<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE
OCTOBER 7, 1996]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
__________________to__________________
Commission File No. 1-2745
</TABLE>
---------------------
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-7410
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
7.85 percent Notes due 2002 New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1999 -- NONE (ALL VOTING STOCK OF THE REGISTRANT
IS HELD BY ITS PARENT COMPANY, SONAT INC.)
NUMBER OF SHARES OF COMMON STOCK, $3.75 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1999 -- 1,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(A) AND (B)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SOUTHERN NATURAL GAS COMPANY
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I
Item 1. Business.................................................... I-1
Sea Robin Pipeline Company.................................. I-1
South Georgia Natural Gas Company........................... I-1
Destin Pipeline Company, L.L.C. ............................ I-1
Etowah LNG Company, L.L.C. ................................. I-2
Southern LNG Inc. .......................................... I-2
Markets -- Transportation................................... I-2
Markets -- System Expansions................................ I-4
Gas Sales and Supplies...................................... I-6
Rate and Regulatory Proceedings............................. I-6
Storage Fields.............................................. I-7
Competition and Current Business Conditions................. I-7
Government Regulations...................................... I-9
Environmental Matters....................................... I-9
Year 2000 Project........................................... I-9
Cautionary Statement Concerning Forward-Looking
Statements................................................ I-10
Item 2. Properties.................................................. I-10
Item 3. Legal Proceedings........................................... I-10
Item 4. Submission of Matters to a Vote of Security Holders......... Omitted*
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... II-1
Item 6. Selected Financial Data..................................... II-1
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. II-1
Item 7 A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... II-6
Item 8. Financial Statements and Supplementary Data................. II-10
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-29
PART III
Item 10. Directors and Executive Officers of the Registrant.......... Omitted*
Item 11. Executive Compensation...................................... Omitted*
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ Omitted*
Item 13. Certain Relationships and Related Transactions.............. Omitted*
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... IV-1
</TABLE>
- ---------------
* Item Nos. 4, 10, 11, 12 and 13 have been omitted in reliance upon General
Instruction I(1) and (2) of Form 10-K.
<PAGE> 3
PART I
ITEM 1. BUSINESS
The principal business of Southern Natural Gas Company ("Southern" or the
"Company"), which is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the
transmission and storage of natural gas in interstate commerce. Southern owns
approximately 7,300 miles of interstate natural gas pipelines. Southern's
interstate pipeline system extends from gas fields in Texas, Louisiana,
Mississippi, Alabama, and the Gulf of Mexico to markets in Louisiana,
Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. Southern
is the principal pipeline supplier to the growing Southeastern markets of
Alabama and Georgia. Southern's interstate pipeline system has a certificated
daily delivery capacity of 2.5 billion cubic feet ("Bcf") of natural gas. A map
of Southern's pipeline system, including pipelines of its subsidiaries appears
on page I-8.
Southern's interstate pipeline business is subject to regulation by the
Federal Energy Regulatory Commission ("FERC"), the U.S. Department of
Transportation under the terms of the Natural Gas Policy Act of 1978 (the
"NGPA"), the Natural Gas Act (the "NGA"), and various pipeline safety and
environmental laws. See "Governmental Regulation" below for information
concerning the regulation of natural gas transmission operations.
Additional business information concerning Southern and its wholly owned
subsidiaries is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial
Statements in Part II of this report and is incorporated herein by reference.
At March 1, 1999, Southern and its subsidiaries employed approximately 770
people.
Southern's principal executive offices are located at 1900 Fifth Avenue
North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number
is (205) 325-7410.
SEA ROBIN PIPELINE COMPANY
Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of
Southern, owns an approximately 430-mile interstate natural gas pipeline system
located in the Gulf of Mexico. Sea Robin gathers natural gas and condensate for
others and delivers those products to shore for condensate removal and gas
processing and redelivery to one independent storage company and five downstream
transmission pipelines, including Southern. See the system map on page I-8. Sea
Robin transported approximately 238 Bcf of natural gas in 1998 compared to 278
Bcf in 1997. These Sea Robin volumes are included within the Southern
transportation volumes discussed below.
SOUTH GEORGIA NATURAL GAS COMPANY
South Georgia Natural Gas Company ("South Georgia"), a wholly owned
subsidiary of Southern, owns an approximately 910-mile interstate natural gas
transmission system located in eastern Alabama, southern Georgia, and the
Florida Panhandle. See the system map on page I-8. South Georgia transported
approximately 39 Bcf of natural gas in 1998 compared to 38 Bcf in 1997. These
South Georgia volumes are included within the Southern transportation volumes
discussed below.
DESTIN PIPELINE COMPANY, L.L.C.
Destin Pipeline Company, L.L.C. ("Destin"), is owned one-third each by
Southern and subsidiaries of Shell Oil Company ("Shell") and BP Amoco
Corporation ("BP Amoco"). Destin owns a 223-mile interstate pipeline system that
transports natural gas from the growing eastern Gulf of Mexico production area,
with an additional 31-mile extension scheduled to go in service in the second
quarter of 1999. Destin's pipeline system extends northward into Mississippi,
where it connects with five other interstate pipelines, including Southern. See
the system map on page I-8. The pipeline has a firm daily delivery capacity of
1.0 Bcf of natural gas. Southern is the operator of the system. Destin's
pipeline system was partially completed and in service in September 1998 and was
fully in service in March 1999. As of March 1999, the total capital to be
expended by
I-1
<PAGE> 4
Destin is estimated to be $475 million, including two substantial extensions of
the original mainline system that were constructed in late 1998 and early 1999.
Destin's FERC Gas Tariff includes a flexible firm transportation service,
which provides for levels of firm transportation capacity that may vary
quarterly, with the transportation provided at a volumetric rate provided
certain minimum throughput levels are maintained. Under the flexible firm
service, Destin's transportation revenue will fluctuate based on the levels of
gas production from its shippers. To be eligible for Destin's flexible firm
service, a shipper must make a life-of-reserves commitment of production from
offshore leases with estimated proven recoverable reserves of 100 Bcf or more.
Shell, BP Amoco, and other shippers have dedicated their production from
certain leases in the Eastern Gulf of Mexico to Destin for transportation under
Destin's flexible firm rate schedule. Discussions are underway with other
prospective shippers.
ETOWAH LNG COMPANY, L.L.C.
In December 1997 an affiliate of AGL Resources, Inc., an unaffiliated
company ("AGL Resources"), and Southern formed a new entity, Etowah LNG Company,
L.L.C. ("Etowah"), to jointly construct, own, and operate a new liquefied
natural gas ("LNG") 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, 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 ("AGLC"), and Southern's pipeline. Etowah
will provide natural gas storage and peaking services to AGLC and the city of
Austell, Georgia. The new facility will cost approximately $90 million. AGLC has
subscribed for 200 MMcf per day of deliverability capacity from Etowah, which
represents two-thirds of its anticipated available capacity, for a term of 20
years. The agreement for Etowah to provide services to AGLC includes, however,
provisions allowing AGLC 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") or if AGLC determines it should not
proceed with the agreement. In September 1998 the Georgia PSC issued an order
approving the agreement, but allowed for further review of it. The parties
extended the time period during which AGLC may terminate the agreement. AGLC has
advised Southern that it is reevaluating the timing and extent of its needs for
firm peaking services and will advise Southern whether it will proceed with this
project during the third quarter of 1999. If AGLC exercises its option to
terminate its service agreement with Etowah, the project would not go forward
and AGLC would be obligated to reimburse Etowah for all of its costs incurred in
the project.
SOUTHERN LNG INC.
Southern LNG Inc. ("Southern LNG"), formerly known as Southern Energy
Company, a wholly owned subsidiary of Southern, owns an LNG receiving and
regasification terminal near Savannah, Georgia, which was constructed for a
project, now terminated, to import LNG from Algeria. The terminal has been
inactive since the early 1980s. In 1992 the FERC approved a settlement relating
to Southern LNG's facilities. The settlement resolved a number of outstanding
rate and accounting issues. Southern LNG must determine by the end of 1999,
however, whether to file with the FERC to abandon its facility. If it abandons
the facility, Southern LNG would nevertheless be allowed to recover most of its
remaining investment in the facility pursuant to the settlement.
MARKETS -- TRANSPORTATION
Southern and its subsidiaries provide natural gas transportation services
for their distribution customers, primarily for residential and commercial end
use, industrial customers, electric generation companies, gas producers, other
gas pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. The principal
industries served directly by Southern's pipeline
I-2
<PAGE> 5
systems and indirectly through their customers' distribution systems include the
electric generation, fertilizer, chemical, pulp and paper, textile, primary
metals, stone, clay, and glass industries.
Transportation volumes in 1998 for Southern and all of its subsidiaries
were 984 Bcf, compared with transportation volumes in 1997 of 1,007 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1998 sales of 12 Bcf and 1997 sales of 65 Bcf. In each of 1998 and
1997, the volumes associated with the 1998 and 1997 sales are not accounted for
as sales volumes, but rather are included in transportation volumes because all
sales are made at the receipt points where the gas enters Southern's pipeline
system.
