UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-2745
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-7410
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $3.75 PAR VALUE:
1,000 SHARES OUTSTANDING ON JULY 31, 1998
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<S> <C>
(Unaudited)--June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Six Months Ended
June 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Six Months Ended June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7 - 13
PART II. Other Information
Item 5. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 424 $ 2,905
Notes receivable from affiliates 23,093 89,277
Accounts receivable 66,239 78,248
Inventories 26,544 21,529
Gas imbalance receivables 9,494 13,493
Other 5,220 4,250
---------- ----------
Total Current Assets 131,014 209,702
---------- ----------
Investments in Unconsolidated Affiliates and Other 156,302 97,054
---------- ----------
Plant, Property and Equipment 2,527,416 2,456,773
Less accumulated depreciation and amortization 1,505,397 1,497,827
---------- ----------
1,022,019 958,946
---------- ----------
Deferred Charges and Other 107,476 120,629
---------- ----------
$1,416,811 $1,386,331
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 5,000 $ 6,220
Accounts payable 25,126 49,364
Accrued income taxes 3,311 4,078
Other accrued taxes 6,735 9,150
Accrued interest 20,169 20,028
Gas imbalance payables 7,630 10,498
Other 9,325 10,493
---------- ----------
Total Current Liabilities 77,296 109,831
---------- ----------
Long-Term Debt 400,000 405,000
---------- ----------
Deferred Credits and Other:
Deferred income taxes 151,267 134,073
Other 73,453 85,734
---------- ----------
224,720 219,807
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 79,590 79,336
Retained earnings 635,205 572,357
---------- ----------
Total Stockholder's Equity 714,795 651,693
---------- ----------
$1,416,811 $1,386,331
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Transportation and storage $90,006 $ 86,950 $185,096 $180,714
Other 5,494 16,431 15,905 21,833
------- -------- -------- --------
95,500 103,381 201,001 202,547
------- -------- -------- --------
Costs and Expenses:
Operating and maintenance 19,037 22,170 38,595 39,801
General and administrative 12,226 19,049 27,698 37,092
Depreciation and amortization 13,048 11,960 18,539 23,613
Taxes, other than income 5,371 4,773 10,720 9,970
------- -------- -------- --------
49,682 57,952 95,552 110,476
------- -------- -------- --------
Operating Income 45,818 45,429 105,449 92,071
------- -------- -------- --------
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 5,612 2,701 9,737 5,397
Other, net 1,094 968 1,747 4,925
------- -------- -------- --------
6,706 3,669 11,484 10,322
------- -------- -------- --------
Earnings Before Interest and Taxes 52,524 49,098 116,933 102,393
------- -------- -------- --------
Interest:
Interest income, primarily
from affiliates 1,170 43 2,569 189
Interest expense (9,209) (7,063) (18,275) (14,374)
Interest capitalized 493 348 966 856
------- -------- -------- --------
(7,546) (6,672) (14,740) (13,329)
------- -------- -------- --------
Income Before Income Taxes 44,978 42,426 102,193 89,064
Income Tax Expense 17,346 16,404 39,345 34,376
------- -------- -------- --------
Net Income $27,632 $ 26,022 $ 62,848 $ 54,688
======= ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 62,848 $ 54,688
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,539 23,613
Deferred income taxes 17,194 9,534
Equity in earnings of unconsolidated
affiliates, less distributions (6,237) (897)
Reserves for regulatory matters (4,431) (10,003)
Gas supply realignment costs 563 4,967
Change in:
Accounts receivable 12,008 16,294
Inventories (5,015) (5,045)
Accounts payable (24,239) (20,636)
Accrued interest and income taxes, net 178 2,978
Other current assets and liabilities (4,225) 3,360
Other 2,174 1,558
-------- --------
Net cash provided by operating
activities 69,357 80,411
-------- --------
Cash Flows from Investing Activities:
Plant, property and equipment additions (82,234) (59,037)
Notes receivable, primarily from affiliates 66,184 (16,455)
Investment in unconsolidated affiliates and other (49,568) 1,261
-------- --------
Net cash used in investing activities (65,618) (74,231)
-------- --------
Cash Flows from Financing Activities:
Payments of long-term debt (6,220) (5,640)
Changes in short-term borrowings - (1,189)
-------- --------
Net cash used in financing activities (6,220) (6,829)
-------- --------
Net Decrease in Cash (2,481) (649)
Cash at Beginning of Period 2,905 2,316
-------- --------
Cash at End of Period $ 424 $ 1,667
======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 16,014 $ 12,438
Income taxes paid, net 21,862 23,249
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Southern Natural Gas Company is a wholly owned subsidiary of Sonat Inc.
