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, 1996
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, 1996
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>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<S> <C>
(Unaudited)--June 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Six Months Ended
June 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Six Months Ended June 30, 1996 and
1995 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 14
PART II. Other Information
Item 5. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 1,528 $ 711
Notes receivable, primarily from affiliates 99,415 103,845
Accounts receivable 98,593 118,542
Inventories 25,734 21,625
Gas imbalance receivables 16,368 15,919
Federal and state income taxes 33,365 13,160
Other 24,494 25,835
---------- -------
Total Current Assets 299,497 299,637
-------- --------
Investments in Unconsolidated Affiliates and Other 49,535 49,535
------- -------
Plant, Property and Equipment 2,359,836 2,315,003
Less accumulated depreciation and amortization 1,526,910 1,504,087
---------- ----------
832,926 810,916
-------- --------
Deferred Charges and Other:
Gas supply realignment costs 24,126 199,073
Other 77,609 78,548
---------- -------
101,735 277,621
-------- --------
$1,283,693 $1,437,709
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,964 $ 6,964
Notes payable to affiliates 51,582 14,981
Accounts payable 47,576 56,787
Accrued state income taxes - 1,856
Accrued interest 15,920 15,404
Gas imbalance payables 14,096 17,196
Other 16,886 17,258
---------- -------
Total Current Liabilities 153,024 130,446
-------- --------
Long-Term Debt 311,739 317,627
-------- --------
Deferred Credits and Other:
Deferred income taxes 119,603 80,956
Reserves for regulatory matters 14,459 181,798
Other 91,485 152,784
---------- --------
225,547 415,538
-------- --------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other 100,616 100,616
Retained earnings 492,767 473,482
-------- --------
Total Stockholder's Equity 593,383 574,098
-------- --------
$1,283,693 $1,437,709
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Natural gas sales $ 54,364 $ 47,257 $114,588 $ 93,936
Transportation and storage 88,274 88,230 183,835 194,451
Other 166,275 (4,572) 167,752 21,767
-------- -------- -------- --------
308,913 130,915 466,175 310,154
-------- -------- -------- --------
Costs and Expenses:
Natural gas cost 54,413 47,193 111,957 92,399
Transition cost recovery 158,519 (12,480) 153,136 8,406
Operating and maintenance 22,410 21,027 42,270 40,300
General and administrative 20,524 19,771 40,033 40,582
Depreciation and amortization 12,393 12,666 24,794 27,524
Taxes, other than income 4,175 4,543 9,313 10,134
------ -------- ------ --------
272,434 92,720 381,503 219,345
-------- -------- -------- --------
Operating Income 36,479 38,195 84,672 90,809
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 2,340 2,341 4,895 4,842
Other 613 (39) 889 102
-------- -------- ---- --------
2,953 2,302 5,784 4,944
------ -------- ------ --------
Interest:
Interest income, primarily
from affiliates 1,331 2,864 3,255 4,924
Interest expense (11,159) (10,637) (22,295) (20,961)
Interest capitalized 211 61 296 101
---- -------- ---- --------
(9,617) (7,712) (18,744) (15,936)
------- -------- -------- --------
Income before Income Taxes 29,815 32,785 71,712 79,817
Income Taxes 11,551 12,604 27,627 30,717
------- -------- ------- --------
Net Income $ 18,264 $ 20,181 $ 44,085 $ 49,100
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1995
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 44,085 $ 49,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,794 27,524
Deferred income taxes 38,690 27,671
Equity in earnings of joint
ventures, less distributions 255 (592)
Loss on disposal of assets - 253
Reserves for regulatory matters (167,339) (9,487)
Gas supply realignment costs 177,837 (70,482)
Change in:
Accounts receivable 19,949 39,392
Inventories (4,109) (3,249)
Accounts payable (9,211) (5,294)
Accrued interest and income taxes, net (21,563) (7,026)
Other current assets and liabilities (2,562) (15,619)
Other (59,180) (18,048)
------- --------
Net cash provided by operating
activities 41,646 14,143
------- --------
Cash Flows from Investing Activities:
Plant, property and equipment additions (51,930) (16,825)
Notes receivable, primarily from affiliates 4,430 32,913
Proceeds from disposal of assets and other 758 35
---- --------
Net cash provided by (used in)
investing activities (46,742) 16,123
-------- --------
Cash Flows from Financing Activities:
Payments of long-term debt (5,888) (5,640)
Changes in short-term borrowings 36,601 -
------- --
Net changes in debt 30,713 (5,640)
Dividends paid (24,800) (24,800)
Other - 73
-------- --------
Net cash provided by (used in)
financing activities 5,913 (30,367)
------ --------
Net Increase (Decrease) in Cash 817 (101)
Cash at Beginning of Period 711 975
---- --------
Cash at End of Period $ 1,528 $ 874
======= ========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 13,513 $ 15,104
Income taxes, net 11,049 10,742
</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 (Southern) is a wholly owned subsidiary of
Sonat Inc.