Southern and its subsidiaries' pipelines provide transportation service
under rate schedules that are subject to FERC regulatory authority. Rates for
transportation service depend on whether service is on a firm or interruptible
basis and the location of the service on Southern's pipeline system. Firm
service is transportation service for which the shipper pays a fixed monthly fee
to reserve capacity in the pipeline system (the "Reservation Fee"). The shipper
may not use this capacity it has reserved at all times, but the firm
transportation customers of Southern (with the exception of certain small
customers) must pay the monthly Reservation Fee regardless of the volumes
shipped. Shippers are able to resell their unused firm capacity pursuant to FERC
rules and regulations. Interruptible service is only available when pipeline
capacity is available and may be interrupted by the pipeline as needed when use
of the pipeline is at its greatest, typically during winter periods. For most
pipelines, including Southern, FERC requires a rate design, known as
straight-fixed-variable ("SFV"), that is designed to allow pipelines to recover
substantially all of their fixed costs, a return on their equity investment in
facilities, and income taxes in the Reservation Fee. Pipelines charge
transportation rates for interruptible service for actual volumes transported.
Rates for transportation service are discounted by Southern in individual
instances to respond to competition in the markets they serve.
Southern's contracts to provide firm transportation service for their
customers are for varying amounts and periods of time. The following chart
describes the expiration dates and amounts of service covered under the various
firm transportation agreements of Southern with their firm transportation
customers.
EXPIRATION DATES OF
SOUTHERN'S FIRM TRANSPORTATION CONTRACTS
<TABLE>
<CAPTION>
YEAR MCF/D
- ---- ---------
<S> <C>
1999........................................................ 162,022
2000........................................................ 190,433
2001........................................................ 21,994
2002........................................................ 771,125
2003........................................................ 281,341
2004........................................................ 35,504
2005........................................................ 165,198
2006........................................................ 45,108
2007........................................................ 309,523
2008........................................................ 356,254
2009........................................................ 13,000
Beyond 2009................................................. 98,783
---------
Total............................................. 2,450,285
=========
</TABLE>
Substantially all of the firm transportation capacity currently available
in Southern's two largest market areas is fully subscribed. Nearly all of
Southern's firm transportation contracts contain evergreen provisions that
automatically extend the term for additional months or years unless notice of
termination is given by one of the parties. There can be no assurance that the
existing customers of Southern will extend their firm service agreements at the
same levels when their current service agreements expire.
Transportation capacity reservation fees to Southern from AGLC and its
subsidiary, Chattanooga Gas Company, accounted for approximately 34 percent of
Southern's 1998 consolidated revenues. Reservation fees
I-3
<PAGE> 6
to Southern from Alabama Gas Corporation accounted for approximately 12 percent
of Southern's 1998 consolidated revenues. No other customer accounted for as
much as ten percent of Southern's consolidated revenues for 1998.
Southern and its subsidiaries' pipelines hold easements acquired through
either purchase or condemnation for all of their pipeline rights-of-way. Such
easements remain valid until the pipeline traversing it is abandoned. Each
company has the power to eminent domain if needed in connection with acquiring
additional rights-of-way for expansion projects.
Southern's pipeline businesses are subject to operating risks associated
with the transmission of natural gas through a pipeline system, which could
result in property damage and personal injury. Southern has a comprehensive
safety program to address these risks. Southern has consistently ranked at or
near the top of its industry peer group in safety performance. Sonat maintains
broad insurance coverage on behalf of Southern and its subsidiaries insuring
against financial loss resulting from these operating risks.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
MARKETS -- SYSTEM EXPANSIONS
Southern continually seeks to expand its pipeline system (i) to reach new
markets, (ii) to increase delivery capacity to existing markets to serve the
increasing gas demands in its market area, and (iii) to connect new gas
supplies, principally in the Gulf of Mexico, to deliver gas not only into
Southern's system but also into the interstate pipeline grid.
Demand for natural gas in the six Southeastern states that comprise
Southern's principal market area, Alabama, Florida, Georgia, Mississippi, South
Carolina, and Tennessee, has grown at an annual average rate of 3.5 percent in
the last ten years, compared to the national annual average growth rate for gas
demand of 2.6 percent during such period.
In November 1998 Southern placed in service an expansion to its pipeline
system that will serve firm transportation commitments totaling 65 million cubic
feet of natural gas per day from customers in eastern Tennessee, Georgia, and
Alabama. Another expansion to North Alabama, which originally received FERC
approval in May 1997, has now received the necessary FERC and other regulatory
authorizations to change the route of the pipeline as it crosses the Wheeler
National Wildlife Refuge, although the certificate order from the FERC is on
appeal for judicial review and the permit from the U.S. Fish & Wildlife Service
is on administrative appeal. Barring further unforeseen delays, it is expected
that the pipeline will be completed and ready for service for the 1999-2000
winter heating season. The 122-mile expansion will provide 78 million
cubic-feet-per-day capacity to the participating customers.
In addition to the general growth in gas demand throughout the Southeast,
the use of natural gas to generate electric power represents a significant
growth prospect in the market areas of Southern. Since 1994, electric utilities
served by Southern have added 23 gas-fired combustion turbine generation units
with generating capacity of 1,980 megawatts. These units, which have consumed in
excess of 200 MMcf of natural gas on a peak day, are used primarily to meet the
utilities' peak generation loads in the summer and winter months.
In late 1998 Southern completed a $10 million, 34 million
cubic-feet-per-day expansion in Alabama that primarily provides firm service to
a 100-megawatt base load gas-fired electric generation plant operated by Alabama
Power Company, a subsidiary of Southern Company. Units of Southern Company had
previously installed 19 natural gas-fired peaking turbines that are served by
Southern's pipeline, but this is the first natural gas-fired electric generation
facility in Southern's market designed for year-round use.
On March 3, 1999, Carolina Power & Light Company ("CP&L") and Southern
announced plans to form a 50/50 joint venture to construct, own, and operate a
175-mile, 30-inch, natural gas pipeline from the terminus of Southern's pipeline
system in Aiken, South Carolina, to an interconnect with the pipeline system of
North Carolina Natural Gas Corporation ("NCNG") in Robeson County, North
Carolina. The new
I-4
<PAGE> 7
Palmetto Interstate Pipeline ("Palmetto") will provide a significant interstate
natural gas pipeline connection in eastern North Carolina.
Palmetto has a planned initial capacity of 200 million to 300 million cubic
feet of natural gas per day and will be expanded to accommodate future growth.
CP&L plans to subscribe for a substantial portion of the capacity in Palmetto to
fuel new electric generation being developed for its customers in the Carolinas,
with the remainder to be used to increase the region's natural gas availability.
An open season will start soon for customers to subscribe to firm capacity on
the pipeline. Depending upon the resulting firm subscription, the capital cost
for Palmetto is expected to be $200 million to $250 million.
The proposed schedule calls for the new pipeline to be operational in April
2002. Construction is scheduled to begin in the summer of 2001, following the
completion of engineering and environmental preparation and federal and state
permitting. The exact route of the pipeline has not yet been determined, but the
pipeline route likely will cross portions of Aiken, Lexington, Richland, Sumter,
Lee, Darlington, Marlboro, and Dillon counties in South Carolina and Robeson
County, North Carolina. A detailed environmental analysis is under way to
establish the most environmentally sound path.
As part of the project Southern will undertake a major expansion of its
existing interstate pipeline system, consisting of extensive pipeline looping
and additional compression at points from Mississippi to Aiken. The extent of
Southern's pipeline expansion, which is expected to cost in excess of $200
million, will depend on capacity requirements. This expansion will provide
significant rate and operational benefits to Southern's existing customers.
CP&L is considering sites in North Carolina and northeastern South Carolina
for new electric generation to be fueled by the new pipeline. CP&L plans to
build about 4,000 megawatts of natural gas-fueled generation by 2007. Some of
the new electric generation will be served in conjunction with NCNG, a natural
gas distribution company headquartered in Fayetteville, North Carolina, which
owns natural gas pipelines that currently serve eastern North Carolina. CP&L is
in the process of acquiring NCNG.
The construction of Palmetto and expansion of the Southern system require
approval by the FERC as well as other federal and state agencies and is likely
to be challenged on both environmental grounds and economic grounds by certain
of its competitors, environmental groups, or landowners. Construction is also
subject to execution of definitive agreements between CP&L and Southern.
Another growth area for Southern's pipeline business is in expanding
production area pipeline capacity to receive and transport projected increases
in gas production from the Gulf of Mexico, driven by deep water developments. In
March 1997 Southern placed in service a $14 million expansion project that
allows producers to transport, under 10-year contracts, 140 MMcf per day of
natural gas from offshore Louisiana to interconnections between Southern and
other pipelines in South Louisiana. In addition, as described above, the initial
construction of the Destin pipeline system has been completed. Destin, which
connects with five interstate pipelines in Mississippi, including Southern,
enables producers to deliver gas from the eastern deepwater Gulf of Mexico to
interstate markets. In June 1998 the FERC approved Destin's application to
extend its pipeline system approximately 12 miles to transport additional gas
reserves committed by other producers to Destin's system. This extension was
partially completed and in service in December 1998 and was placed fully in
service in January 1999. In July 1998 the FERC also approved another Destin
application to extend its pipeline by approximately 31 miles to transport
additional gas reserves committed by other producers to Destin's system. This
extension is expected to be in service in the second quarter of 1999.