The accompanying condensed consolidated financial statements of
Southern Natural Gas and its subsidiaries (Southern) have been prepared in
accordance with the instructions to Form 10-Q and include the information and
footnotes required by such instructions. In the opinion of management, all
adjustments, including those of a normal recurring nature, have been made that
are necessary for a fair presentation of the results for the interim periods
presented herein.
Certain amounts in the 1997 condensed consolidated financial statements
and notes have been reclassified to conform with the 1998 presentation.
During the first quarter of 1998, Southern recognized the effect of a
change in salvage values, including reversal of excess depreciation expense,
relating to certain fixed assets, primarily aircraft and vehicles. The change,
which was to comply with recent Federal Energy Regulatory Commission (FERC)
directives, increased net income for the six-month period ended June 30, 1998,
by $4.4 million. The effect of the change on the three-month period ended June
30, 1998, was not material.
In the first quarter of 1998, Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which established
standards for reporting and display of comprehensive income and its components,
became effective for Southern. Southern has no items of other comprehensive
income that it is required to report under provisions of SFAS No. 130.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information also became effective for Southern in the first quarter of 1998.
SFAS No. 131 establishes standards for the way public enterprises are to report
information about operating segments and requires certain other disclosures.
Southern operates in one segment and implementation of SFAS No. 131 has minimal
effect on its reporting.
2. Unconsolidated Affiliates
Southern Natural Gas owns a one-third interest in Destin Pipeline
Company, L.L.C. and a subsidiary of Southern Natural Gas owns 50 percent of Bear
Creek Storage Company, an underground gas storage company.
<PAGE>
2. Unconsolidated Affiliates (Cont'd)
The following is summarized income statement information for Bear
Creek. No provision for income taxes has been included since its income taxes
are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,821 $8,973 $17,850 $18,319
Expenses:
Operating expenses 1,452 1,120 3,753 2,361
Depreciation 1,360 1,358 2,719 2,714
Other expenses, net 1,116 1,248 2,308 2,581
------ ------ ------- -------
Income Reported $4,893 $5,247 $ 9,070 $10,663
====== ====== ======= =======
</TABLE>
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern in the ownership of Destin Pipeline, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water development in the eastern Gulf of Mexico. Construction of the
pipeline began in December 1997, and it is expected to be partially completed
and in service in August 1998, and fully in service by January 1999. The FERC
has approved two extensions of Destin for a total filed cost of an additional
$56 million. The total cost of Destin is now estimated to be $416 million.
Destin's earnings of $9.2 million and $15.4 million for the three month and six
month periods ended June 30, 1998, respectively, primarily relate to the
allowance for funds used during construction capitalized on its expenditures to
date.
3. Debt and Notes To and From Affiliates
As part of Sonat's cash management program, Southern Natural Gas 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.
Southern Natural Gas has short-term lines of credit of $50.0 million
available through May 31, 1999. Borrowings are available for a period of not
more than 364 days and are in the form of unsecured promissory notes that bear
interest at rates based on the banks' prevailing prime, international or
money-market lending rates. At June 30, 1998, no amounts were outstanding under
its agreement.
<PAGE>
4. Rate Matters and Contingencies
Periodically, Southern and its subsidiaries make general rate filings
with the FERC to provide for the recovery of cost of service and a return on
equity. The FERC normally allows the filed rates to become effective, subject to
refund, until it rules on the approved level of rates. Southern and its
subsidiaries provide reserves relating to such amounts collected subject to
refund, as appropriate, and make refunds upon establishment of the final rates.
At June 30, 1998, Southern's rates are established by a settlement that was
approved by FERC orders issued in 1995 and 1996. All of its customers are
parties to the settlement, and all revenue is based on the final settlement
rates and therefore not collected subject to refund.
