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 September 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 OCTOBER 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.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
September 30, 1995 and December 31, 1994 1
Condensed Consolidated Statements of Income--
Three Months and Nine Months
Ended September 30, 1995 and 1994 2
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1995 and 1994 3
Notes to Condensed Consolidated Financial
Statements 4 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9 - 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 4,204 $ 975
Notes receivable, primarily from affiliates 129,373 173,060
Accounts receivable 102,174 122,514
Inventories 22,572 20,930
Gas imbalance receivables 17,096 35,053
Prepaid income taxes 22,604 -
Other 17,117 8,511
---------- ------
Total Current Assets 315,140 361,043
---------- ------
Investments in Joint Ventures and Other 51,425 47,952
-------- -------
Plant, Property and Equipment 2,298,596 2,241,972
Less accumulated depreciation and amortization 1,504,977 1,460,649
---------- ---------
793,619 781,323
---------- ---------
Deferred Charges:
Gas supply realignment costs 211,169 160,850
Other 39,267 24,042
---------- --------
250,436 184,892
---------- --------
$1,410,620 $1,375,210
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,964 $ 6,964
Accounts payable 44,410 42,356
Accrued income taxes 5,408 14,271
Accrued interest 12,721 19,505
Gas imbalance payables 18,831 35,112
Other 19,677 19,892
---------- -------
Total Current Liabilities 108,011 138,100
---------- -------
Long-Term Debt 317,947 323,907
---------- -------
Deferred Credits and Other:
Deferred income taxes 88,118 43,812
Reserves for regulatory matters 177,013 183,343
Operating and other reserves 75,464 79,610
Other 72,157 87,214
---------- -------
412,752 393,979
---------- -------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 100,616 78,635
Retained earnings 471,294 440,589
---------- -------
Total Stockholder's Equity 571,910 519,224
---------- -------
$1,410,620 $1,375,210
========== ==========
</TABLE>
See accompanying notes.
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Natural gas sales $ 44,884 $ 47,444 $138,820 $191,591
Transportation and storage 88,155 70,741 282,606 254,727
Other 46,093 36,627 78,106 138,165
-------- -------- -------- --------
179,132 154,812 499,532 584,483
-------- -------- -------- --------
Costs and Expenses:
Natural gas cost 44,729 47,447 137,128 186,667
Transition cost recovery 32,259 22,656 40,665 93,105
Operating and maintenance 27,856 33,658 78,402 97,204
General and administrative 20,507 17,865 61,089 57,124
Depreciation and amortization 12,257 (720) 39,781 31,412
Taxes, other than income 4,761 4,599 14,895 13,588
-------- -------- -------- --------
142,369 125,505 371,960 479,100
-------- -------- -------- --------
Operating Income 36,763 29,307 127,572 105,383
Other Income, Net:
Equity in earnings of
joint ventures 2,319 2,158 7,161 6,653
Other 269 181 371 388
-------- -------- -------- --------
2,588 2,339 7,532 7,041
-------- -------- -------- --------
Interest:
Interest income, primarily
from affiliates 1,783 3,465 6,707 11,962
Interest expense (10,663) (9,744) (31,624) (32,144)
Interest capitalized 64 37 165 663
-------- -------- -------- --------
(8,816) (6,242) (24,752) (19,519)
-------- -------- -------- --------
Income before Income Taxes 30,535 25,404 110,352 92,905
Income Taxes 11,730 9,586 42,447 35,589
-------- -------- -------- --------
Net Income $ 18,805 $ 15,818 $ 67,905 $ 57,316
======== ======== ======== ========
</TABLE>
See accompanying notes.
