UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 APRIL 30, 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--
March 31, 1995 and December 31, 1994 1
Condensed Consolidated Statements of Income--
Three Months Ended March 31, 1995 and 1994 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 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 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
(Unaudited)
(In Thousands)
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ASSETS
Current Assets:
Cash $ 1,605 $ 975
Notes receivable, primarily from affiliates 138,038 173,060
Accounts receivable 104,357 122,514
Inventories 21,184 20,930
Gas imbalance receivables 19,262 35,053
Other 20,149 8,511
Total Current Assets 304,595 361,043
Investments in Joint Venture and Other 51,005 47,952
Plant, Property and Equipment 2,292,453 2,241,972
Less accumulated depreciation and amortization 1,491,091 1,460,649
801,362 781,323
Deferred Charges:
Gas supply realignment costs 196,620 160,850
Other 31,674 24,042
228,294 184,892
$1,385,256 $1,375,210
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,964 $ 6,964
Accounts payable 36,427 42,356
Accrued income taxes 21,413 14,271
Accrued interest 17,524 19,505
Gas imbalance payables 18,163 35,112
Other 14,203 19,892
Total Current Liabilities 114,694 138,100
Long-Term Debt 318,587 323,907
Deferred Credits and Other:
Deferred income taxes 60,503 43,812
Reserves for regulatory matters 171,106 183,343
Operating and other reserves 78,247 79,610
Other 84,395 87,214
394,251 393,979
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 100,616 78,635
Retained earnings 457,108 440,589
Total Stockholder's Equity 557,724 519,224
$1,385,256 $1,375,210
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See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1995 1994
(In Thousands)
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Revenues:
Natural gas sales $ 46,679 $ 86,873
Transportation and storage 106,221 98,325
Other 32,535 50,333
185,435 235,531
Costs and Expenses:
Natural gas cost 45,206 81,736
Transition cost recovery and gas
purchase contract settlement costs 20,886 42,920
Operating and maintenance 25,469 22,843
General and administrative 20,811 18,260
Depreciation and amortization 14,858 16,036
Taxes, other than income 5,591 4,621
132,821 186,416
Operating Income 52,614 49,115
Other Income, Net:
Equity in earnings of joint ventures 2,501 2,281
Other 141 348
2,642 2,629
Interest Income (Expense):
Interest income, primarily from affiliates 2,060 4,839
Interest expense (10,324) (11,078)
Interest capitalized 40 272
(8,224) (5,967)
Income before Income Taxes 47,032 45,777
Income Taxes 18,113 17,574
Net Income $ 28,919 $ 28,203
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See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1995 1994
(In Thousands)
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Cash Flows from Operating Activities:
Net income $ 28,919 $ 28,203
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 14,858 16,036
Deferred income taxes 10,518 (2,245)
Equity in earnings of joint
venture, less distributions (2,501) (2,281)
Reserves for regulatory matters (12,237) 11,799
Gas supply realignment costs (35,770) 7,559
Natural gas purchase contract
settlement costs - 16,502
Change in:
Accounts receivable 20,534 (8,282)
Inventories 83 1,204
Accounts payable (6,927) (12,562)
Accrued interest and income taxes, net 5,215 20,034
Other current assets and liabilities (19,274) (24,579)
Other (7,799) 12,020
Net cash provided by (used in)
operating activities (4,381) 63,408
Cash Flows from Investing Activities:
Plant, property and equipment additions (6,236) (12,997)
Notes receivable, primarily from affiliates 28,813 (35,652)
Proceeds from disposal of assets and other 81 292
Net cash provided by (used in)
investing activities 22,658 (48,357)
Cash Flows from Financing Activities:
Payments of long-term debt (5,320) (5,320)
Dividends paid (12,400) (12,400)
Other 73 -
Net cash used in financing
activities (17,647) (17,720)
Net Increase (Decrease) in Cash 630 (2,669)
Cash at Beginning of Period 975 4,243
Cash at End of Period $ 1,605 $ 1,574
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 9,961 $ 10,012
Income taxes (refunds received), net 420 (238)
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See accompanying notes.
1. Basis of Presentation
Southern Natural Gas Company is a wholly owned
subsidiary of Sonat Inc.