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation,
provides that rate-regulated entities account for and report assets and
liabilities consistent with the economic effect of the way in which regulators
establish rates, if the rates established are designed to recover costs of
providing the regulated service and if the competitive environment makes it
reasonable to assume such rates can be charged and collected. Certain expenses
and credits subject to rate determination normally reflected in income are
deferred in the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. Information regarding Southern's regulatory assets and liabilities is
shown below:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In Thousands)
Regulatory Assets:
<S> <C> <C>
SFAS No. 109 Tax Gross-Up $21,143 $19,801
Unrecovered Depreciation 13,953 13,853
Work Force Reduction 7,089 8,608
Charitable Donation 7,446 7,897
Cash Out Differential 8,058 12,449
Other 7,605 8,398
------- -------
$65,294 $71,006
======= =======
Regulatory Liabilities:
Excess Deferred Taxes Due Customers $ 4,513 $ 5,291
======= =======
</TABLE>
SFAS No. 109 tax gross-up is recorded pursuant to FERC policies
allowing future recovery of taxes associated with the allowance for funds used
during construction (AFUDC). Unrecovered depreciation represents amounts to be
recovered in future rates pursuant to a 1992 FERC settlement. Cash out
differential is the reserve for price differential associated with storage
transactions recoverable pursuant to Southern Natural Gas' customer settlement.
Excess deferred tax due customers represents amounts due customers pursuant to
federal tax rate normalization.
<PAGE>
Item 2. 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 transmission and storage of natural gas in
interstate commerce in the southeastern United States. Southern is actively
pursuing opportunities to expand its pipeline system in its traditional market
areas and to connect new gas supplies.
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern in the ownership of Destin Pipeline Company, L.L.C., a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Southern has a one-third
interest in this pipeline. Shell and Amoco have made substantial firm
transportation commitments to this pipeline. Eight other shippers have also
dedicated their production from certain leases in the eastern Gulf of Mexico to
Destin for transportation and discussions are under way with other prospective
shippers. Construction of the pipeline began in December 1997, and it is
expected to be partially completed and in service in August 1998, and fully in
service by January 1999. In June 1998, the Federal Energy Regulatory Commission
(FERC) approved Destin's application to extend its pipeline system approximately
14 miles to transport additional gas reserves committed to Destin's system. This
extension, which will cost approximately $19 million, is expected to be in
service in late 1998. In July 1998 the FERC also approved another Destin
application to extend its pipeline again by approximately 31 miles at a cost of
approximately $37 million to transport additional gas reserves committed to its
system. This extension is expected to be in service in early 1999. The total
cost of Destin is now estimated to be $416 million.
Southern is moving forward on three expansions to northern Alabama,
eastern Tennessee, and central Alabama that have a total filed capital cost of
$126 million. The North Alabama expansion, which received FERC approval in May
1997, is now anticipated to go in service in the fall of 1999, subject to FERC
approval of an application that Southern filed in February 1998 to change the
route of the pipeline as it crosses the Wheeler National Wildlife Refuge. The
122-mile expansion will provide 76 million-cubic-feet-per-day capacity to the
participating customers. A second expansion to serve customers primarily in
eastern Tennessee received FERC approval in April 1998 and is anticipated to go
in service in November 1998. Southern has firm transportation commitments
totaling 65 million cubic feet of natural gas per day from customers in eastern
Tennessee, Georgia and Alabama related to this expansion. The expansion in
central Alabama received FERC approval in March 1998 and is also expected to go
in service in the fourth quarter of 1998. This expansion will provide 34 million
cubic feet per day of firm transportation to Alabama Power Company and two other
customers.
In December 1997, an affiliate of AGL Resources, Inc. and Southern
formed a new entity, Etowah LNG Company, L.L.C. (Etowah LNG), to jointly
construct, own and operate a new liquefied natural gas peaking facility in Polk
County, Georgia. Peaking services provide supplemental gas supplies on days when
demand is highest, typically during the winter. Under the agreement, AGL
Resources and Southern each will own 50 percent of Etowah LNG, which will be
regulated by the FERC. The proposed plant will connect directly into AGL
Resources' principal natural gas distribution subsidiary, Atlanta Gas Light
Company, and Southern's pipeline. Etowah LNG will provide natural gas storage
and peaking services to Atlanta Gas Light and the city of Austell, Georgia. The
new facility will cost approximately $90 million with 300 million cubic feet per
day of deliverability capacity. Affiliates of AGL Resources will manage the
construction of the facility and operate it. Southern will provide
administrative services. Etowah LNG filed a certificate application with the
FERC in April 1998. Subject to receiving timely FERC approval, construction will
begin in early 1999 in order to provide peaking services during the 2001-02
winter heating season.
