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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 [NO FEE REQUIRED, EFFECTIVE
OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
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
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, 1997 -- 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, 1997 -- 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, 1996
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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-2
Markets -- Transportation and Sales....................... I-3
Markets -- System Expansions.............................. I-4
Gas Supplies.............................................. I-5
Potential Royalty Claims.................................. I-5
Sea Robin Pipeline Company................................ I-5
South Georgia Natural Gas Company......................... I-6
Competition and Current Business Conditions............... I-6
Governmental Regulation................................... I-7
Rate and Regulatory Proceedings......................... I-7
Environmental Matters..................................... I-9
Forward-Looking Statements................................ I-9
Item 2. Properties.................................................. I-9
Item 3. Legal Proceedings........................................... I-9
Item 4. Submission of Matters to a Vote of Security Holders........Omitted*
PART II
Item 5. Market for Registrant's Common Equity and Related II-1
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition II-3
and Results of Operations.................................
Item 8. Financial Statements and Supplementary Data................. II-14
Item 9. Changes in and Disagreements with Accountants on Accounting II-34
and Financial Disclosure..................................
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" or the
"Company"), which is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the
transmission of natural gas in interstate commerce. Southern, including its
subsidiaries, owns 9,055 miles of interstate pipeline. Its interstate pipeline
system has a certificated daily delivery capacity of 2.4 billion cubic feet
("Bcf") 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-8.
Southern's interstate pipeline business is subject to regulation by the
Federal Energy Regulatory Commission ("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, 1997, Southern and its subsidiaries employed approximately 780
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, 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, which
included separating (unbundling) their sales, transportation, and storage
services. Interstate pipeline companies, including Southern, incurred, and in
certain limited instances are continuing to incur, certain costs ("transition
costs") as a result of Order No. 636, the principal one being costs related to
amendment or termination of, or purchases of gas at above-market prices under,
existing gas purchase contracts, which are referred to as gas supply realignment
("GSR") costs.
As of December 31, 1996, Southern had either paid or accrued $276 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, 1996, Southern had incurred $85 million in price differential
costs.
Beginning in December 1993 Southern has made a number of filings with the
FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative
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law judge regarding whether such costs were prudently incurred and are eligible
for recovery under Order No. 636. Southern's customers had generally opposed its
recovery of its GSR costs in these proceedings based on both eligibility and
prudence grounds.
Customer Settlement
In an order issued on September 29, 1995 (the "Settlement Order"), the FERC
approved a comprehensive settlement (the "Customer Settlement") that is
effective as to all of Southern's customers, except one customer representing
approximately two percent of the firm transportation capacity on Southern's
system. The Customer Settlement resolved all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636. The four major rate cases
resolved by the Customer Settlement cover consecutive periods beginning
September 1, 1989. In May 1996 the Customer Settlement became final, and
Southern credited in the aggregate the full amount of Southern's rate reserves
as of February 28, 1995, plus interest, less certain amounts withheld for
potential refunds to contesting parties, to reduce the GSR costs borne by
Southern's customers. The total credit recorded in May 1996 amounted to $164
million. Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1,
1999. The Customer Settlement also provides for Southern to recover $363 million
of GSR costs incurred or reserved as of December 31, 1996, and 50 percent of GSR
costs that Southern may incur thereafter. The Company believes that future GSR
costs that may be borne by it will not be material to its financial position or
results of operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (the "April 11 Order"). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the one remaining contesting party concern the recoverability of
certain GSR and other transition costs under Order No. 636, which would not be
material even if such issues were determined adversely to Southern. The
contesting party, and one other entity that may potentially compete with
Southern in providing storage services, have each appealed the April 11 Order
and the Settlement Order to the D.C. Circuit Court of Appeals. Although there
can be no assurances, the Company believes that the Settlement Order and the
April 11 Order should be upheld on appeal.
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 had
determined that additional working storage capacity could have been made
available to its customers, it would have been required promptly to offer such
capacity to them. In January of 1996 and 1997, however, Southern informed its
customers that the results of its 1995 and 1996 reviews supported the
reclassification and that Southern proposed no adjustment to the total level of
working storage gas at Muldon. Consequently, 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.
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tennessee Gas Pipeline Company
("Tennessee"), a subsidiary of El Paso Energy Corporation, an unaffiliated
company, 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
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Southern, Tennessee, 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, 1996, Bear Creek's gross facilities cost
was $247,785,000, its net facilities cost was $154,388,000, and its
participants' equity was $97,677,000. Southern had an investment in Bear Creek,
including its equity in undistributed earnings, of $48,838,000 at December 31,
1996.
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
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 1996
Southern transported gas to nine gas distribution companies, to 101 municipal
distributors and gas districts, to eight connecting interstate pipeline
companies, and to 69 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.
Transportation volumes in 1996 for Southern and all of its subsidiaries
were 983 Bcf, compared with transportation volumes in 1995 of 1,016 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1996 sales of 77 Bcf and 1995 sales of 93 Bcf. With the exception of
eight Bcf of sales made by Sonat Intrastate-Alabama Inc., a wholly owned
subsidiary of Southern prior to January 1, 1997, in each of 1996 and 1995, the
volumes associated with the 1996 and 1995 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.
Southern has firm transportation contracts with its largest customer,
Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, for an
aggregate of 787 million cubic feet per day under primary terms extending for
various periods through February 28, 1999, to April 30, 2007. Alabama Gas
Corporation, Southern's second largest customer, has executed firm
transportation contracts for a total of 393 million cubic feet per day under
primary terms extending for various periods through October 31, 1998, to October
31, 2008. Southern has firm transportation contracts with South Carolina
Pipeline Corporation, its third largest customer, for a total of 188 million
cubic feet per day under primary terms extending for various periods through
March 31, 1999, to October 31, 2003. 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.
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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.
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 23 percent and 11 percent,
respectively, of Southern's 1996 consolidated revenues. Atlanta and Alabama Gas
were the only two customers that accounted for ten percent or more of Southern's
consolidated revenues for 1996.
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.
Markets -- System Expansions
Southern is aggressively attempting to expand its pipeline system in its
traditional market area and to connect new gas supplies. Southern received
approval from the FERC in December 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 $16 million expansion project was November 1, 1996.
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 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 during the winter of
1997-98. 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, alleging that the
parties violated Alabama's competitive bid law since the contract was not
subjected to competitive bidding in accordance with such law. Southern's
position that the competitive bid law does not apply to the contract was upheld
by the trial court, whose summary judgment decision in favor of Southern and the
City of Huntsville is now on appeal to the Alabama Supreme Court. See Item 3.
Legal Proceedings below. This company has also opposed the system expansion
application at the FERC. Although there is no assurance that Southern will
prevail in either forum, Southern believes that its position in the state court
proceeding will be upheld and that the FERC should grant approval of its
application.
In October 1995 Southern received FERC approval for a production area
expansion project with a capital cost of $14 million. Southern installed 9,400
horsepower of additional compression at its Toca, Louisiana compressor station
south of New Orleans and 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 is
supported by a 10-year firm transportation agreement with Shell Offshore Inc.
The necessary compression facilities for this project have been completed, but
certain of the receipt-point facilities are not expected to be completed before
April 1, 1997.
In early 1995 Southern initiated an open season to obtain customer
commitments to expand its system in order to meet increased demand for natural
gas in the Southeast. As a result of the open season, Southern executed
contracts for additional firm transportation services totaling approximately 46
million cubic feet per
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day with 11 customers in Georgia and Tennessee. Southern filed an application
for authorization to construct and operate the necessary facilities for this $36
million project in May 1996. If timely FERC approval is received, the in-service
date for the firm transportation service is expected to be November 1997.