The accompanying condensed consolidated financial statements of
Southern and its subsidiaries have been prepared in accordance with the
instructions to Form 10-Q and include the information and footnotes required by
such instructions. In the opinion of management, all adjustments including those
of a normal recurring nature have been made that are necessary for a fair
presentation of the results for the interim periods presented herein.
Certain amounts in the 1995 condensed consolidated financial statements
have been reclassified to conform with the 1996 presentation.
2. Derivative Financial Instruments
Financial Risk - On January 22, 1996, Southern entered into a forward
rate agreement to hedge the interest rate risk of an anticipated future
borrowing under an existing shelf registration statement. The base treasury rate
for this future borrowing has been hedged at approximately 5.78 percent on a
notional amount of $97 million. At June 30, 1996, this agreement had a fair
market value of $6.6 million.
3. Unconsolidated Affiliates
A subsidiary of Southern owns 50 percent of Bear Creek Storage Company
(Bear Creek), an underground gas storage company. The following is summarized
income statement information for Bear Creek. No provision for income taxes has
been included since its income taxes are paid directly by the joint-venture
participants.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,952 $8,906 $18,193 $18,228
Expenses:
Operating expenses 1,370 1,251 2,535 2,526
Depreciation 1,353 1,349 2,707 2,699
Other expenses, net 1,408 1,525 2,894 3,158
------ ------ ------ -------
Income Reported $4,821 $4,781 $10,057 $ 9,845
====== ====== ======= =======
</TABLE>
<PAGE>
4. Debt and Notes To and From Affiliates
Unsecured Notes - 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.
On May 28, 1996, Southern renewed its short-term lines of credit of $50
million for a period of 364 days. Borrowings are available through May 27, 1997,
and are in the form of unsecured promissory notes that bear interest at rates
based on the banks' prevailing prime, international or money-market lending
rates. At June 30, 1996, no amounts were outstanding.
5. 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. At June 30, 1996, Southern's rates are
established by the Customer Settlement and a FERC order effective for parties
contesting the Customer Settlement and are not subject to refund (see discussion
below).
Customer Settlement - 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 gas supply realignment (GSR) costs.
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 is supported by
customers representing approximately 97 percent of the firm transportation
capacity on Southern's system, resolves, as to the parties supporting the
settlement, all of Southern's pending rate proceedings and proceedings to
recover GSR and other transition costs associated with the implementation of
Order No. 636. The four major rate cases resolved by the Customer Settlement
cover consecutive periods beginning September 1, 1989. In May 1996, the
Settlement became final and Southern credited in the aggregate the full amount
of Southern's rate reserves as of February 28, 1995, plus interest, less certain
amounts withheld for potential refunds to contesting parties, to reduce the GSR
costs borne by Southern's
<PAGE>
5. Commitments and Contingencies (Cont'd)
customers. The total credit recorded in May 1996 amounted to $164 million.