<PAGE>
Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $77.9 $ 74.6 $161.4 $157.8
Supply transportation 12.1 12.4 23.7 22.9
Other 5.5 16.5 15.9 21.9
----- ------ ------ ------
Total Revenues 95.5 103.5 201.0 202.6
----- ------ ------ ------
Costs and Expenses:
Operating and maintenance 19.0 22.2 38.6 39.8
General and administrative 12.2 19.1 27.7 37.1
Depreciation and amortization 13.1 11.9 18.6 23.6
Taxes, other than income 5.4 4.8 10.7 10.0
----- ------ ------ ------
49.7 58.0 95.6 110.5
----- ------ ------ ------
Operating Income 45.8 45.5 105.4 92.1
----- ------ ------ ------
Other Income:
Equity in Earnings of
Unconsolidated Affiliates 5.6 2.7 9.7 5.4
Other 1.1 .9 1.8 4.9
----- ------ ------ ------
6.7 3.6 11.5 10.3
----- ------ ------ ------
Earnings Before Interest and Taxes $52.5 $ 49.1 $116.9 $102.4
===== ====== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 137 136 322 306
Supply transportation 103 100 198 180
----- ------ ------ ------
Total Volumes 240 236 520 486
===== ====== ====== ======
Transition gas sales 3 17 6 35
===== ====== ====== ======
</TABLE>
<PAGE>
Second Quarter 1998 to Second Quarter 1997 Analysis
Earnings before interest and taxes (EBIT) for Southern was $52.5
million compared with $49.1 million in the second quarter of 1997. The increase
was primarily due to lower expenses of Southern and higher equity in earnings of
the Destin Pipeline. Partially offsetting was the effect of a $10 million
reserve adjustment in the second quarter of 1997 relating to Southern's
obligation to pay royalty claims in connection with take-or-pay settlements
entered into in the 1980's. The adjustment related to a favorable state court
ruling.
Market transportation revenues increased as a result of recent
expansions. Other revenue decreased primarily due to the reserve adjustment of
$10 million included in the 1997 period. Operating and maintenance expense
decreased primarily due to lower fuel costs. General and administrative expenses
decreased primarily due to lower employee benefit expenses and stock-based
compensation. Depreciation and amortization expense increased in the 1998 period
due to plant additions and pursuant to a provision of the customer settlement
allowing a deferral of depreciation on certain plant categories until March 1,
1998.
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin Pipeline, primarily resulting from the allowance for funds
used during construction (AFUDC) capitalized.
Six Months 1998 to Six Months 1997 Analysis
EBIT was $116.9 million for the six months ending June 30, 1998,
compared with $102.4 million for the 1997 period. The increase was primarily due
to expansions placed in service, lower expenses and earnings of Destin Pipeline.
Partially offsetting was the net effect of reserve adjustments made in the 1997
and 1998 periods, which is discussed below.
Market transportation revenues improved primarily due to recent
expansions. Other revenues decreased due to a favorable 1997 reserve adjustment,
discussed earlier, offset partially by the reversal of the remaining royalty
reserves in 1998. Such reversal has been made because management has determined
that the likelihood of Southern making any significant royalty payments as a
result of its prior take-or-pay settlements is remote. Operating and maintenance
expense decreased primarily due to lower fuel costs. General and administrative
expenses decreased primarily due to lower employee benefit expenses, lower
insurance expenses and lower stock-based compensation. Depreciation and
amortization expense decreased primarily due to an adjustment of the salvage
value on certain fixed assets (see Note 1 of the Notes to Condensed Consolidated
Financial Statements).
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin Pipeline, primarily resulting from AFUDC capitalized on
its current construction costs. Other income was lower primarily due to the
recognition of a gain on the termination of a forward rate agreement in the 1997
period.
<PAGE>
Natural Gas Sales and Supply
As a result of FERC Order No. 636, Southern terminated or renegotiated to
market pricing substantially all of its gas supply contracts through which it
had historically obtained its long-term gas supply. Pending the termination of
the remaining supply contracts, Southern's remaining gas supply is sold on a
month-to-month basis. Gas sales revenue and natural gas cost are included in
other revenue.
Southern's annual purchase commitments total less than $25 million per
year for 1998 and subsequent years. Based on Southern's current expectations
with respect to natural gas prices in 1998 and the years following, only an
insignificant amount of gas volumes is expected to be at prices above market.