In December 1996 Southern, Amoco Pipeline Company, and Shell Gas Pipeline
Company announced their intent to construct the Destin Pipeline, a $300 million
project that will begin offshore in Main Pass Block 260 and extend northward
into Mississippi, intersecting five interstate pipelines, including Southern.
This pipeline will be owned equally by Southern and affiliates of Amoco Pipeline
and Shell Gas Pipeline and will have one billion cubic feet of daily capacity
when completed. Subject to receipt of the necessary FERC approval, construction
is scheduled to begin in late 1997 and the system could begin service as early
as mid-1998. When the system is completed, Southern will operate the pipeline.
The execution of definitive agreements is expected to occur in early 1997.
In December 1996 Southern also concluded a systemwide open season to obtain
customer commitments to expand its system. Southern currently has received firm
transportation commitments totaling 65 million cubic feet of natural gas per day
from 15 customers in eastern Tennessee, Georgia, and Alabama and additional
customers may join this project. Therefore, the capital investment associated
with this project is uncertain. Additionally, existing customers will be given
the option to release firm capacity that comes up for renewal during the next
three years to meet the needs of this project. The necessary FERC approval will
be sought in an application that is expected to be filed in May 1997, with the
project scheduled to go in service in November 1998.
Gas Supplies
During 1996 Southern reduced the number of its existing long-term gas
supply contracts from 15 to seven. 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 by 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 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
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for others and delivers those products to shore for condensate removal and gas
processing and redelivery to five downstream transmission pipelines and one
independent storage company. See the system map on page I-8. Sea Robin is a
transportation-only pipeline that has restructured in compliance with FERC Order
No. 636. Sea Robin transported approximately 243 Bcf of natural gas in 1996
compared to 302 Bcf in 1995. 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 was denied by the FERC on June 26, 1996.
Sea Robin filed a petition with the Fifth Circuit Court of Appeals on August 15,
1996, for judicial review of the orders denying its petition.
Following the filing of Sea Robin's petition for a gathering exemption,
several of the shippers on the Sea Robin system filed with the FERC in February
1995 a complaint against Sea Robin under Section 5 of the Natural Gas Act
claiming that Sea Robin's rates are unjust and unreasonable. In its answer, Sea
Robin asked the FERC to dismiss the complaint or to find that its rates continue
to be just and reasonable based on the data it presented. On August 2, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed
settlement of the complaint proceeding pursuant to which it would voluntarily
reduce its transportation rates by $.0042 per Dekatherm, calculated on a 100
percent load factor basis, effective January 1, 1997. The settlement is
supported by the FERC Staff and one of two groups of active intervenors, but is
opposed by the complainant shippers, who are the other group of active
intervenors. By order dated February 7, 1997, the Presiding Administrative Law
Judge certified the settlement to the FERC Commissioners. Sea Robin is unable to
predict the outcome of this proceeding, but if the proposed settlement is not
approved, any reduction in Sea Robin's rates can be implemented only on a
prospective basis and any such change is not expected to be material to the
Company's financial position or results of operations.
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-8. As
described above, South Georgia has restructured pursuant to Order No. 636 and is
a transportation-only pipeline. South Georgia transported approximately 37 Bcf
of natural gas in 1996 compared to 38 Bcf in 1995. These South Georgia volumes
are included within the Southern transportation volumes discussed earlier.
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.
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 three largest customers are all 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
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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.
Governmental Regulation
Southern and its interstate transmission subsidiaries are 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").
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. As necessary, Southern and its interstate
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 and LNG 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 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. Each of them has 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 both 1996 and 1995. Southern anticipates that such
expenditures will be approximately $12 million in 1997.
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, 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
resolves all of Southern's previously pending rate proceedings and proceedings
to recover GSR and other transition costs associated with the implementation of
Order No. 636, except for one contesting party that represents approximately two
percent of Southern's firm transportation volumes.
I-7
<PAGE> 10
[MAP]
I-8
<PAGE> 11
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
From time to time the Company may make or publish forward-looking
statements relating to such matters as anticipated financial performance,
business plans and prospects, objectives, future projects, and similar matters.
This report, including the information incorporated by reference herein,
contains such forward-looking statements. These forward-looking statements are
based on assumptions that the Company believes are reasonable. A variety of
factors, however, could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements.
Important factors that could cause actual results to differ include the
timing and extent of changes in oil and gas prices and underlying demand, which
would affect profitability and might cause the Company to alter its plans, the
pace of deregulation of retail natural gas and electricity markets in the United
States, and the success of management's cost reduction activities. Realization
of the Company's objectives and expected performance can also be adversely
affected by the actions of customers and competitors, changes in governmental
regulation of the Company's businesses, and changes in general economic
conditions and the state of domestic capital markets.
The success of the Company's expansion projects in its natural gas
transmission segment is dependent on obtaining both the necessary number of
customer commitments for a project and regulatory approval of the project, which
may encounter opposition by the staff of the FERC, environmental groups, and
other customers of the Company or its local distribution customers. The
Company's regulated natural gas transmission subsidiaries recover substantially
all of their fixed costs, a return on equity, and income taxes in the capacity
reservation component of their firm transportation rates. There can be no
assurance, however, that the existing customers of the Company's natural gas
transmission subsidiaries will extend their firm service agreements at the same
levels when their current service agreements expire.
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
I-9
<PAGE> 12
11th Circuit Court of Appeals. The FERC denied the requests for rehearing in an
order issued on November 26, 1996, and Atlanta and another customer have also
filed petitions for review of that order in the 11th Circuit Court of Appeals.
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 January of 1996 Southern entered into a 20-year service
agreement with the City of Huntsville, Alabama to provide 40 million cubic feet
per day of firm transportation service. In its lawsuit, Alabama-Tennessee
Natural Gas Company, which currently provides natural gas transportation service
to Huntsville, is seeking to have this agreement set aside, alleging that the
parties violated Alabama's competitive bid law since the contract was not
subjected to competitive bidding in accordance with such law. 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. Southern's position was upheld by the trial court, whose summary
judgment decision in favor of Southern and the City of Huntsville is now on
appeal to the Alabama Supreme Court, which has granted expedited consideration
to the appeal.
Southern Natural Gas Company and its wholly owned subsidiary, Sea Robin
Pipeline Company, are two of seventy defendants named in Jack J. Grynberg, ex
rel. v. Alaska Pipeline Company, et al., which was filed in the United States
District Court for the District of Columbia. The defendants include
substantially all of the interstate pipelines in the United States. Grynberg
filed suit on behalf of the United States Government under 31 U.S.C. sec. 3729,
et seq., commonly known as the False Claims Act, alleging that the methods used
by the defendants to measure the heating content and volume of natural gas
purchased by them have caused producers of natural gas to underpay royalties
owed by the producers to the United States. The complaint seeks recovery of
actual damages based upon the unpaid royalties, the amount of which is not
specified in the complaint. Such damages may be trebled under Section 3729.
Southern and Sea Robin intend to defend the suit vigorously.
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-10
<PAGE> 13
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>
1996
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth (1) 62,400,000
-----------
$99,600,000
===========
1995
First $12,400,000
Second 12,400,000
Third 12,400,000
Fourth 12,400,000
-----------
$49,600,000
===========
</TABLE>
(1) Includes a special dividend declared by Southern of $50 million.
