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 September 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 OCTOBER 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
(Unaudited)--September 30, 1998 and
<S> <C>
December 31, 1997 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 15
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 155 $ 2,905
Notes receivable from affiliates 63,382 89,277
Accounts receivable 65,885 78,248
Inventories 23,324 21,529
Gas imbalance receivables 8,018 13,493
Other 2,743 4,250
---------- ----------
Total Current Assets 163,507 209,702
---------- ----------
Investments in Unconsolidated Affiliates and Other 184,733 97,054
---------- ----------
Plant, Property and Equipment 2,605,474 2,456,773
Less accumulated depreciation and amortization 1,517,040 1,497,827
---------- ----------
1,088,434 958,946
---------- ----------
Deferred Charges and Other 108,213 120,629
---------- ----------
$1,544,887 $1,386,331
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 5,000 $ 6,220
Accounts payable 29,919 49,364
Accrued income taxes 5,987 4,078
Other accrued taxes 9,047 9,150
Accrued interest 20,322 20,028
Gas imbalance payables 8,350 10,498
Other 9,876 10,493
---------- ----------
Total Current Liabilities 88,501 109,831
---------- ----------
Long-Term Debt 500,000 405,000
---------- ----------
Deferred Credits and Other:
Deferred income taxes 155,801 134,073
Other 61,907 85,734
---------- ----------
217,708 219,807
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 79,722 79,336
Retained earnings 658,956 572,357
---------- ----------
Total Stockholder's Equity 738,678 651,693
---------- ----------
$1,544,887 $1,386,331
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Transportation and storage $88,822 $87,675 $273,918 $268,389
Other 4,527 5,479 20,432 27,312
------- ------- -------- --------
93,349 93,154 294,350 295,701
------- ------- -------- --------
Costs and Expenses:
Operating and maintenance 21,054 20,440 59,649 60,241
General and administrative 14,812 15,770 42,510 52,862
Depreciation and amortization 13,647 11,982 32,186 35,595
Taxes, other than income 5,335 5,005 16,055 14,975
------- ------- -------- --------
54,848 53,197 150,400 163,673
------- ------- -------- --------
Operating Income 38,501 39,957 143,950 132,028
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 5,938 2,716 15,675 8,113
Other, net 2,002 986 3,749 5,911
------- ------- -------- --------
7,940 3,702 19,424 14,024
------- ------- -------- --------
Earnings Before Interest and Taxes 46,441 43,659 163,374 146,052
Interest:
Interest income, primarily
from affiliates 269 326 2,838 515
Interest expense (9,210) (7,151) (27,485) (21,525)
Interest capitalized 850 462 1,816 1,318
------- ------- -------- --------
(8,091) (6,363) (22,831) (19,692)
------- ------- -------- --------
Income before Income Taxes 38,350 37,296 140,543 126,360
Income Tax Expense 14,599 14,206 53,944 48,582
------- ------- -------- --------
Net Income $23,751 $23,090 $ 86,599 $ 77,778
======= ======= ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 86,599 $ 77,778
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32,186 35,595
Deferred income taxes 21,676 16,395
Equity in earnings of unconsolidated
affiliates, less distributions (12,175) (3,613)
Reserves for regulatory matters (4,431) (9,905)
Gas supply realignment costs 792 5,988
Change in:
Accounts receivable 12,363 12,741
Inventories (1,795) (816)
Accounts payable (19,446) (19,112)
Accrued interest and income taxes, net 3,165 (1,148)
Other current assets and liabilities 3,153 20,519
Other (13,558) (4,414)
Net cash provided by operating
activities 108,529 130,008
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (160,297) (100,503)
Notes receivable, primarily from affiliates 25,895 (110,817)
Investments in unconsolidated affiliates and other (70,657) (12,131)
--------- ---------
Net cash used in investing activities (205,059) (223,451)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 100,000 100,000
Payments of long-term debt (6,220) (5,960)
Changes in short-term borrowings - (1,189)
--------- ---------
Net cash provided by financing activities 93,780 92,851
--------- ---------
Net Decrease in Cash (2,750) (592)
Cash at Beginning of Period 2,905 2,316
--------- ---------
Cash at End of Period $ 155 $ 1,724
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 23,705 $ 20,715
Income taxes paid, net 29,119 29,841
</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 nine-month period ended September 30,
1998, by $4.6 million. The effect of the change on the three-month period ended
September 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. (Destin) 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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,882 $8,899 $26,732 $27,218
Expenses:
Operating expenses 1,533 1,157 5,286 3,519
Depreciation 1,361 1,358 4,080 4,072
Other expenses, net 1,112 1,269 3,420 3,849
------ ------ ------- -------
Income Reported $4,876 $5,115 $13,946 $15,778
====== ====== ======= =======
</TABLE>
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Construction of the pipeline
began in December 1997. Destin was partially completed and placed in service in
September 1998, and is expected to be 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 $446 million.