I-5
<PAGE> 8
Under FERC regulations, a pipeline is allowed to charge rates that are
designed to recover fully its cost of providing service to the pipeline's
customers, including a reasonable rate of return on its investment in the
facilities it uses to provide its service, which is referred to as the rate base
of the pipeline. The allowed rate of return includes both a cost of debt
component and a return on equity component. The cumulative effect of capital
investment required to serve the existing and pending projects in the three
growth segments of Southern's pipeline business described above -- market area,
electric generation, and production area demand -- together with capital
investment for necessary pipeline repair and replacements, has resulted in the
growth in rate base for Southern's pipeline businesses as shown in the table
below.
RATE BASE (IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR SOUTHERN AND SUBSIDIARIES(1)
- ---- ----------------------------
<S> <C>
1994.............................................. $ 735
1995.............................................. 735
1996.............................................. 768
1997.............................................. 843
1998.............................................. 1,146
1999 (Estimated).................................. 1,329
2000 (Estimated).................................. 1,334
</TABLE>
- ---------------
(1) Includes rate bases of Destin, Etowah, and other joint ventures attributable
to Southern's ownership interests.
The amounts estimated for 1999 and 2000 in the foregoing table include (i)
currently planned capital expenditures for those years for maintenance, repair,
and replacement of the pipeline system, (ii) projects that have received FERC
approval and are currently under construction, and (iii) projects that have been
agreed to but for which FERC approval has not yet been obtained. The above
numbers include no amounts for Palmetto or for the related expansion capital to
be spent by Southern. No assurance can be given that such projects, which are
subject to protest by customers, competitors, the staff of the FERC, and other
interested parties, such as environmental groups and landowners, will be
approved by the FERC or, if approved, that such construction will not be delayed
for environmental, weather, or other reasons. A pipeline cannot reflect a change
in its rate base in its rates until it files a new rate case and a pipeline's
rate of return is subject to change every time it files a new rate case.
Consequently, there can also be no assurance that the rate of return a pipeline
is permitted by the FERC to earn on its rate base in the future will be equal to
the returns effectively earned in the past. Thus, the changes in rate base
projected above do not necessarily equate to an expected change in earnings.
GAS SALES AND SUPPLIES
As a result of its restructuring pursuant to FERC directive, 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.
At December 31, 1998, Southern had five remaining long-term gas supply
contracts. 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. Except for such sales, Southern's participation in gas supply activities
will be limited to the purchase and sale of volumes of gas from time to time as
may be required for system management purposes.
RATE AND REGULATORY PROCEEDINGS
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.
I-6
<PAGE> 9
At December 31, 1998, Southern's currently effective rates are established
by a settlement that was approved by a FERC order issued in 1995, which order is
now final and nonappealable. All of Southern's customers are parties to the
settlement. Under the terms of the settlement, Southern is required to file a
new rate case no later than September 1, 1999, to become effective, after normal
suspension by the FERC, by March 1, 2000
STORAGE FIELDS
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. The certificated working storage capacity of Muldon is 31 Bcf of gas.
Southern and Tennessee Gas Pipeline Company ("Tennessee"), a subsidiary of El
Paso Energy Corporation, an unaffiliated company, each owns 50-percent of the
Bear Creek Storage Field ("Bear Creek"), an underground natural gas storage
field located in Louisiana. Southern operates Bear Creek, which provides storage
service to Southern, Tennessee, and their customers. Bear Creek has a total
certificated working storage capacity of 65 Bcf of gas, half of which is
committed to Southern.
COMPETITION AND CURRENT BUSINESS CONDITIONS
The natural gas transmission industry, although regulated, is very
competitive. Customers purchase gas supply from producers and gas marketing
companies in unregulated transactions and contract with Southern for
transportation and storage services to deliver such gas supply to their markets.
Southern's three largest customers are each able to obtain a significant portion
of their natural gas requirements through transportation by other pipelines. In
addition, Southern competes with several pipelines for the transportation and
storage business of many of its other customers. The competition with such
pipelines is intense, and Southern must at times discount their transportation
rates in order to maintain market share and revenues.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, electricity, and heavy crude oil. An important
consideration in the markets of Southern is the ability of natural gas to
compete with alternate fuels, which are fuels to which a potential end user of
gas may switch depending on the price of the fuel and other factors. Residual
fuel oil, the principal competitive alternate fuel in the market area of
Southern, has been at certain times in the past, and may be at times in the
future, priced at or below the comparable price of natural gas in industrial and
electric generation markets. Some parts of Southern's market area are also
served by one or more other pipeline systems that can provide transportation
service in competition with Southern.
As described above, for most pipelines the FERC requires the SFV rate
design that permits pipelines to recover substantially all of their fixed costs,
a return on equity, and income taxes in the capacity reservation component of
their rates. The firm transportation customers of Southern (with the exception
of certain small customers) must pay these reservation charges regardless of the
volumes shipped. Accordingly, the SFV rate design should result in relative
stability in the revenues, earnings, and cash flows of interstate pipelines,
including Southern, compared to other rate design methodologies. There can be no
assurance, however, that the existing customers of Southern will extend their
firm service agreements at the same levels when their current service agreements
expire. As described above, Destin's rates are designed to recover all of its
fixed and variable costs, including a return on equity and income taxes, through
a volumetric rate design. In order to receive firm service at a volumetric rate,
Destin's customers must commit to Destin all of their gas production from
certain specified areas. Sea Robin's customers principally subscribe for
interruptible service, so its revenues are highly dependent on the volumes of
gas it transports.
I-7
<PAGE> 10
SOUTHERN PIPELINE SYSTEMS
(SOUTHERN PIPELINE SYSTEMS MAP)
I-8
<PAGE> 11
GOVERNMENT REGULATIONS
Southern and its interstate transmission subsidiaries are subject to
regulation by the FERC under the NGA and the NGPA.
The NGA grants to the FERC authority to regulate the construction and
operation of pipeline and related facilities utilized in the transportation and
sale of natural gas in interstate commerce, including the extension,
enlargement, or abandonment of such facilities. Southern and its interstate
transmission subsidiaries hold required certificates of public convenience and
necessity issued by the FERC authorizing them to construct and operate all
pipelines, facilities, and properties now in operation for which certificates
are required, and to transport and sell natural gas in interstate commerce.
The FERC regulates rates for the transportation of natural gas in
interstate commerce. As necessary, Southern and its interstate transmission
subsidiaries file with the FERC applications for changes in their transportation
rates and charges designed to allow them to recover fully their costs of
providing such service to their customers, including a reasonable rate of return
on their investment in facilities. These rates are normally allowed to become
effective, subject to refund, until such time as the FERC rules on the actual
level of rates. See "Rate and Regulatory Proceedings" above.
In July 1998 FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it seeks comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. Among
other things, the NOPR proposes the following: (i) removing the price cap for
the short-term capacity market; (ii) establishing procedures to make pipeline
and shipper-owned capacity more comparable; (iii) auctioning all available
short-term pipeline capacity on a daily basis with the pipeline unable to set a
reserve price above variable costs; (iv) changing policies on pipeline
penalties, nomination procedures, and services; (v) permitting the negotiation
of terms and conditions of service; and (vi) potentially modifying the
procedures for certificating new pipeline construction. Also in July 1998 FERC
issued a Notice of Inquiry ("NOI") seeking comments on FERC's policy for pricing
long-term capacity. Comments on the NOPR and NOI are due in April 1999. It is
unclear when and what action, if any, FERC will take in connection with the NOPR
and NOI and the comments received in response to them, but the resulting
regulatory changes could have a significant impact on the businesses of Southern
and its natural gas transmission subsidiaries.
Southern and its natural gas transmission subsidiaries are subject to the
Natural Gas Pipeline Safety Act of 1968, as amended, which regulates pipeline
and LNG plant safety requirements, and to the National Environmental Policy Act
and other environmental legislation. Each of them has a continuing program of
inspection designed to keep all of their facilities in compliance with pollution
control and pipeline safety requirements and believe that they are in
substantial compliance with applicable requirements. Southern's capital
expenditures to comply with environmental and pipeline safety regulations were
approximately $23 million in 1998 and $23 million in 1997. Southern anticipates
that such expenditures will be approximately $4 million in 1999.
ENVIRONMENTAL MATTERS
Various environmental matters relating to, or that could affect, Southern
or one or more of its subsidiaries are described in Part II of this report in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Environmental Issues," which is incorporated
herein by reference.
YEAR 2000 PROJECT
The year 2000 issues as they relate to Southern are discussed in Part II of
this report in Management's Discussion and Analysis of Financial Condition and
Results of Operations under the caption "Year 2000 Project," which is
incorporated herein by reference.
