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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 1-2745
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SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-7410
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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7.85 percent Notes due 2002 New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1996 -- NONE (ALL VOTING STOCK OF THE REGISTRANT
IS HELD BY ITS PARENT COMPANY, SONAT INC.)
NUMBER OF SHARES OF COMMON STOCK, $3.75 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1996 -- 1,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SOUTHERN NATURAL GAS COMPANY
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
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ITEM PAGE
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PART I
Item 1. Business................................................................... I-1
Order No. 636 Restructuring................................................ I-1
Customer Settlement........................................................ I-2
Storage Fields............................................................. I-4
Markets -- Transportation and Sales........................................ I-4
Gas Supplies............................................................... I-6
Potential Royalty Claims................................................... I-6
Sea Robin Pipeline Company................................................. I-7
Sonat Intrastate-Alabama Inc. ............................................. I-7
South Georgia Natural Gas Company.......................................... I-7
Southern Energy Company.................................................... I-7
Competition and Current Business Conditions................................ I-8
Governmental Regulation.................................................... I-10
Rate and Regulatory Proceedings............................................ I-10
Environmental Matters...................................................... I-10
Forward Looking Statements................................................. I-10
Item 2. Properties................................................................. I-11
Item 3. Legal Proceedings.......................................................... I-11
Item 4. Submission of Matters to a Vote of Security Holders......................Omitted*
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... II-1
Item 6. Selected Financial Data.................................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. II-3
Item 8. Financial Statements and Supplementary Data................................ II-15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. II-39
PART III
Item 10. Directors and Executive Officers of the Registrant.......................Omitted*
Item 11. Executive Compensation...................................................Omitted*
Item 12. Security Ownership of Certain Beneficial Owners and Management...........Omitted*
Item 13. Certain Relationships and Related Transactions...........................Omitted*
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... IV-1
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* Item Nos. 4, 10, 11, 12 and 13 have been omitted in reliance upon General
Instruction J(1) and (2) of Form 10-K.
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PART I
ITEM 1. BUSINESS
The principal business of Southern Natural Gas Company ("Southern"), which
is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the transmission of
natural gas in interstate commerce. Southern, including its subsidiaries, owns
9,322 miles of interstate pipeline and 454 miles of intrastate pipeline. Its
interstate pipeline system has a certificated daily delivery capacity of 2.4
billion cubic feet of natural gas. Southern's interstate pipeline system extends
from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf of
Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South
Carolina, and Tennessee. Southern also has pipeline facilities offshore Texas
connecting gas supplies to other pipelines that transport such gas to Southern's
system. A map of Southern's pipeline system, including pipelines of its
subsidiaries, appears on page I-9.
Southern's interstate pipeline business is subject to regulation by the
Federal Energy Regulatory Commission (the "FERC"), the U.S. Department of
Energy's Economic Regulatory Administration (the "ERA"), and the U.S. Department
of Transportation under the terms of the Natural Gas Policy Act of 1978 (the
"NGPA"), the Natural Gas Act (the "NGA"), and various pipeline safety and
environmental laws. See "Governmental Regulation" below for information
concerning the regulation of natural gas transmission operations.
Southern's business is subject to the usual operating risks associated with
the transmission of natural gas through a pipeline system, which could result in
property damage and personal injury. Southern has a comprehensive safety program
to address these risks and has consistently ranked at or near the top of its
industry peer group in safety performance. Sonat maintains broad insurance
coverage on behalf of Southern insuring against financial loss resulting from
these operating risks.
Additional business information concerning Southern and its wholly owned
subsidiaries is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial
Statements in Part II of this report and is incorporated herein by reference.
At March 1, 1996, Southern and its subsidiaries employed approximately 790
people.
Southern's principal executive offices are located at 1900 Fifth Avenue
North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number
is (205) 325-7410.
Order No. 636 Restructuring
In 1992 the FERC issued its Order No. 636 (the "Order"), which required
interstate natural gas pipeline companies, including Southern and South Georgia
Natural Gas Company ("South Georgia"), a wholly owned interstate pipeline
subsidiary of Southern, to make significant changes in the way they provide
services. The Order required pipelines, among other things, to (1) separate
(unbundle) their sales, transportation, and storage services; (2) provide a
variety of transportation services, including a "no-notice" service pursuant to
which the customer is entitled to receive gas from the pipeline to meet
fluctuating requirements without having previously scheduled delivery of that
gas; (3) adopt a straight-fixed-variable method for rate design (which assigns
more costs to the demand component of the rates than do other rate-design
methodologies previously utilized by pipelines); and (4) implement a pipeline
capacity release program under which firm customers have the ability to "broker"
the pipeline capacity for which they have contracted. The Order also authorized
pipelines to offer unbundled sales services at market-based rates and allowed
for pregranted abandonment of some services. Various parties have appealed the
Order to the Court of Appeals for the District of Columbia Circuit.
In requiring that Southern provide unbundled storage service, the Order
resulted in a substantial reduction of Southern's working storage gas inventory
and consequently a reduction in its rate base. This reduction was effective on
November 1, 1993, when Southern restructured pursuant to the Order and sold at
its cost $123 million of its working storage gas inventory to its new storage
customers. The Order also resulted in rates that are less seasonal, thereby
shifting revenues and earnings for Southern out of the winter months.
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Interstate pipeline companies, including Southern, are incurring certain
costs ("transition costs") as a result of the Order, the principal one being
costs related to amendment or termination of, or purchasing gas at above-market
prices under, existing gas purchase contracts, which are referred to as gas
supply realignment ("GSR") costs. The Order provided for the recovery of 100
percent of the GSR costs and other transition costs to the extent the pipeline
can prove that they are eligible, that is, incurred as a result of customers'
service choices in the implementation of the Order, and were incurred prudently.
The prudence review will extend both to the prudence of the underlying gas
purchase contracts, based on the circumstances that existed at the time the
contracts were executed, and to the prudence of the amendments or terminations
of the contracts.
As of December 31, 1995, Southern had either paid or accrued $263 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. In addition to its GSR costs relating to
termination or amendment of its remaining gas supply contracts, Southern has
incurred and expects to continue to incur certain price differential GSR costs
resulting from Southern's continued purchase of gas under its remaining supply
contracts that provide for prices in excess of current market prices. As of
December 31, 1995, Southern had incurred $83 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 had
generally opposed its recovery of its GSR costs in these proceedings based on
both eligibility and prudence grounds. These proceedings, which have all been
consolidated, are in the early stages of discovery and Southern cannot predict
their outcome at this time.
Customer Settlement
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. Several parties that opposed the Customer
Settlement have filed with the FERC requests for rehearing of the Settlement
Order. The FERC has not yet ruled on those rehearing petitions. 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. The
Customer Settlement was supported initially by Southern, the FERC staff,
customers representing approximately 95 percent of the firm transportation
capacity on Southern's system, and other parties.
On November 20, 1995, Southern and one of the initial contesting parties to
the Customer Settlement filed a settlement with the FERC pursuant to which that
party became a supporting party to the Customer Settlement. The November 20
settlement, which was not opposed, was approved by the FERC on February 2, 1996.
With that addition, the Customer Settlement is now supported by customers
representing approximately 97 percent of the firm transportation capacity on
Southern's system.
The Customer Settlement resolves, as to the supporting parties, all issues
in Southern's current and prior rate cases. These four major rate cases cover
consecutive periods beginning September 1, 1989, January 1, 1991, September 1,
1992, and May 1, 1993, respectively. 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 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 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.
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In addition to approving the Customer Settlement, the Settlement Order
decided on the merits all cost of service (including rate of return and the
recovery of costs associated with Southern's Mississippi Canyon pipeline), cost
allocation, and rate design issues in Southern's current rate case for the
period beginning May 1, 1993. 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 in the Mississippi Canyon and Ewing Bank Area Blocks, offshore
Louisiana. The Settlement Order also applied the merits determination concerning
the recovery of Southern's Mississippi Canyon pipeline costs to the rate period
beginning September 1, 1992. These determinations form the basis of FERC's
approval of Southern's current rates to the contesting parties and refunds due
them with respect to certain past rate periods. The contesting parties' requests
for rehearing of the Settlement Order included challenges to many of the
substantive rate determinations in the Settlement Order, such as the cost
recovery of Southern's Mississippi Canyon pipeline, Southern's rate of return on
equity, IT rate design, the appropriate IT and FT billing units used for
designing rates, and the allocation of storage costs.
Many of the other issues in the rate cases beginning September 1, 1989,
January 1, 1991, and September 1, 1992, have previously been settled with the
contesting parties. Thus, if the Customer Settlement and the rates
determinations made in the Settlement Order are upheld on rehearing, there
remains to be litigated, as to the contesting parties, the GSR cost recovery
discussed below and only certain cost allocation and rate design issues, which
would not be material even if such rate issues are determined adversely to
Southern. The Customer Settlement continues to be contested by certain
interruptible customers and firm customers representing approximately three
percent of Southern's firm transportation capacity.
The Settlement Order also permits the contesting parties to litigate the
issue of the recovery of Southern's GSR and other Order No. 636 transition costs
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, as described above, ruled on numerous other rate
issues for the pre-March 1, 1995, periods.
In the event that the FERC on rehearing does not uphold the Customer
Settlement and reverses or materially modifies its prior determinations of the
substantive rate issues decided in the Settlement Order, then all parties would
be permitted to challenge Southern's recovery of GSR and other transition costs
and Southern's current rates would be affected by such ruling. In such event,
Southern is unable to predict the outcome of any such transition costs recovery
litigation or any modification of the FERC's prior rate determination, but the
effect in the aggregate could be material.
If the FERC denies the contesting parties' rehearing requests, 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,
including the challenges to the rate determinations in that order, should be
denied by the FERC and that the Settlement Order should be upheld on any
judicial appeal.
In accordance with the cost-sharing mechanism adopted in the Customer
Settlement, pursuant to which Southern will absorb an agreed-upon portion of its
total GSR costs, Southern is now at the level of GSR costs that requires it to
absorb 50 percent of all additional GSR costs incurred. 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. In the fourth quarter of 1995, Southern recognized an additional $11
million charge, reflecting expensed GSR costs not expected to be recovered from
customers, based on its estimate of total GSR costs at December 31, 1995.
The amount of GSR costs that Southern 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
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actually incurred, the amount of GSR costs was estimated at December 31, 1995,
to be approximately $366 million on a present-value basis.
Storage Fields
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. Based on operating experience, Southern had sought to have 21 Bcf of the
certificated working storage capacity of Muldon reclassified to cushion gas,
resulting in a certificated working storage capacity of 31 Bcf of gas. The FERC
approved Southern's reclassification as part of the Customer Settlement.
Southern agreed to review, in the fall of 1995 and 1996, the amount of storage
at Muldon that had been reclassified to cushion gas and to report its
conclusions to its customers. If, as a result of either review, Southern
determines that additional working storage capacity may be made available to its
customers, it must promptly offer such capacity to them. Otherwise, the
reclassification of 21 Bcf of working storage gas to cushion gas at Muldon
cannot be challenged until Southern files a new general rate case. In January
1996 Southern informed its customers that the results of its 1995 review
supported the reclassification and that Southern proposed no adjustment to the
total level of working storage gas at Muldon at this time.
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is
a 50-percent participant, owns a large underground natural gas storage field
located in Louisiana that is operated by Southern and provides storage service
to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc.,
and their customers. The Bear Creek Storage Field has a total certificated
working storage capacity of 65 Bcf of gas, half of which is committed to
Southern. At December 31, 1995, Bear Creek's gross facilities cost was
$247,329,000, its net facilities cost was $159,348,000, and its participants'
equity was $96,008,000. Southern had an investment in Bear Creek, including its
equity in undistributed earnings, of $48,004,000 at December 31, 1995.
Under the terms of Order No. 636, effective November 1, 1993, Southern
commenced providing contract storage services as part of its unbundled and
restructured services. Consequently, most of Southern's working storage capacity
at Muldon and its half of Bear Creek are now used for such services.