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1995 1994
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 67,905 $ 57,316
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,781 31,412
Deferred income taxes 38,172 (9,270)
Equity in earnings of joint
ventures, less distributions (2,911) (2,653)
Reserves for regulatory matters (6,330) 48,407
Gas supply realignment costs (50,319) 22,428
Natural gas purchase contract
settlement costs (1,328) 18,360
Change in:
Accounts receivable 22,717 29,994
Inventories (1,304) 1,091
Accounts payable 1,055 (24,674)
Accrued interest and income taxes, net (36,799) (9,445)
Other current assets and liabilities (8,002) (9,146)
Other (17,920) 9,820
-------- ---------
Net cash provided by operating
activities 44,717 163,640
-------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (36,823) (35,323)
Notes receivable, primarily from affiliates 37,477 4,098
Proceeds from disposal of assets and other 945 8,025
-------- ---------
Net cash provided by (used in)
investing activities 1,599 (23,200)
-------- ---------
Cash Flows from Financing Activities:
Payments of long-term debt (5,960) (106,730)
Dividends paid (37,200) (37,200)
-------- ---------
Net cash used in financing
activities (43,160) (143,930)
-------- ---------
Net Increase (Decrease) in Cash 3,156 (3,490)
Cash at Beginning of Period 1,048 4,243
-------- ---------
Cash at End of Period $ 4,204 $ 753
======== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 24,820 $ 30,120
Income taxes (refunds received), net 34,392 50,301
</TABLE>
See accompanying notes.
<PAGE>
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 Natural Gas Company 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 $15,099,000 and combined net income of
$223,000 for the nine-month period ended September 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.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which will become effective for years beginning after December 15,
1995. Southern has not yet determined the effect of the new statement.
Certain amounts in the 1994 condensed consolidated financial statements
have been reclassified to conform with the 1995 presentation.
2. Joint Venture
Southern Natural Gas Company owns 50 percent of Bear Creek Storage
Company (Bear Creek), an underground gas storage company. The following is
summarized income statement information for Bear Creek. No provision for income
taxes has been included since its income taxes are paid directly by the
joint-venture participants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,885 $8,825 $27,113 $26,698
Expenses:
Operating expenses 1,206 1,385 3,732 3,950
Depreciation 1,350 1,350 4,049 4,050
Other expenses, net 1,560 1,774 4,718 5,393
------ ------ ------- -------
Income Reported $4,769 $4,316 $14,614 $13,305
====== ====== ======= =======
</TABLE>
2. Joint Venture (Cont'd)
On October 31, 1995, Southern executed a Capital Contribution Agreement
in connection with the project financing for Bear Creek from The Prudential
Insurance Company of America. In the event that Bear Creek does not refinance
the remaining principal, this agreement provides that Southern and its partner
will contribute $21 million each to Bear Creek on October 31, 2000, to provide
funds to enable Bear Creek to make a principal payment due under the financing.
3. 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.
Short-Term Debt - 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 September 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.
Customer Settlement - In an order issued on September 29, 1995 (the
Settlement Order), the FERC approved a comprehensive settlement (the Customer
Settlement) that Southern had filed on March 15, 1995. The Customer Settlement,
which became effective on October 9, 1995, resolves, as to the parties
supporting the settlement, all of Southern's pending rate proceedings and
proceedings to recover gas supply realignment (GSR) and other transition costs
associated with the implementation of Order No. 636 (described below). The
Customer Settlement provides for reduced rates that became effective March 1,
1995, and a three-year rate moratorium on future rate increases by Southern. The
Customer Settlement was supported by Southern, the FERC staff, customers
representing approximately 95 percent of the firm transportation capacity on
Southern's system, and other parties.
4. Commitments and Contingencies (Cont'd)
Pursuant to the Customer Settlement, all issues in Southern's current
and prior rate cases have been settled as to the supporting parties. Southern
will 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 supported the Customer Settlement on an interim basis effective
March 1, 1995. 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).
The Settlement Order also included authorizations for Southern to
construct approximately $27 million of additional facilities to improve its
existing level of transportation service and to expand service to Atlanta Gas
Light Company and South Carolina Pipeline Corporation and its affiliate under
firm contracts with terms of at least three years.
The Customer Settlement has been contested by firm customers
representing approximately five percent of Southern's firm contract demand and
by certain interruptible customers.