Southern implemented reduced settlement rates for parties that supported the
Customer Settlement 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. The Settlement also provides
for Southern to recover $363 million of GSR costs incurred or reserved as of
June 30, 1996, and 50 percent of future GSR costs that Southern may incur
thereafter which Southern believes will not be material to its financial
position or results of operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (April 11 Order). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the contesting parties concern the recoverability of certain GSR
and other transition costs under Order No. 636, which would not be material even
if such issues were determined adversely to Southern. The three remaining
contesting parties have each appealed the April 11 Order and the Settlement
Order to the D.C. Circuit Court of Appeals. Although there can be no assurances,
Southern believes that the Settlement Order and the April 11 Order should be
upheld on appeal.
Sea Robin - In January 1995, Sea Robin Pipeline Company, a subsidiary
of Southern, filed with the FERC a petition for a declaratory ruling that the
Sea Robin pipeline system is engaged in the gathering of natural gas and is,
therefore, exempt from FERC regulation under the Natural Gas Act. In June 1995,
the FERC denied Sea Robin's petition on the basis that the primary function of
the Sea Robin system is the interstate transportation of gas. Sea Robin's
request for rehearing of that ruling was denied by the FERC on June 26, 1996.
Sea Robin plans to file for judicial review of the orders denying its petition.
Following the filing of Sea Robin's petition for a gathering exemption,
several of the shippers on the Sea Robin system 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. 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. On July 31, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act. Sea Robin is unable to predict the
outcome of this proceeding, but any reduction in Sea Robin's rates as a result
of this complaint can be implemented only on a prospective basis and any such
change is not expected to be material to Southern's financial position or
results of operations.
<PAGE>
5. Commitments and Contingencies (Cont'd)
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.
<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 and its subsidiaries is the
interstate transmission of natural gas in the southeastern United States, which
is regulated by the FERC.
Southern continues to pursue opportunities to expand its pipeline
system in its traditional market area and to connect new gas supplies. Southern
filed an application on January 24, 1996, with the FERC seeking approval to
extend its pipeline system to provide firm gas transportation service to
customers in North Alabama. The proposed 76-million-cubic-feet-per-day expansion
is supported by long-term firm transportation agreements with five customers,
including the cities of Huntsville and Decatur, which have executed 20-year
service agreements for 40 million cubic feet per day and 25 million cubic feet
per day, respectively. The $53 million project includes 118 miles of new
pipeline and additional compression on Southern's existing system. The proposed
expansion, which requires FERC approval, is scheduled to be in service by
November 1997. The company that currently provides transportation service to the
city of Huntsville has filed suit against Southern and Huntsville seeking to
have Southern's service agreement with Huntsville set aside as violative of
Alabama's competitive bid laws and the Alabama Constitution. This company has
also opposed the system expansion application at the FERC. In July 1996 the FERC
approved the non-environmental aspects of this project and denied the
non-environmental portions of the protests to the project, including the
opposition of Huntsville's current transportation provider. Environmental issues
will be reviewed later by the FERC and a certificate issued, if warranted,
following the environmental review. Southern cannot predict the outcome of this
litigation or the FERC proceeding.
In May 1996, Southern filed an application with the FERC to expand its
pipeline system in its market area. This $36 million expansion will enable
Southern to provide additional firm transportation services totaling 46 million
cubic feet per day to 11 customers in Georgia and Tennessee. If FERC approval is
received, the in-service date for this firm transportation service is expected
to be November 1997.
In July 1996, Destin Pipeline Company Inc., a wholly owned subsidiary
of Southern, filed an application with the FERC seeking authorization to
construct, own, and operate a large-diameter interstate pipeline system to
transport approximately one billion cubic feet of gas per day from the deepwater
and corridor areas being developed in the eastern Gulf of Mexico for delivery to
pipeline interconnections in central Mississippi. The proposed 207 miles of pipe
and related compression facilities include a 36-inch pipeline extending from a
gathering platform to be constructed in the Main Pass Block 248 Area to a point
near Pascagoula, Mississippi, and a 36-inch and 30-inch pipeline from there to
interconnections or exchange points with five other interstate pipelines in
Mississippi. The estimated capital cost of the facilities is $294 million. In
addition to FERC authorization, the project will require firm, long-term
contracts from prospective customers. Destin Pipeline has requested preliminary
regulatory approval for the project by January 1997 so that commercial
agreements can be entered into in early 1997. Engineering would be completed
during 1997, and construction would begin in 1998. The projected in-service date
is scheduled for January 1999. There is no assurance that the FERC will approve
this application or that Destin Pipeline will be successful in securing the
necessary long-term contracts.
Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Gas sales $ 54.4 $ 47.3 $114.6 $ 94.0
Market transportation and
storage 76.1 75.0 160.5 168.5
Supply transportation 12.1 13.2 23.3 25.9
Other 166.3 (4.6) 167.8 21.7
------ ------ ------ ------
Total Revenues 308.9 130.9 466.2 310.1
------ ------ ------ ------
Costs and Expenses:
Natural gas cost 54.4 47.2 112.0 92.4
Transition cost recovery 158.5 (12.5) 153.1 8.4
Operating and maintenance 22.4 21.0 42.3 40.3
General and administrative 20.5 19.8 40.0 40.6
Depreciation and amortization 12.4 12.7 24.8 27.5
Taxes, other than income 4.2 4.5 9.3 10.1
---- ------ ---- ------
272.4 92.7 381.5 219.3
------ ------ ------ ------
Operating Income $ 36.5 $ 38.2 $ 84.7 $ 90.8
====== ====== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.3 $ 2.3 $ 4.9 $ 4.8
===== ====== ===== ======
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 2 4 4
Market transportation 142 127 350 305
--- --- --- ---
Total Market Throughput 144 129 354 309
Supply transportation 80 100 165 187
--- --- --- ---
Total Volumes 224 229 519 496
=== === === ===
Transition gas sales 18 23 35 49
=== === === ===
</TABLE>
<PAGE>
Quarter-to-Quarter Analysis
Operating income for the second quarter declined $1.7 million compared
with the 1995 period primarily due to lower supply-area transportation volumes
and slightly higher operating and maintenance expenses and general and
administrative expenses. Higher market transportation revenues resulting from
higher volumes related to the East Tennessee expansion partially offset this
decline.
Gas sales revenues and natural gas cost increased compared with the
1995 second quarter reflecting higher gas prices on transition gas sales from
supply remaining under contract. Both other revenue and transition cost recovery
in the 1996 period include $164 million as a result of Southern's Customer
Settlement becoming final. Other revenue and transition cost recovery in the
1995 period were reduced by an adjustment of approximately $25 million to
reflect the terms of the Customer Settlement agreement, which was implemented
March 1, 1995. The adjustment did not impact operating income. General and
administrative expenses for the second quarter of 1996 were slightly higher
compared with the second quarter of 1995, primarily due to higher stock-based
employee compensation expense.
Year-to-Date Analysis
Operating income for the six-month period decreased $6.1 million
primarily because incremental revenues from the sale of firm transportation
capacity were collected in the 1995 period prior to revised rates going into
effect on March 1, 1995. The 1995 period also included positive adjustments 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.
Gas sales revenues and natural gas cost increased compared with the
1995 period reflecting higher gas prices on transition gas sales from supply
remaining under contract. Both other revenue and transition cost recovery in the
1996 period include $164 million as a result of Southern's Customer Settlement
becoming final. Other revenue and transition cost recovery in the 1995 period
were reduced by an adjustment of approximately $25 million to reflect the terms
of the Customer Settlement. Depreciation and amortization decreased in the 1996
period due to lower rates implemented March 1, 1995.
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 the cost of gas under some of these contracts is in excess of
current spot-market prices, Southern currently is incurring no take-or-pay
liabilities under any of these contracts. Two market-priced contracts entered
into with Exxon Corporation in 1995 as part of a settlement of certain other gas
purchase contracts account for 85 percent in 1996 and 1997 of the purchase
commitments described below. Of such purchase commitments, the percent that is
priced in excess of current spot-market prices is 2 percent in 1996, 2 percent
in 1997, 12 percent in 1998, and substantially all of the volumes for years
thereafter. (See Note 5 of the Notes to Condensed Consolidated Financial
Statements for a discussion of price differential GSR costs.) 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 have been 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 1996 and years 1997 through 2000 are estimated as
follows:
Estimated
Purchase
Commitments
(In Millions)
1996 $ 83
1997 135
1998 22
1999 22
2000 19
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.