Destin's pretax earnings of $10.1 million and $25.5 million for the three-month
and nine-month periods ended September 30, 1998, and $.6 million and $.9 million
for the three-month and nine-month periods ended September 30, 1997, 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 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 September 30, 1998, no amounts were outstanding
under its agreement.
<PAGE>
3. Debt and Notes To and From Affiliates (Cont'd)
In September 1998, Southern Natural Gas made a public offering of
$100.0 million of its 6.125 percent Notes due September 15, 2008, at 99.531
percent to yield 6.189 percent. The net proceeds from the offering were
initially loaned to Sonat to be later used for general corporate purposes,
including capital expenditures.
4. Rate Matters and Contingencies
Periodically, Southern makes 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 provides reserves relating to
such amounts collected subject to refund, as appropriate, and makes refunds upon
establishment of the final rates. At September 30, 1998, Southern Natural Gas'
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:
September 30, December 31,
1998 1997
(In Thousands)
Regulatory Assets:
SFAS No. 109 Tax Gross-Up $22,339 $19,801
Unrecovered Depreciation 14,003 13,853
Work Force Reduction 6,332 8,608
Charitable Donation 7,220 7,897
Cash Out Differential 6,496 12,449
Other 7,443 8,398
------- -------
$63,833 $71,006
======= =======
Regulatory Liabilities:
Excess Deferred Taxes Due Customers $ 4,124 $ 5,291
======= =======
<PAGE>
4. Rate Matters and Contingencies (Cont'd)
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 represents the amount of price differential cost 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 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 Natural Gas in the ownership of Destin, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Southern Natural Gas 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 was
partially completed and in service in September 1998, and is expected to be
fully in service by January 1999. In June 1998, the 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 is expected
to be in service in late 1998. In July 1998 the FERC also approved another
Destin application to extend its pipeline by approximately 31 miles to transport
additional gas reserves committed to its system. This extension is expected to
be in service in early 1999. The total capital expended by Destin is now
estimated to be $446 million.
Southern Natural Gas 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 originally received
FERC approval in May 1997, is now anticipated to go in service in the fall of
1999. Southern Natural Gas received FERC approval in October 1998 of an
application that it had filed to change the route of the pipeline as it crosses
the Wheeler National Wildlife Refuge, but the new route must still be approved
by the U.S. Fish and Wildlife Service. 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 was placed in service in November 1998. Southern
Natural Gas 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 November 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
Natural Gas 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 Natural Gas 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 Natural Gas' 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. 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. The agreement for Etowah LNG
to provide services to Atlanta Gas Light includes, however, a provision allowing
Atlanta Gas Light to terminate the agreement in the event it does not receive,
with respect to the agreement, a satisfactory order from the Georgia Public
Service Commission (Georgia PSC). In September 1998 the Georgia PSC issued an
order approving the agreement, but allowed for further review of it. In light of
this order, the parties have agreed to extend the time period during which
Atlanta Gas Light may terminate the agreement to December 15, 1998. If Atlanta
Gas Light exercises its option to terminate its service agreement with Etowah
LNG, the project would not go forward and Atlanta Gas Light would be obligated
to reimburse Etowah LNG for all of its costs incurred in the project to date.