I-9
<PAGE> 12
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report, including the information incorporated by reference herein,
contains forward-looking statements regarding the Company's business plans and
prospects, objectives, future drilling plans, expansion projects, proposed
capital expenditures, and expected performance or results. These forward-looking
statements are based on assumptions that the Company believes are reasonable,
but are subject to a wide range of risks and uncertainties and, as a result,
actual results may differ materially from those 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 changes
in oil and gas prices and underlying demand, which would affect profitability
and might cause the Company to alter its plans; the success of the Company's
internal cost reduction activities; and the requirements to receive various
governmental approvals to proceed with pipeline and storage projects, and
unanticipated construction delays in connection with such projects. Realization
of the Company's objectives and expected performance can also be adversely
affected by the actions of customers and competitors, changes in governmental
regulation of the Company's businesses, and changes in general economic
conditions and the state of domestic capital markets.
ITEM 2. PROPERTIES
A description of Southern's and its subsidiaries' principal properties is
included under Item 1. Business above and is hereby incorporated by reference
herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding various environmental matters relating to, or
that could affect, Southern or one or more of its subsidiaries, see Management's
Discussion and Analysis of Financial Condition and Results of Operations in Part
II of this report under the caption "Environmental Issues."
Aline Moye v. Exxon Corporation, et al., CV No. 98-20, is a class action
lawsuit filed in state court in Monroe County, Alabama in January 1998 on behalf
of royalty owners in the Big Escambia Creek Gas Field ("Field") in Alabama,
against Exxon Corporation, a gas producer in the Field, Southern, which
purchased or transported gas from the Field, and five other named defendants,
alleging that the methods used by the defendants to measure the heating content
and volume of natural gas produced from the Field have caused the producer(s) of
this gas to underpay royalties owed to the royalty owners. The complaint seeks
recovery of actual damages based upon the allegedly unpaid royalties as well as
punitive damages, the amount of which are not specified in the complaint.
Although it cannot predict the outcome, Southern believes that the methods of
measurement were appropriate and intends to defend the suit vigorously.
United States of America ex rel. Jack J. Grynberg v. Southern Natural Gas
Company, et al., U.S. District Court, E.D. La., CV No. 97-2087. Southern
received a letter from the United States Department of Justice on August 31,
1998, enclosing a copy of a complaint that was filed, but not served, by Jack J.
Grynberg in 1997 against Southern, its wholly owned subsidiary, Sea Robin, and a
number of affiliated companies in the United States District Court for the
Eastern District of Louisiana. Grynberg filed the suit on behalf of the United
States Government under 31 U.S.C. sec.3729, et seq., commonly known as the False
Claims Act, alleging that the methods used by the defendants to measure the
heating content and volume of gas purchased or transported by them have caused
producers of natural gas to underpay royalties owed by the producers to the
United States. The complaint also alleges that the defendants deprived the
United States of appropriate royalties by selling gas to affiliated companies at
artificially low prices, which were the basis for payment of royalties to the
United States, and that the affiliates resold the gas to third parties at higher
prices. The complaint seeks recovery of actual damages based upon the unpaid
royalties owed, the amount of which is not specified in the complaint. Such
damages may be trebled under the False Claims Act. The Complaint is similar to
76 other complaints that Grynberg has filed in various federal district courts
against virtually every firm that has purchased gas from federal leases in the
past ten years.
I-10
<PAGE> 13
The complaint makes allegations similar to those in a 1995 complaint that
Grynberg filed under the False Claims Act against Southern, Sea Robin, and 68
other defendants in the United States District Court for the District of
Columbia, which was dismissed on procedural grounds. The Justice Department has
requested Southern and the defendants in the other 76 cases to address the
allegations in the complaints in order for the Justice Department to determine
whether to intervene and take over the cases as provided by the False Claims
Act, which Southern and the other defendants have done. Southern believes that
its and Sea Robin's measurement practices conformed to Department of Interior
regulations, industry standards, and the terms of the applicable tariffs, which
are filed with the FERC. Southern also believes that the prices its affiliates
paid were equal to the prices paid in comparable arms-length transactions and
are in compliance with applicable Department of Interior regulations. As a
result, Southern believes that it and its affiliates have meritorious defenses
to the complaint and intends to defend the suit vigorously whenever it is served
and the suit goes forward.
Southern Natural Gas Company v. O. D. Chafin, et al., Circuit Court of
Cullman County, CV No. 96-217. Southern initiated a proceeding in 1996 to obtain
a right-of-entry to the subject property in order to perform pipeline surveys.
In September 1997, Chafin, et al., filed a class-action counterclaim against
Southern that seeks (i) to keep any condemnation action in state court (Southern
had filed condemnation actions in federal court), (ii) to enjoin construction of
the North Alabama pipeline project, and (iii) unspecified compensatory and
punitive damages. Chafin, et al. also filed a motion for conditional class
certification, which the Court granted ex parte. In October 1997, Southern filed
to dismiss the counterclaim and to reconsider the class certification. The court
did not rule on Southern's motion, but placed the case on its administrative
(inactive) docket, where it remains. Southern believes that it is procedurally
incorrect for a counterclaim to be filed to a right-of-entry action and that
Southern has meritorious defenses to the counterclaim and class certification.
Since the filing of the motion for conditional class certification, the Alabama
Supreme Court has decided several cases that would prevent the type of ex parte
action taken by the Cullman County Circuit Court.
Southern and its subsidiaries are involved in a number of other lawsuits,
all of which have arisen in the ordinary course of business. Southern does not
believe that any ultimate liability resulting from any of these other pending
lawsuits will have a material adverse effect on it.
I-11
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the common stock of Southern Natural Gas Company is held by its
parent company, Sonat Inc. (see Note 12 of the Notes to Consolidated Financial
Statements); accordingly, there is no market for the stock. No dividends were
paid in either 1998 or 1997.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for Southern Natural Gas Company and
its subsidiaries is shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 394.2 $ 393.3 $ 398.8 $ 412.3 $ 381.8
Costs and Expenses............................. 209.0 214.4 232.9 253.2 289.0
-------- -------- -------- -------- --------
Operating Income............................... 185.2 178.9 165.9 159.1 92.8
Other Income, Net.............................. 24.8 18.9 16.3 10.0 9.5
-------- -------- -------- -------- --------
Earnings Before Interest and Taxes............. 210.0 197.8 182.2 169.1 102.3
Interest Expense, Net.......................... (31.9) (26.3) (32.0) (35.0) (26.2)
-------- -------- -------- -------- --------
Income Before Income Taxes..................... 178.1 171.5 150.2 134.1 76.1
Income Taxes................................... 68.4 66.1 57.6 51.6 28.3
-------- -------- -------- -------- --------
Net Income(1)(2)............................. $ 109.7 $ 105.4 $ 92.6 $ 82.5 $ 47.8
======== ======== ======== ======== ========
Assets......................................... $1,566.1 $1,386.3 $1,231.1 $1,437.7 $1,375.2
======== ======== ======== ======== ========
Debt Maturing Within One Year.................. $ 5.0 $ 6.2 $ 8.2 $ 21.9 $ 7.0
Long-Term Debt................................. 500.0 405.0 310.5 317.6 323.9
Stockholder's Equity........................... 761.7 651.7 567.2 574.1 519.2
-------- -------- -------- -------- --------
Total Capitalization........................... $1,266.7 $1,062.9 $ 885.9 $ 913.6 $ 850.1
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Net income in 1995 includes a loss of $6.8 million on unrecoverable gas
contract realignment costs at Southern Natural Gas.
(2) Net income in 1994 includes a charge of $16.6 million related to Southern
Natural Gas' Customer Settlement and gas supply realignment costs (GSR) and
$20.6 million related to a reduction in work force and other matters.
ITEM 7. 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 (Shell) and BP Amoco Corporation
(BP Amoco) joined with Southern Natural Gas in the ownership of Destin Pipeline
Company L.L.C. (Destin), a 1 billion-cubic-feet-per-day pipeline designed to
transport natural gas from growing production areas in the eastern Gulf of
Mexico. Southern Natural Gas has a one-third interest in this pipeline. Shell,
BP Amoco, and other shippers have dedicated their production from certain leases
in the eastern Gulf of Mexico to Destin for transportation under Destin's
flexible firm rate schedule. Construction of the pipeline began in December
1997. The pipeline was partially completed and in service in September 1998, and
was fully in service in March 1999. In June 1998, the Federal Energy Regulatory
Commission (FERC) approved Destin's application to extend its
II-1
<PAGE> 15
pipeline system approximately 12 miles to transport additional gas reserves
committed by other producers to Destin's system. This extension was partially
completed and in service in December 1998 and was placed fully in service in
January 1999. In July 1998, the FERC also approved another Destin application to
extend its pipeline by approximately 31 miles to transport additional gas
reserves committed by other producers to Destin's system. This extension is
expected to be in service in the second quarter of 1999. As of March 1999, the
total capital to be expended by Destin is estimated to be $475 million.