Markets -- Transportation and Sales
As described above, effective November 1, 1993, Southern and South Georgia
(collectively "Southern" unless the context indicates otherwise), restructured
their services in compliance with FERC Order No. 636 by separating their
transportation, storage, and merchant services. With the exception of some
limited sales necessary to dispose of its gas supply remaining under contract,
Southern essentially became solely a transporter of natural gas. Effective May
5, 1992, South Georgia had converted all its sales service to
transportation-only service and Southern had begun to provide a gas sales
service to South Georgia's former sales customers.
Transportation service is rendered by Southern for its distribution
customers, direct industrial customers and other end-users, gas producers, other
gas pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. During 1995
Southern transported gas to nine gas distribution companies, to 113 municipal
distributors and gas districts, to eight connecting interstate pipeline
companies, and to 56 industrial end-users. The principal industries served
directly by Southern's pipeline system and indirectly through its customers'
distribution systems include the chemical, pulp and paper, textile, primary
metals, stone, clay, and glass industries.
Transportation service is provided under rate schedules that are subject to
FERC regulatory authority. Rates for transportation service depend on whether
such service is on a firm or interruptible basis and the location of such
service on Southern's pipeline system. Transportation rates for interruptible
service (i.e., service of a lower priority than firm transportation) are charged
for actual volumes transported. Firm transportation service also includes a
reservation charge designed so that the customer pays for a significant portion
of the service each month based on a transportation demand volume regardless of
the actual volume transported. Rates for transportation service are discounted
by Southern in individual instances to respond to competition in the markets it
serves.
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Transportation volumes in 1995 for Southern and all of its subsidiaries
were 1,016 Bcf, compared with transportation volumes in 1994 of 886 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1995 sales of 93 Bcf and 1994 sales of 103 Bcf. With the exception
of eight Bcf of sales made by Sonat Intrastate-Alabama Inc. in 1995, the volumes
associated with the 1995 and 1994 sales are not accounted for as sales volumes,
but rather are included in transportation volumes because, as required by Order
No. 636, all sales are now made at the receipt points where the gas enters
Southern's pipeline system.
Pursuant to the Customer Settlement, 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 has amended one of its firm transportation
contracts totaling 28 million cubic feet per day to extend its primary term for
a period of three years beginning March 1, 1995. Such extension is in addition
to the remaining 160 million cubic feet per day of South Carolina's firm
transportation services that remain in effect under terms extending from 1999
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 two largest market areas is fully
subscribed.
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
gas purchase contracts through which it had traditionally obtained its long-term
gas supply. Some of these contracts contain clauses requiring Southern either to
purchase minimum volumes of gas under the contract or to pay for it
("take-or-pay" clauses). Although 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. 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 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. Subject to the
cost-sharing mechanism in the Customer Settlement described above, Southern will
recover in accordance with the Customer Settlement or, pending final approval of
the Customer Settlement, will file to recover as a GSR cost pursuant to Order
No. 636, the difference between the cost associated with the gas supply
contracts and the revenue from the sale agreements and month-to-month sales as
well as any cost previously incurred or to be incurred as a result of Order No.
636 to terminate or to reduce the price under Southern's remaining gas supply
contracts.
Transportation and sales by Southern to two distribution customers, Atlanta
Gas Light Company and its subsidiary, Chattanooga Gas Company, and Alabama Gas
Corporation, accounted for approximately 29 percent and 14 percent,
respectively, of Southern's 1995 consolidated revenues. Atlanta and Alabama Gas
were the only two customers that accounted for ten percent or more of Southern's
consolidated revenues for 1995.
Southern continues to pursue growth 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. Most of the proposed 76 million cubic feet per day
expansion is supported by long-term firm transportation agreements with four
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
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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. See
Item 3. Legal Proceedings below. This company has also opposed the system
expansion application at the FERC. Southern cannot predict the outcome of this
litigation or the FERC proceeding.
In April 1995 Southern received authorization from the FERC to construct a
21-mile pipeline extension to a delivery point near Chattanooga, Tennessee, to
deliver natural gas to a group of new customers who signed 10-year contracts for
firm transportation volumes totaling approximately 14 million cubic feet per
day. This $11 million project was placed in service November 1, 1995. Southern
also received approval from the FERC on December 5, 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. The in-service date of this $13 million expansion project is
expected to be November 1996.
In addition, in October 1995 Southern received FERC approval for a
production area expansion project with a capital cost of $15 million. Southern
plans 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 its offshore Louisiana supply system through Toca by 140 million
cubic feet per day. This expansion, which is supported by a 10-year firm
transportation agreement with Shell Offshore Inc., is expected to be in service
in early 1997.
In early 1995 Southern 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 sought requests for
additional firm transportation services. Southern received requests for
additional firm transportation services in its largest market area totaling
approximately 35 million cubic feet per day. Southern is studying the economic
feasibility of an expansion of its system to serve these requests and
anticipates that it will file an application for authorization to construct and
operate the necessary facilities later this year. If FERC approval is received,
the in-service date for the firm transportation service is expected to be
November 1997.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
Gas Supplies
During 1995 Southern reduced the number of its existing long-term gas
supply contracts from 31 to 15. As a result of the prohibition in Order No. 636
against interstate pipelines providing bundled merchant services, Southern does
not anticipate at this time that it will enter into new gas purchase contracts
in order to continue to provide a merchant sales service. Except for the sales
of its remaining gas supply described above, Southern's participation in gas
supply activities will be limited to the purchase and sale of minimal volumes of
gas from time to time as may be required for system management purposes, and
activities related to the attachment of new gas supplies to its system so that
the shippers on Southern's system will have the opportunity to purchase those
supplies in order to meet their requirements.
Potential Royalty Claims
In connection with certain of its settlements of take-or-pay claims made by
producers during the 1980s, Southern indemnified the producers against various
potential claims related to the settlement that might be made by royalty owners.
Southern has thus far been notified by several producers of potential royalty
claims under the indemnity provisions of various settlement agreements. The
claims for which Southern may have to indemnify these producers have been
asserted by both private lessors with respect to onshore leases and the Minerals
Management Service of the U.S. Department of the Interior with respect to
federal offshore and Indian leases. Southern has spent approximately $1.2
million to date in settlement of claims of this type. Under the terms of a 1988
take-or-pay recovery settlement with Southern's customers, Southern is entitled
to seek recovery of a portion of such costs related to federal offshore or
Indian leases under the FERC's Order
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No. 500 cost-sharing procedures. The customers are entitled, however, to
challenge any effort by Southern to recover those costs. Southern is unable to
state whether any additional royalty claims based on Southern's indemnification
provisions in its take-or-pay settlements will be asserted or to predict the
outcome of any such claims or resulting litigation or of Southern's efforts to
recover from its customers any amounts it may pay, but believes that these
claims will not have a material adverse effect on Southern's financial condition
or results of operations.
Sea Robin Pipeline Company
Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of
Southern, owns and operates a 438-mile pipeline system located in the Gulf of
Mexico through which it gathers natural gas and condensate for others and
delivers those products to shore for condensate removal and gas processing and
redelivery to five downstream transmission pipelines. See the system map on page
I-9. Sea Robin is a transportation-only pipeline that has restructured in
compliance with FERC Order No. 636. Sea Robin transported approximately 302 Bcf
of natural gas in 1995 compared to 282 Bcf in 1994. These Sea Robin volumes are
included within the Southern transportation volumes discussed earlier.
In January 1995 Sea Robin filed with the FERC a petition for a declaratory
order that its 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 is pending before the FERC. In addition to
their protests in the gathering proceeding, several of the shippers on Sea
Robin's pipeline system filed with the FERC in February 1995 a complaint against
Sea Robin under Section 5 of the NGA claiming that Sea Robin's rates are unjust
and unreasonable and should be reduced. 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. Any reduction in Sea Robin's rates as
a result of this complaint could be implemented only on a prospective basis. Sea
Robin is unable to predict the outcome of either of these proceedings.
Sonat Intrastate-Alabama Inc.
Sonat Intrastate-Alabama Inc. ("SIA"), a wholly owned subsidiary of
Southern, owns a 454-mile intrastate pipeline system extending from natural gas
fields and coal seam gas production areas in the Black Warrior Basin in
northwest and central Alabama to connections with customers in Alabama, as well
as interconnections with three other pipelines, including Southern. See the
system map on page I-9. SIA's throughput in 1995 was approximately 28 Bcf
compared to 38 Bcf in 1994.
South Georgia Natural Gas Company
South Georgia, a wholly owned subsidiary of Southern, owns and operates a
909-mile interstate natural gas transmission system located in eastern Alabama,
southern Georgia, and the Florida Panhandle. See the system map on page I-9. As
described above, South Georgia has restructured pursuant to Order No. 636 and is
a transportation-only pipeline. South Georgia transported approximately 38 Bcf
of natural gas in 1995 compared to 34 Bcf in 1994. These South Georgia volumes
are included within the Southern transportation volumes discussed earlier.
Southern Energy Company
Southern Energy Company ("Southern Energy"), a wholly owned subsidiary of
Southern, owns a liquefied natural gas ("LNG") receiving terminal near Savannah,
Georgia, which was constructed for a project, now terminated, to import LNG from
Algeria. The terminal has been inactive since the early 1980s. On July 22, 1992,
the FERC issued an order approving a settlement relating to Southern Energy's
LNG facilities. The settlement resolved a number of outstanding rate and
accounting issues and preserved an option for customers of Southern Energy to
obtain LNG through this facility at least through the year 1999.
I-7
<PAGE> 10
During 1995 Southern Energy conducted an open season seeking requests from
customers for a new LNG service that would be provided through its LNG
facilities in Savannah. Southern Energy is evaluating the requests received from
potential customers during the open season to determine whether it is
economically feasible to reactivate its LNG facilities. If sufficient
commitments are obtained and the necessary regulatory approvals are received,
the in-service date for the LNG service is expected to be in 1998.
Competition and Current Business Conditions
The natural gas transmission industry, although regulated, is very
competitive. Since the mid-1980s customers have switched their volumes from a
bundled merchant service to transportation service, acquiring gas supply under
unregulated arrangements. Southern competes with several pipelines for the
transportation business of its customers and at times discounts its
transportation rates in order to maintain market share. Southern continues to
provide a limited merchant service with gas supply remaining under contract and,
in this capacity, competes with other suppliers, pipelines, gas producers,
marketers, and alternate fuels.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, electricity, and heavy crude oil. An important
consideration in Southern's markets is the ability of natural gas to compete
with alternate fuels. Residual fuel oil, the principal competitive alternate
fuel in Southern's market area, has been at certain times in the past, and may
be at times in the future, priced at or below the comparable price of natural
gas in industrial and electric generation markets. Some parts of Southern's
market area are also served by one or more other pipeline systems that can
provide transportation as well as sales service in competition with Southern.
Southern's two largest customers are both able to obtain a portion of their
natural gas requirements through transportation by other pipelines.
FERC's Order No. 636 mandates a rate design, known as
straight-fixed-variable ("SFV"), that is designed to allow pipelines to recover
substantially all fixed costs, a return on equity, and income taxes in the
capacity reservation component of their rates. The firm transportation customers
of Southern (with the exception of certain small customers) must pay these
reservation charges regardless of the volumes shipped. Accordingly, the SFV rate
design should result in greater stability in the revenues, earnings, and cash
flows of interstate pipelines, including Southern, for the foreseeable future
when compared to what was experienced prior to 1994.
I-8
<PAGE> 11
(MAP)
I-9
<PAGE> 12
Governmental Regulation
Southern is subject to regulation by the FERC and by the Secretary of
Energy under the NGA, the NGPA, and the Department of Energy Organization Act of
1977 (the "DOE Act"). Southern's interstate transmission subsidiaries are also
subject to such regulation.