<PAGE>
Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $77.7 $74.9 $239.1 $232.7
Supply transportation 11.1 12.8 34.8 35.7
Other 4.6 5.4 20.5 27.3
----- ----- ------ ------
Total Revenues 93.4 93.1 294.4 295.7
----- ----- ------ ------
Costs and Expenses:
Operating and maintenance 21.0 20.4 59.6 60.2
General and administrative 14.8 15.8 42.5 52.9
Depreciation and amortization 13.6 12.0 32.2 35.6
Taxes, other than income 5.4 5.0 16.1 15.0
----- ----- ------ ------
54.8 53.2 150.4 163.7
----- ----- ------ ------
Operating Income 38.6 39.9 144.0 132.0
Other Income:
Equity in earnings of
unconsolidated affiliates 6.0 2.7 15.7 8.1
Other 1.9 1.0 3.7 5.9
----- ----- ------ ------
7.9 3.7 19.4 14.0
----- ----- ------ ------
Earnings Before Interest and Taxes $46.5 $43.6 $163.4 $146.0
===== ===== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 140 133 462 439
Supply transportation 85 109 283 289
----- ----- ------ ------
Total Volumes 225 242 745 728
===== ===== ====== ======
</TABLE>
Third Quarter 1998 to Third Quarter 1997 Analysis
Earnings before interest and taxes (EBIT) for Southern was $46.5
million in the third quarter of 1998 compared with $43.6 million in the third
quarter of 1997. The increase was primarily due to higher equity in earnings of
Destin and an expansion placed in service, partially offset by higher
depreciation expense.
Market transportation revenues increased as a result of the recent
expansions. Supply transportation revenues decreased due to a decrease in
volumes as a result of hurricanes and tropical storms, and natural production
declines taking place in certain Gulf of Mexico fields. General and
administrative expense decreased primarily due to lower employee benefit
expenses and stock-based compensation expense. 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. That deferral is now being
amortized.
<PAGE>
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin, primarily resulting from AFUDC capitalized. During the
third quarter, construction of the offshore portion on the Destin Pipeline was
completed, and it is currently transporting about 90 million cubic feet (MMcf)
of natural gas per day. As additional reserves are connected during the fourth
quarter, daily throughput is expected to exceed 200 MMcf per day by year end.
Nine Months 1998 to Nine Months 1997 Analysis
EBIT was $163.4 million for the nine months ending September 30, 1998,
compared with $146.0 million for the same 1997 period. The increase was
primarily due to an expansion placed in service, lower expenses and increased
earnings of Destin. Partially offsetting these increases 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 a recent
expansion. Other revenues decreased due to a favorable $10 million reserve
adjustment in 1997 relating to Southern Natural Gas' obligation to pay royalty
claims in connection with take-or-pay settlements entered into in the 1980's,
offset partially by the reversal of the remaining $4.2 million of royalty
reserves in 1998. Such reversal was made because management determined that the
likelihood of Southern Natural Gas making any significant royalty payments as a
result of its prior take-or-pay settlements was remote. General and
administrative expenses decreased primarily due to lower employee benefit
expenses, lower insurance expenses and lower stock-based compensation expense.
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). Increases due to plant additions
and the amortization of the deferred depreciation pursuant to the customer
settlement partially offset this decrease.
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin, 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.
Natural Gas Sales and Supply
As a result of FERC Order No. 636, Southern Natural Gas 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 Natural Gas' remaining
gas supply is sold on a month-to-month basis. Gas sales revenue and natural gas
cost are included in other revenue.
Southern Natural Gas' annual purchase commitments total less than $25
million per year for 1998 and subsequent years. Based on Southern Natural Gas'
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.
<PAGE>
Rate Matters
Under terms of a settlement approved by the FERC, all of Southern
Natural Gas' 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
Natural Gas to file a new rate case no later than September 1, 1999.
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $(8.1) $(6.4) $(22.8) $(19.7)
</TABLE>
Net interest expense increased in both the three-month and nine-month
periods of 1998 due to higher average debt levels and interest on taxes. Average
interest rates on debt decreased slightly in both 1998 periods. In addition, the
nine-month period of 1998 included higher interest income resulting from higher
average loan balances to affiliates.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense $14.6 $14.2 $ 53.9 $ 48.6
</TABLE>
Income tax expense increased in the 1998 periods due to higher pretax
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
(In Millions)
<S> <C> <C>
Operating Activities $108.5 $ 130.0
</TABLE>
Cash flow from operations decreased $21.5 million compared to the 1997
period. The change in deferred taxes is primarily attributable to an increase in
plant in service and the 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 due to higher earnings of
Destin. The change in reserves for regulatory matters reflects the royalty
reserve adjustments in 1998 and 1997, which were discussed earlier. The change
in other current assets and liabilities primarily reflects the timing of certain
tax payments and higher payments for storage replacement in 1998.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
(In Millions)
<S> <C> <C>
Investing Activities $(205.1) $(223.5)
</TABLE>
Net cash used in investing activities was $18.4 million less in 1998
compared to 1997. The decrease was attributable to repayments to Southern
Natural Gas of intercompany loans in the current period by Southern's parent,
Sonat Inc. Sonat had borrowed funds from Southern Natural Gas in the prior
period. Partially offsetting the change in intercompany loans were higher
investments in unconsolidated affiliates, primarily for Destin, and higher
capital expenditures related to Southern Natural Gas' expansion programs in
1998.