Southern Natural Gas placed in service two expansions to its pipeline
system during 1998 and expects to place a 122-mile, 78
million-cubic-foot-per-day expansion to North Alabama in service this year
barring further unforeseen delays. The two expansions placed in service during
1998 include firm transportation commitments totaling 65 million cubic feet of
natural gas per day from customers in eastern Tennessee, Georgia and Alabama and
34 million cubic feet per day from Alabama Power Company and two other
customers.
OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Market transportation and storage......................... $326.0 $313.2 $323.2
Supply transportation..................................... 43.3 48.5 46.6
Other..................................................... 24.9 31.6 29.0
------ ------ ------
Total Revenues.................................... 394.2 393.3 398.8
------ ------ ------
Costs and Expenses:
Operating and maintenance................................. 84.4 75.4 74.9
General and administrative................................ 57.0 71.3 91.6
Depreciation and amortization............................. 46.3 47.8 48.3
Taxes, other than income.................................. 21.3 19.9 18.1
------ ------ ------
209.0 214.4 232.9
------ ------ ------
Operating Income............................................ 185.2 178.9 165.9
Other Income:
Equity in earnings of unconsolidated affiliates........... 19.7 11.8 9.6
Other..................................................... 5.1 7.1 6.7
------ ------ ------
24.8 18.9 16.3
------ ------ ------
Earnings Before Interest and Taxes.......................... $210.0 $197.8 $182.2
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(BILLION CUBIC FEET)
<S> <C> <C> <C>
Volumes:
Market transportation..................................... 612 611 630
Supply transportation..................................... 372 396 315
Intrastate (1)............................................ -- -- 38
------ ------ ------
Total Volumes..................................... 984 1,007 983
====== ====== ======
Transition gas sales...................................... 12 65 69
====== ====== ======
</TABLE>
- ---------------
(1) Southern's investment in Sonat Intrastate-Alabama Inc., a small intrastate
pipeline subsidiary, was transferred to Sonat Inc. on January 1, 1997.
1998 Versus 1997. Earnings before interest and taxes (EBIT) was $210.0
million in 1998 compared with $197.8 million in 1997. EBIT improved primarily
due to lower general and administrative expenses and higher equity in earnings
of unconsolidated affiliates. System expansions also increased operating
results,
II-2
<PAGE> 16
partly offset by declining results at Sea Robin Pipeline Company (Sea Robin) as
a result of lower interruptible throughput.
The market transportation and storage revenue increase was due to higher
firm transportation revenues associated with expansion projects completed in
1998. Supply transportation revenues decreased primarily due to lower
interruptible throughput on the Sea Robin system. 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. Operating and maintenance expense increased primarily
due to the difference in proceeds recognized on the disposition of assets
between 1997 and 1998, offset by favorable fuel expenses in 1998. Both 1998 and
1997 periods include positive effects related to the sale of assets. General and
administrative expenses decreased primarily due to lower stock-based
compensation, employee benefit, insurance and professional services expenses.
Equity in earnings of unconsolidated affiliates increased primarily due to
the inclusion of Southern's share of earnings in Destin, slightly offset by
lower earnings from Bear Creek Storage Company. Destin's earnings increase was
the result of higher allowance for funds used during construction (AFUDC)
capitalized in 1998 as compared with 1997 levels. The Company expects Destin's
1999 earnings will be lower than 1998 as operating revenues are adversely
affected by currently anticipated delays in the development of the substantial
offshore discoveries of Shell and BP Amoco that are dedicated to the Destin
system. Other, net decreased in 1998 compared to 1997 primarily due to a
non-recurring gain in 1997 on the termination of Southern's interest rate
forward agreement of $2.4 million. This decrease was slightly offset by higher
AFUDC.
1997 Versus 1996. EBIT for Southern was $197.8 million in 1997 compared
with $182.2 million in 1996. EBIT improved primarily due to lower general and
administrative expenses. Also favorably impacting EBIT were expansions and
improved results at Sea Robin. Partly offsetting was warmer winter weather
during 1997 which negatively affected operating results.
Market transportation revenues decreased primarily due to lower volumes
resulting from warmer weather and the transfer of Southern's ownership of a
small intrastate pipeline to Sonat, which was immaterial to operating results,
partially offset by increased revenues from expansions. Supply transportation
revenues increased due to higher volumes. Other revenues in 1997 includes the
favorable $10 million reserve adjustment discussed above. Operating and
maintenance expense increased slightly primarily due to higher fuel expense.
Operating and maintenance expense in both periods included positive effects
related to the disposition of assets. General and administrative expenses
decreased primarily due to lower stock-based compensation and employee benefit
expenses in 1997 and a $9.0 million donation to the Sonat Foundation in 1996.
Equity in earnings of unconsolidated affiliates increased primarily due to
the inclusion of Southern's share of earnings in the Destin Pipeline joint
venture and slightly higher earnings from Bear Creek Storage Company. Other, net
increased in 1997 compared to 1996 primarily due to higher levels of AFUDC at
Southern recognized during construction of its expansions, offset slightly by
lower gains recognized on the termination of an interest rate forward agreement
associated with an anticipated financing that did not occur.
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 substantially 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.
II-3
<PAGE> 17
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 customer settlement approved by the FERC (the Customer
Settlement), 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 conclusion of the rate case.
---------------------
Other Income Statement Items
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Interest Expense, Net....................................... $31.9 $26.3 $32.0
</TABLE>
1998 Versus 1997. Net interest expense increased in 1998 compared to 1997
due to higher average levels of outside debt and higher accruals for interest on
taxes. The increase was partially offset by a slight decline in average interest
rates on debt and higher interest income resulting from higher loan balances to
Southern Natural Gas Company's parent, Sonat Inc. (see Note 12 of the Notes to
Consolidated Financial Statements). In addition, interest capitalized increased
due to Southern's expansion programs.
1997 Versus 1996. Net interest expense decreased in 1997 compared to 1996
due to lower interest expense, slightly offset by lower interest income.
Interest expense decreased due to lower average regulatory reserve balances, and
lower average debt levels with Sonat Inc. The decline was slightly offset by
higher average levels of outside debt. Interest income was lower due to lower
average balances of loans to affiliates and lower GSR related interest income
due to the recording of the Customer Settlement in the second quarter of 1996.
Interest capitalized increased due to Southern's expansion programs.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Income Taxes................................................ $68.4 $66.1 $57.6
</TABLE>
1998 Versus 1997. Income tax expense increased $2.3 million in 1998
compared to 1997 due to higher pretax income (see Note 7 of the Notes to
Consolidated Financial Statements).
1997 Versus 1996. Income tax expense increased $8.5 million in 1997
compared to 1996 due to higher pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Operating Activities........................................ $142.4 $167.7 $135.0
</TABLE>
1998 Versus 1997. Cash flows from operations decreased $25.3 million
compared to the 1997 period. The primary reasons for the decrease were a $16.6
million decrease in the change in accounts receivable
II-4
<PAGE> 18
primarily due to lower receipts from the sale of microwave rights and a $13.6
million decrease in the change in accounts payable primarily due to lower gas
purchases related to declining transition gas sales, and the timing of storage
gas purchases and intercompany settlements.
The change in deferred taxes was primarily attributable to an increase in
plant in service and the adjustment of the salvage value of certain fixed assets
(see Note 5 of the Notes to the Consolidated Financial Statements). Equity in
the 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 GSR costs was due to lower recovery levels from customers.
1997 Versus 1996. Cash flow from operations increased $32.7 million
compared to the 1996 period. The primary reason for the increase was $34.0
million of cash refunds paid to customers in 1996.
Other than the refunds discussed above, the change in GSR costs and the
change in reserves for regulatory matters were attributable to the Customer
Settlement in 1996. In addition, the change in deferred income taxes and accrued
income taxes is also primarily due to the Customer Settlement. The expiration of
two gas purchase contracts in 1997 was the primary reason for the change in both
accounts receivable and accounts payable.
The change in Other, net is primarily due to $41.2 million of accrual
reversals related to the Customer Settlement and interruptible transportation
revenue refunds of $13.5 million, both of which occurred in 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Investing Activities........................................ $(238.5) $(259.5) $(12.9)
</TABLE>
1998 Versus 1997. Net cash used in investing activities was $21.0 million
less compared with the 1997 period. The decrease was attributable to repayments
to Southern Natural Gas of 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
capital expenditures related to Southern Natural Gas' expansion programs in
1998, and higher investments in unconsolidated affiliates, primarily for the
Destin Pipeline joint venture.
1997 Versus 1996. Net cash used in investing activities was $246.6 million
higher in 1997 compared to 1996. The increase was primarily attributable to
increased loans by Southern Natural Gas to Sonat in the 1997 period, including
the net proceeds of the issuance of $100.0 million in notes, compared to
repayments in the 1996 period. The increase in investments in unconsolidated
affiliates primarily reflects Southern's investment of $39.1 million in the
Destin Pipeline joint venture during 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C>
Financing Activities........................................ $93.3 $92.4 $(120.5)
</TABLE>
1998 Versus 1997. Net cash provided by financing activities was
essentially unchanged in 1998 compared to the 1997 period. Southern Natural
borrowed $100.0 million in the public market in both periods.