The NGA, modified by the DOE Act, grants to the FERC authority to regulate
the construction and operation of pipeline and related facilities utilized in
the transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities. Southern and its
interstate transmission subsidiaries hold required certificates of public
convenience and necessity issued by the FERC authorizing them to construct and
operate all pipelines, facilities, and properties now in operation for which
certificates are required, and to transport and sell natural gas in interstate
commerce.
The FERC also has authority to regulate the transportation of natural gas
in interstate commerce and the sale of natural gas in interstate commerce for
resale. Although the FERC still retains jurisdiction over their resale rates,
following the implementation of Order No. 636, Southern and other interstate
pipeline companies are now permitted to charge market-based rates for gas sold
in interstate commerce for resale. Transportation rates of interstate pipeline
companies remain fully regulated. The maximum transportation rates for gas
delivered by SIA into interstate commerce are also regulated by the FERC. As
necessary, Southern and its transmission subsidiaries file with the FERC
applications for changes in their transportation rates and charges designed to
allow them to recover fully their costs of providing such service to their
customers, including a reasonable rate of return. These rates are normally
allowed to become effective, subject to refund, until such time as the FERC
rules on the actual level of rates. See "Rate and Regulatory Proceedings" below.
Regulation of the importation of natural gas is vested in the Secretary of
Energy, who has delegated various aspects of this import jurisdiction to the
FERC and the ERA.
Southern and its natural gas transmission subsidiaries, including SIA, are
subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which
regulates pipeline and LNG plant safety requirements, and to the National
Environmental Policy Act and other environmental legislation. Southern and its
operating subsidiaries have a continuing program of inspection designed to keep
all of their facilities in compliance with pollution control and pipeline safety
requirements and believe that they are in substantial compliance with applicable
requirements. Southern's capital expenditures to comply with environmental and
pipeline safety regulations were approximately $8 million in 1995 compared to
$13 million in 1994. Southern anticipates that such expenditures will be
approximately $11 million in 1996.
Rate and Regulatory Proceedings. Various matters pending before the FERC,
or before the courts on appeal from the FERC, relating to, or that could affect,
Southern or one or more of its subsidiaries are described in Part II of this
report in Note 8 of the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Rate Matters," which are incorporated herein by
reference. As described in Note 8, several general rate changes have been
implemented by Southern and remain subject to refund and Southern filed with the
FERC on March 15, 1995, a Customer Settlement (described above), which was
approved by the FERC in a Settlement Order issued September 29, 1995 (described
above), that would resolve all outstanding rate and GSR cost recovery
proceedings as to supporting customers.
Environmental Matters
Various environmental matters relating to, or that could affect, Southern
or one or more of its subsidiaries are described in Part II of this report in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Environmental Issues," which is incorporated
herein by reference.
Forward Looking Statements
This report, including the information incorporated by reference herein,
contains 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
I-10
<PAGE> 13
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.
ITEM 2. PROPERTIES
A description of Southern's and its subsidiaries' principal properties is
included under Item 1. Business above and is hereby incorporated by reference
herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding certain proceedings pending before federal
regulatory agencies, see Note 8 of the Notes to Consolidated Financial
Statements in Part II of this report. For information regarding various
environmental matters relating to, or that could affect, Southern or one or more
of its subsidiaries, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this report under the caption
"Environmental Issues."
Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light
Company was filed in January 1992 in the U.S. District Court for the Southern
District of Georgia. This lawsuit was filed against Southern and Atlanta Gas
Light Company ("Atlanta") for alleged violation of the antitrust laws in
connection with Southern's refusal to provide direct service to the plaintiff,
Arcadian Corporation ("Arcadian"). Arcadian claims actual damages of at least
$15 million, which could be trebled under the antitrust laws. Southern and
Arcadian executed an agreement settling this lawsuit on November 30, 1993. The
settlement provides that the lawsuit will be dismissed with prejudice upon
final, nonappealable approval by the FERC of the direct connection and
transportation service requested by Arcadian. Pending such approval the lawsuit
has been stayed. On May 12, 1994, the FERC issued an order granting such
approval. Atlanta and others sought rehearing on the May 12 order. Atlanta also
filed a petition for review of such order in the Court of Appeals. The FERC has
not acted upon the rehearing requests other than to give itself more time to
consider the rehearing petition. While management believes it has meritorious
defenses and intends to defend the suit vigorously if the stay were to be
lifted, given the inherently unpredictable nature of litigation and the
relatively early state of discovery in the case, management is unable to predict
the ultimate outcome of the proceeding if it were to go forward.
Alabama-Tennessee Natural Gas Company v. Southern Natural Gas Company and
City of Huntsville was filed in February 1996 in state court in Jefferson
County, Alabama. In this lawsuit, Alabama-Tennessee Natural Gas Company, which
currently provides natural gas transportation service to the city of Huntsville,
Alabama, is seeking to have a 20-year service agreement Southern entered into
with Huntsville to provide 40 million cubic feet per day of firm transportation
service set aside as violative of Alabama's competitive bid laws and the Alabama
Constitution. The service agreement with Huntsville supports a proposed 76
million cubic feet per day, $53 million expansion project for which Southern has
filed an application seeking FERC approval. Management believes that Southern's
service agreement with Huntsville is exempt from the Alabama competitive bid
laws and Huntsville has previously requested and obtained an opinion of the
Attorney General of Alabama to such effect. Management, however, is unable to
predict the outcome of this litigation.
Southern and its subsidiaries are involved in a number of other lawsuits,
all of which have arisen in the ordinary course of business. Southern does not
believe that any ultimate liability resulting from any of these other pending
lawsuits will have a material adverse effect on it.
I-11
<PAGE> 14
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
All of the common stock of Southern is held by its parent company,
Sonat Inc.; accordingly, there is no market for the stock. The following table
shows the quarterly cash dividends paid on Southern's common stock during the
past two years.
<TABLE>
<CAPTION>
Quarter Total Dividends Paid
------- --------------------
<S> <C>
1995
----
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth 12,400,000
-----------
$49,600,000
===========
1994
----
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth (1) 12,400,000
-----------
$49,600,000
===========
</TABLE>
(1) Excludes a special noncash dividend declared by Southern of $100
million to Sonat, which was satisfied by forgiveness of an intercompany loan to
Sonat.
II-1
<PAGE> 15
Item 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for Southern and its subsidiaries
is shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 661.6 $ 727.2 $ 832.6 $ 728.6 $ 760.4
Costs and Expenses (1) 502.5 634.4 686.0 578.0 623.9
-------- -------- -------- -------- --------
Operating Income 159.1 92.8 146.6 150.6 136.5
Other Income, Net 10.0 9.5 9.4 8.9 10.4
Interest Expense, Net (35.0) (26.2) (28.4) (32.8) (27.6)
-------- -------- -------- -------- --------
Income Before Income Taxes 134.1 76.1 127.6 126.7 119.3
Income Taxes 51.6 28.3 43.5 47.3 45.9
-------- -------- -------- -------- --------
Net Income (2)(3) $ 82.5 $ 47.8 $ 84.1 $ 79.4 $ 73.4
======== ======== ======== ======== ========
Assets $1,437.7 $1,375.2 $1,531.2 $1,425.7 $1,426.5
Debt Maturing Within One Year $ 21.9 $ 7.0 $ 107.3 $ 6.8 $ 6.1
Long-Term Debt 317.6 323.9 329.4 435.5 340.1
Stockholder's Equity 574.1 519.2 620.0 585.5 655.7
-------- -------- -------- -------- --------
Total Capitalization $ 913.6 $ 850.1 $1,056.7 $1,027.8 $1,001.9
======== ======== ======== ======== ========
</TABLE>
(1) In accordance with a new FERC policy, certain fuel revenues and
fuel operating costs have been netted. Therefore revenue and operating costs
have been restated for 1994.
(2) Net income in 1995 includes a loss of $6.8 million on
unrecoverable gas contract realignment costs at Southern.
(3) Net income in 1994 includes a charge of $33.5 million related to
the recognition of significant unusual items. See Customer Settlement
discussion in Note 8 of the Notes to Consolidated Financial Statements.
II-2
<PAGE> 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
SOUTHERN NATURAL GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The principal business of Southern Natural Gas Company and its
subsidiaries (Southern) is the interstate transmission of natural gas in the
southeastern United States, which is regulated by the Federal Energy Regulatory
Commission (FERC).
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. Most of the proposed 76-
million-cubic-feet-per-day expansion is supported by long-term firm
transportation agreements with four 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 public bid laws and the Alabama Constitution. This company has also
opposed the system expansion application at the FERC. Southern cannot predict
the outcome of this litigation or the FERC proceeding.
In April 1995, Southern received authorization from the FERC to
construct a 21-mile pipeline extension to a delivery point near Chattanooga,
Tennessee, to deliver natural gas to a group of new customers that signed
10-year contracts for firm transportation volumes totaling approximately 14
million cubic feet per day. This $11 million project was placed in service
November 1, 1995. Southern also received approval from the FERC on December 5,
1995, to expand its north main pipeline system to provide approximately 27
million cubic feet per day of additional firm capacity. This project is
supported by 10-year firm transportation agreements with 15 customers in
Alabama, Georgia and Tennessee. The in-service date of this $13 million
expansion project is expected to be November 1996.
In addition, on October 16, 1995, Southern received FERC approval for
a production-area expansion project with a capital cost of $15 million.
Southern plans 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 its offshore Louisiana supply system through Toca by
140 million cubic feet per day. This expansion, which is
II-3
<PAGE> 17
supported by a 10-year firm transportation agreement with Shell Offshore Inc.,
is expected to be in service in early 1997.
In early 1995, Southern 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 sought requests for
additional firm transportation services and for a new liquefied natural gas
(LNG) service. Southern received requests for additional firm transportation
services in its largest market area totaling approximately 35 million cubic
feet per day. Southern is studying the economic feasibility of an expansion
of its system to serve these requests and anticipates that it will file an
application for authorization to construct and operate the necessary facilities
later this year. If FERC approval is received, the in-service date for the
firm transportation service is expected to be November 1997. Requests for LNG
service are still being evaluated. If sufficient commitments are obtained and
the necessary regulatory approvals are received, the in-service date for the
LNG service is expected to be in 1998. The LNG service would be provided at an
existing LNG storage terminal near Savannah, Georgia, that is owned by Southern
Energy Company, a wholly owned subsidiary of Southern. The LNG facility was
constructed in 1978 but was taken out of service in 1980.
In January 1995, 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. In February 1995, several of Sea Robin's
shippers filed with the FERC a complaint against Sea Robin under Section 5 of
the Natural Gas Act claiming that Sea Robin's rates are unjust and
unreasonable. 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. Sea
Robin cannot predict the outcome of these proceedings.
II-4
<PAGE> 18
OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Gas sales $ 195 $234 $541
Market transportation and storage (1) 325 321 170
Supply transportation 51 37 50
Other 91 135 72
------ ---- ----
Total Revenues 662 727 833
------ ---- ----
Costs and Expenses:
Natural gas cost 191 229 364
Transition cost recovery and
gas purchase contract
settlement costs 58 116 52
Operating and maintenance 96 151 103
General and administrative 86 72 85
Depreciation and amortization (1) 52 47 64
Taxes, other than income 20 19 18
------ ---- ----
503 634 686
------ ---- ----
Operating Income $ 159 $ 93 $147
====== ==== ====
Equity in Earnings of
Unconsolidated Affiliates $ 9 $ 9 $ 9
====== ==== ====
(Billion Cubic Feet)
Volumes (2):
Intrastate gas sales 8 - -
Interstate gas sales (excludes storage gas) - - 73
Market transportation 636 551 435
------ ---- ----
Total Market Throughput 644 551 508
Supply transportation 372 335 328
------ ---- ----
Total Volumes 1,016 886 836
====== ==== ====
Transition gas sales 85 103 19
====== ==== ====
</TABLE>
(1) Southern's transportation revenues and depreciation expense in 1994
include a $16 million decrease reflecting a retroactive reduction in certain
depreciation rates.