Rate Matters
Under terms of a settlement approved by the FERC, all of Southern's
previously pending rate proceedings and proceedings to recover gas supply
realignment and other transition costs associated with the implementation of
FERC Order No. 636 have been resolved. The settlement requires Southern to file
a new rate case no later than September 1, 1999.
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $ 7.5 $ 6.7 $14.7 $13.3
</TABLE>
Net interest expense increased in both the three-month and six-month
periods of 1998 due to higher average debt levels and higher interest on taxes.
The effect of lower interest rates on debt and increased interest income on
higher average loan balances to affiliates slightly offset the increase in
interest expense.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense $17.3 $16.4 $39.3 $34.4
</TABLE>
Income tax expense increased in the 1998 periods due to higher pretax
income.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
(In Millions)
<S> <C> <C>
Operating Activities $ 69.4 $ 80.4
</TABLE>
Cash flow from operations decreased $11.0 million compared to the 1997
period. The change in depreciation is primarily due to an adjustment of the
salvage value on certain fixed assets (see Note 1 of the Notes to Condensed
Consolidated Financial Statements). The change in deferred taxes is primarily
attributable to an increase in plant in service and the depreciation adjustment.
Lower gas sales and lower GSR direct bill collections were the primary reasons
for the change in accounts receivable. The change in accounts payable was due to
the timing of intercompany settlements. The change in accrued interest and taxes
is primarily due to higher state tax payments in the current period. The change
in other current assets and liabilities primarily reflects the timing of
payments for property and other taxes.
<TABLE>
<S> <C> <C>
Investing Activities $(65.6) $(74.2)
</TABLE>
Net cash used in investing activities was $8.6 million less in 1998
compared to 1997. The decrease was attributable to repayments of intercompany
loans in the current period by Southern's parent, Sonat Inc., compared to
borrowings on intercompany loans in the prior period. Partially offsetting the
change in intercompany loans were investments in unconsolidated affiliates of
$53.0 million, primarily for Destin, and higher capital expenditures related to
Southern's expansion programs in 1998.
<TABLE>
<S> <C> <C>
Financing Activities $ (6.2) $ (6.8)
</TABLE>
Net cash used in financing activities was essentially unchanged in 1998
compared to the 1997 period.
CAPITAL RESOURCES
At June 30, 1998, Southern had bank lines of credit with a total
capacity of $50.0 million, all of which was available. Southern also has a shelf
registration statement with the Securities and Exchange Commission which
provides for the issuance of up to $500.0 million in debt securities.
Southern's capital expenditures and other investing requirements for
1998 are budgeted to aggregate $260 million. This amount reflects investments in
unconsolidated affiliates, expansions and other projects.
Southern expects to continue to use cash from operations and borrowings
in either the public or private markets or loans from affiliates to finance its
capital and other corporate expenditures.
<PAGE>
MARKET RISK
Financial instruments of Southern expose it to interest rate risk.
Southern's entire portfolio of interest rate risk instruments is classified as
non-trading.
Southern's interest income is sensitive to changes in the level of
short-term interest rates in the United States. In general, Southern either
loans excess funds to Sonat or repays its short-term borrowings. Excess cash
generated by or contributed to joint venture projects is invested on a
short-term basis pending distribution or expenditure on capital projects.
YEAR 2000 PROJECT
Southern is aware of the potential impact the Year 2000 could have on
its information technology and business infrastructure. To answer the Year 2000
challenge, the Sonat Board of Directors directed that a corporate-wide
initiative be undertaken. A consulting firm was engaged to assist in this
effort.
Southern has divided its Year 2000 project into assessment,
implementation, and testing phases. During the assessment phase, Southern
completed a comprehensive inventory of IT and non-IT systems, equipment,
computer hardware, and software that rely on a computer chip as well as service
providers that could be impacted by the Year 2000 problem. For vendor supplied
items, Southern has contacted its vendors seeking written verification of Year
2000 readiness. In addition, Southern is also communicating with its larger
customers and business partners to determine the extent to which it is
vulnerable to the failure of those third parties to remediate their Year 2000
issue.
Southern is currently engaged in the implementation and testing phases
of the Year 2000 project. The implementation phase includes completing the
replacement of mainframe systems with Year 2000-compliant vendor packages on new
client/server platforms and performing any required modifications and upgrades
identified during the assessment phase. The testing phase involves testing
systems for Year 2000 readiness and developing contingency plans for critical
systems and service providers. Southern has not completely finished analyzing
the most reasonably likely worst case scenarios and cannot estimate potential
lost revenue at this time. Southern is scheduled to be completed with the
implementation and testing phases by December 31, 1998.