The accompanying condensed consolidated
financial statements of Southern and its subsidiaries
(Southern) have been prepared in accordance with the
instructions to Form 10-Q and include the information
and footnotes required by such instructions. In the
opinion of management, all adjustments including those
of a normal recurring nature have been made that are
necessary for a fair presentation of the results for
the interim periods presented herein.
On January 1, 1995, Sonat transferred its
investment in Sonat Intrastate-Alabama Inc., Sonat
Gathering Company and Sonat Ventures Inc. to Southern.
They had combined revenues of $6,245,000 and a
combined net loss of $1,310 for the three-month period
ended March 31, 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 the first quarter of 1995, the Financial
Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 - Accounting
for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of, which will become
effective for years beginning after December 15, 1995.
The Company has not yet determined the effect of the
new rules.
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
Ended March 31,
1995 1994
(In Thousands)
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Revenues $9,322 $9,030
Expenses:
Operating expenses 1,275 1,278
Depreciation 1,350 1,350
Other expenses, net 1,633 1,839
Income Reported $5,064 $4,563
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3. Long-Term Debt and Notes To and From Affiliates
As part of Sonat's cash management program,
Southern regularly loans funds to or borrows funds from
Sonat. Notes receivable and payable are in the form of
demand notes with rates reflecting Sonat's return on
funds loaned to its subsidiaries, average short-term
investment rates and cost of borrowed funds. In certain
circumstances, these notes are subordinated in right of
payment to amounts payable by Sonat under certain long-
term credit agreements.
4. Commitments and Contingencies
Rate Matters - Periodically, Southern and its
subsidiaries make general rate filings with the Federal
Energy Regulatory Commission (FERC) to provide for the
recovery of cost of service and a return on equity. The
FERC normally allows the filed rates to become
effective, subject to refund, until it rules on the
approved level of rates. Southern and its subsidiaries
provide reserves relating to such amounts collected
subject to refund, as appropriate, and make refunds upon
establishment of the final rates.
On September 1, 1989, Southern implemented new
rates, subject to refund, reflecting a general rate
decrease of $6 million. In January 1991 Southern
implemented new rates, subject to refund, that
restructured its rates consistent with a FERC policy
statement on rate design and increased its sales and
transportation rates by approximately $65 million
annually. These two proceedings have been consolidated
for hearing. On October 7, 1993, the presiding
administrative law judge certified to the FERC a
contested offer of settlement pertaining to the
consolidated rate cases that (1) resolved all
outstanding issues in the rate decrease proceeding,
(2) resolved the cost of service, throughput, billing
determinant, and transportation discount issues in the
rate increase proceeding, and (3) provided a method to
resolve all other issues in the latter proceeding,
including the appropriate rate design. 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
4. Commitments and Contingencies (Cont'd)
annually. The filing is designed to recover increased
operating costs 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, the Company
recognized a $29 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 customers; thus, 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 anticipates 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.
Gas Purchase Contracts - Pursuant to a final and
nonappealable FERC order, Southern has collected from
its customers over a five-year period that ended on
April 30, 1994, substantially all of its gas purchase
contract settlement payments relating to contract
terminations or amendments entered into in the 1980s.
Southern currently is incurring no take-or-pay
liabilities under its gas purchase
4. Commitments and Contingencies (Cont'd)
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.
Southern's compliance plan contains two mechanisms
pursuant to which Southern is permitted to recover
100 percent of its GSR costs. The first mechanism is a
monthly fixed charge designed to recover 90 percent of
the GSR costs from Southern's firm transportation
customers. The second mechanism is a volumetric charge
designed to collect the remaining 10 percent of such
costs from Southern's interruptible transportation
customers. These funding mechanisms will continue until
the GSR costs are fully recovered or funded. The FERC
also indicated that Southern could file to recover any
GSR costs not recovered through the volumetric charge
after a period of two years. In addition, Southern's
compliance plan provides for the recovery of other
transition costs as they are incurred and any remaining
transition costs may be recovered through a regular rate
filing.
Southern's customers have generally opposed the
recovery of Southern's GSR costs based on both
eligibility and prudence grounds. The September 3 order
rejected the argument of certain customers that a
1988 take-or-pay recovery settlement bars Southern from
recovering GSR costs under gas purchase contracts
executed before March 31, 1989, which comprise most of
Southern's GSR costs. Those
4. Commitments and Contingencies (Cont'd)
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 March 31, 1995, Southern had either paid or
accrued $181 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 within the
amount for March 31, 1995, above. In addition, Southern
also has an agreement under which another high-cost
contract price is reduced in exchange for monthly
payments having a present value of approximately
$44 million. Southern has received permission from the
FERC to purchase an annuity in order to monetize this
obligation.