(2) Volumes for 1995 include 38 billion cubic feet of gas associated with
three subsidiaries of Sonat Inc., Southern's parent, that were transferred to
Southern on January 1, 1995, which were not included in Southern's 1994 or
1993 volumes.
II-5
<PAGE> 19
OPERATING INCOME
The table below shows unusual items that affect operating income. The
table is presented because Southern believes this information enhances the
analysis of results of operations.
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating Income $159 $ 93 $147
Unusual Expenses Included Above:
Rate settlement and GSR costs 11 27 -
Reduction in force and other - 34 -
Tax adjustments - - 2
---- ---- ----
Operating Income Excluding Unusual Items $170 $154 $149
==== ==== ====
</TABLE>
1995 VERSUS 1994. Operating income, excluding the unusual items
discussed below, increased $16 million in 1995 due to lower operating expenses
and the sale of previously unsubscribed firm transportation capacity.
The unusual item in 1995 of $11 million increased operating and
maintenance expense in recognition of Southern's share of gas supply
realignment (GSR) costs that will not be recoverable. The unusual items in
1994 included in Southern's operating expenses consisted of a $27 million
charge associated with recognition of the comprehensive customer rate
settlement (the Customer Settlement) and a $34 million provision primarily
relating to regulatory assets not recoverable as a result of the Customer
Settlement, including $19 million attributable to a corporate restructuring
undertaken in 1994. See Rate Matters for a discussion of the Customer
Settlement.
Southern's gas sales revenues and gas costs in 1995 and 1994 represent
recognition of gas sales made from supply remaining under contract after the
implementation of Order No. 636. The volumes associated with these sales are
not accounted for as sales volumes, but rather are included in transportation
volumes because all sales are now made at the wellhead, as required by Order
No. 636.
Market transportation and storage revenues increased in 1995 due in
part to a $16 million revenue reserve provision in 1994 relating to a
retroactive reduction in certain depreciation rates. The effect on operating
revenue of this reduction was partially offset by lower settlement rates that
were placed into effect on March 1, 1995. Supply transportation revenues
increased 38 percent due to increased volumes under Southern's new
transportation contract with Florida Gas Transmission Company, a subsidiary of
Citrus Corp. (50 percent owned by Sonat). Other Revenue and Transition Cost
Recovery decreased due to declining billings and lower recovery rates for GSR
costs in 1995.
Operating and maintenance expense, excluding the unusual items
discussed above, decreased 6 percent in 1995 reflecting lower fuel costs and
the impact
II-6
<PAGE> 20
of the 1994 fourth quarter restructuring. General and administrative expense
increased 19 percent in 1995 due to higher employee benefit expenses related to
1993 and 1994 special early retirement options (SERO's) and higher stock-based
compensation. Depreciation and amortization expense increased in 1995 due to
the $16 million retroactive adjustment in 1994 partially offset by lower
depreciation rates as a result of the Customer Settlement.
1994 VERSUS 1993. Excluding unusual items, Southern's operating
income for 1994 increased $5 million when compared with 1993 as a result of
higher transportation revenue resulting primarily from the sale of unsubscribed
firm transportation capacity and lower general and administrative costs.
Southern's gas sales revenues and gas costs were down significantly in
1994 as a result of implementing Order No. 636 and primarily represent
recognition of gas sales made from supply remaining under contract after the
implementation of Order No. 636. Another factor in the decrease in revenues
was the recovery of $42 million of Order No. 500 costs in 1993 revenues.
Higher transportation revenues and volumes are a result of the shift from sales
to transportation due to the implementation of Order No. 636. Other revenue
also increased in 1994 due to the recovery of transition costs of $108 million
related to the implementation of Order No. 636.
General and administrative costs decreased primarily due to lower
employee costs, including stock-based compensation expenses.
TRANSPORTATION CONTRACTS
Pursuant to the Customer Settlement (described in Note 8 of the Notes
to 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 (SCPC) has amended one of its firm
transportation contracts totaling 28 million cubic feet per day, to extend its
primary term for a period of three years beginning March 1, 1995. Such
extension is in addition to the remaining 160 million cubic feet per day of
SCPC's firm transportation services that remain in effect under terms extending
from 1999 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 two largest
market areas 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
II-7
<PAGE> 21
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 76 percent and
72 percent in 1996 and 1997, respectively, of the purchase commitments
described below. Of such purchase commitments, the percent that is priced in
excess of current spot-market prices is 19 percent in 1996, 23 percent in 1997,
and substantially all of the volumes for years thereafter. (See Note 8 of the
Notes to 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 years 1996 through 2000 are estimated as follows:
<TABLE>
<CAPTION>
Estimated Purchase Commitments
-----------------------------------------------------------------------------------------
(In Millions)
-------------
<S> <C>
1996 $154
1997 137
1998 38
1999 35
2000 31
</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.
See Note 8 of the Notes to 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. The Customer Settlement resulted in reducing Southern's filed
rates to more competitive levels, reduced somewhat reported revenues and
reduced depreciation expense in 1995. Southern implemented reduced settlement
rates for parties that supported the Customer Settlement effective March 1,
1995, pursuant to interim agreements with its customers pending final FERC
action on petition for rehearing of the Customer Settlement filed by contesting
parties. (See Note 8 of the Notes to Consolidated Financial
II-8
<PAGE> 22
Statements for a discussion of the Customer Settlement and other rate matters.)
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OTHER INCOME, NET $10 $10 $ 9
</TABLE>
Other income, net, primarily represents Southern's share of earnings
from Bear Creek Storage Company. Equity in earnings from Bear Creek was flat
for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INTEREST EXPENSE, NET $35 $26 $28
</TABLE>
1995 VERSUS 1994. Net interest expense for 1995 increased due to
lower interest income and slightly higher interest expense. Interest income
was lower due to lower average balances of intercompany loans to Sonat in 1995.
A special noncash dividend in December 1994 of $100 million declared by
Southern to Sonat, which was satisfied by forgiveness of an intercompany loan
to Sonat, was primarily responsible for the decrease in intercompany loans.
Interest expense was slightly higher in 1995 versus 1994. Interest expense on
revenue reserves was higher due to higher average reserve balances. Partly
offsetting the increase was lower interest expense on outside debt, due to
lower average debt levels and lower average interest rates.
1994 VERSUS 1993. Excluding the effect of the accrual in 1993 of $8
million of interest expense relating to certain income tax issues, net interest
expense increased due to lower interest income, partially offset by lower
interest expense. Interest income was lower due to lower average rates on
notes from affiliates. Interest expense was lower primarily due to the
redemption of the $100 million 9 5/8 Percent Notes in 1994, which was financed
by Sonat's partial repayment of its intercompany loan from Southern.
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INCOME TAXES $52 $28 $44
</TABLE>
1995 VERSUS 1994. Income taxes increased in 1995 compared to 1994 due
to higher pretax income.
1994 VERSUS 1993. Income tax expense decreased in 1994 compared to
1993 due to lower pretax income. Income taxes in 1993 included $4 million
(federal and state) of positive tax adjustments, including the settlement of
the 1983-1985 federal income tax returns and certain other tax issues.
II-9
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES $39 $199 $197
</TABLE>
1995 VERSUS 1994. Several factors contributed to the $160 million
decrease in cash flows from operations in 1995 compared to 1994. A $45 million
payment to Exxon and the funding of a $42 million GSR liability were the
principal expenditures responsible for the $99 million change in net payments
for gas supply realignment costs. On March 1, 1995, Southern implemented
reduced rates and ceased collection of additional revenues, which is reflected
in the $64 million reduction in cash flows from regulatory reserves. The
increase in deferred income taxes reflects the impact of the GSR payments, the
cessation of collecting revenues subject to refund and the accounting for
Southern's Customer Settlement. In 1994 Southern completed recovery of its
take-or-pay costs, which resulted in the $19 million reduction in recoveries of
take-or-pay costs. The caption Other in the Consolidated Statement of Cash
Flow primarily consists of certain transition costs deferred for collection in
future periods.
1994 VERSUS 1993. Net cash provided by operating activities in 1994
was relatively even with 1993. The decrease in depreciation expense reflects
an adjustment and the change in depreciation rates, which were discussed
earlier. The increase in the change in regulatory reserves primarily reflects
the continued collection of revenues in 1994 subject to refund. Deferred taxes
are provided on these revenue reserves, which resulted in an increase in the
balance of deferred tax assets (see Note 7 of the Notes to Consolidated
Financial Statements). The $147 million change in gas supply realignment costs
was a result of net recoveries of $19 million in 1994 compared with net
payments of $128 million in 1993. In 1994 Southern completed recovery of its
take-or-pay costs, resulting in the $33 million decrease in the change in
natural gas purchase contract settlement costs compared with 1993. The $49
million decrease in the change in inventories reflects the sale, pursuant to
Order No. 636, of storage gas that was in inventory at December 31, 1992. The
$40 million decrease in the change in accounts payable is the result of the
change in Southern's business under Order No. 636, which reduced purchased gas
volumes. The primary reason for the $44 million change in other current assets
and liabilities was the settlement of gas imbalances in 1994 allowed under
Order No. 636. The amount in Other in 1994 includes a $55 million provision
for the Customer Settlement discussed in Note 8 of the Notes to Consolidated
Financial Statements. The caption Other also includes deferred revenue
credits.
II-10
<PAGE> 24
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INVESTING ACTIVITIES $ 1 $ (46) $(140)
</TABLE>
1995 VERSUS 1994. Net cash from investing activities provided $1
million in 1995 compared to the use of $46 million in 1994. The change was
attributable to loan repayments from Sonat, partially offset by an increase in
capital expenditures of $12 million.
1994 VERSUS 1993. Net cash used in investing activities in 1994
reflects loan repayments from Sonat while 1993 reflects increased loans to
Sonat. Loan repayments by Sonat to Southern in 1994 were used to retire $100
million of debt that matured in 1994. The increase in proceeds from disposal
of assets reflects receipt in 1994 of insurance proceeds of $7.1 million
related to damages from Hurricane Andrew. This increase is offset, however, by
a $9 million decrease in capital expenditures.
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
FINANCING ACTIVITIES $(41) $(157) $ (55)
</TABLE>
1995 VERSUS 1994. Net cash used in financing activities decreased
$116 million primarily due to the maturity and redemption of Southern's $100
million 9 5/8 Percent Notes in 1994, and Southern's borrowings from Sonat in
1995 of $15 million.
1994 VERSUS 1993. Net cash used in financing activities in 1994
reflects the maturity and redemption of Southern's $100 million 9 5/8 Percent
Notes.
CAPITAL EXPENDITURES
Capital expenditures for 1996, including unconsolidated affiliates,
are expected to be approximately $118 million, primarily for pipeline additions
and replacements and other projects, some of which have not yet received
regulatory approval.
CAPITAL RESOURCES
At December 31, 1995, Southern had lines of credit with a capacity of
$50 million. 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 the shelf registration in either late 1996 or early 1997.
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.
II-11
<PAGE> 25
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. This is the first such hedge transaction for
Southern.
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the
past several years and has not significantly affected the profitability of
Southern. Southern's Customer Settlement prohibits it from filing a general
rate case to be effective before March 1, 1998, which would be necessary for it
to recover higher costs of operations (see Note 8 of the Notes to Consolidated
Financial Statements).
CORPORATE RESTRUCTURING
In late 1994 and early 1995, Southern completed a reduction in
staffing levels through a combination of SEROs and involuntary terminations.
The SEROs and terminations, which involved 302 employees, or approximately 27
percent of Southern's workforce, occurred primarily in field locations, but
also included significant reductions in office employees. The total cost of
the program, which was recognized in 1994, amounted to $19 million. The
majority of the charge represented accelerated retirement costs, with the
remainder being primarily cash severance payments.
ENVIRONMENTAL ISSUES
Southern and its subsidiaries are subject to extensive federal, state
and local environmental laws and regulations that affect their operations.
Governmental authorities may enforce these laws and regulations with a variety
of civil and criminal enforcement measures, including monetary penalties,
assessment and remediation requirements, and injunctions as to future
activities.