The Settlement Order permits the contesting parties to litigate the
issue of the recovery of Southern's GSR and other Order No. 636 transition costs
and to litigate various rate issues with respect to rate periods prior to March
1, 1995, with the results to be applied only to such parties. The Settlement
Order decided the level of Southern's rates to contesting parties for the period
beginning March 1, 1995, and ruled on numerous other rate issues for the
pre-March 1, 1995, periods. These rulings included a reversal of a 1994
administrative law judge determination that Southern could not include in its
rates any portion of the approximately $45 million cost of a pipeline that
Southern constructed in 1992 to connect gas reserves developed by Exxon
Corporation (Exxon) in the Mississippi Canyon and Ewing Bank Area Blocks,
offshore Louisiana. Certain of the contesting parties have sought rehearing of
the Settlement Order by the FERC. After rehearing, the Settlement Order will be
subject to appeal to the courts. Although there can be no assurances, Southern
believes that rehearing of the Settlement Order should be denied by the FERC and
that the Settlement Order should be upheld on any judicial appeal.
In the fourth quarter of 1994, Southern recognized a $27 million charge
associated with the Customer Settlement, which included anticipated amounts for
GSR costs that Southern would not recover from its customers, and a $28 million
charge for a 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.
<PAGE>
4. Commitments and Contingencies (Cont'd)
Sea Robin - 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 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. In its answer, Sea Robin asked the FERC to dismiss the
complaint or to find that its rates 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.
As of September 30, 1995, Southern had either paid or accrued $200
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 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 became effective upon the Customer
Settlement becoming effective. Additionally, at September 30, 1995, Southern was
a party to an agreement under which another high-cost contract price would be
reduced in exchange for monthly payments having a present value of approximately
$42 million. Southern entered into a payment agreement on October 20, 1995, with
a financial institution, pursuant to which Southern made a one-time payment of
$42.3 million to the institution, which agreed to make these monthly payments.
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 September 30, 1995, Southern
had incurred $103 million in price differential costs.
As described above, Southern's Customer Settlement resolves 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. Additionally, Southern will absorb an agreed-upon portion of its
total GSR costs, an estimate of 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 September 30, 1995,
to be approximately $349 million on a present-value basis.
<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).
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.
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. This project was placed in service November 1, 1995.
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 27 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.
In addition, on October 11, 1995, Southern received FERC approval for a
production area expansion project with a capital cost of $15 million. Southern
proposes to install 9,400 horsepower of additional compression at its Toca,
Louisiana compressor station south of New 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. The FERC issued an initial determination on the
proposed project, which will 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.
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 the firm transportation service is expected to be
November 1997 and the in-service date for the LNG service is expected to be
sometime in 1998. The open season for the firm transportation service ended on
October 31, 1995, and requests for service are being evaluated. The open season
for the LNG service will continue through November 17, 1995.
<PAGE>
<TABLE>
<CAPTION>
Operations
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Gas sales $ 45 $ 47 $139 $192
Market transportation and
storage 75 63 244 229
Supply transportation 13 8 39 25
Other 46 37 78 138
---- ---- ---- ----
Total Revenues $179 $155 $500 $584
==== ==== ==== ====
Natural Gas Cost:
Purchased from others $ 45 $ 43 $130 $175
Purchased from affiliates - 4 7 12
---- ---- ---- ----
Total Natural Gas Cost $ 45 $ 47 $137 $187
==== ==== ==== ====
Transition Cost Recovery $ 32 $ 23 $ 41 $ 93
==== ==== ==== ====
Depreciation and Amortization $ 12 $ (1) $ 40 $ 31
==== ==== ==== ====
Operating Income $ 2 $ 29 $128 $105
==== ==== ==== ====
Equity in Earnings of
Joint Ventures $ 2 $ 2 $ 7 $ 7
==== ==== ==== ====
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 1 - 5 -
Market transportation 143 118 448 402
---- ---- ---- ----
Total Market Throughput 144 118 453 402
Supply transportation 101 87 288 249
---- ---- ---- ----
Total Volumes (1) 245 205 741 651
==== ==== ==== ====
Transition gas sales 21 23 67 80
==== ==== ==== ====
</TABLE>
(1) Volumes for the three months and nine months ended September 30, 1995,
include 8 and 28 billion cubic feet of gas, respectively, associated
with new subsidiaries of Southern which were not included in Southern's
1994 volumes. These companies were subsidiaries of Sonat Inc. in 1994.
Quarter-to-Quarter Analysis
Operating results for the third quarter of 1995 were higher primarily
due to lower operating expenses and the sale of previously unsubscribed firm
transportation capacity.