In addition to its GSR costs relating to
termination or amendment of its remaining gas purchase
contracts, Southern has incurred and expects to continue
to incur certain price differential GSR costs resulting
from Southern's continued purchase of gas under its
remaining supply contracts that provide for prices in
excess of current market prices. As of March 31, 1995,
Southern had incurred $85 million in price differential
costs.
Beginning in December 1993, Southern has made a
number of filings with the FERC seeking to recover GSR
costs paid through various periods prior to the filings.
In each instance, the FERC has accepted Southern's
filing subject to refund, and subject to a determination
through a hearing before an administrative law judge
regarding whether such costs were prudently incurred and
are eligible for recovery under the Order. Southern's
customers are opposing its recovery of its GSR costs in
these proceedings based on both eligibility and prudence
grounds. These proceedings, which have all been
consolidated, are in the early stages of discovery and
Southern cannot predict their outcome at this time.
As described above, Southern's Customer Settlement
would settle 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
4. Commitments and Contingencies (Cont'd)
supporting the Customer Settlement, including all issues
related to eligibility and prudence. Additionally,
Southern would absorb an agreed-upon portion of its
total GSR costs, which was reflected in the provision
for the Customer Settlement noted above.
In its Customer Settlement discussions, Southern
has advised its customers that the amount of GSR costs
that it actually incurs will depend on a number of
variables, including future natural gas and fuel oil
prices, future deliverability under Southern's existing
gas purchase contracts, and Southern's ability to
renegotiate certain of these contracts. While the level
of GSR costs is impossible to predict with certainty
because of these numerous variables, based on current
spot-market prices, a range of estimates of future oil
and gas prices, recent contract renegotiations, and
price differential costs actually incurred, the amount
of GSR costs was estimated at December 31, 1994, to be
approximately $328 million on a present-value basis.
This amount included 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 $87 million in projected GSR costs
that would be incurred if the settlement with Exxon does
not become effective and Exxon prevails in its lawsuit
regarding Southern's March 1, 1994, termination of a
contract relating to Exxon's reserves in its Mississippi
Canyon blocks (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 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
4. Commitments and Contingencies (Cont'd)
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 December
31, 1994, to be approximately $125 million on a present-
value basis, although such estimate is subject to
significant uncertainty since the assumptions inherent
in the estimate (including underlying reserves, future
deliverability, and a range of estimated future gas
market prices) are not known today with certainty and
there is a wide range of possible outcomes for each
assumption. In addition, Southern 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.
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, has filed a petition with the
FERC requesting it be declared an unregulated gas
gathering system.
Southern is pursuing 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.
Also, Florida Gas Transmission Company, a subsidiary of
Citrus Corp. (50 percent-owned by Sonat), contracted in
February 1995 for 100 million cubic feet per day of new
firm transportation to be delivered from Southern's
system. Southern also plans to seek approval in a
filing with the FERC to be made in May 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.
In addition, Southern has 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
July 31, 1995.
Operations
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1995 1994
(In Millions)
<S> <C> <C>
Revenues:
Gas sales $ 47 $ 87
Market transportation and storage 93 88
Supply transportation 13 11
Other 32 50
Total Revenues $185 $236
Natural Gas Cost:
Purchased from others $ 41 $ 78
Purchased from affiliates 4 4
Total Natural Gas Cost $ 45 $ 82
Transition Cost Recovery and Gas
Purchase Contract Settlement Costs $ 21 $ 43
Depreciation and Amortization $ 15 $ 16
Operating Income $ 53 $ 49
Equity in Earnings of
Joint Ventures $ 3 $ 2
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 -
Market transportation 178 159
Total Market Throughput 180 159
Supply transportation 87 79
Total Volumes 267 238
Transition gas sales 26 33
</TABLE>
Quarter-to-Quarter Analysis
Southern's operating results for the first quarter
of 1995 were up primarily due to higher margins. 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
was offset by a $6 million reduction in fuel gas
liability in 1994.
Gas sales revenue and gas cost at Southern
decreased significantly compared with the 1994 first
quarter as transition gas sales from supply remaining
under contract declined (see Natural Gas Sales and
Supply below).
