $ (7) $(16) $(13)
</TABLE>
Interest income in 1995 decreased for the three and six-month periods
compared with 1994 primarily due to lower balances of notes receivable from
affiliates, slightly offset by marginally higher average rates on notes. Lower
note balances primarily resulted from the special noncash dividend in December
1994 of $100 million declared by Southern to Sonat, which was satisfied by
forgiveness of intercompany debt. Slightly offsetting these decreases was an
increase in other interest income due to higher GSR interest income.
Interest expense decreased due to the redemption of Southern's $100
million 9 5/8 Percent Notes in June 1994. Largely offsetting this decrease was
increased interest expense on higher reserve balances.
<TABLE>
<S> <C> <C> <C> <C>
Income Taxes $ 13 $ 8 $ 31 $ 26
</TABLE>
Income taxes for both the three and six-month periods increased due to
higher pretax income. Effective tax rates were consistent in all periods.
FINANCIAL CONDITION
Cash Flows
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1995 1994
(In Millions)
<S> <C> <C>
Operating Activities $14 $116
</TABLE>
The net change in cash used in operating activities for 1995 was $102
million lower than the 1994 amount. The primary reasons for the decrease were
the $86 million change in gas supply realignment costs, refunds and lower rates
(see below), and the $18 million decrease in natural gas purchase contract
settlement costs reflecting the completion of recoveries of take-or-pay costs in
1994.
16
<PAGE>
The change in depreciation reflects a reduction in depreciation rates
effective March 1, 1995, in connection with the Customer Settlement. The
increase in deferred income taxes and the decrease in accrued income taxes is
primarily due to the refund of GSR cost previously recovered from customers and
the amount of GSR cost deductible for taxes. The decrease in regulatory reserves
is due to a $21 million refund made to customers for the overcollection of
volumetric take-or-pay costs, and to lower rates effective March 1, 1995, under
the comprehensive settlement.
Other working capital changes include the decrease in accounts
receivable due primarily to the GSR direct bills associated with the settlement
refund of $25 million. The increase in accounts payable is due to the change in
the gas business and the settlement of gas contracts. Reducing accrued interest
was the redemption of Southern's $100 million 9 5/8 Percent Notes in June 1994.
The amounts in Other are related to the settlement. In 1994, there was $10
million of deferred interruptible transportation revenue credits associated with
amounts that could possibly be credited back to customers, and in 1995, there is
$16 million of other transition costs that are being deferred for collection at
a future date.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1995 1994
(In Millions)
<S> <C> <C>
Investing Activities $ 16 $ 14
</TABLE>
The net change in investing activities reflects a decrease in capital
expenditures of $4 million, offset partially by a $2 million reduction in loan
repayments from Sonat in 1995 compared with the 1994 period.
<TABLE>
<CAPTION>
<S> <C> <C>
Financing Activities $(30) $(131)
</TABLE>
Net cash used in financing activities decreased for the 1995 period due
to the maturity and redemption of Southern's $100 million 9 5/8 Percent Notes in
June 1994.
Liquidity and Capital Resources
At June 30, 1995, 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, borrowings in the
public or private markets or loans from affiliates to finance future capital or
other corporate expenditures.
<TABLE>
<CAPTION>
June 30, December 31,
Capitalization Information 1995 1994
<S> <C> <C>
Debt to Capitalization 37% 39%
</TABLE>
The debt to capitalization ratio decreased slightly for the 1995 period
due to increased stockholder's equity and to scheduled repayments of long-term
debt.
17
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits1
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule for the
period ended June 30, 1995,
filed electronically with this
Report
* Filed with this Report
(b) Reports on Form 8-K
The Company did not file any Report on Form 8-K during the quarter
ended June 30, 1995
- --------
1 The Company will furnish to requesting security holders the
exhibits on this list upon the payment of a fee of 10 cents per page up to a
maximum of $5.00 per exhibit. Requests must be in writing and
should be addressed to R. David Hendrickson, Secretary, Southern
Natural Gas Company, P. O. Box 2563, Birmingham, Alabama 35202-
2563.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date August 11, 1995 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Treasurer
Date: August 11, 1995 By: /s/ Norman G. Holmes
Norman G. Holmes
Vice President & Controller
<TABLE>
<CAPTION>
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
Six Months Ended June 30, Years Ended December 31,
1995 1994 1994 1993 1992 1991 1990
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 79,817 $67,501 $ 76,098 $127,617 $126,691 $119,326 $103,797
Fixed charges (see computation below) 23,870 25,808 48,385 59,171 49,131 46,596 49,899
Total Earnings Available for Fixed Charges $103,102 $93,309 $124,483 $186,788 $175,822 $165,922 $153,696
Fixed Charges:
Interest expense before deducting
interest capitalized $ 22,682 $24,273 $ 45,900 $ 56,599 $ 46,298 $ 42,957 $ 47,323
Rentals(b) 1,188 1,535 2,485 2,572 2,833 3,639 2,576
$ 23,870 $25,808 $ 48,385 $ 59,171 $ 49,131 $ 46,596 $ 49,899
Ratio of Earnings to Fixed Charges 4.3 3.6 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 874
<SECURITIES> 0
<RECEIVABLES> 85,499
<ALLOWANCES> 0
<INVENTORY> 24,516
<CURRENT-ASSETS> 280,537
<PP&E> 2,300,976
<DEPRECIATION> 1,503,918
<TOTAL-ASSETS> 1,396,345
<CURRENT-LIABILITIES> 104,040
<BONDS> 318,267
<COMMON> 4
0
0
<OTHER-SE> 565,502
<TOTAL-LIABILITY-AND-EQUITY> 1,396,345
<SALES> 93,936
<TOTAL-REVENUES> 320,400
<CGS> 92,399
<TOTAL-COSTS> 151,351
<OTHER-EXPENSES> 27,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,860
<INCOME-PRETAX> 79,817
<INCOME-TAX> 30,717
<INCOME-CONTINUING> 49,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