<TABLE>
<S> <C> <C>
Financing Activities $ 93.8 $ 92.9
</TABLE>
Net cash provided by financing activities was essentially unchanged in 1998
compared to the 1997 period. Southern Natural Gas borrowed $100 million in the
public market in both periods.
Capital Resources
At September 30, 1998, Southern Natural Gas had bank lines of credit
with a total capacity of $50.0 million, all of which was available. Southern
Natural Gas 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 of which $100.0 million has been issued.
Southern's capital expenditures and other investing requirements for
1998 are budgeted to aggregate approximately $315 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.
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.
<PAGE>
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, testing, and contingency phases. During the assessment phase,
Southern completed a comprehensive inventory of IT systems, embedded 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
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. Southern is scheduled to have all critical
systems tested, remediations plans defined, and corrective action underway by
December 31, 1998. All remediation efforts are scheduled to be completed by June
30, 1999.
Southern is also currently developing contingency plans as practicable
for critical systems, service providers, and business partners. These plans
involve developing contingencies for failures that may result from the Year 2000
problem. Southern is scheduled to have these plans completed by June 30, 1999.
Southern has not completed analyzing worst case scenarios and therefore is not
able to estimate potential lost revenue at this time.
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 September 30, 1998, Southern has incurred approximately $600,000
in Year 2000 project costs. Southern expects 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, and unanticipated construction delays
in connection with such projects. 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. There can be no assurance that Destin will be able to timely connect
new fields or that the production from those fields will allow it to meet its
planned throughput objectives.
<PAGE>
PART II. OTHER INFORMATION
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 September 30, 1998,
filed electronically only
- ------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on September 17, 1998, reporting
certain information under Item 5 with respect to the Grynberg complaint.
The Company filed a Report on Form 8-K on September 24, 1998, reporting
certain information under Item 5 with respect to the issuance and sale by the
Company of $100,000,000 aggregate principal amount of 6.125% Notes due September
15, 2008, and furnished certain related exhibits under Item 7.
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: November 12, 1998 By: /s/ Thomas W. Barker, Jr.
---------------------------- --------------------------
Thomas W. Barker, Jr.
Vice President-Finance
Date: November 12, 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>
Nine Months Ended Sept 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 $132,029 $126,053 $170,227 $150,219 $134,124 $ 76,098 $127,618
Fixed charges (see computation below) 31,019 24,952 34,786 43,028 48,779 47,576 58,250
-------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $163,048 $151,005 $205,013 $193,247 $182,903 $123,674 $185,868
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 29,380 $ 23,649 $ 33,130 $ 41,147 $ 46,859 $ 45,900 $ 56,600
Rentals(b) 1,639 1,303 1,656 1,881 1,920 1,676 1,650
-------- -------- -------- -------- -------- -------- --------
$ 31,019 $ 24,952 $ 34,786 $ 43,028 $ 48,779 $ 47,576 $ 58,250
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 5.3 6.1 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 155
<SECURITIES> 0
<RECEIVABLES> 65,885
<ALLOWANCES> 0
<INVENTORY> 23,324
<CURRENT-ASSETS> 163,507
<PP&E> 2,605,474
<DEPRECIATION> 1,517,040
<TOTAL-ASSETS> 1,544,887
<CURRENT-LIABILITIES> 88,501
<BONDS> 500,000
0
0
<COMMON> 4
<OTHER-SE> 738,674
<TOTAL-LIABILITY-AND-EQUITY> 1,544,887
<SALES> 0
<TOTAL-REVENUES> 294,350
<CGS> 0
<TOTAL-COSTS> 59,649
<OTHER-EXPENSES> 32,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,669
<INCOME-PRETAX> 140,543
<INCOME-TAX> 53,944
<INCOME-CONTINUING> 86,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,599
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