The estimated cost to Southern of the Year 2000 project for capital as
well as general and administrative costs is expected to be $2.5 million to $5
million. As of June 30, 1998, Southern has incurred approximately $400,000 in
Year 2000 project costs. Southern expects to be able to fund Year 2000
expenditures from normal operations.
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income as changes
occur. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. SFAS No. 133 becomes effective for fiscal
years beginning after June 15, 1999. As a result, calendar year-end companies
have until January 1, 2000, to adopt. Early application is encouraged, but only
permitted as of the beginning of any fiscal quarter. Retroactive application to
previous periods, even previous quarters within the same fiscal year, is not
permitted. Southern does not currently have any derivative instruments.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements
regarding Southern's business plans and prospects, objectives, expansion
projects, proposed capital expenditures and expected performance or results.
These forward-looking statements are based on assumptions that Southern believes
are reasonable, but are subject to a wide range of risks and uncertainties and,
as a result, actual results and experience may differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. Such statements are made in reliance on the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results to differ include the
requirements to receive various governmental approvals to proceed with expansion
projects at Southern, Destin, and Etowah. Realization of Southern's objectives
and expected performance can also be adversely affected by the actions of
customers and competitors, changes in governmental regulation of Southern's
businesses, and changes in general economic conditions and the state of domestic
capital markets.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Legal Proceedings
As reported in Item 3 of the Company's Report on Form 10-K for the year
ended December 31, 1997, Tennessee Gas Pipeline Company ("Tennessee") had filed
an application with the FERC seeking to have the exchange agreement between
Southern and Tennessee, pursuant to which Southern delivers and receives gas to
and from the Bear Creek Storage Field at no charge, converted into a standard
transportation agreement by which Tennessee would charge Southern tariff rates
for providing that service. In May 1998 the FERC denied Tennessee's application.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits1
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedules for the period ended June 30, 1998, filed
electronically only
- ------------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter
ended June 30, 1998.
1 The Company will furnish to requesting security holders the exhibits on
this list upon the payment of a fee of $.10 per page up to a maximum of
$5.00 per exhibit. Requests must be in writing and should be addressed to
R. David Hendrickson, Secretary, Southern Natural Gas Company, P. O. Box
2563, Birmingham, Alabama, 35202-2563.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date: August 13, 1998 By: /s/ Thomas W. Barker, Jr.
-------------------------- --------------------------
Thomas W. Barker, Jr.
Vice President-Finance
Date: August 13, 1998 By: /s/ Norman G. Holmes
-------------------------- ---------------------
Norman G. Holmes
Vice President & Controller
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
From Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $102,193 $ 89,064 $171,503 $150,219 $134,124 $ 76,098 $127,618
Fixed charges (see computation below) 19,645 16,569 34,785 43,028 48,779 47,576 58,250
-------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $121,838 $105,633 $206,288 $193,247 $182,903 $123,674 $185,868
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 18,573 $ 15,792 $ 33,130 $ 41,147 $ 46,859 $ 45,900 $ 56,600
Rentals(b) 1,072 777 1,655 1,881 1,920 1,676 1,650
-------- -------- -------- -------- -------- -------- --------
$ 19,645 $ 16,569 $ 34,785 $ 43,028 $ 48,779 $ 47,576 $ 58,250
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 6.2 6.4 5.9 4.5 3.7 2.6 3.2
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 424
<SECURITIES> 0
<RECEIVABLES> 66,239
<ALLOWANCES> 0
<INVENTORY> 26,544
<CURRENT-ASSETS> 131,014
<PP&E> 2,527,416
<DEPRECIATION> 1,505,397
<TOTAL-ASSETS> 1,416,811
<CURRENT-LIABILITIES> 77,296
<BONDS> 400,000
0
0
<COMMON> 4
<OTHER-SE> 714,791
<TOTAL-LIABILITY-AND-EQUITY> 1,416,811
<SALES> 0
<TOTAL-REVENUES> 201,001
<CGS> 0
<TOTAL-COSTS> 38,595
<OTHER-EXPENSES> 18,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,309
<INCOME-PRETAX> 102,193
<INCOME-TAX> 39,345
<INCOME-CONTINUING> 62,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,848
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