Market transportation and storage revenues
increased 6 percent in the 1995 period. Market
throughput volumes increased 13 percent in the
1995 period. Market throughput includes Sonat
Intrastate-Alabama Inc. in 1995 (see Note 1 of the Notes
to Condensed Consolidated Financial Statements). Supply
transportation increased 10 percent due to increased
volumes under existing contracts at Sea Robin Pipeline
Company and a new transportation contract at Southern.
Other revenue decreased in the 1995 period due to
a decrease in take-or-pay cost recovery. Southern's
billings for take-or-pay costs were essentially
completed in the first quarter of 1994.
Operating and maintenance expense, excluding the
reduction in fuel gas liability recognized in the 1994
period mentioned above, decreased in 1995 reflecting the
impact of the fourth quarter restructuring, which
reduced Southern's staffing level by approximately
27 percent. General and administrative expenses were up
in the same period due to an increase in stock-based
compensation.
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. 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 sold a
portion of its remaining gas supply to a number of its
firm transportation customers for a one-year term that
began November 1, 1993. A portion of these sales
agreements were extended for an additional one-year
term, while the sales agreements with Atlanta were
extended through March 31, 1995. Certain customers,
including Atlanta, have advised Southern that if the
Customer Settlement becomes effective, they will extend
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.
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 $40
1996 50
1997 50
1998 52
1999 34
</TABLE>
These estimates are subject to significant
uncertainty due both to the number of assumptions
inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the
three major factors that determine purchase commitments
(underlying reserves, future deliverability, and future
price) is known today with certainty. These estimates
also exclude estimated purchase commitments under
certain contracts with Exxon that will be terminated if
the Customer Settlement becomes effective. If the
Customer Settlement does not become effective and
Southern were therefore required to perform these
contracts, and further assuming that Exxon were to
prevail 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 $114 million in 1995,
$154 million in 1996, $65 million in 1997, $8 million in
1998, and $3 million in 1999. Of these amounts,
$89 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 $76 million in 1995,
$94 million in 1996, and $103 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. (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
Ended March 31,
1995 1994
(In Millions)
<S> <C> <C>
Interest Income (Expense), Net $(8) $(6)
</TABLE>
Interest income in 1995 decreased 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. Other interest income also decreased
due to the accrual of GSR interest income in 1994.
Interest expense decreased due to the redemption
of Southern's $100 million 9 5/8 Percent Notes in
June 1994. Partly offsetting this decrease was
increased interest expense on higher reserve balances.
<TABLE>
<S> <C> <C>
Income Taxes $18 $18
</TABLE>
Income taxes were flat when compared to the prior
year due to consistent pre-tax income, and the absence
of unusual items.
FINANCIAL CONDITION
Cash Flows
<TABLE>
<S> <C> <C>
Operating Activities $(4) $63
</TABLE>
The net change in cash used in operating
activities for 1995 was $67 million lower than the 1994
amount. The primary reasons for the decrease were the
$43 million change in gas supply realignment costs,
reflecting the $45 million payment for the Exxon
settlement described in Note 4 of the Notes to Condensed
Consolidated Financial Statements and the $17 million
decrease in natural gas purchase contract settlement
costs, reflecting the completion of recoveries of take-
or-pay costs in 1994.
The change in regulatory reserves reflects the
reduction in 1995 of amounts reserved for the volumetric
take-or-pay surcharge collected from December 18, 1993
through April 30, 1994, pursuant to the FERC's
acceptance in February 1995, of Southern's refund
report. The $29 million increase in the change in
accounts receivable reflects the election by some of
Southern's customers to offset amounts they would have
received under the provisions of the take-or-pay refund
against amounts they owed Southern for Order No. 636
cost, as well as the lack of gas sales receivables and
receivables for the sale of storage gas in 1995. The
$6 million increase in the change in accounts payable is
primarily due to reductions in the amounts of gas
purchased in 1995. The primarily reason for the
fluctuation in the change in accrued interest reflects
the redemption of Southern's $100 million 9 5/8 Percent
Notes in June 1994 as well as the forgiveness of
intercompany debt in December 1994. The primarily
reason for the $5 million increase in cash flow for
other current assets and liabilities was the result of
settlements of gas imbalances in 1994 as required by
Order No. 636. The amount in Other in 1995 includes an
$8 million noncash change in other transition costs as
the result of reclassification from GSR costs while the
1994 amount includes $9 million collected through
interruptible transportation services that was for
recovery of allocated fixed cost and amounts to be used
to offset customers GSR liabilities.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1995 1994
(In Millions)
<S> <C> <C>
Investing Activities $23 $(48)
</TABLE>
The net change in investing activities reflects
loan repayments from Sonat of $29 million in 1995
compared with Sonat borrowings of $36 million in 1994.
