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, 1999
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, 1999
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, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Six Months Ended
June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Six Months Ended June 30, 1999 and 1998 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 - 14
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 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>
June 30, December 31,
1999 1998
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 35 $ 107
Notes receivable from affiliates 59,003 67,329
Accounts receivable 75,994 72,692
Inventories 19,774 20,190
Gas imbalance receivables 5,037 5,675
Other 4,915 232
---------- ----------
Total Current Assets 164,758 166,225
---------- ----------
Investments in Unconsolidated Affiliates and Other 165,907 154,743
---------- ----------
Plant, Property and Equipment 2,718,994 2,672,225
Less accumulated depreciation and amortization 1,550,626 1,533,990
---------- ----------
1,168,368 1,138,235
---------- ----------
Deferred Charges and Other 111,341 106,924
---------- ----------
$1,610,374 $1,566,127
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ - $ 5,000
Accounts payable 20,367 25,463
Accrued income taxes 11,719 3,123
Other accrued taxes 4,357 4,782
Accrued interest 23,563 23,688
Gas imbalance payables 8,860 9,231
Other 15,799 11,082
---------- ----------
Total Current Liabilities 84,665 82,369
---------- ----------
Long-Term Debt 500,000 500,000
---------- ----------
Deferred Credits and Other:
Deferred income taxes 178,968 164,482
Other 50,371 57,531
---------- ----------
229,339 222,013
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 79,797 79,722
Retained earnings 716,573 682,023
---------- ----------
Total Stockholder's Equity 796,370 761,745
---------- ----------
$1,610,374 $1,566,127
========== ==========
</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,
1999 1998 1999 1998
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Transportation and storage $90,647 $90,006 $187,279 $185,096
Other 4,539 5,494 8,611 15,905
------- ------- -------- --------
95,186 95,500 195,890 201,001
------- ------- -------- --------
Costs and Expenses:
Operating and maintenance 18,501 19,037 38,034 38,595
General and administrative 15,992 12,226 31,561 27,698
Depreciation and amortization 14,947 13,048 28,945 18,539
Taxes, other than income 5,706 5,371 11,662 10,720
------- ------- -------- --------
55,146 49,682 110,202 95,552
------- ------- -------- --------
Operating Income 40,040 45,818 85,688 105,449
------- ------- -------- --------
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 2,425 5,612 4,850 9,737
Other, net 1,061 1,094 2,935 1,747
------- ------- -------- --------
3,486 6,706 7,785 11,484
------- ------- -------- --------
Earnings Before Interest and Taxes 43,526 52,524 93,473 116,933
------- ------- -------- --------
Interest:
Interest income, primarily
from affiliates 1,083 1,170 2,106 2,569
Interest expense (9,743) (9,209) (19,815) (18,275)
Interest capitalized 450 493 933 966
------- ------- -------- --------
(8,210) (7,546) (16,776) (14,740)
------- ------- -------- --------
Income Before Income Taxes 35,316 44,978 76,697 102,193
Income Tax Expense 13,780 17,346 29,747 39,345
------- ------- -------- --------
Net Income $21,536 $27,632 $ 46,950 $ 62,848
======= ======= ======== ========
</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,
1999 1998
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 46,950 $ 62,848
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 28,945 18,539
Deferred income taxes 14,486 17,194
Equity in earnings of unconsolidated
affiliates, less distributions 1,400 (6,237)
Reserves for regulatory matters (194) (4,431)
Gas supply realignment costs (1,567) 563
Change in:
Accounts receivable (3,302) 12,008
Inventories 416 (5,015)
Accounts payable (5,096) (24,239)
Accrued interest and income taxes, net 8,471 178
Other current assets and liabilities (124) (4,225)
Other (6,389) 2,174
Net cash provided by operating
activities 83,996 69,357
-------- --------
Cash Flows from Investing Activities:
Plant, property and equipment additions (63,015) (82,234)
Notes receivable, primarily from affiliates 8,326 66,184
Investment in unconsolidated affiliates and other (11,979) (49,568)
-------- --------
Net cash used in investing activities (66,668) (65,618)
-------- --------
Cash Flows from Financing Activities:
Payments of long-term debt (5,000) (6,220)
Dividends paid (12,400) -
-------- --------
Net cash used in financing activities (17,400) (6,220)
-------- --------
Net Decrease in Cash (72) (2,481)
Cash at Beginning of Period 107 2,905
-------- --------
Cash at End of Period $ 35 $ 424
======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 17,404 $ 16,014
Income taxes paid, net 6,589 21,862
</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.