Southern or an affiliate has been notified that one of them is or may
be a potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) in connection with a total of
five Superfund sites. In these cases, Southern has determined that the
aggregate maximum amount of loss reasonably likely to be named by it, after
giving effect to likely contributions by other PRPs would not be material to
its financial position or results of operations. However, liability for PRPs
under CERCLA (and applicable state law) is joint and several among all PRPs.
Although volumetric allocation is a factor in assessing liability, it is not
necessarily determinative; thus, the ultimate liability at any of these sites
could be substantially greater than the maximum amounts estimated by Southern.
II-12
<PAGE> 26
In the operation of their natural gas pipeline systems, Southern and
its wholly owned subsidiary, South Georgia Natural Gas Company, have used, and
continue to use at several locations, gas meters containing elemental mercury.
Southern and South Georgia plan to remove all remaining mercury meters during
the course of regularly scheduled facilities upgrades. Mercury and mercury
meters are handled pursuant to procedures that are designed to protect
employees and the environment and to comply with Occupational Safety and Health
Administration standards. It is generally believed in the natural gas pipeline
industry that, in the course of normal maintenance and replacement operations,
elemental mercury may have been released from mercury meters. Southern has
determined that its pipeline meters may in the past have been the source of
small releases of elemental mercury. As a result, Southern undertook the
characterization of 443 sites across the system during 1995. Approximately 190
remaining sites are scheduled to be characterized in the first quarter of 1996,
all of which are in Mississippi. After Southern evaluates the results of the
characterization, it plans to remediate contaminated sites within Georgia
during 1996, with remediation of sites elsewhere to be scheduled thereafter.
Southern is unable to estimate the cost of mercury remediation because costs
will vary based on a number of factors particular to each site and because
regulatory standards for elemental mercury cleanup are uncertain at this time.
Neither the Environmental Protection Agency nor any state in which Southern
operates has yet issued cleanup levels or guidelines with respect to
contamination from past releases or spills of mercury; however, Southern has
received informal guidance from the State of Louisiana with respect to cleanup
standards in that state that will also be used for remediation in other states
absent specific guidelines. Based on its experience with other remediation
projects, industry experience to date with remediation of mercury, and its
preliminary analysis of the possible extent of the contamination, Southern
believes that the cost of its characterization and remediation of any mercury
contamination will not be material to its financial position or results of
operations.
Southern generally considers environmental assessment and remediation
costs and costs associated with compliance with environmental standards to be
recoverable through rates since they are prudent costs incurred in the ordinary
course of business and, accordingly, generally will seek recovery of such costs
through rate filings, although no assurance can be given with regard to their
ultimate recovery. As described in Note 8 of the Notes to Consolidated
Financial Statements, however, Southern's Customer Settlement prevents Southern
from filing a general rate case to be effective prior to March 1, 1998.
NEW ACCOUNTING PRONOUNCEMENT
In 1995, Southern adopted Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The adoption had no effect on Southern's
Consolidated Financial Statements.
II-13
<PAGE> 27
FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis and the information provided
elsewhere in this document 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.
II-14
<PAGE> 28
Item 8. Financial Statements and Supplementary Data
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Southern Natural Gas Company
We have audited the accompanying consolidated balance sheets of Southern
Natural Gas Company and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in retained earnings and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Natural
Gas Company and Subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
January 18, 1996
II-15
<PAGE> 29
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 711 $ 975
Notes receivable, primarily from affiliates 103,845 173,060
Accounts receivable, including $11,899,809 in
1995 and $13,358,000 in 1994 from affiliates 118,542 122,514
Inventories 21,625 20,930
Gas imbalance receivables 15,919 35,053
Federal income taxes 13,160 -
Other 25,835 8,511
---------- ----------
Total Current Assets 299,637 361,043
---------- ----------
Investments:
Unconsolidated affiliates (Note 4) 48,631 46,908
Other investments 904 1,044
---------- ----------
49,535 47,952
---------- ----------
Plant, Property and Equipment (Note 5) 2,315,003 2,241,972
Less accumulated depreciation
and amortization 1,504,087 1,460,649
---------- ----------
810,916 781,323
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs (Note 8) 199,073 160,850
Other 78,548 24,042
---------- ----------
277,621 184,892
---------- ----------
$1,437,709 $1,375,210
========== ==========
</TABLE>
See accompanying notes.
II-16
<PAGE> 30
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Long-term debt due within one year (Note 6) $ 6,964 $ 6,964
Notes payable to affiliates 14,981 -
Accounts payable, including $19,606,697 in 1995
and $9,615,000 in 1994 to affiliates 56,787 42,356
Accrued income taxes 1,856 14,271
Accrued interest 15,404 19,505
Gas imbalance payables 17,196 35,112
Other 17,258 19,892
---------- ----------
Total Current Liabilities 130,446 138,100
---------- ----------
Long-Term Debt (Note 6) 317,627 323,907
---------- ----------
Deferred Credits and Other:
Deferred income taxes (Note 7) 80,956 43,812
Reserves for regulatory matters (Note 8) 181,798 183,343
Other 152,784 166,824
---------- ----------
415,538 393,979
---------- ----------
Commitments and Contingencies (Note 8)
Stockholder's Equity (Note 2):
Common stock, $3.75 par value; 1,000 shares
authorized and outstanding 4 4
Capital in excess of par value 100,612 78,631
Retained earnings 473,482 440,589
---------- ----------
574,098 519,224
---------- ----------
$1,437,709 $1,375,210
========== ==========
</TABLE>
See accompanying notes.
II-17
<PAGE> 31
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues (Note 9):
Natural gas sales $195,201 $233,667 $540,623
Transportation and storage 375,070 357,826 219,742
Other 91,325 135,686 72,284
-------- -------- --------
661,596 727,179 832,649
-------- -------- --------
Costs and Expenses:
Natural gas cost 191,260 229,137 364,551
Transition cost recovery and gas
purchase contract settlement costs 58,010 116,159 51,827
Operating and maintenance 96,097 151,732 102,666
General and administrative 85,361 71,988 85,256
Depreciation and amortization 52,274 46,576 63,611
Taxes, other than income 19,446 18,748 18,120
-------- -------- --------
502,448 634,340 686,031
-------- -------- --------
Operating Income 159,148 92,839 146,618
-------- -------- --------
Other Income, Net:
Equity in earnings of unconsolidated
affiliates (Note 4) 9,357 8,954 8,638
Other 588 576 810
-------- -------- --------
9,945 9,530 9,448
-------- -------- --------
Interest:
Interest income from affiliates 6,876 13,234 20,204
Interest income 1,373 1,947 3,621
Interest expense (43,467) (42,203) (52,598)
Interest capitalized 249 751 324
-------- -------- --------
(34,969) (26,271) (28,449)
-------- -------- --------
Income Before Income Taxes 134,124 76,098 127,617
Income Taxes (Note 7) 51,631 28,274 43,548
-------- -------- --------
Net Income $ 82,493 $ 47,824 $ 84,069
======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $440,589 $542,365 $507,896
Add:
Net income 82,493 47,824 84,069
Deduct:
Dividends 49,600 149,600 49,600
-------- -------- --------
Balance at End of Year $473,482 $440,589 $542,365
======== ======== ========
</TABLE>
See accompanying notes.
II-18
<PAGE> 32
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 82,493 $ 47,824 $ 84,069
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 52,274 46,576 63,611
Deferred income taxes 37,144 (43,315) (21,241)
Equity in earnings of unconsolidated
affiliates, less distributions (857) (1,454) (638)
Reserves for regulatory matters (1,545) 62,572 20,554
Gas supply realignment costs (38,223) 18,736 (127,986)
Funding of gas supply realignment
cost liability (42,330) - -
Natural gas purchase contract
settlement costs - 18,535 51,947
Change in:
Accounts receivable 6,349 6,096 6,687
Inventories (358) 2,716 51,446
Accounts payable 13,433 (27,942) 11,583
Accrued interest and income
taxes, net (28,224) (956) 1,085
Other current assets 766 2,289 35,263
Other current liabilities (21,692) (14,441) (3,522)
Other (19,735) 81,834 24,523
--------- --------- ---------
Net cash provided by operating
activities 39,495 199,070 197,381
--------- --------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (62,720) (51,206) (59,907)
Notes receivable from affiliates 63,030 (3,399) (82,151)
Proceeds from disposal of assets 1,323 8,986 2,360
Other, net (566) (69) (166)
--------- --------- ---------
Net cash provided by (used in)
investing activities 1,067 (45,688) (139,864)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt - - 675
Payments of long-term debt (6,280) (107,050) (6,310)
Changes in short-term borrowings 14,981 - -
--------- --------- ---------
Net changes in debt 8,701 (107,050) (5,635)
Dividends paid (49,600) (49,600) (49,600)
Other 73 - -
--------- --------- ---------
Net cash used in financing
activities (40,826) (156,650) (55,235)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents (264) (3,268) 2,282
Cash and Cash Equivalents at Beginning
of Year 975 4,243 1,961
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 711 $ 975 $ 4,243
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 29,160 $ 35,170 $ 37,521
Income taxes, net 44,804 71,079 73,591
</TABLE>
See accompanying notes.
II-19
<PAGE> 33
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description - Southern Natural Gas Company, which is a wholly
owned subsidiary of Sonat Inc., is primarily engaged in the transmission of
natural gas in interstate commerce. Its transmission systems are located in
the Southeastern United States. It transports gas to gas distributing
companies, municipalities and gas districts, connecting interstate pipeline
companies and industrial end-users. The principal industries served directly
by the natural gas transmission's pipeline system and indirectly through its
resale customers' distribution systems include the chemical, pulp and paper,
textile, primary metals, stone, clay and glass industries. For information
concerning major customers, see Note 9. For a description of financial
instruments, credit risk and contingencies, see Notes 3 and 8.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of Southern Natural Gas Company and its subsidiaries
(Southern). Intercompany transactions and accounts have been eliminated in
consolidation. The equity method of accounting is used for investments in
unconsolidated affiliates owned 50 percent or less.
Certain amounts in the 1994 and 1993 Consolidated Financial Statements
have been reclassified to conform with the 1995 presentation.
Use of Estimates in the Preparation of Financial Statements - In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories - At December 31, 1995, inventories consist primarily of
materials and supplies that are carried at cost.
Gas Imbalance Receivables and Payables - Gas imbalances represent the
difference between gas receipts from and gas deliveries to Southern's
transportation and storage customers. Gas imbalances arise when these
customers deliver more or less gas into the pipeline than they take out.
Imbalances incurred prior to implementation of Order No. 636 are settled
through exchange of gas. Imbalances incurred after implementation of Order No.
636 are settled monthly.
Plant, Property and Equipment, and Depreciation - Plant, property and
equipment is carried at cost. Southern generally provides for depreciation on
a composite basis. (See Note 5.)
Revenue Recognition - Southern recognizes revenue from natural gas
transportation in the period the service is provided. Reserves are provided on
revenues collected subject to refund when appropriate.
II-20
<PAGE> 34
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Environmental Expenditures - Southern provides for environmental
liabilities when environmental assessments and/or remediation are probable and
such costs can be reasonably estimated.
Income Taxes - Southern and its subsidiaries file federal income tax
returns on a consolidated basis with its parent and other members of its
affiliated group. For financial statement purposes, income taxes are provided
as though Southern and its subsidiaries file separate income tax returns;
however, those companies incurring losses are allocated the tax benefit of such
losses due to the consolidated return.
Southern and its subsidiaries follow a liability and asset approach in
accounting for income taxes. Deferred tax liabilities and assets are
determined using the tax rate for the period in which those amounts are
expected to be paid or received.
New Accounting Pronouncement - In 1995, Southern adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The adoption
had no impact on Southern's Consolidated Financial Statements.