Market transportation and storage revenues for 1994 include a $16
million adjustment relating to a retroactive reduction in certain depreciation
rates. Supply transportation revenues increased 63 percent due to Southern's new
transportation contract with Florida Gas and increased volumes under existing
contracts at Sea Robin Pipeline Company. Other Revenue and Transition Cost
Recovery increased due to an $18 million adjustment related to the Customer
Settlement. This adjustment did not impact operating income.
Operating and maintenance expense decreased 18 percent in the 1995
period reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring, which reduced Southern's staffing levels. General and
administrative expense increased 11 percent in the 1995 period, primarily due to
higher employee benefit expenses. Depreciation and amortization expense was
higher in 1995 due to a $16 million retroactive reduction in depreciation rates
in 1994.
Year-to-Date Analysis
Operating results for the nine-month period were up primarily due to
lower operating expenses and the sale of previously unsubscribed firm
transportation capacity. 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.
Market transportation and storage revenues for 1994 include a $16
million adjustment relating to a retroactive reduction in certain depreciation
rates and the sale of firm transportation capacity. Supply transportation
revenues increased 56 percent due to increased volumes under existing contracts
at Sea Robin Pipeline Company and to Southern's new transportation contract with
Florida Gas. Other Revenue and Transition Cost Recovery decreased due to
declining billings and lower recovery rates for GSR costs during the 1995
period.
Operating and Maintenance expense decreased 20 percent in the 1995
period, reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring. General and administrative expense increased 7 percent in the
1995 period, primarily due to higher employee benefit expenses. Depreciation and
Amortization expense increased in the 1995 period due to the $16 million revenue
reserve established in the 1994 period partially offset by lower depreciation
rates as a result of the Customer Settlement.
Transportation Contracts
Pursuant to the Customer Settlement (described in Note 4 of the Notes
to Condensed Consolidated Financial Statements), Southern's largest customer,
Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, have
amended their 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 will
remain under its current term to April 30, 2007. Also pursuant to the Customer
Settlement, South Carolina Pipeline Corporation (SCPL) has amended 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. 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 that
are being extended through November 30, 1997. The remainder of Southern's gas
supply will continue to be sold on a month-to-month basis.
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:
Estimated
Purchase
Commitments
(In Millions)
1995 $ 30
1996 129
1997 127
1998 40
1999 36
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 include two new
contracts with Exxon with terms from November 1, 1995, to November 30, 1997, and
provide for market-based index prices.
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
The Customer Settlement resolves all outstanding rate and Order No. 636
transition cost recovery proceedings with respect to the supporting parties. The
Customer Settlement will result in reducing Southern's filed rates to more
competitive levels, will reduce somewhat reported revenues, and will reduce
depreciation expense to approximately $40 million in 1995. Southern implemented
reduced settlement rates for parties that support the Customer Settlement
effective March 1, 1995. (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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
(In Millions)
Interest
<S> <C> <C> <C> <C>
Interest income $ 2 $ 4 $ 7 $ 12
Interest expense (11) (10) (32) (33)
Interest capitalized - - - 1
---- ---- ---- ----
$ (9) $ (6) $(25) $(20)
==== ==== ==== ====
</TABLE>
Interest income in 1995 decreased for the three and nine-month periods
compared with 1994 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.
Interest expense on outside debt was flat for the three-month period.
However, it decreased for the nine-month period due primarily to the redemption
of Southern's $100 million 9 5/8 Percent Notes in June 1994. Both periods
reflect increased interest expense on higher average reserve balances and
accrued interest on Federal Income Taxes for the 1995 periods.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income Taxes $ 12 $ 10 $ 42 $ 36
</TABLE>
Income taxes for both the three and nine-month periods increased due to
higher pretax income. Effective tax rates were consistent in all periods.
FINANCIAL CONDITION
Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1995 1994
(In Millions)
<S> <C> <C>
Operating Activities $45 $164
</TABLE>
Net cash provided by operating activities for 1995 was $119 million
lower than the 1994 amount. The primary reasons for the decrease were $73
million change in gas supply realignment costs, refunds, lower rates (see
below), and the $18 million decrease in natural gas purchase contract settlement
costs reflecting the completion of the majority of recoveries of take-or-pay
costs in 1994.