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 (Bear Creek).
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,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,940 $8,821 $18,023 $17,850
Expenses:
Operating expenses 1,050 1,452 2,261 3,753
Depreciation 1,362 1,360 2,724 2,719
Other expenses, net 923 1,116 1,908 2,308
------ ------ ------- -------
Income Reported $5,605 $4,893 $11,130 $ 9,070
====== ====== ======= =======
</TABLE>
The following are summarized results of operations for Destin. No
provision for income taxes has been included since its income taxes are paid
directly by joint venture participants.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $ 6,093 $ 2,921 $ 9,926 $ 4,793
Expenses:
Operating expenses 1,754 - 3,379 -
Depreciation 3,229 - 4,815 -
Interest and other 2,141 (6,301) 3,896 (10,608)
------- ------- ------- --------
Income Reported $(1,031) $ 9,222 $(2,164) $ 15,401
======= ======= ======= ========
</TABLE>
<PAGE>
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.
At June 30, 1999, Southern had available short-term lines of credit of
$42.0 million available through May 29, 2000. 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, 1999, no amounts were
outstanding.
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 June 30, 1999, 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 is not being 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,
1999 1998
(In Thousands)
Regulatory Assets:
<S> <C> <C>
SFAS No. 109 Tax Gross-Up $24,940 $23,319
Unrecovered Depreciation, 14,098 14,053
Work Force Reduction 4,374 5,574
Charitable Donation 6,543 6,994
Cash Out Differential 3,664 4,511
Other 5,574 6,987
------- -------
$59,193 $61,438
======= =======
Regulatory Liabilities:
Excess Deferred Taxes Due Customers $ 2,957 $ 3,735
======= =======
</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 represents the amount of price differential cost associated with
storage transactions recoverable pursuant to Southern's customer settlement.
Excess deferred tax due customers represents amounts due customers pursuant to
federal tax rate normalization.
5. Subsequent Event
On March 13, 1999, Sonat Inc., and El Paso Corporation (El Paso) entered
into an Agreement and Plan of Merger, as amended (the Merger Agreement),
providing for, among other things, the merger of El Paso and Sonat. Under the
terms of the Merger Agreement, Sonat's stockholders will receive one share of El
Paso common stock for each share of common stock of Sonat they own. The merger,
which has been approved by Sonat's and El Paso's stockholders, is subject to
certain customary conditions, including, among others, receipt of certain
required government approvals.
<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.
Units of Shell Oil Company (Shell) and BP Amoco Corporation (BP Amoco)
are equal partners with Southern in the ownership of Destin Pipeline Company,
L.L.C. (Destin). Destin owns a 223-mile, 1 billion cubic feet per day interstate
pipeline system that transports natural gas from the growing eastern Gulf of
Mexico production area, which was placed fully in service in March 1999. An
additional 31-mile extension was placed in service in May 1999.
Construction is progressing on Southern's expansion project to North
Alabama. The 122-mile, 78 million-cubic-foot-per-day expansion is expected to be
in service in late 1999.
Southern LNG Inc., a subsidiary of Southern, filed an application with
the FERC in July 1999 to reactivate its liquefied natural gas (LNG) marine
receiving terminal located on Elba Island, near Savannah, Georgia. The Elba
Island terminal has been out of service since 1982. Sonat Energy Services Inc.
(Sonat Energy Services), another Sonat subsidiary, was awarded a 22-year service
agreement for all of Elba Island's terminaling, storage, and vaporization
capacity. The Elba Island terminal is capable of achieving a peak sendout of 540
million cubic feet of natural gas per day and a baseload sendout of 330 million
cubic feet of natural gas per day. Sonat estimates that the capital cost
associated with recommissioning the Elba Island terminal will be approximately
$26 million.