II-1
<PAGE> 14
Item 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for Southern and its subsidiaries
is shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Millions)
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 776.3 $ 661.6 $ 727.2 $ 832.6 $ 728.6
Costs and Expenses (1) 610.4 502.5 634.4 686.0 578.0
-------- -------- -------- -------- --------
Operating Income 165.9 159.1 92.8 146.6 150.6
Other Income, Net 16.3 10.0 9.5 9.4 8.9
Interest Expense, Net (32.0) (35.0) (26.2) (28.4) (32.8)
-------- -------- -------- -------- --------
Income Before Income Taxes 150.2 134.1 76.1 127.6 126.7
Income Taxes 57.6 51.6 28.3 43.5 47.3
-------- -------- -------- -------- --------
Net Income (2)(3) $ 92.6 $ 82.5 $ 47.8 $ 84.1 $ 79.4
======== ======== ======== ======== ========
Assets $1,231.1 $1,437.7 $1,375.2 $1,531.2 $1,425.7
======== ======== ======== ======== ========
Debt Maturing Within One Year $ 8.2 $ 21.9 $ 7.0 $ 107.3 $ 6.8
Long-Term Debt 310.5 317.6 323.9 329.4 435.5
Stockholder's Equity 567.2 574.1 519.2 620.0 585.5
-------- -------- -------- -------- --------
Total Capitalization $ 885.9 $ 913.6 $ 850.1 $1,056.7 $1,027.8
======== ======== ======== ======== ========
</TABLE>
(1) Revenues and costs and expenses in 1996 include $163.9 million as
a result of the offset of rate reserves against gas supply realignment (GSR)
costs as provided in Southern's Customer Settlement.
(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 $16.6 million related to
Southern's Customer Settlement and GSR costs and $20.6 million related to a
reduction in work force and other matters.
II-2
<PAGE> 15
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 is aggressively attempting to expand its pipeline system in
its traditional market area and to connect new gas supplies. In late 1995
Southern's East Tennessee expansion was placed in service. This $11 million
project provides approximately 14 million cubic feet per day of firm
transportation volumes to a group of new customers that signed 10-year
contracts. Additionally, in November 1996, Southern placed in service a $16
million expansion providing approximately 27 million cubic feet per day of
additional firm capacity to 15 customers in Alabama, Georgia and Tennessee.
Southern also completed another project that enhances its customers' ability to
access new supplies being developed offshore Louisiana. This $14 million
project added 140 million cubic feet per day of firm capacity, making it a very
low-cost way for producers to transport their growing Gulf of Mexico natural
gas production into the U.S. pipeline grid.
Southern filed an application on January 24, 1996, with the FERC
seeking approval to expand its pipeline system to provide firm gas
transportation service to three existing customers and to two new customers in
North Alabama. Most of the proposed 76-million-cubic-feet-per-day expansion is
supported by long-term firm transportation agreements with 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 earliest in-service date for
the proposed expansion, which requires FERC approval, would be November 1997.
The company currently providing transportation service to the cities of
Huntsville and Decatur has challenged this project in Alabama state court
proceedings and with the FERC. Southern's position was upheld by the trial
court in the state court proceedings, whose summary judgment decision in favor
of Southern and the City of Huntsville is now on appeal to the Alabama Supreme
Court, which has granted expedited consideration to the appeal.
In May 1996, Southern filed an application with the FERC to expand its
pipeline system in the eastern portion (Zone 3) of its market area. This $36
million expansion will enable Southern to provide additional firm
transportation services totaling 46 million cubic feet per day to 11 customers
in Georgia and Tennessee. If FERC approval is received, the in-service date
for this firm transportation service is expected to be November 1997.
II-3
<PAGE> 16
In December 1996, Southern, Amoco Pipeline Company, and Shell Gas
Pipeline Company announced their intent to construct the Destin Pipeline, a
$300 million project that will begin offshore in Main Pass Block 260 and extend
northward into Mississippi, intersecting five interstate pipelines, including
Southern and Florida Gas Transmission Company. This pipeline will be owned
equally by Southern and affiliates of Amoco Pipeline and Shell Gas Pipeline and
will have one billion cubic feet of daily capacity when completed.
Construction is scheduled to begin in late 1997, and the system could begin
service as early as mid-1998, subject to necessary governmental approvals.
When the system is completed, Southern will operate the pipeline. The
execution of definitive agreements is expected to occur in early 1997.
Southern currently has firm transportation commitments totaling 65
million cubic feet of natural gas per day from 15 customers in eastern
Tennessee, Georgia and Alabama that will result in an expansion of its
facilities that serve these areas. Additional customers may join this project,
thus the capital investment associated with this project is uncertain.
Additionally, existing customers will be given the option to release firm
capacity that comes up for renewal during the next three years to meet the
needs of this project. The necessary FERC approval will be sought in an
application that is expected to be filed in May 1997, with the project
scheduled to go in service in November 1998.
II-4
<PAGE> 17
OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Gas sales $210.0 $195.2 $233.7
Market transportation and storage 323.2 324.5 321.0
Supply transportation 46.6 50.6 36.8
Other 196.5 91.3 135.7
------ ------ ------
Total Revenues 776.3 661.6 727.2
------ ------ ------
Costs and Expenses:
Natural gas cost 206.8 191.3 229.1
Transition cost recovery and natural
gas purchase contract
settlement costs 170.7 58.0 116.2
Operating and maintenance 83.9 96.1 151.7
General and administrative 82.6 85.4 72.0
Depreciation and amortization 48.3 52.3 46.6
Taxes, other than income 18.1 19.4 18.8
------ ------ ------
610.4 502.5 634.4
------ ------ ------
Operating Income $165.9 $159.1 $ 92.8
====== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 9.6 $ 9.4 $ 9.0
====== ====== ======
(Billion Cubic Feet)
Volumes (Note):
Intrastate gas sales 8 8 -
Market transportation 660 636 551
--- ----- ---
Total Market Throughput 668 644 551
Supply transportation 315 372 335
--- ----- ---
Total Volumes 983 1,016 886
=== ===== ===
Transition gas sales 69 85 103
=== ===== ===
</TABLE>
Note: Volumes for 1995 include 38 billion cubic feet of gas associated
with three subsidiaries of Sonat Inc. that were transferred to
Southern on January 1, 1995, which were not included in Southern's
1994 volumes.
II-5
<PAGE> 18
OPERATING INCOME
The table below shows unusual items in 1995 and 1994 that affect
operating income and net income comparisons. The table is presented because
Southern believes this information enhances the analysis of results of
operations.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating Income $165.9 $159.1 $ 92.8
------ ------ ------
Unusual Items (Expense) Income Included Above:
Rate settlement and GSR costs - (11.1) (27.0)
Reduction in work force and other - - (33.5)
------ ------ ------
- (11.1) (60.5)
------ ------ ------
Operating Income Excluding Unusual Items $165.9 $170.2 $153.3
====== ====== ======
Net Income as Reported $ 92.6 $ 82.5 $ 47.8
------ ------ ------
Unusual Items (Expense) Income Included Above:
Rate settlement and GSR costs - (6.8) (16.6)
Reduction in work force and other - - (20.6)
IRS settlement - - .1
------ ------ ------
- (6.8) (37.1)
------ ------ ------
Net Income Excluding Unusual Items $ 92.6 $ 89.3 $ 84.9
====== ====== ======
</TABLE>
1996 VERSUS 1995. Absent the effect of an unusual item, operating
income decreased 3 percent in 1996 primarily due to the receipt of incremental
revenues in 1995 from the sale of firm transportation capacity prior to revised
rates going into effect on March 1, 1995. Also included in 1995 are positive
adjustments to reflect actual interruptible transportation revenue and cost
recovery in the first year of post Order No. 636 operations, the reduction of a
take-or-pay liability and the accrual of gas supply realignment (GSR) interest
on larger recovery balances compared to 1996. These were partially offset by
lower costs and additional firm transportation revenues in 1996. The unusual
item in 1995 of $11.1 million increased operating and maintenance expense in
recognition of Southern's share of GSR costs that were not recoverable.
Southern's gas sales revenues and gas costs 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.
Gas sales revenues and natural gas cost increased compared with the
1995 period reflecting higher gas prices on transition gas sales from supply
remaining under contract. Other revenue and transition cost recovery in 1996
increased by $163.9 million as a result of the offset of rate reserves against
GSR costs as provided in Southern's comprehensive customer rate settlement (the
Customer Settlement). Otherwise, other revenue and transition cost
II-6
<PAGE> 19
recovery decreased primarily due to declining billings and lower recovery rates
for GSR costs. The items discussed in this paragraph had no net impact on
operating income.