1997 Versus 1996. Financing activities provided $92.4 million in 1997
compared to requiring $120.5 million in 1996. The change primarily reflects the
issuance of $100.0 million in notes under Southern's shelf registration
statement in the 1997 period and dividend payments to Sonat of $99.6 million in
the 1996 period.
Capital Resources
At December 31, 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.
II-5
<PAGE> 19
Southern's capital expenditures and other investing requirements for 1999
are budgeted to aggregate approximately $171.0 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 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.
At December 31, 1998, Southern had no variable rate debt. Fixed-rate
long-term debt, which was $411.2 million (fair value of $434.9 million) at
December 31, 1997, increased 23 percent. Southern Natural Gas' note receivable
from its parent, Sonat Inc. decreased from $89.3 million at December 31, 1997 to
$22.3 million at December 31, 1998. In 1998, Southern Natural Gas purchased a
$45.0 million note receivable from Mississippi Business Finance Corporation (see
Note 4 of the Notes to Consolidated Financial Statements). In 1996, Southern
entered into an interest rate forward agreement to hedge the interest rate risk
of an anticipated future borrowing. The agreement has been terminated and
Southern has no other derivative instruments (see Note 3 of the Notes to
Consolidated Financial Statements).
The following table provides information about Southern's financial
instruments that are sensitive to changes in interest rates. The table presents
long-term debt maturity amounts and related weighted-average interest rates by
expected maturity dates.
INTEREST RATE RISK INSTRUMENTS
PRINCIPAL AMOUNT BY EXPECTED MATURITY AND AVERAGE INTEREST RATE
<TABLE>
<CAPTION>
FAIR
VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
----- ----- ------ ------ ----- ---------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Notes Receivable from
Affiliates:
Fixed Rate.......... $45.0 $ -- $ -- $ -- $ -- $ -- $ 45.0 $ 45.0
Average Interest
Rate............. 8.0%
Variable Rate....... $22.3 $ -- $ -- $ -- $ -- $ -- $ 22.3 $ 22.3
Average Interest
Rate............. 6.3%
Liabilities:
Long-term Debt, including
Current Portion:
Fixed Rate.......... $ 5.0 $ -- $100.0 $200.0 $ -- $200.0 $505.0 $532.2
Average Interest
Rate............. 7.6% 7.6% 7.4% 6.7% 6.4% 6.4%
</TABLE>
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the past
several years and has not significantly affected the profitability of Southern.
To be able to recover higher costs of operations, Southern has to file general
rate cases. Southern Natural Gas' Customer Settlement requires it to file a new
rate case no later than September 1, 1999.
II-6
<PAGE> 20
ENVIRONMENTAL ISSUES
The operations and properties of Southern are subject to extensive and
changing federal, state, and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation, and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction commences and for certain other activities,
limit or prohibit construction, and other activities on certain lands lying
within wilderness or wetlands and other protected areas and impose substantial
liabilities for pollution resulting from operations. The permits required for
various operations are subject to revocation, modification, and renewal by
issuing authorities. Southern believes that its operations currently are in
substantial compliance with applicable environmental regulations.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunction, or both.
Southern does not expect environmental compliance matters to have a material
adverse effect on its financial position or results of operations. It is also
not anticipated that Southern will be required in the near future to expend
amounts that are material to its financial condition or operations by reason of
environmental laws and regulations, but because such laws and regulations are
frequently changed, and may impose increasingly stricter requirements, Southern
is unable to predict the ultimate cost of complying with such laws and
regulations.
In the operation of their natural gas pipeline systems, Southern Natural
Gas and its wholly owned subsidiaries, South Georgia Natural Gas Company (South
Georgia) and Sea Robin, have used, and continue to use at several locations, gas
meters containing elemental mercury. Southern Natural Gas, South Georgia and Sea
Robin plan to remove all remaining mercury meters during the course of regularly
scheduled facilities upgrades. Mercury and mercury meters are handled pursuant
to procedures that are designed to protect employees and the environment and to
comply with Occupational Safety and Health Administration standards. It is
generally believed in the natural gas pipeline industry that, in the course of
normal maintenance and replacement operations, elemental mercury may have been
released from mercury meters. Based on its previous determination that its
pipeline meters may in the past have been the source of small releases of
elemental mercury, Southern Natural Gas and Sea Robin have completed the
characterization of their sites in Alabama, Georgia, Louisiana, and Mississippi.
Characterization of potential sites on the pipeline system of South Georgia has
not yet commenced. At this time, only the State of Georgia has issued formal
guidelines for remediation of mercury sites, although the State of Louisiana has
issued informal guidance. Southern filed copies of the characterization reports
with the State of Georgia and the State is evaluating what remediation actions,
if any, are necessary. Southern is unable to estimate the cost of mercury
remediation because costs will vary based on a number of factors particular to
each site and because regulatory guidance is still uncertain for all sites.
Based on its experience with other remediation projects, industry experience to
date with remediation of mercury, and its preliminary characterization data,
Southern believes that the cost of its characterization and remediation of any
mercury contamination will not be material to Southern's financial position or
results of operations.
Southern generally considers environmental assessment and remediation costs
and costs associated with compliance with environmental standards to be
recoverable through rates since they are prudent costs incurred in the ordinary
course of business and, accordingly, generally will seek recovery of such costs
through rate filings, although no assurance can be given with regard to their
ultimate recovery.
RECENT ACCOUNTING PRONOUNCEMENTS
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
II-7
<PAGE> 21
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.
YEAR 2000 PROJECT
The following disclosure contains forward-looking statements. Southern'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, Southern 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 Southern's Year
2000 project is progressing and Southern 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 of which Southern's effort is a
component. A consulting firm was engaged to assist in this effort. Southern has
divided its Year 2000 project into assessment, remediation, testing, and
contingency planning 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 continues to contact entities with whom it has
a material relationship, 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 Southern is vulnerable to
the failure of those third parties to remediate their Year 2000 issue.
Southern is currently engaged in the remediation and testing phases of the
Year 2000 project. 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. Southern has completed remediation and testing for all of its
critical systems. Non-critical systems are scheduled to be remediated and tested
by June 30, 1999.
Southern 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 Southern's basic operations. Should any third party with which
Southern has a material relationship fail, the impact could become a significant
challenge to Southern's ability to perform its basic operations. Due to the
nature of Southern's business, extensive contingency plans are already in place,
including plans to provide pipeline system reliability. Because of the
additional uncertainties caused by the Year 2000 problem, Southern is developing
additional contingency plans as practicable for critical systems, service
providers, and business partners. A consulting firm has been engaged to assist
in this effort. These plans involve developing 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 Southern's pipeline system.
Southern is scheduled to have these plans completed by June 30, 1999.
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 December 31, 1998, Southern has incurred approximately $1.1
million in Year 2000 project costs. Southern expects to fund Year 2000
expenditures from normal operations. The timing of expenditures is not
indicative of readiness efforts or progress to date.
II-8
<PAGE> 22
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This 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 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.
II-9
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Southern Natural Gas Company
We have audited the accompanying consolidated balance sheets of Southern
Natural Gas Company and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in retained earnings and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southern
Natural Gas Company and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
January 19, 1999
II-10
<PAGE> 24
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 107 $ 2,905
Notes receivable from affiliates.......................... 67,329 89,277
Accounts receivable, including $6,867,000 in 1998 and
$11,709,000 in 1997 from affiliates.................... 72,692 78,248
Inventories............................................... 20,190 21,529
Gas imbalance receivables................................. 5,675 13,493
Other..................................................... 232 4,250
---------- ----------
Total Current Assets.............................. 166,225 209,702
---------- ----------
Investments:
Unconsolidated affiliates (Note 4)........................ 153,676 95,979
Other investments......................................... 1,067 1,075
---------- ----------
154,743 97,054
---------- ----------
Plant, Property and Equipment (Note 5)...................... 2,672,225 2,456,773
Less accumulated depreciation and amortization............ 1,533,990 1,497,827
---------- ----------
1,138,235 958,946
---------- ----------
Deferred Charges and Other.................................. 106,924 120,629
---------- ----------
Total Assets................................................ $1,566,127 $1,386,331
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year (Note 6)............... $ 5,000 $ 6,220
Accounts payable, including $7,518,000 in 1998 and
$26,554,000 in 1997 to affiliates...................... 25,463 49,364
Accrued income taxes...................................... 3,123 4,078
Other accrued taxes....................................... 4,782 9,150
Accrued interest.......................................... 23,688 20,028
Gas imbalance payables.................................... 9,231 10,498
Other..................................................... 11,082 10,493
---------- ----------
Total Current Liabilities......................... 82,369 109,831
---------- ----------
Long-Term Debt (Note 6)..................................... 500,000 405,000
---------- ----------
Deferred Credits and Other:
Deferred income taxes (Note 7)............................ 164,482 134,073
Reserves for regulatory matters (Note 8).................. 194 4,432
Other..................................................... 57,337 81,302
---------- ----------
222,013 219,807
---------- ----------
Commitments and Contingencies (Note 8)
Stockholder's Equity:
Common stock, $3.75 par value; 1,000 shares authorized and
outstanding............................................ 4 4
Other capital............................................. 79,718 79,332
Retained earnings......................................... 682,023 572,357
---------- ----------
761,745 651,693
---------- ----------
Total Liabilities and Stockholder's Equity.................. $1,566,127 $1,386,331
========== ==========
</TABLE>
See accompanying notes.