Sonat Energy Services plans to import LNG from Trinidad through the Elba
Island terminal. Shipment of the LNG to Elba Island will be arranged by the
sellers of the LNG, who are a group of producers led by British Gas Trinidad and
Tobago Limited. Deliveries are estimated to commence in mid-2002 and will
provide approximately 80 Bcf of natural gas per year through the Elba Island
terminal for a primary term of 17 years. The supply arrangement could be
extended for an additional term of five years. Depending upon operating and
market conditions, Sonat Energy Services can handle additional volumes from
Trinidad or other sources through its contracted capacity in the reactivated
facility. Because of growing natural gas demand in the Southeast, Southern
expects to initiate several pipeline expansion projects over the next several
years. The Elba Island terminal is located on the eastern end of Southern's
service territory, making it a strategically valuable source of natural gas
supply. Not only is the terminal's reactivation expected to serve expansions
within its current service territory, but it is also offers the potential to
expand the Southern pipeline system to new markets.
<PAGE>
Southern's Elba Island reactivation and Sonat Energy Services'
importation project are subject to several conditions, including U.S. and
Trinidadian governmental approvals, the execution of final agreements, the
finalization of plans relating to shipping, and the expansion of its LNG
facility in Trinidad by Atlantic LNG Company of Trinidad and Tobago.
Southern had previously announced plans to form a 50/50 joint venture
with Carolina Power & Light Company (CP&L) to construct, own, and operate a
natural gas pipeline, to be known as the Palmetto Interstate Pipeline, from
Southern's pipeline system to a delivery point in North Carolina. The planned
in-service date of the Palmetto Interstate Pipeline has been delayed in order to
allow CP&L time to analyze two other competing pipeline proposals that have been
announced. Consequently, all ongoing survey, environmental, and route selection
activities for this project have been suspended. The Company is unable to
predict whether or at what time this project may go forward.
Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $79.6 $77.9 $165.8 $161.4
Supply transportation 11.1 12.1 21.5 23.7
Other 4.5 5.5 8.6 15.9
----- ----- ------ ------
Total Revenues 95.2 95.5 195.9 201.0
----- ----- ------ ------
Costs and Expenses:
Operating and maintenance 18.5 19.0 38.0 38.6
General and administrative 16.0 12.2 31.6 27.7
Depreciation and amortization 14.9 13.1 28.9 18.6
Taxes, other than income 5.7 5.4 11.7 10.7
----- ----- ------ ------
55.1 49.7 110.2 95.6
----- ----- ------ ------
Operating Income 40.1 45.8 85.7 105.4
----- ----- ------ ------
Other Income:
Equity in Earnings of
Unconsolidated Affiliates 2.5 5.6 4.9 9.7
Other 1.0 1.1 2.9 1.8
----- ----- ------ ------
3.5 6.7 7.8 11.5
----- ----- ------ ------
Earnings Before Interest and Taxes $43.6 $52.5 $ 93.5 $116.9
===== ===== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 135 137 312 322
Supply transportation 90 103 179 198
----- ----- ------ ------
Total Volumes 225 240 491 520
===== ===== ====== ======
</TABLE>
<PAGE>
Second Quarter 1999 to Second Quarter 1998 Analysis
Earnings before interest and taxes (EBIT) for the second quarter of 1999
decreased $8.9 million compared with the prior year. The decrease was primarily
due to higher general and administrative expenses as a result of higher
stock-based compensation expense in the 1999 period and an insurance cost
adjustment in the 1998 period, higher depreciation expense as a result of higher
plant balances in 1999 and lower equity in earnings of unconsolidated
affiliates.
Market transportation revenues increased due to recent expansions.
Supply transportation revenues declined due to lower volumes at Sea Robin
Pipeline Company. Equity in earnings of unconsolidated affiliates decreased
primarily due to lower earnings at Destin Pipeline as a result of allowance for
funds used during construction (AFUDC) capitalized in the 1998 period.
Six Months 1999 to Six Months 1998 Analysis
EBIT decreased $23.4 million for the six months ending June 30, 1999
compared with the 1998 period. The decrease was primarily due to higher
depreciation and amortization expense, the recognition of a royalty reserve
reversal of $4.2 million in the 1998 period, higher general and administrative
expenses, and lower equity in earnings of unconsolidated affiliates.
Depreciation and amortization expenses increased primarily due to a $7.0 million
pretax adjustment of the salvage value on certain fixed assets in the 1998
period and higher plant balances in 1999. General and administrative expenses
increased in the 1999 period primarily due to higher stock-based compensation
expense in the 1999 period and an insurance reserve reversal in the 1998 period.
Equity in earnings of unconsolidated affiliates decreased primarily due to lower
earnings at Destin Pipeline as a result of higher AFUDC capitalized in the 1998
period.