See Note 5 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, as to the parties supporting the
settlement, all of Southern's pending rate proceedings and proceedings to
recover GSR and other transition costs associated with the implementation of
Order No. 636. See Note 5 of the Notes to Condensed Consolidated Financial
Statements for a discussion of the Customer Settlement and other rate matters.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Other Income-Other $ 0.6 $ - $ 0.9 $ 0.1
</TABLE>
The increase in other in the 1996 periods compared to the same periods in
1995 is attributable to AFUDC-Equity associated with Southern's pipeline
expansion projects.
Interest:
<TABLE>
<S> <C> <C> <C> <C>
Interest income $ 1.3 $ 2.9 $ 3.3 $ 4.9
Interest expense (11.1) (10.6) (22.3) (20.9)
Interest capitalized 0.2 - 0.3 0.1
---- ----- ---- ----
$(9.6) $ (7.7) $(18.7) $(15.9)
====== ====== ====== ======
</TABLE>
The change in net interest in both 1996 periods as compared to the 1995
periods is primarily due to higher interest expense and lower interest income.
Interest expense on debt increased as a result of higher average debt levels
with its parent. Partially offsetting was a decrease in interest expense in the
current three-month period related to lower reserve balances. Interest income
was lower in both periods due to lower GSR interest and lower average balances
of loans to affiliates.
<TABLE>
<S> <C> <C> <C> <C>
Income Taxes $ 11.6 $ 12.6 $ 27.6 $ 30.7
</TABLE>
Income taxes decreased in both 1996 periods compared to the same
periods in 1995 due to lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1995
(In Millions)
<S> <C> <C>
Operating Activities $ 41.6 $14.1
</TABLE>
Cash flow from operations increased $27.5 million compared to the 1995
period. The 1995 period had much higher GSR payments, primarily resulting from a
$45.0 million payment in February 1995. Slightly offsetting were net refunds to
customers, which were $15.0 million higher in the current period. Operating
results were essentially level in both periods.
Other than the higher payments discussed above, the change in gas
supply realignments costs was attributable to the recording of the Customer
Settlement in the second quarter of 1996. In addition, the change in reserves
for regulatory matters, deferred income taxes, accrued income taxes, and other
is due to the settlement accounting, which was essentially offsetting among
these captions. The change in accounts receivable is attributable to customer
refunds in June 1995.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1995
(In Millions)
<S> <C> <C>
Investing Activities $(46.7) $ 16.1
</TABLE>
Investing activities required $46.7 million of net cash in 1996
compared to providing $16.1 million in 1995. Due to system expansions, capital
expenditures increased from $16.8 million in the 1995 period to $51.9 million in
1996. In the 1995 period, repayments of loans by Southern's parent provided
$32.9 million compared to only $4.4 million in the 1996 period.
<TABLE>
<S> <C> <C>
Financing Activities $ 5.9 $(30.4)
</TABLE>
Financing activities provided $5.9 million in 1996 compared to
requiring $30.4 million in 1995. The increase was due to borrowings by Southern
from its parent to supplement cash flow from operations which was primarily used
for capital expenditures in the 1996 program.
Capital Resources
At June 30, 1996, 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 issue the $100 million remaining under its
shelf registration in either late 1996 or early 1997 to fund planned expansion
of its pipeline system.
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.
FINANCIAL RISK MANAGEMENT
Southern faces exposure to financial market risks, primarily interest
rate risk. Use of derivatives to manage this risk is governed by a set of
policies approved by the Sonat Board of Directors. These policies prohibit
speculative transactions and require all counterparties to be approved by the
Board. On January 22, 1996, Southern entered into a forward rate agreement to
hedge the interest rate risk of an anticipated future borrowing under its shelf
registration. The base treasury rate for this future borrowing has been hedged
at approximately 5.78 percent.