II-11
<PAGE> 25
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues (Note 9):
Transportation and storage................................ $369,354 $361,737 $369,804
Other..................................................... 24,862 31,555 29,024
-------- -------- --------
394,216 393,292 398,828
-------- -------- --------
Costs and Expenses:
Operating and maintenance................................. 84,393 75,361 74,930
General and administrative................................ 56,977 71,341 91,590
Depreciation and amortization............................. 46,281 47,769 48,292
Taxes, other than income.................................. 21,342 19,933 18,092
-------- -------- --------
208,993 214,404 232,904
-------- -------- --------
Operating Income............................................ 185,223 178,888 165,924
-------- -------- --------
Other Income, Net:
Equity in earnings of unconsolidated affiliates (Note
4)..................................................... 19,666 11,849 9,630
Other, net................................................ 5,148 7,032 6,664
-------- -------- --------
24,814 18,881 16,294
-------- -------- --------
Earnings Before Interest and Taxes.......................... 210,037 197,769 182,218
-------- -------- --------
Interest:
Interest income from affiliates........................... 2,902 1,911 3,993
Interest income........................................... 593 322 1,084
Interest expense to affiliates............................ (271) (334) (3,062)
Interest expense.......................................... (37,621) (30,014) (34,998)
Interest capitalized...................................... 2,506 1,849 984
-------- -------- --------
(31,891) (26,266) (31,999)
-------- -------- --------
Income Before Income Taxes.................................. 178,146 171,503 150,219
Income Tax Expense (Note 7)................................. 68,480 66,096 57,594
-------- -------- --------
Net Income.................................................. $109,666 $105,407 $ 92,625
======== ======== ========
</TABLE>
See accompanying notes.
II-12
<PAGE> 26
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at Beginning of Year................................ $572,357 $466,507 $473,482
Add:
Net income................................................ 109,666 105,407 92,625
Contribution of investment to parent (Note 2)............. -- 443 --
Deduct:
Dividends................................................. -- -- 99,600
-------- -------- --------
Balance at End of Year...................................... $682,023 $572,357 $466,507
======== ======== ========
</TABLE>
See accompanying notes.
II-13
<PAGE> 27
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 109,666 $ 105,407 $ 92,625
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 46,281 47,769 48,292
Deferred income taxes.................................. 30,409 19,535 38,894
Equity in earnings of unconsolidated affiliates, less
distributions........................................ (13,166) (1,849) (280)
Reserves for regulatory matters........................ (4,238) (10,212) (167,154)
Gas supply realignment costs........................... 1,068 7,514 187,929
Change in:
Accounts receivable.................................. 5,556 22,154 (7,961)
Inventories.......................................... 1,339 2,427 (2,572)
Accounts payable..................................... (23,901) (10,305) 5,729
Accrued interest and income taxes, net............... 3,668 6,600 12,254
Other current assets................................. 10,873 8,632 1,418
Other current liabilities............................ (5,046) (2,770) (1,015)
Other, net............................................. (20,127) (27,223) (73,209)
--------- --------- ---------
Net cash provided by operating activities............ 142,382 167,679 134,950
--------- --------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions................... (222,165) (144,269) (130,418)
Notes receivable from affiliates.......................... 21,948 (86,718) 103,645
Proceeds from disposal of assets.......................... 6,249 12,814 14,261
Investments in unconsolidated affiliates and other........ (44,523) (41,339) (351)
--------- --------- ---------
Net cash used in investing activities................ (238,491) (259,512) (12,863)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of long-term debt.............. 99,531 99,891 --
Payments of long-term debt................................ (6,220) (6,280) (7,091)
Changes in short-term borrowings.......................... -- (1,189) (13,791)
--------- --------- ---------
Net changes in debt....................................... 93,311 92,422 (20,882)
Dividends paid............................................ -- -- (99,600)
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ 93,311 92,422 (120,482)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. (2,798) 589 1,605
Cash at Beginning of Year................................... 2,905 2,316 711
--------- --------- ---------
Cash at End of Year......................................... $ 107 $ 2,905 $ 2,316
========= ========= =========
Supplemental Disclosures of Cash Flow Information Cash Paid
for:
Interest (net of amount capitalized)...................... $ 30,690 $ 24,555 $ 26,197
Income taxes, net......................................... 37,838 40,546 8,075
</TABLE>
See accompanying notes.
II-14
<PAGE> 28
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description -- Southern Natural Gas Company, which is a wholly
owned subsidiary of Sonat Inc. (see Note 12), is primarily engaged in the
transmission of natural gas in interstate commerce. Its transmission systems are
located in the Southeastern United States. Transportation service is provided
for its distribution customers, direct industrial customers and other end-users,
gas producers, other gas pipelines, and gas marketing and trading companies. It
provides transportation service in both its gas supply and market areas. The
principal industries served directly by Southern's pipeline system and
indirectly through its distribution customers' systems include the electric
generation, fertilizer, chemical, pulp and paper, textile, primary metals,
stone, clay and glass industries. For information concerning major customers,
see Note 9. For a description of financial instruments and credit risk, see Note
3.
Principles of Consolidation -- The Consolidated Financial Statements
include the accounts of Southern Natural Gas Company and its subsidiaries
(Southern). Intercompany transactions and accounts have been eliminated in
consolidation. The equity method of accounting is used for investments in
affiliates owned 50 percent or less.
Certain amounts in the 1997 and 1996 Consolidated Financial Statements and
Notes have been reclassified to conform with the 1998 presentation.
Use of Estimates in the Preparation of Financial Statements -- In preparing
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories -- Inventories consist of materials and supplies utilized for
ongoing replacements and expansions that are reviewed regularly and adjusted to
their net realizable value.
Gas Imbalance Receivables and Payables -- Gas imbalances represent the
difference between gas receipts from and gas deliveries to Southern's
transportation and storage customers. Gas imbalances arise when these customers
deliver more or less gas into the pipeline than they take out. Imbalances
incurred prior to implementation of Order No. 636 are settled through the
exchange of gas. Imbalances incurred after implementation of Order No. 636 are
settled monthly.
Plant, Property and Equipment, and Depreciation -- Plant, property and
equipment is carried at cost. Southern generally provides for depreciation on a
composite basis. Southern reviews its long-lived assets for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. No impairment was required in any of the three years in
the period ended December 31, 1998. (See Note 5.)
Gas Supply Realignment (GSR) Costs -- GSR costs were incurred by Southern
to amend or terminate, or to purchase gas at above-market prices under, its gas
purchase contracts as a result of the separation of its sales, transportation,
and storage services mandated by Federal Energy Regulatory Commission (FERC)
directive.
Revenue Recognition -- Revenue is recognized from natural gas
transportation and storage in the period the service is provided. Reserves are
provided on revenues collected subject to refund when appropriate.
Environmental Expenditures -- Southern and its subsidiaries provide for
environmental liabilities when environmental assessments and/or remediation are
probable and such costs can be reasonably estimated. Accruals for environmental
remediation liabilities are not material and have not been discounted.
II-15
<PAGE> 29
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalization of Interest -- Southern capitalizes the costs of debt and
equity funds used on major projects during construction. The rates used by
regulated companies are calculated pursuant to FERC regulations. The allowance
for equity funds is included in Other Income, Net.
Income Taxes -- Southern and its subsidiaries file federal income tax
returns on a consolidated basis with its parent and other members of its
affiliated group. For financial statement purposes, income taxes are provided as
though Southern and its subsidiaries file separate income tax returns; however,
those companies incurring losses are allocated the tax benefit of such losses
used in the consolidated return.
Southern and its subsidiaries follow a liability and asset approach in
accounting for income taxes. Deferred tax liabilities and assets are determined
using the tax rate for the period in which those amounts are expected to be paid
or received. (See Note 7.)
2. CHANGES IN OPERATIONS
On January 1, 1997, Southern transferred its investment of $23,612,000,
including a retained earnings deficit of $443,000, in Sonat Intrastate-Alabama
(SIA) to Sonat. Other Capital in the Consolidated Balance Sheet was adjusted to
reflect the transfer. For the year ended December 31, 1996, SIA had revenues of
$24,399,000 and a net loss of $630,000.