Partially offsetting the decrease was the effect of higher market
transportation revenues due to recent expansions. Supply transportation revenues
declined due to lower volumes at Sea Robin Pipeline Company. Other income
increased due to higher AFUDC equity and the sale of certain facilities.
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 its restructuring pursuant to FERC directives in past years,
Southern terminated or renegotiated to market pricing virtually all of its gas
supply contracts through which it had historically obtained its long-term gas
supply. Pending the termination or expiration of the few remaining supply
contracts, Southern's remaining gas supply is being sold on a month-to-month
basis. Because Southern is primarily a gas transporter and does not realize
significant margins on gas sales, the net of gas sales revenues and natural gas
cost is included in other revenue.
<PAGE>
Except for the sale of its remaining gas supply described above,
Southern's participation in gas supply activities will be limited to the
purchase and sale of gas from time to time as may be required for system
management purposes.
Southern's annual purchase commitments total less than $21 million per
year for 1999 and subsequent years. Based on Southern's current expectations
with respect to natural gas prices in 1999 and the years following, an
immaterial volume of gas is expected to be at prices above market.
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 were resolved. The settlement requires Southern Natural
Gas to file a new rate case no later than September 1, 1999. Southern expects
the rates filed in that rate case to become effective after normal suspension by
the FERC on March 1, 2000, subject to refund upon settlement or final litigated
conclusion of the rate case.
In June 1999, in a case on remand from the Fifth Circuit Court of
Appeals and in response to an application filed earlier by Southern's wholly
owned subsidiary, Sea Robin Pipeline Company (Sea Robin), the FERC determined
that Sea Robin performs a nonjurisdictional gathering function in part and a
jurisdictional transmission function in part. Specifically, the FERC concluded
that the two legs of Sea Robin's inverted Y-shaped pipeline system in the Gulf
of Mexico upstream of the Vermilion Block 149 compressor station constitute
gathering facilities, while a 66.3-mile, 36-inch pipeline downstream from the
Vermilion 149 station to Erath, Louisiana is a transmission facility. In the
order, the FERC required Sea Robin to file tariff sheets with separate gathering
rates for the gathering services to be provided on the gathering segments of Sea
Robin's system. Sea Robin has filed for an extension of time to make this tariff
filing until the FERC makes a decision on rehearing.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $ 8.2 $ 7.5 $16.8 $14.7
</TABLE>
Net interest expense increased in both the three-month and six-month
periods of 1999 due to higher average debt levels. The increase was partially
offset by a smaller provision for interest related to income taxes and the
effect of lower average interest rates in the current period.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense $13.8 $17.3 $29.7 $39.3
</TABLE>
Income tax expense decreased in the 1999 periods due to lower pretax
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
(In Millions)
<S> <C> <C>
Operating Activities $ 84.0 $ 69.4
</TABLE>
Cash flow from operations increased $14.6 million compared to 1998. The
change in depreciation is primarily due to the adjustments made in 1998 to
reflect salvage value on certain fixed assets. Equity in earnings of
unconsolidated affiliates was lower in 1999 compared to 1998 due to lower
operating results at Destin (discussed earlier in the operating section). The
change in reserves for regulatory matters is attributable to the reversal of a
reserve in 1998 originally established for royalties on take-or-pay contract
buyouts. The change in accounts receivable and accounts payable is primarily due
to the timing of intercompany settlements. The change in accrued interest and
income taxes primarily reflects the timing of an income tax payment.
<TABLE>
<S> <C> <C>
Investing Activities $(66.7) $(65.6)
</TABLE>
Net cash used in investing activities was $1.1 million higher in 1999
compared to 1998. Higher repayments of intercompany loans by Southern's parent,
Sonat Inc., in the prior period were partially offset by lower capital
expenditures and investments in the Destin pipeline joint venture in the current
period.
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
(In Millions)
<S> <C> <C>
Financing Activities $(17.4) $ (6.2)
</TABLE>
Net cash used in financing activities was higher in 1999 compared to
1998 due to the payment of an intercompany dividend to Southern's parent in the
current period.
CAPITAL RESOURCES
At June 30, 1999, Southern Natural Gas had bank lines of credit with a
total capacity of $42.0 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
1999 are expected to total approximately $173 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.