<PAGE>
FORWARD LOOKING STATEMENTS
Disclosures provided in this Quarterly Report contain forward looking
statements regarding Southern's future plans, objectives, and expected
performance. These statements are based on assumptions that Southern believes
are reasonable, but are subject to a wide range of risks, and there is no
assurance that actual results may not differ materially. Realization of
Southern's objectives and expected performance can be adversely affected by the
actions of customers and competitors, changes in governmental regulation of
Southern's businesses, and changes in general economic conditions and the state
of domestic capital markets.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Legal Proceedings
Southern Natural Gas Company and its wholly owned subsidiary, Sea Robin
Pipeline Company, are two of seventy defendants named in Jack J. Grynberg, ex
rel. v. Alaska Pipeline Company, et al., which was filed in the United States
District Court for the District of Columbia. The defendants include
substantially all of the interstate pipelines in the United States. Grynberg
filed suit on behalf of the United States Government under 31 U.S.C. ss. 3729,
et seq., commonly known as the False Claims Act, alleging that the methods used
by the defendants to measure the heating content and volume of natural gas
purchased by them have caused producers of natural gas to underpay royalties
owed by the producers to the United States. The complaint seeks recovery of
actual damages based upon the unpaid royalties, the amount of which is not
specified in the complaint. Such damages may be trebled under Section 3729.
Southern and Sea Robin intend to defend the suit vigorously.
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, 1996
* 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, 1996.
----------------------
1/ The Company will furnish to requesting security
holders the exhibits on this list upon the payment of a fee of $.10 per page up
to a maximum of $5.00 per exhibit. Requests must be in writing and should be
addressed to R. David Hendrickson, Secretary, Southern Natural Gas Company, P.
O. Box 2563, Birmingham, Alabama 35202-2563.
<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 6, 1996 By: /s/ Thomas W. Barker, Jr.
--------------------------- --------------------------
Thomas W. Barker, Jr.
Treasurer
(Principal Financial Officer)
Date: August 6, 1996 By: /s/ Norman G. Holmes
--------------------------- ---------------------
Norman G. Holmes
Vice President & Controller
(Principal Accounting Officer)
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
From Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $71,712 $ 79,817 $134,124 $ 76,098 $127,617 $126,691 $119,326
Fixed charges (see computation below) 24,946 23,870 49,679 48,385 59,171 49,131 46,596
------- -------- ------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $96,658 $103,687 $183,803 $124,483 $186,788 $175,822 $165,922
======= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $23,863 $ 22,682 $ 46,859 $ 45,900 $ 56,599 $ 46,298 $ 42,957
Rentals(b) 1,083 1,188 2,820 2,485 2,572 2,833 3,639
------ -------- ------ -------- -------- -------- --------
$24,946 $ 23,870 $ 49,679 $ 48,385 $ 59,171 $ 49,131 $ 46,596
======= ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 3.9 4.3 3.7 2.6 3.2 3.6 3.6
==== ======== ==== ======== ======== ========= ========
</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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,528
<SECURITIES> 0
<RECEIVABLES> 98,593
<ALLOWANCES> 0
<INVENTORY> 25,734
<CURRENT-ASSETS> 299,497
<PP&E> 2,359,836
<DEPRECIATION> 1,526,910
<TOTAL-ASSETS> 1,283,693
<CURRENT-LIABILITIES> 153,024
<BONDS> 311,739
0
0
<COMMON> 4
<OTHER-SE> 593,379
<TOTAL-LIABILITY-AND-EQUITY> 1,283,693
<SALES> 114,588
<TOTAL-REVENUES> 466,175
<CGS> 111,957
<TOTAL-COSTS> 307,363
<OTHER-EXPENSES> 24,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,999
<INCOME-PRETAX> 71,712
<INCOME-TAX> 27,627
<INCOME-CONTINUING> 44,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,085
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