Certain other items affected operating income. Supply transportation
revenues decreased due to lower supply-area transportation volumes resulting
from lower throughput at Sea Robin. Operating and maintenance expense in 1995
included the $11.1 million of GSR expense which was discussed earlier. General
and administrative expense decreased due to lower employee related expenses
despite higher stock-based compensation expense. Depreciation and amortization
decreased in 1996 primarily due to lower rates implemented March 1, 1995, as a
part of the Customer Settlement.
1995 VERSUS 1994. Operating income, excluding unusual items,
increased 11 percent in 1995 due to lower operating expenses and the sale of
previously unsubscribed firm transportation capacity. The unusual item in 1995
of $11.1 million increased operating and maintenance expense in recognition of
Southern's share of GSR costs that was not recoverable.
Unusual items included in Southern's 1994 operating expenses consisted
of a $27.0 million charge associated with recognition of the Customer
Settlement and a $33.5 million provision primarily relating to regulatory
assets not recoverable as a result of the Customer Settlement, including $18.9
million attributable to a corporate restructuring undertaken in 1994.
Market transportation and storage revenues increased in 1995 due in
part to a $15.8 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. 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 of the 1994 fourth quarter restructuring. General and
administrative expense increased 19 percent in 1995 primarily due to higher
employee benefit expenses related to 1993 and 1994 special early retirement
options (SEROs) and higher stock-based compensation expense. Depreciation and
amortization expense increased in 1995 due to the $15.8 million retroactive
adjustment in 1994 partially offset by lower depreciation rates as a result of
the Customer Settlement.
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 has terminated or
renegotiated to market pricing substantially all of its gas supply contracts
through which it had historically obtained its long-term gas supply. Some of
the remaining contracts contain clauses requiring Southern either to purchase
minimum
II-7
<PAGE> 20
volumes of gas under the contract or to pay for it (take-or-pay clauses).
Although the cost of gas under some of these contracts is in excess of current
spot-market prices, Southern currently is incurring no take-or-pay liabilities
under any of these contracts. Two market-priced contracts entered into with
Exxon Corporation in 1995 as part of a settlement of certain other gas purchase
contracts account for 85 percent of the purchase commitments in 1997 described
below. Based on Southern's current expectations with respect to natural gas
prices in the years following 1997, only a small amount of gas volumes are
expected to be at prices above market. (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
is selling 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 1997 through 2001 are estimated as follows:
<TABLE>
<CAPTION>
Estimated Purchase Commitments
-------------------------------------------------------------------------------------------
(In Millions)
-------------
<S> <C>
1997 $156
1998 21
1999 19
2000 17
2001 18
</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.
RATE MATTERS
The Customer Settlement resolves all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636, except for one contesting
party that represents approximately 2 percent of Southern's firm transportation
volumes. 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, but requires Southern to file a new rate case no later than
September 1, 1999. (See Note 8 of the Notes to Consolidated Financial
Statements for a discussion of the Customer Settlement and other rate matters.)
II-8
<PAGE> 21
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OTHER INCOME, NET $16.3 $ 9.9 $ 9.5
</TABLE>
1996 VERSUS 1995. The increase in Other in the 1996 period compared
to the 1995 period is attributable to a $3.9 million gain on partial
termination of an interest rate swap in September 1996 and AFUDC equity
associated with Southern's pipeline expansion projects. Equity in earnings
from affiliates was relatively unchanged from the prior period.
1995 VERSUS 1994. Other Income, Net, primarily represents Southern's
share of earnings from Bear Creek Storage Company, which was essentially flat.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INTEREST EXPENSE, NET $32.0 $35.0 $26.3
</TABLE>
1996 VERSUS 1995. Net interest expense decreased in 1996 compared to
1995 due to lower interest expense, slightly offset by lower interest income.
Interest expense on revenue reserves decreased due to lower average regulatory
reserve balances, while interest expense on debt increased due to higher
average debt levels with Sonat Inc. (Sonat), Southern's parent. Interest
income was lower due to lower average balances of loans to affiliates.
Capitalized interest increased due to Southern's higher capital expenditures in
the current period.
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 $100.0 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.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INCOME TAXES $57.6 $51.6 $28.3
</TABLE>
1996 VERSUS 1995. Income taxes increased $6.0 million in 1996
compared to 1995 due to higher pretax income (see Note 7 of the Notes to
Consolidated Financial Statements).
1995 VERSUS 1994. Income taxes increased $23.3 million in 1995
compared to 1994 primarily due to higher pretax income.
II-9
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES $135.0 $39.5 $199.1
</TABLE>
1996 VERSUS 1995. Cash flow from operations increased $95.5 million
compared with the 1995 period. Net GSR recoveries in 1996 compared with net
GSR payments in 1995 resulted in a $104.6 million improvement in cash flow from
operations.
Other than the net GSR recoveries/payments discussed above, both the
change in GSR costs and reserves for regulatory matters were attributable to
recognition of the Customer Settlement in the second quarter of 1996 (see
discussion earlier). The change in accrued income taxes essentially reflects
income tax deductions of GSR payments in the current period compared to income
tax payments in 1995. The change in other current assets and other current
liabilities is primarily due to a decrease in gas imbalance receivables and
payables, which occurred in the prior period. The change in Other is primarily
due to $32.9 million of accrual reversals in May 1996 related to the Customer
Settlement. The change in Other also reflects an increase in the net pension
asset and a decrease in interruptible transportation revenue credits.
1995 VERSUS 1994. Several factors contributed to the $159.6 million
decrease in cash flow from operations in 1995 compared to 1994. The $99.3
million change in net payments for GSR costs is primarily due to a $45.0
million payment to Exxon and the funding of a $42.3 million GSR liability in
the current period compared to net recoveries of $18.7 million in the prior
period. The $64.1 million change in reserves for regulatory matters reflects
Southern's implementation of reduced rates and cessation of additional revenue
collection on March 1, 1995. The increase in deferred taxes reflects the
impact of the GSR payments, the cessation of collecting revenues subject to
refund and the accounting for the Customer Settlement. The change in
take-or-pay costs reflects the completion of Southern's take-or-pay cost
recovery in 1994. The change in accounts receivable and accounts payable is
due to the change in Southern's business under Order No. 636, which eliminated
their merchant function. The change in Other is primarily due to a $56.5
million provision for the Customer Settlement discussed in Note 8 of the Notes
to Consolidated Financial Statements and deferred revenue credits in 1994.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
INVESTING ACTIVITIES $ (12.9) $ 1.1 $(45.7)
</TABLE>
1996 VERSUS 1995. Investing activities required $12.9 million of net
cash in 1996 compared to providing $1.1 million in 1995. The primary use of
cash in investing activities was capital expenditures, which increased to
$130.4 million in 1996 from $62.7 million in 1995. Southern's system
II-10
<PAGE> 23
expansions were the primary reason for the capital expenditure increase. Major
sources of investing funds were loan repayments from Southern's parent and
increased proceeds from the disposal of assets.
1995 VERSUS 1994. Investing activities provided $1.1 million of net
cash in 1995 compared to requiring $45.7 million in 1994. The increase in cash
from investing activities was attributable to loan repayments from Southern's
parent, partially offset by an increase in capital expenditures of $11.5
million.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
FINANCING ACTIVITIES $(120.5) $(40.8) $(156.7)
</TABLE>
1996 VERSUS 1995. Net cash used in financing activities was $79.7
million higher in the 1996 period compared to the 1995 period. The change was
due to loan repayments and a special $50.0 million dividend by Southern to its
parent in the 1996 period.