YEAR 2000 PROJECT
The following disclosure contains forward-looking statements. The
Company's ability to meet its objectives identified below is dependent upon
several factors that could cause actual results to differ materially from those
set forth below, including the timely provision of necessary upgrades and
modifications by suppliers. In addition, the Company cannot guarantee that third
parties on whom it depends for essential services will convert their critical
systems and processes in a timely manner. Each of the phases of the Company's
Year 2000 project is progressing and the Company believes that it is taking all
reasonable and appropriate steps necessary to be able to operate in the Year
2000 and beyond.
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. The Company has divided its Year 2000 project into
assessment, remediation, testing, and contingency planning phases. During the
assessment phase, the Company 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, the Company has contacted its vendors
seeking written verification of Year 2000 readiness. In addition, the Company
continues to communicate with its critical service providers and business
partners such as natural gas suppliers, pipelines, electric utilities,
telecommunication service providers, banks, and other suppliers of goods and
services, to determine the extent to which the Company is vulnerable to the
failure of those third-parties to remediate their Year 2000 issues.
<PAGE>
The remediation phase includes completing the replacement of mainframe
systems with Year 2000-ready 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. The Company has completed remediation and testing of its critical
systems and has substantially completed remediation and testing of its
non-critical systems.
The Company relies on producers of natural gas, natural gas pipelines,
natural gas distribution companies, and natural gas marketing companies.
External infrastructure, such as electric, telecommunication and water service
is also necessary for the Company's basic operations. Should any third party
with which the Company has a material relationship fail, the impact could become
a significant challenge to the Company's ability to perform its basic
operations. Due to the nature of the Company's business, contingency plans are
already in place for certain conditions, including plans to provide pipeline
system reliability. The company has reviewed these existing plans and has
developed additional plans as practicable for critical systems, service
providers and business partners. A consulting firm was engaged to assist in this
effort. These plans involve contingencies for failures that may result from the
Year 2000 problem, and include plans to establish control centers to facilitate
communications in the event of a telecommunications failure and staffing at
selected locations on the Company's pipeline system.
The estimated cost to the Company of the Year 2000 project for capital
as well as general and administrative costs is expected to be less than $5
million. As of June 30, 1999, the Company has incurred approximately $2.0
million in Year 2000 project costs. The Company expects to fund Year 2000
expenditures from normal operations. The timing of expenditures is not
indicative of readiness efforts or progress to date.
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 and LNG projects, and the execution of final agreements 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>
Item 3. Quantitative and Qualitative Disclosure About 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 Natural Gas
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>
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 Schedule for the period ended June 30, 1999
- -------------
* 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, 1999.
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 11, 1999 By: /s/ Thomas W. Barker, Jr.
-------------------------- --------------------------
Thomas W. Barker, Jr.
Vice President-Finance
Date: August 11, 1999 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,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes $77,419 $ 97,059 $168,177 $170,227 $150,219 $134,124 $ 76,098
Fixed charges (see computation below) 22,020 19,645 42,326 34,785 43,028 48,779 47,575
------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $99,439 $116,704 $210,503 $205,012 $193,247 $182,903 $123,673
======= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $20,927 $ 18,573 $ 40,369 $ 33,130 $ 41,147 $ 46,859 $ 45,900
Rentals(b) 1,093 1,072 1,957 1,655 1,881 1,920 1,675
------- -------- -------- -------- -------- -------- --------
$22,020 $ 19,645 $ 42,326 $ 34,785 $ 43,028 $ 48,779 $ 47,575
======= ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 4.5 5.9 5.0 5.9 4.5 3.7 2.6
======= ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 134,997
<ALLOWANCES> 0
<INVENTORY> 19,774
<CURRENT-ASSETS> 164,758
<PP&E> 2,718,994
<DEPRECIATION> 1,550,626
<TOTAL-ASSETS> 1,610,374
<CURRENT-LIABILITIES> 84,665
<BONDS> 500,000
0
0
<COMMON> 4
<OTHER-SE> 796,366
<TOTAL-LIABILITY-AND-EQUITY> 1,610,374
<SALES> 0
<TOTAL-REVENUES> 195,890
<CGS> 0
<TOTAL-COSTS> 38,034
<OTHER-EXPENSES> 28,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,882
<INCOME-PRETAX> 76,697
<INCOME-TAX> 29,747
<INCOME-CONTINUING> 46,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,950
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