2. CHANGES IN OPERATIONS
On January 1, 1995, Sonat transferred its investment in Sonat
Intrastate-Alabama Inc., Sonat Gathering Company and Sonat Ventures Inc. to
Southern. They had combined revenues of $19,562,000 and $17,946,000 and
combined net income of $76,300 and $174,000 for the years ended December 31,
1994 and 1993, respectively. Their combined net book value of $21,981,000 was
recorded as a capital contribution from Sonat.
3. FINANCIAL INSTRUMENTS
The carrying amounts and fair values of Southern's financial
instruments are as follows:
<TABLE>
<CAPTION>
Carrying Amounts Fair Value
---------------- ----------
(In Thousands)
<S> <C> <C>
DECEMBER 31, 1995
Cash $ 711 $ 711
Notes Receivable, Primarily from Affiliates 103,845 103,845
Gas Supply Realignment Costs 199,073 199,073
Notes Payable to Affiliates 14,981 14,981
Long-Term Debt 324,591 361,169
DECEMBER 31, 1994
Cash $ 975 $ 975
Notes Receivable, Primarily from Affiliates 173,060 173,060
Gas Supply Realignment Costs 160,850 160,850
Long-Term Debt 330,871 330,287
</TABLE>
II-21
<PAGE> 35
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by Southern in
estimating its fair value disclosures for financial instruments:
Cash, notes receivable from affiliates, gas supply realignment (GSR)
costs and notes payable to affiliates - The carrying amount reported in the
balance sheets approximates its fair value.
Long-term debt - The fair values of Southern's long-term debt are
based on quoted market values or estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
All of Southern's financial instruments are held for purposes other
than trading.
Southern's financial instruments from unaffiliated parties that are
exposed to concentrations of credit risk consist primarily of accounts
receivable and GSR costs which Southern expects to recover from its customers.
(See Note 8.)
Accounts receivable of Southern relate to business conducted with gas
distribution companies, municipalities, gas districts, industrial customers,
gas marketers, and interstate pipeline companies in the Southeast. Southern
performs ongoing credit evaluations of its customers' financial condition and,
in some circumstances, requires collateral from its customers.
4. UNCONSOLIDATED AFFILIATES
At December 31, 1995, Southern's investment in unconsolidated
affiliates totaled $48.6 million and equaled its share of underlying equity in
net assets of the investees. Through December 31, 1995, Southern's cumulative
equity in earnings of its unconsolidated affiliates was $144.3 million and
cumulative dividends received from them totaled $133.3 million.
Southern owns 50 percent of Bear Creek Storage Company, an underground
gas storage company. The following is summarized financial information for
Bear Creek. No provision for income taxes has been included since its income
taxes are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues $36,167 $35,655 $36,566
Expenses:
Operating expenses 5,408 5,303 6,137
Depreciation 5,399 5,396 5,397
Other expenses, net 6,167 7,048 7,756
------- ------- -------
Income Reported $19,193 $17,908 $17,276
======= ======= =======
</TABLE>
II-22
<PAGE> 36
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Current $ 7,438 $ 6,968
Net plant and property 159,348 164,257
Other 434 533
-------- --------
$167,220 $171,758
======== ========
LIABILITIES AND EQUITY
Current $ 8,554 $ 8,356
Long-term debt and other liabilities 62,658 69,587
Participants' equity 96,008 93,815
-------- --------
$167,220 $171,758
======== ========
</TABLE>
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.
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION
A summary of plant, property and equipment by classification follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $1,283,330 $1,216,931
Gas Supply 531,413 532,607
Gas Gathering 39,650 18,827
Underground Storage Facilities 58,936 57,961
Liquefied Natural Gas Facilities 154,083 154,050
Gas Stored Underground 130,223 141,794
Other 117,368 119,802
---------- ----------
$2,315,003 $2,241,972
========== ==========
</TABLE>
Other plant, property and equipment includes construction work in
progress of $15.0 million and $8.8 million at December 31, 1995 and 1994,
respectively.
II-23
<PAGE> 37
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED)
The accumulated depreciation and amortization amounts by
classification are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $ 828,148 $ 793,964
Gas Supply 460,521 458,309
Gas Gathering 23,570 15,703
Underground Storage Facilities 42,101 40,291
Liquefied Natural Gas Facilities 109,358 104,538
Other 40,389 47,844
---------- ----------
$1,504,087 $1,460,649
========== ==========
</TABLE>
The annual depreciation rates by classification are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Mainline Transmission Property 2.8% 2.8% 2.8%
Gas Supply 4.4% 4.4% 5.1%
Gas Gathering 2.8% 2.8% 6.25%
Underground Storage Facilities 3.3% 3.3% 3.3%
Liquefied Natural Gas Facilities 3.2% 3.2% 3.2%
Other 2.8 - 24% 2.8 - 24% 2.8 - 24%
</TABLE>
II-24
<PAGE> 38
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT
Long-Term Debt - Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Southern Natural Gas Company
7.85% Notes due January 15, 2002 $100,000 $100,000
8-5/8% Notes due May 1, 2002 100,000 100,000
8-7/8% Notes due February 15, 2001 100,000 100,000
Capital Leases 2,031 2,031
South Georgia Natural Gas Company
9.85% Term Loan due through December 31, 1997 1,760 2,640
7.80% Term Loan due through December 31, 1997 800 1,200
Southern Energy Company
Promissory Note (an effective rate of
6.75% at December 31, 1995) due
through April 1999 20,000 25,000
-------- --------
Total Outstanding 324,591 330,871
Less Long-Term Debt Due Within One Year 6,964 6,964
-------- --------
$317,627 $323,907
======== ========
</TABLE>
Southern had no restrictions on the payment of dividends at December 31, 1995.
Annual maturities of long-term debt at December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
Years (In Thousands)
----- --------------
<S> <C>
1996 $ 6,964
1997 6,771
1998 5,113
1999 5,124
2000 135
2001-2003 300,484
--------
$324,591
========
</TABLE>
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. In December 1994, Southern declared a special
II-25
<PAGE> 39
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT (CONTINUED)
noncash dividend of $100 million to Sonat, which was satisfied by forgiveness
of an intercompany loan to Sonat.
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 December 31, 1995 and 1994, no amounts were
outstanding under this agreement.
7. INCOME TAXES
An analysis of Southern's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $16,553 $ 61,483 $ 58,995
State (2,066) 10,106 5,794
------- -------- --------
14,487 71,589 64,789
------- -------- --------
Deferred:
Federal 32,875 (30,383) (21,427)
State 4,269 (12,932) 186
------- -------- --------
37,144 (43,315) (21,241)
------- -------- --------
$51,631 $ 28,274 $ 43,548
======= ======== ========
</TABLE>
II-26
<PAGE> 40
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $139,913 $136,345
Inventories 11,573 11,573
GSR and other transition costs 26,052 3,067
Employee benefits 1,060 -
Other 2,106 2,557
-------- --------
Total deferred tax liabilities 180,704 153,542
-------- --------
Deferred Tax Assets:
Revenue reserves 74,876 76,818
Other accounting accruals 18,144 20,608
Interest on income taxes 2,580 3,745
Employee benefits - 2,414
Other 4,148 6,145
-------- --------
Total deferred tax assets 99,748 109,730
-------- --------
Net Deferred Tax Liabilities $ 80,956 $ 43,812
======== ========
</TABLE>
Southern and its subsidiaries have not provided a valuation allowance
to offset deferred tax assets because, based on the weight of available
evidence, it is more likely than not that all deferred tax assets will be
realized.
Consolidated income tax expense is different from the amount computed
by applying the U.S. federal income tax rate to income before income tax. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income Tax Expense at Statutory
Federal Income Tax Rates $46,943 $26,634 $44,666
Increases (Decreases) in Tax
Resulting From:
State income taxes, net of
federal income tax benefit 1,432 (4,174) 4,147
Refunds and adjustment of
accrued tax position 5,091 5,949 (5,645)
Effect of change in statutory
rate on deferred taxes - - 199
Other (1,835) (135) 181
------- ------- -------
Income Tax Expense $51,631 $28,274 $43,548
======= ======= =======
</TABLE>
II-27
<PAGE> 41
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
Rate Matters - Periodically, Southern makes 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 provides 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. Several parties that
opposed the Customer Settlement have filed with the FERC requests for rehearing
of the Settlement Order. The FERC has not yet ruled on those rehearing
petitions. 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 (described below). The Customer Settlement was supported
initially by Southern, the FERC staff, customers representing approximately 95
percent of the firm transportation capacity on Southern's system, and other
parties.
On November 20, 1995, Southern and one of the initial contesting
parties to the Customer Settlement filed a settlement with the FERC pursuant to
which that party became a supporting party to the Customer Settlement. The
November 20 settlement, which was not opposed, was approved by the FERC on
February 2, 1996. With that addition, the Customer Settlement is now supported
by customers representing approximately 97 percent of the firm transportation
capacity on Southern's system. The Customer Settlement resolves, as to the
supporting parties, all issues in Southern's current and prior rate cases.
These four major rate cases cover consecutive periods beginning September 1,
1989, January 1, 1991, September 1, 1992, and May 1, 1993, respectively.
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 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.
In addition to approving the Customer Settlement, the Settlement Order
decided on the merits all cost of service (including rate of return and the
recovery of costs associated with Southern's Mississippi Canyon pipeline),
II-28
<PAGE> 42
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
cost allocation, and rate design issues for Southern's current rate case for
the period beginning May 1, 1993. 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 in the Mississippi Canyon and Ewing Bank Area Blocks, offshore
Louisiana. The Settlement Order also applied the merits determination
concerning the recovery of Southern's Mississippi Canyon costs to the rate
period beginning September 1, 1992. These determinations form the basis of
FERC's approval of Southern's current rates to the contesting parties and
refunds due them with respect to certain past rate periods. The contesting
parties' requests for rehearing of the Settlement Order included challenges to
many of the substantive rate determinations in the Settlement Order, such as
the cost recovery of Southern's Mississippi Canyon pipeline, Southern's rate of
return on equity, IT rate design, the appropriate IT and FT billing units used
for designing rates, and the allocation of storage costs.
Many of the other issues in the rate cases beginning September 1,
1989, January 1, 1991 and September 1, 1992, have previously been settled with
the contesting parties. Thus, if the Customer Settlement and the rates
determinations made in the Settlement Order are upheld on rehearing, there
remains to be litigated, as to the contesting parties, the GSR cost recovery
discussed below and only certain cost allocation and rate design issues, which
would not be material even if such rate issues are determined adversely to
Southern. The Customer Settlement continues to be contested by certain
interruptible customers and firm customers representing approximately 3 percent
of Southern's firm transportation capacity.
The Settlement Order also permits the contesting parties to litigate
the issue of the recovery of Southern's GSR and other Order No. 636 transition
costs 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.
In the event that the FERC on rehearing does not uphold the Customer
Settlement and reverses or materially modifies its prior determinations of the
substantive rate issues decided in the Settlement Order, then all parties would
be permitted to challenge Southern's recovery of GSR and other transition costs
and Southern's current rates would be affected by such ruling. In such event,
Southern is unable to predict the outcome of any such transition costs recovery
litigation or any modification of the FERC's prior rate determination, but the
effect in the aggregate could be material.
If the FERC denies contesting parties' rehearing requests, 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,
including the challenges to the rate determinations in that Order, should be
denied by the FERC and that the Settlement Order should be upheld on any
judicial appeal.
II-29
<PAGE> 43
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the fourth quarter of 1994, Southern recognized a $27 million
charge associated with the Customer Settlement, which included anticipated
amounts for costs that Southern would not recover from its customers, and also
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. As discussed below, Southern also
incurred an additional $11 million charge in the fourth quarter of 1995 related
to GSR costs not expected to be recovered.
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 is pending before the FERC.
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. 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 could be implemented only on a
prospective basis.
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. Various parties have appealed the Order to the Circuit Courts of
Appeal.
II-30
<PAGE> 44
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 in October 1995 upon the Customer Settlement
becoming effective. Additionally, Southern is a party to an agreement under
which another high-cost contract price is reduced in exchange for monthly
payments. 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.