1995 VERSUS 1994. Net cash used in financing activities was $115.9
million less in the 1995 period compared to the 1994 period, primarily due to
the maturity and redemption of Southern's $100.0 million 9 5/8 Percent Notes in
1994, and Southern's net borrowings from Sonat in 1995 of $15.0 million.
CAPITAL RESOURCES
At December 31, 1996, 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 continue to use cash from operations and
borrowings in the public or private markets or loans from affiliates to finance
its capital and other corporate expenditures.
FINANCIAL RISK MANAGEMENT
Southern faces exposure to financial market risks, primarily interest
rate risk. Use of derivatives to manage this risk is governed by a set of
policies approved by the Sonat Board of Directors. These policies prohibit
speculative transactions and require all counterparties to be approved by the
Board. On January 22, 1996, Southern entered into a forward rate agreement to
hedge the interest rate risk of an anticipated future borrowing under its shelf
registration statement. The base 10 year treasury rate for this future
borrowing was hedged at approximately 5.78 percent on a notional amount of
$97.0 million. In September 1996, due to revised expectations of external
financing requirements, 50 percent of the forward rate agreement was liquidated
resulting in a gain of $3.9 million.
II-11
<PAGE> 24
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).
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 has been notified that it is or may be a potentially
responsible party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) in connection with three Superfund
sites for which the amount of its liability has not been settled. In these
cases, Southern has determined that the aggregate maximum amount of loss
reasonably likely to be attributed to 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.
In the operation of their natural gas pipeline systems, Southern and
its wholly owned subsidiaries, South Georgia Natural Gas Company and Sea Robin
Pipeline Company, have used, and continue to use at several locations, gas
meters containing elemental mercury. Southern, South Georgia and Sea Robin 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. Southern completed the characterization of its remaining
190 sites in Mississippi during 1996. Approximately 50 percent of the sites
characterized in 1995 and 1996 across the pipeline systems of Southern and Sea
Robin had detectable levels of mercury. Characterization of potential sites on
the pipeline system of South Georgia has not commenced at this time. Southern
will file copies of the characterization reports with the applicable state
agencies upon their finalization. At this time, only the State of Georgia has
issued formal guidelines for remediation of mercury sites, although the State
of Louisiana
II-12
<PAGE> 25
has issued informal guidance. 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 guidance is still uncertain for
all sites. Based on its experience with other remediation projects, industry
experience to date with remediation of mercury, and its characterization data,
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
incurred by Southern, South Georgia, and Sea Robin 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.
FORWARD-LOOKING STATEMENTS
See Forward-Looking Statements in Part I of this report.
II-13
<PAGE> 26
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
January 20, 1997
II-14
<PAGE> 27
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,316 $ 711
Notes receivable, primarily from affiliates - 103,845
Accounts receivable, including $14,286,000 in
1996 and $11,900,000 in 1995 from affiliates 104,432 96,798
Inventories 24,197 21,625
Gas imbalance receivables 20,161 15,919
Federal and state income taxes 902 13,160
Other 5,210 10,899
---------- ----------
Total Current Assets 157,218 262,957
---------- ----------
Investments:
Unconsolidated affiliates (Note 4) 49,383 48,631
Other investments 984 904
---------- ----------
50,367 49,535
---------- ----------
Plant, Property and Equipment (Note 5) 2,422,845 2,315,003
Less accumulated depreciation
and amortization 1,539,984 1,504,087
---------- ----------
882,861 810,916
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs (Note 8) 11,144 199,073
Other 129,555 115,228
---------- ----------
140,699 314,301
---------- ----------
$1,231,145 $1,437,709
========== ==========
</TABLE>
See accompanying notes.
II-15
<PAGE> 28
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year (Note 6) $ 6,964 $ 6,964
Notes payable to affiliates 1,189 14,981
Accounts payable, including $24,173,000 in 1996
and $19,607,000 in 1995 to affiliates 62,516 56,787
Accrued income taxes 184 1,856
Other accrued taxes 8,031 7,825
Accrued interest 17,015 15,404
Gas imbalance payables 17,162 17,196
Other 8,217 9,433
---------- ----------
Total Current Liabilities 121,278 130,446
---------- ----------
Long-Term Debt (Note 6) 310,536 317,627
---------- ----------
Deferred Credits and Other:
Deferred income taxes (Note 7) 119,850 80,956
Reserves for regulatory matters (Note 8) 14,644 181,798
Other 97,656 152,784
---------- ----------
232,150 415,538
---------- ----------
Commitments and Contingencies (Note 8)
Stockholder's Equity:
Common stock, $3.75 par value; 1,000 shares
authorized and outstanding 4 4
Capital in excess of par value 100,670 100,612
Retained earnings 466,507 473,482
---------- ----------
567,181 574,098
---------- ----------
$1,231,145 $1,437,709
========== ==========
</TABLE>
See accompanying notes.
II-16
<PAGE> 29
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Revenues (Note 9):
Natural gas sales $209,971 $195,201 $233,667
Transportation and storage 369,804 375,070 357,826
Other 196,536 91,325 135,686
--------- -------- --------
776,311 661,596 727,179
--------- -------- --------
Costs and Expenses:
Natural gas cost 206,765 191,260 229,137
Transition cost recovery and natural gas
purchase contract settlement costs 170,718 58,010 116,159
Operating and maintenance 83,955 96,097 151,732
General and administrative 82,565 85,361 71,988
Depreciation and amortization 48,292 52,274 46,576
Taxes, other than income 18,092 19,446 18,748
--------- -------- --------
610,387 502,448 634,340
--------- -------- --------
Operating Income 165,924 159,148 92,839
--------- -------- --------
Other Income, Net:
Equity in earnings of unconsolidated
affiliates (Note 4) 9,630 9,357 8,954
Other 6,664 588 576
--------- -------- --------
16,294 9,945 9,530
--------- -------- --------
Interest:
Interest income from affiliates 3,993 6,876 13,234
Interest income 1,084 1,373 1,947
Interest expense (38,060) (43,467) (42,203)
Interest capitalized 984 249 751
--------- -------- --------
(31,999) (34,969) (26,271)
--------- -------- --------
Income Before Income Taxes 150,219 134,124 76,098
Income Taxes (Note 7) 57,594 51,631 28,274
--------- -------- --------
Net Income $ 92,625 $ 82,493 $ 47,824
========= ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $473,482 $440,589 $542,365
Add:
Net income 92,625 82,493 47,824
Deduct:
Dividends 99,600 49,600 149,600
-------- -------- --------
Balance at End of Year $466,507 $473,482 $440,589
======== ======== ========
</TABLE>
See accompanying notes.
II-17
<PAGE> 30
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 92,625 $ 82,493 $ 47,824
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 48,292 52,274 46,576
Deferred income taxes 38,894 37,144 (43,315)
Equity in earnings of unconsolidated
affiliates, less distributions (280) (857) (1,454)
Reserves for regulatory matters (167,154) (1,545) 62,572
Gas supply realignment costs 187,929 (38,223) 18,736
Funding of gas supply realignment
cost liability - (42,330) -
Natural gas purchase contract
settlement costs - - 18,535
Change in:
Accounts receivable (7,634) 177 28,550
Inventories (2,572) (358) 2,716
Accounts payable 5,729 13,433 (27,942)
Accrued interest and income
taxes, net 12,254 (28,224) (956)
Other current assets 1,418 7,674 9,778
Other current liabilities (1,015) (21,692) (14,441)
Other (73,536) (20,471) 51,891
--------- -------- ---------
Net cash provided by operating
activities 134,950 39,495 199,070
--------- -------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (130,418) (62,720) (51,206)
Notes receivable from affiliates 103,645 63,030 (3,399)
Proceeds from disposal of assets 14,261 1,323 8,986
Other, net (351) (566) (69)
--------- -------- ---------
Net cash provided by (used in)
investing activities (12,863) 1,067 (45,688)
--------- -------- ---------
Cash Flows from Financing Activities:
Payments of long-term debt (7,091) (6,280) (107,050)
Changes in short-term borrowings (13,791) 14,981 -
--------- -------- ---------
Net changes in debt (20,882) 8,701 (107,050)
Dividends paid (99,600) (49,600) (49,600)
Other - 73 -
--------- -------- ---------
Net cash used in financing
activities (120,482) (40,826) (156,650)
--------- -------- ---------
Net Increase (Decrease) in Cash 1,605 (264) (3,268)
Cash at Beginning of Year 711 975 4,243
--------- -------- ---------
Cash at End of Year $ 2,316 $ 711 $ 975
========= ======== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 26,257 $ 29,160 $ 35,170
Income taxes, net 8,075 44,804 71,079
</TABLE>
See accompanying notes.