The increase in deferred income taxes and the change in accrued income
taxes is primarily due to the timing of the amount of GSR cost deductible for
taxes. The decrease in regulatory reserves is due to lower rates effective March
1, 1995, under the comprehensive settlement, and to a $21 million refund made to
customers for the overcollection of volumetric take-or-pay costs. In addition,
reserve balances in 1994 were increased for the effect of the $16 million
depreciation adjustment.
<TABLE>
<CAPTION>
<S> <C> <C>
Investing Activities $ 2 $ (23)
</TABLE>
Net cash flow from investing activities increased due primarily to
repayments of borrowings by Sonat to Southern, offset by lower proceeds from
disposals of assets. Proceeds received in 1994 included insurance proceeds of $7
million related to damages from Hurricane Andrew.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1995 1994
(In Millions)
<S> <C> <C>
Financing Activities $(43) $(144)
</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 September 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.
In October, Southern monetized a GSR obligation for $42.3 million.
Funds for this transaction were obtained by Sonat repaying intercompany loans
and funds from operations.
Southern expects to continue to use cash from operations and borrowings
on the public or private markets or loans from affiliates to finance its capital
and other corporate expenditures.
<TABLE>
<CAPTION>
September 30, December 31,
Capitalization Information 1995 1994
------------ -----------
<S> <C> <C>
Debt to Capitalization 36% 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.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which will become effective for years beginning after December 15,
1995. Southern has not yet determined the effect of the new statement.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits(1)
Exhibit
Number Exhibits
<S> <C>
10 Amendatory Agreement dated June 1, 1995, to Service Agreement No. 904460,
effective November 1, 1994, between Southern Natural Gas Company and
Atlanta Gas Light Company filed as Exhibit 10 to Form 10-Q of Sonat Inc.
for the quarter ended September 30, 1995
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedule for the period ended September 30, 1995, filed
electronically with this Report
</TABLE>
* 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
September 30, 1995.
(1) The Company will furnish to requesting security holders the exhibits on
this list upon the payment of a fee of 10(cent) 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: November 13, 1995 By: /s/ Thomas W. Barker, Jr.
--------------------------- -------------------------------
Thomas W. Barker, Jr.
Treasurer
Date: November 13, 1995 By: /s/ Norman G. Holmes
--------------------------- -------------------------------
Norman G. Holmes
Vice President & Controller
EXHIBIT 12
<TABLE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<CAPTION>
Nine Months Ended
Sept 30, Years Ended December 31,
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income (loss) before income taxes $110,352 $ 92,905 $ 76,098 $127,617 $126,691 $119,326 $103,797
Fixed charges (see computation below) 36,349 36,820 48,385 59,171 49,131 46,596 49,899
-------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $146,701 $129,725 $124,483 $186,788 $175,822 $165,922 $153,696
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 34,206 $ 34,955 $ 45,900 $ 56,599 $ 46,298 $ 42,957 $ 47,323
Rentals(b) 2,143 1,865 2,485 2,572 2,833 3,639 2,576
-------- -------- -------- -------- -------- -------- --------
$ 36,349 $ 36,820 $ 48,385 $ 59,171 $ 49,131 $ 46,596 $ 49,899
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 4.0 3.5 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,204
<SECURITIES> 0
<RECEIVABLES> 102,174
<ALLOWANCES> 0
<INVENTORY> 22,572
<CURRENT-ASSETS> 315,140
<PP&E> 2,298,596
<DEPRECIATION> 1,504,977
<TOTAL-ASSETS> 1,410,620
<CURRENT-LIABILITIES> 108,011
<BONDS> 317,947
<COMMON> 4
0
0
<OTHER-SE> 571,906
<TOTAL-LIABILITY-AND-EQUITY> 1,410,620
<SALES> 138,820
<TOTAL-REVENUES> 499,532
<CGS> 137,128
<TOTAL-COSTS> 256,195
<OTHER-EXPENSES> 39,781
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,459
<INCOME-PRETAX> 110,352
<INCOME-TAX> 42,447
<INCOME-CONTINUING> 67,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,905
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