Including the above, as of December 31, 1995, Southern had either paid or
accrued $263 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.
In addition to its GSR costs relating to termination or amendment of
its remaining gas purchase contracts, Southern has incurred and expects to
continue to incur certain price differential GSR costs resulting from
Southern's continued purchase of gas under its remaining supply contracts that
provide for prices in excess of current market prices. As of December 31,
1995, Southern had incurred $83 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 made in the fourth quarter of 1994. In the fourth quarter
of 1995, Southern expensed GSR costs not expected to be recovered from
customers based on its estimate of total GSR costs at December 31, 1995.
The amount of GSR costs that Southern 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
December 31, 1995, to be approximately $366 million on a present-value basis.
II-31
<PAGE> 45
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases - Southern has operating lease commitments expiring at various
dates, principally for office space and equipment. Southern has no significant
capital leases.
Rental expense for all operating leases is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Non-Affiliated Operating Leases $1,438 $1,296 $1,081
Affiliated Operating Leases 7,020 6,157 6,634
------ ------ ------
Total $8,458 $7,453 $7,715
====== ====== ======
</TABLE>
At December 31, 1995, future minimum payments for non-cancelable
operating leases for the years 1996 through 2000 are $4 million or less per
year.
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
The following table shows revenues from major customers:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Atlanta Gas Light Company $190,209 $250,932 $329,040
Alabama Gas Corporation 91,635 118,975 147,210
</TABLE>
Southern and its subsidiaries enter into transactions with other Sonat
subsidiaries and unconsolidated affiliates to transport, sell and purchase
natural gas. Services provided by these affiliates for the benefit of Southern
and its subsidiaries are based on the same terms as nonaffiliates.
The following table shows revenues and charges from Southern's
affiliates.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenues from Affiliates $95,610 $80,394 $39,912
Charges from Affiliates 48,534 39,060 42,666
</TABLE>
II-32
<PAGE> 46
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS
Retirement Plans - Sonat has a trusteed, non-contributory, tax
qualified defined benefit retirement plan (the Retirement Plan) covering
substantially all employees of Southern. A supplemental benefit plan (the
Supplemental Plan) that provides retirement benefits in excess of those allowed
under Sonat's tax qualified retirement plan is also in effect. Benefits under
the plans are based on a combination of years of service and a percentage of
compensation. Benefits vest after a period of five years.
Sonat determines the amount of funding to the Retirement Plan on a
year-to-year basis, with amounts consistent with minimum and maximum funding
requirements established by various governmental bodies.
Southern's net periodic pension (income) cost consists of the
following components:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service Cost - Benefits Earned
during the Period $ 2,265 $ 3,022 $ 4,563
Interest Cost on Projected
Benefit Obligation 18,529 17,492 16,874
(Gain) Loss on Assets (70,152) 8,609 (39,181)
Net Amortization and Deferral 43,745 (35,581) 18,564
-------- -------- --------
$ (5,613) $ (6,458) $ 820
======== ======== ========
</TABLE>
II-33
<PAGE> 47
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Retirement Plans and Other Postemployment Benefits (Continued)
The following table sets forth Southern's allocated portion of the
assets and liabilities of Sonat's plans and the amount of the net pension asset
or liability recognized in Southern's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
Plan with Obligations Plan with Obligations
Less than Assets (1) in Excess of Assets(2)
December 31, December 31,
--------------------------- ----------------------
(In Thousands)
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial Present Value of
Benefit Obligations:
Vested benefit obligations $225,605 $182,037 $ 5,979 $ 4,888
Non-vested benefit obligations 4,012 4,127 148 80
-------- -------- -------- -------
Accumulated benefit obligations 229,617 186,164 6,127 4,968
Effect of projected future
salary increases 30,226 22,846 5,869 3,625
-------- -------- -------- -------
Projected benefit obligations 259,843 209,010 11,996 8,593
Plan Assets at Fair Value (3) 309,757 254,019 - -
-------- -------- -------- -------
Projected Benefit Obligations
(in Excess of) or Less Than
Plan Assets 49,914 45,009 (11,996) (8,593)
Unrecognized Net (Assets) or
Obligations at Transition (4) (9,124) (10,210) 87 102
Unrecognized Net (Gain) Loss (40,274) (41,291) 2,683 31
Unrecognized Prior Service Cost 5,227 5,759 1,225 1,274
Net Unamortized Deferred Charge
from Early Retirement
Termination Benefits (5) 7,903 9,381 1,207 2,523
-------- -------- -------- -------
Net Pension Asset (Liability)
Recognized in the
Consolidated Balance Sheets $ 13,646 $ 8,648 $ (6,794) $(4,663)
======== ======== ======== =======
</TABLE>
(1) The Retirement Plan.
(2) The Supplemental Plan.
(3) Plan assets consist primarily of debt and equity securities and
investments in equity index and foreign index funds.
(4) Amortization periods for unrecognized net (asset) or obligation are
16.5 years for the Retirement Plan and 15 years for the Supplemental Plan.
(5) Amortization periods for early retirement termination benefits are 10
years for the Retirement Plan and five years for the Supplemental Plan.
II-34
<PAGE> 48
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Retirement Plans and Other Postemployment Benefits (Continued)
The assumed rates used to measure the projected benefit obligations
and the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted Average Discount Rate 7.0% 8.5% 7.0%
Long-Term Rate of Return 9.5% 8.5% 9.0%
Increase in Future Compensation Levels
(Composite Rate):
Retirement and Supplemental Plans 5.5% 5.5% 6.0%
</TABLE>
Other Postemployment Benefits - Southern participates in plans of Sonat
that provide for postretirement health care and life insurance benefits to its
employees when they retire. Southern adopted SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, for all plans as of
January 1, 1993. SFAS No. 106 requires companies to accrue the cost of
postretirement health care and life insurance benefits within the employees'
active service periods. Southern has elected to amortize the transition
obligation over a 20-year period.
The annual net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service Cost $ 725 $ 910 $1,026
Interest Cost 5,939 5,682 5,778
Return on Plan Assets (3,221) (378) (319)
Net Amortization and Deferral 4,905 2,631 3,237
------- ------ ------
$ 8,348 $8,845 $9,722
======= ====== ======
</TABLE>
Southern funds postretirement health care benefits for the majority of
its employees in an amount generally equal to its annual SFAS No. 106 expense.
These costs are currently being recovered in rates. Southern also funds into
Sonat's Retiree Life Insurance Plan for its employees with the amount of
funding determined on a year-to-year basis with the objective of having assets
equal plan liabilities.
II-35
<PAGE> 49
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (CONTINUED)
The following table sets forth the funded status at December 31, 1995
and 1994, for Southern's postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
(In Thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 59,665 $ 53,176
Fully eligible active plan participants 2,413 6,988
Other active plan participants 14,390 15,307
-------- --------
76,468 75,471
Plan Assets at Fair Value (1) 21,685 14,857
-------- --------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets (54,783) (60,614)
Unrecognized Transition Obligation 49,548 52,351
Unrecognized Net Gain (7,282) (4,486)
Net Unamortized Deferred Charge from
Early Retirement Termination Benefits 8,299 10,232
-------- --------
Accrued Postretirement Benefit Cost $ (4,218) $ (2,517)
======== ========
</TABLE>
(1) Retiree Medical Plan assets are comprised of equity securities,
municipal tax exempt bonds and short-term investment funds. Retiree Life
Insurance Plan assets are held in a life insurance reserve account, which
consists primarily of fixed income securities.
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount Rate 7.0% 8.5% 7.0%
Long-Term Rate of Return:
Medical assets 5.5% 5.5% 5.5%
Life insurance assets 7.5% 8.5% 7.0%
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 9 percent in 1996, decreasing gradually to 5 percent
by the year 2000. Increasing the assumed health care cost trend rate by one
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1995, by approximately $9.5 million and increase
the service cost and interest cost components of the net periodic
postretirement benefit cost by approximately $.9 million.
Southern participates in plans of Sonat that provide disability
benefits to former or inactive employees, their beneficiaries, and covered
dependents after employment but before retirement. Southern adopted SFAS No.
112, Employers' Accounting for Postemployment Benefits, as of January 1, 1994.
SFAS No. 112 requires companies to accrue a liability for employees'
compensation for future absences if certain conditions are met. For the years
II-36
<PAGE> 50
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (CONTINUED)
ended December 31, 1995 and 1994, $1.1 million and $.7 million of expense,
respectively, was recognized for this employee benefit plan.
Corporate Restructuring - In late 1994 and early 1995, Sonat completed
a reduction in staffing levels in the office and field locations through a
combination of special early retirement options and involuntary terminations
involving 302 employees. The total cost of the program in 1994 amounted to
$19.1 million, which included $3.4 million related to the qualified retirement
plan, $10.2 million related to the postretirement plans, and $5.0 million of
cash severance payments. Included in the cash severance amount was $2.0
million paid during 1994. Essentially all of the terminations, voluntary and
involuntary, were completed by the end of January 1995.
Executive Award Plan - Sonat has an Executive Award Plan that provides
awards to certain key employees in the form of stock options, restricted stock,
and stock appreciation rights (SARs) in tandem with any or all stock options.
In years prior to 1991, tax offset payments were also generally provided in
conjunction with these awards. SARs permit the holder of an exercisable option
to surrender that option for an amount equal to the excess of the market price
of the common stock on the date of exercise over the option price
(appreciation). The appreciation is payable in cash, common stock, or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. In November 1995, Sonat issued, in tandem
with its regular stock options, SARs that are exercisable only in the event of
a change in control. No other SARs have been issued since 1990.
Sonat issued 5,600 shares of restricted stock to employees of Southern
during 1995. The shares generally vest 10 years from the date of grant, unless
the closing price of Sonat's common stock achieves certain specified levels.
At December 31, 1995, 15,932 of the 45,700 cumulative restricted shares issued
have vested.
Stock-based employee compensation decreased Southern's pretax income
by $3.7 million in 1995, increased Southern's pretax income by $.5 million in
1994, and decreased pretax income by $5.1 million in 1993.
II-37
<PAGE> 51
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY RESULTS (UNAUDITED)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
1995 (1)(2)
Revenues $179,239 $130,915 $174,514 $176,928
Operating Income 52,614 38,195 36,763 31,576
Net Income 28,919 20,181 18,805 14,588
1994 (2)(3)
Revenues $235,531 $176,958 $147,394 $167,296
Operating Income (Loss) 49,115 26,961 29,307 (12,544)
Net Income (Loss) 28,203 13,295 15,818 (9,492)
</TABLE>
(1) Net income for the fourth quarter of 1995 includes a loss of $6.8
million on unrecoverable gas contract realignment costs.
(2) In accordance with a new FERC policy, certain fuel revenues and
fuel operating costs have been netted. Therefore revenue and operating costs
have been restated for 1995 and 1994.
(3) Net income for the fourth quarter of 1994 includes a charge of
$33.5 million related to the recognition of significant unusual items. See
Customer Settlement discussion in Note 8.
II-38
<PAGE> 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Southern has not had a change in accountants within twenty-four months
prior to the date of its most recent consolidated financial statements or in
any period subsequent to such date.
II-39
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors................................ II-15
Consolidated Balance Sheets at December 31, 1995 and 1994........................ II-16
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993.......................................................................... II-18
Consolidated Statements of Changes in Retained Earnings for the years ended
December 31, 1995, 1994 and 1993.............................................. II-18
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993...................................................................... II-19
Notes to Consolidated Financial Statements....................................... II-20
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted as not being applicable or
because the subject matter is either not present or is not present in amounts
sufficient to require submission of the schedule, in accordance with the
instructions contained in Regulation S-X, or the required information is
included in the financial statements or notes thereto.
Financial statements of 50-percent-or-less-owned companies and joint
ventures are not presented herein because such companies and joint ventures do
not meet the significance test.