II-18
<PAGE> 31
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description - Southern Natural Gas Company (Southern), which
is a wholly owned subsidiary of Sonat Inc., is primarily engaged in the
transmission of natural gas in the Southeastern United States. It transports
gas to gas distribution companies, municipalities, gas districts, industrial
customers and interstate pipeline companies. The principal industries served
directly by Southern's pipeline system and indirectly through its distribution
customers' 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.
Intercompany transactions and accounts have been eliminated in consolidation.
The equity method of accounting is used for investments in affiliates owned 50
percent or less.
Certain amounts in the 1995 and 1994 Consolidated Financial Statements
have been reclassified to conform with the 1996 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, 1996, 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-19
<PAGE> 32
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. Accruals for environmental remediation
liabilities are not material and have not been discounted.
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 used in 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.
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 combined net income of
$76,300 for the year ended December 31, 1994. Their combined net book value of
$21,981,000 was recorded as a capital contribution from Sonat.
On January 1, 1997, Southern transferred its investment of $23,612,000
in Sonat Intrastate-Alabama back to Sonat. For the year ended December 31,
1996, Sonat Intrastate-Alabama had revenues of $24,399,000 and a net loss of
$630,000.
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, 1996
Cash $ 2,316 $ 2,316
Gas Supply Realignment Costs 11,144 11,144
Notes Payable to Affiliates 1,189 1,189
Long-Term Debt 317,500 338,569
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
</TABLE>
II-20
<PAGE> 33
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.
FINANCIAL RISK
On January 22, 1996, Southern entered into a forward rate agreement to
hedge the interest rate risk of an anticipated future borrowing under an
existing shelf registration statement. The base 10 year treasury rate for this
future borrowing was hedged at approximately 5.78 percent on a notional amount
of $97.0 million. In September 1996, due to revised expectations of external
financing requirements, 50 percent of the forward rate agreement was liquidated
resulting in a gain of $3.9 million. At December 31, 1996, the fair market
value of the remaining $48.5 million notional amount of this agreement was
approximately $2.0 million.
CREDIT RISK
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,
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. Accounts receivable are
stated net of valuation allowances of $3.7 million in 1996 and $2.3 million in
1995.
4. UNCONSOLIDATED AFFILIATES
At December 31, 1996, Southern's investment in unconsolidated
affiliates totaled $49.4 million and equaled its share of underlying equity in
net assets of the investees. Through December 31, 1996, Southern's cumulative
equity in earnings of its unconsolidated affiliates was $154.0 million and
cumulative dividends received from them totaled $142.6 million.
II-21
<PAGE> 34
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
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,
--------------------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Revenues $36,258 $36,167 $35,655
Expenses:
Operating expenses 4,817 5,408 5,303
Depreciation 5,415 5,399 5,396
Other expenses, net 5,657 6,167 7,048
------- ------- -------
Income Reported $20,369 $19,193 $17,908
======= ======= =======
December 31,
-----------------------------
1996 1995
-------- --------
(In Thousands)
ASSETS
Current $ 7,205 $ 7,438
Net plant and property 154,388 159,348
Other 338 434
-------- --------
$161,931 $167,220
======== ========
LIABILITIES AND EQUITY
Current $ 8,525 $ 8,554
Long-term debt and other liabilities 55,729 62,658
Participants' equity 97,677 96,008
-------- --------
$161,931 $167,220
======== ========
</TABLE>
In 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.
II-22
<PAGE> 35
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION
A summary of plant, property and equipment by classification follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $1,335,540 $1,283,330
Gas Supply 510,355 531,413
Gas Gathering 36,909 39,650
Underground Storage Facilities 60,528 58,936
Liquefied Natural Gas Facilities 154,092 154,083
Gas Stored Underground 124,805 130,223
Other 200,616 117,368
---------- ----------
$2,422,845 $2,315,003
========== ==========
</TABLE>
Other plant, property and equipment includes construction work in
progress of $67.4 million and $15.0 million at December 31, 1996 and 1995,
respectively.
The accumulated depreciation and amortization amounts by
classification are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Mainline Transmission Property $ 848,352 $ 828,148
Gas Supply 436,638 460,521
Gas Gathering 22,332 23,570
Underground Storage Facilities 44,072 42,101
Liquefied Natural Gas Facilities 114,180 109,358
Other 74,410 40,389
---------- ----------
$1,539,984 $1,504,087
========== ==========
</TABLE>
The annual depreciation rates by classification are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Mainline Transmission Property 2.0% 2.0% 2.8%
Gas Supply 2.9% 2.9% 4.4%
Gas Gathering 2.8% 2.8% 2.8%
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-23
<PAGE> 36
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT
Long-Term Debt - Long-term debt consists of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-------- --------
(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 1,220 2,031
South Georgia Natural Gas Company
9.85% Term Loan due through December 31, 1997 880 1,760
7.80% Term Loan due through December 31, 1997 400 800
Southern LNG Inc.
Promissory Note (an effective rate of
6.75% at December 31, 1996 and 1995)
due through April 1999 15,000 20,000
-------- --------
Total Outstanding 317,500 324,591
Less Long-Term Debt Due Within One Year 6,964 6,964
-------- --------
$310,536 $317,627
======== ========
</TABLE>
Southern had no restrictions on the payment of dividends at December
31, 1996.
Annual maturities of long-term debt at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Years (In Thousands)
----- --------------
<S> <C>
1997 $ 6,964
1998 5,090
1999 5,090
2000 89
2001 100,089
2002-2003 200,178
--------
$317,500
========
</TABLE>
Unsecured Notes - As part of Sonat's cash management program, Southern
can either loan funds to or borrow 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 September 1996 Southern began borrowing from its subsidiaries
and repaid its loan from Sonat.
II-24
<PAGE> 37
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT (CONTINUED)
Southern has available short-term lines of credit of $50 million for a
period of 364 days. Borrowings are available through May 27, 1997, and are in
the form of unsecured promissory notes that bear interest at rates based on the
banks' prevailing prime, international or money-market lending rates. At
December 31, 1996 and 1995, no amounts were outstanding.
7. INCOME TAXES
An analysis of Southern's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $16,182 $16,553 $ 61,483
State 2,518 (2,066) 10,106
------- ------- --------
18,700 14,487 71,589
------- ------- --------
Deferred:
Federal 33,542 32,875 (30,383)
State 5,352 4,269 (12,932)
------- ------- --------
38,894 37,144 (43,315)
------- ------- --------
$57,594 $51,631 $ 28,274
======= ======= ========
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $143,505 $139,913
Inventories 11,573 11,573
GSR and other transition costs - 26,052
Other 3,893 3,166
-------- --------
Total deferred tax liabilities 158,971 180,704
-------- --------
Deferred Tax Assets:
Revenue reserves 4,681 74,876
Other accounting accruals 14,361 18,144
GSR and other transition costs 13,228 -
Other 6,851 6,728
-------- --------
Total deferred tax assets 39,121 99,748
-------- --------
Net Deferred Tax Liabilities $119,850 $ 80,956
======== ========
</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.