Capital expenditures of $6 million in 1995 were down
$7 million from the 1994 period.
Liquidity and Capital Resources
At March 31, 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>
March 31, December 31,
Capitalization Information 1995 1994
<S> <C> <C>
Debt to Capitalization 37% 39%
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 the first quarter of 1995, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which will become effective
for years beginning after December 15, 1995. Southern
has not yet determined the effect of the new rules.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Southern Natural Gas Company v. ARCO Oil and Gas
Company, d/b/a Vastar Resources, Inc. and Vastar
Resources,Inc. v. Southern Natural Gas Company, which
are described in Item 3 of Part I of the Company's
Report on Form 10-K for the year ending December 31,
1994, were both settled and dismissed. Pursuant to the
settlement, Southern paid Vastar the contract price
claimed by Vastar for all gas delivered.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
10.1 Amendatory Agreement dated
March 1, 1994, to Service
Agreements (Nos. 904480, 904481
and S20140) effective November
1, 1994 between Southern
Natural Gas Company and Atlanta
Gas Light Company filed as
Exhibit 10.2 to Form 10-Q of
Sonat Inc. for the quarter
ended March 31, 1995
10.2 Amendatory Agreement dated
March 1, 1994 to Service
Agreements (No. 902470)
effective September 1, 1994 and
(Nos. 904460, 904461 and
S20150) effective November 1,
1994, between Southern Natural
Gas Company and Atlanta Gas
Light Company filed as Exhibit
10.3 to Form 10-Q of Sonat Inc.
for the quarter ended March 31,
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.
(a) Exhibits (continued)
Exhibit
Number Exhibits
10.3 Amendatory Agreement dated
March 1, 1995, to Service
Agreements (No. 901710)
effective June 1, 1994 and (No.
902516) effective October 1,
1994 between Southern Natural
Gas Company and South Carolina
Pipeline Corporation filed as
Exhibit 10.4 to Form 10-Q of
Sonat Inc. for the quarter
ended March 31, 1995
12* Computation of Ratio of
Earnings to Fixed Charges
27 Financial Data Schedule for the
period ended March 31, 1995
* Filed with this Report
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K
during the quarter ended March 31, 1995.<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date: May 12, 1995 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Treasurer
Date: May 12, 1995 By: /s/ Norman G. Holmes
Norman G. Holmes
Vice President & Controller
</TABLE>
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ---------------------------------------------
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 $47,032 $45,777 $ 76,098 $127,617 $126,691 $119,326 $103,797
Fixed charges (see computation below) 11,849 12,678 48,385 59,171 49,131 46,596 49,899
------- ------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $58,881 $58,455 $124,483 $186,788 $175,822 $165,922 $153,696
======= ======= ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $11,184 $12,015 $ 45,900 $ 56,599 $ 46,298 $ 42,957 $ 47,323
Rentals(b) 665 663 2,485 2,572 2,833 3,639 2,576
------- ------- -------- -------- -------- -------- --------
$11,849 $12,678 $ 48,385 $ 59,171 $ 49,131 $ 46,596 $ 49,899
======= ======= ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 5.0 4.6 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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995
<CASH> 1,605
<SECURITIES> 0
<RECEIVABLES> 138,038
<ALLOWANCES> 0
<INVENTORY> 21,184
<CURRENT-ASSETS> 304,595
<PP&E> 2,292,453
<DEPRECIATION> 1,491,091
<TOTAL-ASSETS> 1,385,256
<CURRENT-LIABILITIES> 114,694
<BONDS> 318,587
<COMMON> 4
0
0
<OTHER-SE> 557,720
<TOTAL-LIABILITY-AND-EQUITY> 1,385,256
<SALES> 46,679
<TOTAL-REVENUES> 185,435
<CGS> 45,206
<TOTAL-COSTS> 91,561
<OTHER-EXPENSES> 14,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,284
<INCOME-PRETAX> 47,032
<INCOME-TAX> 18,113
<INCOME-CONTINUING> 28,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,919
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