IV-1
<PAGE> 54
3. EXHIBITS(1)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Southern Natural Gas Company dated as of
March 1, 1994, filed as Exhibit 3-(a) to Form 10-K of Southern Natural Gas Company
for the year 1993
3-(b) By-Laws of Southern Natural Gas Company as amended and in effect October 1, 1982,
filed as Exhibit 3-(b) to Form 10-K of Southern Natural Gas Company for the year
1993
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4 Form of Indenture dated June 1, 1987, from Southern Natural Gas Company to Hanover
Trust Company, Trustee, filed as Exhibit 4-(1) to Registration No. 33-47266 for
Southern Natural Gas Company dated July 31, 1987
PRINCIPAL SERVICE AGREEMENTS OF SOUTHERN NATURAL GAS COMPANY
10.1 Form of Service Agreements, Nos. 866940, 866941 and S10710, between Southern
Natural Gas Company and Alabama Gas Corporation, effective November 1, 1993, filed
as Exhibit 10-(2) to Form 10-Q of Sonat Inc. for the quarter ended September 30,
1993
10.2 Service Agreements (1) No. S10019, effective November 1, 1993, (2) Nos. 901710 and
901711, effective June 1, 1994, and No. 902516, effective October 1, 1994, (3)
Amendatory Agreements dated March 1, 1995, to Service Agreements (Nos. 901710 and
902516), and (4) Amendatory Agreement dated February 1, 1996, to Service Agreement
No. 901710, between Southern Natural Gas Company and South Carolina Pipeline
Corporation, which were filed as (1) Exhibit 10-(3) to Form 10-Q of Sonat Inc. for
the quarter ended September 30, 1993, (2) Exhibit 10.5 to Form 10-Q of Sonat Inc.
for the quarter ended September 30, 1994 (3) Exhibit 10.4 to Form 10-Q of Sonat
Inc. for the quarter ended March 31, 1995, and (4) Exhibit 10.2 to Form 10-K of
Sonat Inc. for the year 1995
10.3(a) Service Agreement No. 902470, effective September 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.6 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(b) Service Agreement No. 904460, effective November 1, 1994, and (1) Amendatory
Agreement dated June 1, 1995, between Southern Natural Gas Company and Atlanta Gas
Light Company, filed as Exhibit 10.7 to Form 10-Q of Sonat Inc. for the quarter
ended September 30, 1994, except (1), which was filed as Exhibit 10 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1995
10.3(c) Service Agreement No. 904461, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.8 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(d) Service Agreement No. 904480, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.9 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(e) Service Agreement No. 904481, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.10 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
</TABLE>
- ---------------
(1) Southern will furnish to requesting security holders any exhibit on this
list upon the payment of a fee of $.10 per page up to a maximum of $5.00
per exhibit. Requests must be made in writing and should be addressed to R.
David Hendrickson, Secretary, Southern Natural Gas Company, P. O. Box 2563,
Birmingham, Alabama 35202.
IV-2
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
10.3(f) Service Agreement No. S20150, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.11 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(g) Service Agreement No. S20140, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.12 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(h) Amendatory Agreement dated March 1, 1995, to Service Agreements (Nos. 904480,
904481, and S20140) 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
10.3(i) Amendatory Agreement dated March 1, 1995 to Service Agreements (No. 902470) 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
OTHER MATERIAL CONTRACTS
10.4 Restated and Amended Joint Venture Agreement dated September 1, 1981, between
Tennessee Storage Company and Southern Gas Storage Company forming Bear Creek
Storage Company (with Appendices A-G), filed as Exhibit 10-(22) to Form 10-K of
Sonat Inc. for the year 1991
10.5 Service Agreement dated June 1, 1981, with Bear Creek Storage Company, and FERC Gas
Tariff of Bear Creek Storage Company, effective July 1, 1981, filed as Exhibit
10-(23) to-Form 10-K of Sonat Inc. for the year 1991
10.6 Parents Agreement dated September 15, 1981, from Southern Natural Gas Company and
Tenneco Inc. in favor of Manufacturers Hanover Trust Company and T. C. Crane, filed
as Exhibit 10-(25) to Form 10-K of Sonat Inc. for the year 1991
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed herewith
23 Consent of Ernst & Young LLP, Independent Auditors, dated March 18, 1996, filed
herewith
24 Powers of Attorney authorizing James E. Moylan, Jr.; Thomas W. Barker, Jr.; James
A. Rubright; Norman G. Holmes; R. David Hendrickson and John C. Griffin to sign the
Southern Natural Gas Company Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 on behalf of certain directors and officers of the registrant,
filed herewith
27 Financial Data Schedule for the period ended December 31, 1995, filed herewith
</TABLE>
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance
upon Instruction J(2)(b) of Form 10-K.
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are hereby
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Southern and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of Southern and its subsidiaries on a consolidated basis.
Southern agrees to furnish a copy of each such instrument to the Commission upon
request.
IV-3
<PAGE> 56
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1995.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-4
<PAGE> 57
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SOUTHERN NATURAL GAS COMPANY
BY: /S/ JAMES E. MOYLAN, JR.
------------------------------------
JAMES E. MOYLAN, JR.
PRESIDENT
Dated: March 21, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
(i) Principal Executive Officer:
/s/ JAMES E. MOYLAN, JR. President March 21, 1996
- ---------------------------------------------
JAMES E. MOYLAN, JR.
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Treasurer March 21, 1996
- ---------------------------------------------
THOMAS W. BARKER, JR.
Principal Accounting Officer:
/s/ NORMAN G. HOLMES Vice President and March 21, 1996
- --------------------------------------------- Controller
NORMAN G. HOLMES
(iii) Directors:*
RONALD L. KUEHN, JR.
L. DAVID MATHEWS
JAMES E. MOYLAN, JR.
LARRY E. POWELL
JAMES A. RUBRIGHT
JAMES C. YARDLEY
* Signed on behalf of each of these persons:
By /s/ R. DAVID HENDRICKSON
--------------------------------------
R. DAVID HENDRICKSON
SECRETARY, AS AUTHORIZED
BY CERTAIN POWERS OF
ATTORNEY DATED MARCH 4, 1996,
ALL OF WHICH ARE
FILED HEREWITH AS
EXHIBIT 24-(1)
</TABLE>
IV-5
<PAGE> 58
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NATURAL GAS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1995
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
- ---- --------------------------------------------------------------------------------------
<C> <S>
I-9 Map of the Southeastern United States showing the approximate location of the pipeline
systems of Southern Sea Robin, SIA and South Georgia (as described on I-1 and I-7),
the underground storage facilities of Southern (each described on pages I-4); and the
approximate location of Southern Energy's LNG terminal, as discussed on page I-7.
</TABLE>
<PAGE> 1
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS
FROM CONTINUING OPERATIONS TO FIXED CHARGES
TOTAL ENTERPRISE (a)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
(In Thousands)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $134,124 $76,098 $127,617 $126,691 $119,326
Fixed charges (see computation below) 49,679 48,385 59,171 49,131 46,596
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $183,803 $124,483 $186,788 $175,822 $165,922
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 46,859 $ 45,900 $ 56,599 $ 46,298 $ 42,957
Rentals(b) 2,820 2,485 2,572 2,833 3,639
-------- -------- -------- -------- --------
$ 49,679 $ 48,385 $ 59,171 $ 49,131 $ 46,596
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 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.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3, No. 33-16190 and Form S-3, No. 33-47266) of Southern Natural Gas
Company and in the related Prospectus and Prospectus Supplement of our report
dated January 18, 1996, with respect to the consolidated financial statements
of Southern Natural Gas Company included in the Annual Report (Form 10-K) for
the year ended December 31, 1995.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
March 18, 1996
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G.
Holmes; R. David Hendrickson and John C. Griffin, and each of them, his true
and lawful attorneys to execute in his name (whether on behalf of Southern
Natural Gas Company or as an officer or director of Southern Natural Gas
Company) the Southern Natural Gas Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and any and all amendments thereto to be
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned does hereby ratify and
confirm all that said attorneys and agents, and each of them, shall do or cause
to be done by virtue hereof. Each of such attorneys shall have and may
exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ L. David Mathews
------------------------
L. David Mathews
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G.
Holmes; R. David Hendrickson and John C. Griffin, and each of them, his true
and lawful attorneys to execute in his name (whether on behalf of Southern
Natural Gas Company or as an officer or director of Southern Natural Gas
Company) the Southern Natural Gas Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and any and all amendments thereto to be
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned does hereby ratify and
confirm all that said attorneys and agents, and each of them, shall do or cause
to be done by virtue hereof. Each of such attorneys shall have and may
exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ James E. Moylan, Jr.
----------------------------
James E. Moylan, Jr.
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G.
Holmes; R. David Hendrickson and John C. Griffin, and each of them, his true
and lawful attorneys to execute in his name (whether on behalf of Southern
Natural Gas Company or as an officer or director of Southern Natural Gas
Company) the Southern Natural Gas Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and any and all amendments thereto to be
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned does hereby ratify and
confirm all that said attorneys and agents, and each of them, shall do or cause
to be done by virtue hereof. Each of such attorneys shall have and may
exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ Larry E. Powell
-----------------------
Larry E. Powell
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G.
Holmes; R. David Hendrickson and John C. Griffin, and each of them, his true
and lawful attorneys to execute in his name (whether on behalf of Southern
Natural Gas Company or as an officer or director of Southern Natural Gas
Company) the Southern Natural Gas Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and any and all amendments thereto to be
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned does hereby ratify and
confirm all that said attorneys and agents, and each of them, shall do or cause
to be done by virtue hereof. Each of such attorneys shall have and may
exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ James A. Rubright
-----------------------
James A. Rubright
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James E. Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G.
Holmes; R. David Hendrickson and John C. Griffin, and each of them, his true
and lawful attorneys to execute in his name (whether on behalf of Southern
Natural Gas Company or as an officer or director of Southern Natural Gas
Company) the Southern Natural Gas Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and any and all amendments thereto to be
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 and to file the same, with all
exhibits thereto, and any other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned does hereby ratify and
confirm all that said attorneys and agents, and each of them, shall do or cause
to be done by virtue hereof. Each of such attorneys shall have and may
exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ James C. Yardley
-----------------------
James C. Yardley
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Southern Natural Gas Company, does hereby constitute and appoint James E.
Moylan, Jr.; James A. Rubright; Thomas W. Barker, Jr.; Norman G. Holmes; R.
David Hendrickson and John C. Griffin, and each of them, his true and lawful
attorneys to execute in his name (whether on behalf of Southern Natural Gas
Company or as a director of Southern Natural Gas Company) the Southern Natural
Gas Company Annual Report on Form 10-K for the fiscal year ended December 31,
1995, and any and all amendments thereto to be filed with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 and to file the same, with all exhibits thereto, and any other
documents in connection therewith, with the Securities and Exchange Commission.
The undersigned does hereby ratify and confirm all that said attorneys and
agents, and each of them, shall do or cause to be done by virtue hereof. Each
of such attorneys shall have and may exercise all powers to act hereunder with
or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of the
4th day of March, 1996.
/s/ Ronald L. Kuehn, Jr.
----------------------------
Ronald L. Kuehn, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 711
<SECURITIES> 0
<RECEIVABLES> 118,542
<ALLOWANCES> 0
<INVENTORY> 21,625
<CURRENT-ASSETS> 299,637
<PP&E> 2,315,003
<DEPRECIATION> 1,504,087
<TOTAL-ASSETS> 1,437,709
<CURRENT-LIABILITIES> 130,446
<BONDS> 317,627
0
0
<COMMON> 4
<OTHER-SE> 574,094
<TOTAL-LIABILITY-AND-EQUITY> 1,437,709
<SALES> 195,201
<TOTAL-REVENUES> 661,596
<CGS> 191,260
<TOTAL-COSTS> 345,367
<OTHER-EXPENSES> 52,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,218
<INCOME-PRETAX> 134,124
<INCOME-TAX> 51,631
<INCOME-CONTINUING> 82,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,493
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