II-25
<PAGE> 38
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
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,
--------------------------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Income Tax Expense at Statutory
Federal Income Tax Rates $52,577 $46,943 $26,634
Increases (Decreases) in Tax
Resulting From:
State income taxes, net of
federal income tax benefit 5,116 1,432 (4,174)
Refunds and adjustment of
accrued tax position 27 5,091 5,949
Other (126) (1,835) (135)
------- ------- -------
Income Tax Expense $57,594 $51,631 $28,274
======= ======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Rate Matters - Periodically, Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (FERC) to provide
for the recovery of cost of service and a return on equity. The FERC normally
allows the filed rates to become effective, subject to refund, until it rules
on the approved level of rates. Southern and its subsidiaries provide reserves
relating to such amounts collected subject to refund, as appropriate, and make
refunds upon establishment of the final rates. At December 31, 1996,
Southern's rates are established by the Customer Settlement and a FERC order
effective for parties contesting the Customer Settlement and are not subject to
refund (see discussion below).
Customer Settlement - In 1992 the FERC issued its Order No. 636 (the
Order). The Order required significant changes in interstate natural gas
pipeline services. Interstate pipeline companies, including Southern, are
incurring or have incurred certain costs (transition costs) as a result of the
Order, the principal one being costs related to amendment or termination of, or
purchases of gas at above-market prices under, existing gas purchase contracts,
which are referred to as gas supply realignment (GSR) costs.
In an order issued on September 29, 1995, (the Settlement Order) the
FERC approved a comprehensive settlement (the Customer Settlement) that is
effective as to all Southern's customers, except one customer representing
approximately 2 percent of the firm transportation capacity on Southern's
system. The Customer Settlement resolved all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636. The four major rate cases
resolved by the Customer Settlement cover consecutive periods beginning
September 1, 1989. In May 1996, the Settlement became final and Southern
II-26
<PAGE> 39
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
credited in the aggregate the full amount of Southern's rate reserves as of
February 28, 1995, plus interest, less certain amounts withheld for potential
refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. The total credit recorded in May 1996 amounted to $163.9 million.
Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1,
1999. The Settlement also provides for Southern to recover $363 million of GSR
costs incurred or reserved as of December 31, 1996, and 50 percent of future
GSR costs that Southern may incur thereafter, which future costs the Company
believes will not be material to its financial position or results of
operations.
Several parties that opposed the Customer Settlement had filed with
the FERC requests for rehearing of the Settlement Order. On April 11, 1996,
the FERC denied those requests for rehearing of the Settlement Order and also
decided certain issues in prior rate proceedings that affect the contesting
parties to the Customer Settlement (April 11 Order). Pursuant to the April 11
Order, Southern made refunds to the contesting parties in May 1996 covering
various rate periods from January 1, 1991, through December 31, 1995. Southern
was adequately reserved for these refunds. The only issues remaining to be
litigated at the FERC by the one remaining contesting party concern the
recoverability of certain GSR and other transition costs under Order No. 636,
which would not be material to the Company's financial position or results of
operations even if such issues were determined adversely to Southern. The
contesting party, and one other entity that may potentially compete with
Southern in providing storage services, have each appealed the April 11 Order
and the Settlement Order to the D.C. Circuit Court of Appeals. Although there
can be no assurances, the Company believes that the Settlement Order and the
April 11 Order should be upheld on appeal.
Sea Robin - In January 1995, Sea Robin Pipeline Company, a subsidiary
of Southern, filed with the FERC a petition for a declaratory ruling that the
Sea Robin pipeline system is engaged in the gathering of natural gas and is,
therefore, exempt from FERC regulation under the Natural Gas Act. In June
1995, the FERC denied Sea Robin's petition on the basis that the primary
function of the Sea Robin system is the interstate transportation of gas. Sea
Robin's request for rehearing of that ruling was denied by the FERC on June 26,
1996. Sea Robin filed on August 15, 1996, for judicial review of the orders
denying its petition.
Following the filing of Sea Robin's petition for a gathering
exemption, several of the shippers on the Sea Robin system filed with the FERC
in February 1995 a complaint against Sea Robin under Section 5 of the Natural
Gas Act claiming that Sea Robin's rates are unjust and unreasonable. In its
answer, Sea Robin asked the FERC to dismiss the complaint or to find that its
rates continue to be just and reasonable based on the data it presented. On
August 2, 1996, the FERC issued an order on the complaint, instituting an
investigation and hearing under Section 5 of the Natural Gas Act and requiring
that an initial decision be issued by May 2, 1997. On December 31, 1996, Sea
II-27
<PAGE> 40
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Robin filed a proposed settlement of the complaint proceeding pursuant to which
it would voluntarily reduce its transportation rates by $.0042 per decatherm,
calculated on a 100 percent load factor basis, effective January 1, 1997. The
settlement is supported by the staff of the FERC and one of two groups of
active intervenors but is opposed by the complainant shippers. By order dated
February 7, 1997, the Presiding Administrative Law Judge certified the
settlement to the FERC Commissioners. Sea Robin is unable to predict the
outcome of this proceeding, but, if the proposed settlement is not approved and
a hearing is held, any reduction in Sea Robin's rates can be implemented only
on a prospective basis and any such change is not expected to be material to
the Company's financial position or results of operations.
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.
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,
------------------------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Non-Affiliated Operating Leases $1,292 $1,438 $1,296
Affiliated Operating Leases 4,351 4,321 3,730
------ ------ ------
Total $5,643 $5,759 $5,026
====== ====== ======
</TABLE>
At December 31, 1996, future minimum payments for non-cancelable
operating leases for the years 1997 through 2001 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,
--------------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Atlanta Gas Light Company $180,051 $190,209 $250,932
Alabama Gas Corporation 82,120 91,635 118,975
</TABLE>
II-28
<PAGE> 41
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES (CONTINUED)
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,
--------------------------------------------------
1996 1995 1994
------ ------- -------
(In Thousands)
<S> <C> <C> <C>
Revenues from Affiliates $83,323 $95,610 $80,394
Charges from Affiliates 45,737 48,534 39,060
</TABLE>
10. RETIREMENT PLANS AND OTHER 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,
--------------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Service Cost - Benefits Earned
during the Period $ 3,296 $ 2,265 $ 3,022
Interest Cost on Projected
Benefit Obligation 18,096 18,529 17,492
(Gain) Loss on Assets (32,745) (70,152) 8,609
Net Amortization and Deferral 4,834 43,745 (35,581)
-------- -------- --------
$ (6,519) $ (5,613) $ (6,458)
======== ======== ========
</TABLE>
II-29
<PAGE> 42
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER 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)
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Actuarial Present Value of
Benefit Obligations:
Vested benefit obligations $218,632 $225,605 $ 6,831 $ 5,979
Non-vested benefit obligations 3,884 4,012 171 148
-------- -------- -------- --------
Accumulated benefit obligations 222,516 229,617 7,002 6,127
Effect of projected future
salary increases 31,465 30,226 4,856 5,869
-------- -------- -------- --------
Projected benefit obligations 253,981 259,843 11,858 11,996
Plan Assets at Fair Value (3) 323,353 309,757 - -
-------- -------- -------- --------
Projected Benefit Obligations
(in Excess of) or Less Than
Plan Assets 69,372 49,914 (11,858) (11,996)
Unrecognized Net (Assets) or
Obligations at Transition (4) (7,906) (9,124) 73 87
Unrecognized Net (Gain) Loss (5) (52,527) (40,274) 1,533 2,683
Unrecognized Prior Service Cost 4,769 5,227 1,106 1,225
Net Unamortized Deferred Charge
from Early Retirement
Termination Benefits (6) 5,965 7,903 - 1,207
-------- -------- -------- --------
Net Pension Asset (Liability)
Recognized in the
Consolidated Balance Sheets $ 19,673 $ 13,646 $ (9,146) $ (6,794)
======== ======== ======== ========
</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 unrecognized net (gain) loss are
approximately 16 years for the Retirement Plan and 16.4 and 14.2 years
for the Supplemental Plan for 1996 and 1995, respectively.
(6) Amortization periods for early retirement termination benefits are 10
years for the Retirement Plan and five years for the Supplemental
Plan.
II-30
<PAGE> 43
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER 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,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted Average Discount Rate 7.0% 7.0% 8.5%
Long-Term Rate of Return 9.5% 9.5% 8.5%
Increase in Future Compensation Levels
(Composite Rate):
Retirement and Supplemental Plans 5.0% 5.5% 5.5%
</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 accrues 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,
-----------------------------------------
1996 1995 1994
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Service Cost $ 854 $ 725 $ 910
Interest Cost 4,905 5,939 5,682
Return on Plan Assets (3,766) (3,221) (378)
Net Amortization and Deferral 4,908 4,905 2,631
------- ------- ------
$ 6,901 $ 8,348 $8,845
======= ======= ======
</TABLE>
Southern funds postretirement health care benefits for the majority of
its employees in an amount generally equal to its annual 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-31
<PAGE> 44
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
The following table sets forth the funded status at December 31, 1996
and 1995, for Southern's postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
(In Thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 55,015 $ 59,665
Fully eligible active plan participants 2,194 2,413
Other active plan participants 14,930 14,390
-------- --------
72,139 76,468
Plan Assets at Fair Value (1) 30,228 21,685
-------- --------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets (41,911) (54,783)
Unrecognized Transition Obligation 46,633 49,548
Unrecognized Net Gain (2) (14,150) (7,282)
Net Unamortized Deferred Charge from
Early Retirement Termination Benefits 6,266 8,299
-------- --------
Accrued Postretirement Benefit Cost $ (3,162) $ (4,218)
======== ========
</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.
(2) Amortization periods for unrecognized net gain are 15.4 and 15.7 years
for 1996 and 1995, respectively.
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount Rate 7.0% 7.0% 8.5%
Long-Term Rate of Return:
Medical assets 5.5% 5.5% 5.5%
Life insurance assets 7.5% 7.5% 8.5%
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 8 percent in 1997, 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, 1996, 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.
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 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
II-32
<PAGE> 45
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
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. Commencing 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 (limited SARs). In November 1995, Southern also
issued limited SARs to certain key employees with respect to all of their then
outstanding options. No other SARs have been issued since 1990.
Sonat issued to employees of Southern 16,400 shares of restricted
stock with a market value of $52 during 1996 and 5,600 shares with a market
value of $32.19 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, 1996, 18,332 of the 62,100 cumulative
restricted shares issued have vested.
Stock-based compensation expense decreased Southern's pretax income by
$5.8 million in 1996 and $3.7 million in 1995 and increased Southern's pretax
income by $.5 million in 1994.
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>
1996(1)
Revenues $157,262 $308,913 $142,233 $167,903
Operating Income 48,193 36,479 36,192 45,060
Net Income 25,821 18,264 22,878 25,662
1995(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
</TABLE>
(1) Revenues and expenses for the second quarter of 1996 include
$163.9 million as a result of the offset of rate reserves against GSR costs as
provided in Southern's Customer Settlement.
(2) Net income for the fourth quarter of 1995 includes a loss of $6.8
million on unrecoverable gas contract realignment costs.
II-33
<PAGE> 46
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-34
<PAGE> 47
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-14
Consolidated Balance Sheets at December 31, 1996 and
1995................................................... II-15
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994...................... II-17
Consolidated Statements of Changes in Retained Earnings
for the years ended December 31, 1996, 1995, and
1994................................................... II-17
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994...................... II-18
Notes to Consolidated Financial Statements................ II-19
</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> 48
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-(a) Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
filed as Exhibit 4-(1) to Registration Statement No.
33-47266 for Southern Natural Gas Company dated July 31,
1987
4-(b) Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4-(c) Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated January
14, 1991
4-(d) Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266, filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed
herewith
23 Consent of Ernst & Young LLP, Independent Auditors, dated
March 18, 1997, 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, 1996, on behalf of certain
directors and officers of the registrant, filed herewith
27 Financial Data Schedule for the period ended December 31,
1996, 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.
- ---------------
(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.
2
<PAGE> 49
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1996.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-3
<PAGE> 50
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, 1997
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, 1997
- -----------------------------------------------------
(JAMES E. MOYLAN, JR.)
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Treasurer March 21, 1997
- -----------------------------------------------------
(THOMAS W. BARKER, JR.)
Principal Accounting Officer:
/s/ NORMAN G. HOLMES Vice President and March 21, 1997
- ----------------------------------------------------- Controller
(NORMAN G. HOLMES)
(iii) Directors:*
RONALD L. KUEHN, JR.
LARRY E. POWELL
L. DAVID MATHEWS
JAMES A. RUBRIGHT
JAMES E. MOYLAN, JR.
JAMES C. YARDLEY
* Signed on behalf of each of these persons
By /s/ R. DAVID HENDRICKSON
- -----------------------------------------------------
SECRETARY, AS AUTHORIZED
BY CERTAIN POWERS OF ATTORNEY DATED
FEBRUARY 28, 1997, ALL OF WHICH ARE
FILED HEREWITH AS EXHIBIT 24
</TABLE>
IV-4
<PAGE> 51
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NATURAL GAS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1996
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-8 Map of the Southeastern United States showing the
approximate location of the pipeline systems of Southern and
its subsidiaries and the underground storage facilities of
Southern (each described on pages I-1 and I-2).
</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)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $150,219 $134,124 $ 76,098 $127,617 $126,691
Fixed charges (see computation below) 43,028 48,779 47,575 58,249 47,995
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $193,247 $182,903 $123,673 $185,866 $174,686
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 41,147 $ 46,859 $ 45,900 $ 56,599 $ 46,298
Rentals(b) 1,881 1,920 1,675 1,650 1,697
-------- -------- -------- -------- --------
$ 43,028 $ 48,779 $ 47,575 $ 58,249 $ 47,995
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 4.5 3.7 2.6 3.2 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
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 the related Prospectus and Prospectus Supplement of our report
dated January 20, 1997, 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, 1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
March 18, 1997
<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, 1996, 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 28th day of February, 1997.
/s/ 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, 1996, 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 28th day of February, 1997.
/s/ 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, 1996, 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 28th day of February, 1997.
/s/ 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, 1996, 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 28th day of February, 1997.
/s/ 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, 1996, 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 28th day of February, 1997.
/s/ 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,
1996, 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 28th day of February, 1997.
/s/ Ronald L. Kuehn, Jr.
------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHERN NATURAL GAS FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,316
<SECURITIES> 0
<RECEIVABLES> 104,432
<ALLOWANCES> 0
<INVENTORY> 24,197
<CURRENT-ASSETS> 157,218
<PP&E> 2,422,845
<DEPRECIATION> 1,539,984
<TOTAL-ASSETS> 1,231,145
<CURRENT-LIABILITIES> 121,278
<BONDS> 310,536
0
0
<COMMON> 4
<OTHER-SE> 567,177
<TOTAL-LIABILITY-AND-EQUITY> 1,231,145
<SALES> 209,971
<TOTAL-REVENUES> 776,311
<CGS> 206,765
<TOTAL-COSTS> 461,438
<OTHER-EXPENSES> 48,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,076
<INCOME-PRETAX> 150,219
<INCOME-TAX> 57,594
<INCOME-CONTINUING> 92,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,625
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