3. FINANCIAL INSTRUMENTS
Southern's entire portfolio of financial instruments is classified as Other
Than Trading. The carrying amounts and fair values of Southern's financial
instruments are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNTS FAIR VALUE
---------------- ----------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1998
Cash........................................................ $ 107 $ 107
Notes Receivable from Affiliates............................ 67,329 67,329
GSR Costs................................................... 2,562 2,562
Long-Term Debt.............................................. 505,000 532,165
DECEMBER 31, 1997
Cash........................................................ $ 2,905 $ 2,905
Notes Receivable from Affiliates............................ 89,277 89,277
GSR Costs................................................... 3,630 3,630
Long-Term Debt.............................................. 411,220 434,913
</TABLE>
The following methods and assumptions were used by Southern in estimating
its fair value disclosures for balance sheet financial instruments:
Cash, notes receivable from affiliates and GSR costs -- The carrying
amount reported in the Consolidated Balance Sheets approximates its fair
value.
Long-term debt -- The fair values of long-term debt are based on
quoted market values or estimated using discounted cash flow analyses,
based on Southern's current incremental borrowing rates for similar types
of borrowing arrangements.
FINANCIAL RISK
On January 22, 1996, Southern entered into an interest rate forward
agreement to hedge the interest rate risk of an anticipated future borrowing
under an existing shelf registration statement. In September 1996, due
II-16
<PAGE> 30
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCIAL INSTRUMENTS (CONTINUED)
to revised expectations of external financing requirements, 50 percent of the
interest rate forward agreement was liquidated resulting in a gain of $3.9
million. A gain of $2.4 million was recognized upon final settlement of this
agreement in 1997.
CREDIT RISK
Southern's financial instruments from unaffiliated parties that are exposed
to concentrations of credit risk consist primarily of accounts receivable and
GSR costs which Southern expects to recover from its customers.
Accounts receivable of Southern relate to business conducted with gas
distribution companies, municipalities, gas districts, industrial customers and
interstate pipeline companies in the Southeast. Southern performs ongoing credit
evaluations of its customers' financial condition and, in some circumstances,
requires collateral from its customers. Accounts receivable are stated net of
valuation allowances of $2.2 million in 1998 and $1.9 million in 1997.
4. UNCONSOLIDATED AFFILIATES
At December 31, 1998, Southern's investment in unconsolidated affiliates
totaled $153.7 million and equaled its share of underlying equity in net assets
of the investees. Through December 31, 1998, Southern's cumulative equity in
earnings of its unconsolidated affiliates was $185.5 million and cumulative
dividends received from them totaled $159.1 million.
A subsidiary of Southern owns 50 percent of Bear Creek Storage Company
(Bear Creek), an underground gas storage company. The following is summarized
financial information for Bear Creek. No provision for income taxes has been
included since its income taxes are paid directly by the joint-venture
participants.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $35,744 $36,226 $36,258
Expenses:
Operating expenses........................................ 6,819 4,440 4,817
Depreciation.............................................. 5,441 5,430 5,415
Other expenses, net....................................... 4,422 4,997 5,657
------- ------- -------
Income Reported............................................. $19,062 $21,359 $20,369
======= ======= =======
</TABLE>
II-17
<PAGE> 31
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Current................................................... $ 11,687 $ 6,503
Net plant and property.................................... 144,519 149,334
Other..................................................... -- 296
-------- --------
$156,206 $156,133
======== ========
Liabilities and Equity
Current................................................... $ 7,968 $ 8,298
Long-term debt and other liabilities...................... 43,140 48,799
Participants' equity...................................... 105,098 99,036
-------- --------
$156,206 $156,133
======== ========
</TABLE>
In 1995 Southern executed a Capital Contribution Agreement in connection
with the project financing for Bear Creek from The Prudential Insurance Company
of America. In the event that Bear Creek does not refinance the remaining
principal, this agreement provides that Southern and its partner will contribute
$21.0 million each to Bear Creek on October 31, 2000, to provide funds to enable
Bear Creek to make a principal payment due under the financing.
In April 1997, units of Shell Oil Company and BP Amoco Corporation joined
with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-foot-per-day pipeline designed to transport natural gas from
growing production 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 was fully in service in March 1999. The FERC has
approved two extensions of Destin which extend its pipeline by 43 miles. The
following is summarized financial information for Destin.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1998 1997
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $ 11,978 $1,049
Expenses (Income):
Operating expenses........................................ 820 --
Depreciation and amortization............................. 641 --
Interest and other........................................ (19,388) (2,778)
-------- ------
Income Reported............................................. $ 29,905 $3,827
======== ======
</TABLE>
II-18
<PAGE> 32
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Current................................................... $ 23,867 $ 54,885
Net transmission plant and property....................... 417,102 81,864
Other..................................................... 12,626 1,429
-------- --------
$453,595 $138,178
======== ========
Liabilities and Equity:
Current................................................... $140,792 $ 4,315
Long-term debt and other liabilities...................... 19,571 2,236
Stockholders' equity...................................... 293,232 131,627
-------- --------
$453,595 $138,178
======== ========
</TABLE>
In November 1998 Destin issued bonds to the Mississippi Business Finance
Corporation (MBFC) in the amount of $135.0 million. The three members of Destin
each purchased $45.0 million of these bonds from the MBFC, which loaned the
proceeds from the sale of the bonds to Destin. Destin used the proceeds from
this loan to finance the construction of its pipeline project, which allowed it
to return invested capital to its three members.
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION
A summary of plant, property and equipment by classification follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Mainline Transmission Property.............................. $1,642,291 $1,295,247
Gas Supply.................................................. 506,965 660,700
Gas Gathering............................................... 10,261 16,568
Underground Storage Facilities.............................. 61,494 60,684
Liquefied Natural Gas Facilities............................ 154,076 154,076
Gas Stored Underground...................................... 142,071 130,128
Other....................................................... 155,067 139,370
---------- ----------
$2,672,225 $2,456,773
========== ==========
</TABLE>
Other plant, property and equipment includes construction work in progress
of $70.6 million and $58.6 million at December 31, 1998 and 1997, respectively.
II-19
<PAGE> 33
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED)
The accumulated depreciation and amortization amounts by classification are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Mainline Transmission Property.............................. $ 866,198 $ 844,885
Gas Supply.................................................. 449,485 434,205
Gas Gathering............................................... 6,206 11,072
Underground Storage Facilities.............................. 47,850 45,869
Liquefied Natural Gas Facilities............................ 123,802 118,981
Other....................................................... 40,449 42,815
---------- ----------
$1,533,990 $1,497,827
========== ==========
</TABLE>
The annual depreciation rates by classification are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Mainline Transmission Property......................... 2.0% 2.0% 2.0%
Gas Supply............................................. 2.9% 2.9% 2.9%
Gas Gathering.......................................... 2.8% 2.8% 2.8%
Underground Storage Facilities......................... 3.3% 3.3% 3.3%
Liquefied Natural Gas Facilities....................... 3.2% 3.2% 3.2%
Other.................................................. 3.3 - 25% 3.3 - 25% 2.8 - 24%
</TABLE>
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 FERC directives, increased net income for the year
ended December 31, 1998, by approximately $4.6 million.
6. DEBT AND LINES OF CREDIT
Long-Term Debt -- Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Southern Natural Gas Company 6.125% Notes due September 15,
2008...................................................... $100,000 $ --
6.70% Notes due October 1, 2007........................... 100,000 100,000
7.85% Notes due January 15, 2002.......................... 100,000 100,000
8 5/8% Notes due May 1, 2002.............................. 100,000 100,000
8 7/8% Notes due February 15, 2001........................ 100,000 100,000
Capital Leases............................................ -- 1,220
Southern LNG Inc.
Promissory Note (an effective rate of 6.75% at December
31, 1998 and 1997) due through April 1, 1999........... 5,000 10,000
-------- --------
Total Outstanding........................................... 505,000 411,220
Less Long-Term Debt Due Within One Year..................... 5,000 6,220
-------- --------
$500,000 $405,000
======== ========
</TABLE>
Southern had no restrictions on the payment of dividends at December 31,
1998.
II-20
<PAGE> 34
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT (CONTINUED)
Annual maturities of long-term debt at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS (IN THOUSANDS)
- ----- --------------
<S> <C>
1999........................................................ $ 5,000
2000........................................................ --
2001........................................................ 100,000
2002........................................................ 200,000
2003........................................................ --
2004-2008................................................... 200,000
--------------
$505,000
==============
</TABLE>
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 proceeds from the offering were initially loaned to
Sonat to be later used for general corporate purposes, including capital
expenditures.
Unsecured Notes -- As part of Sonat's cash management program, Southern can
either loan funds to or borrow funds from Sonat. Notes receivable and payable
are in the form of demand notes with rates reflecting Sonat's return on funds
loaned to its subsidiaries, average short-term investment rates and
cost of borrowed funds. In certain circumstances, these notes are subordinated
in right of payment to amounts payable by Sonat under certain long-term credit
agreements.
At December 31, 1998, Southern had available 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 December 31, 1998 and 1997, no
amounts were outstanding.
7. INCOME TAXES
An analysis of Southern's income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $32,817 $39,968 $16,182
State................................................. 5,254 6,593 2,518
------- ------- -------
38,071 46,561 18,700
------- ------- -------
Deferred:
Federal............................................... 26,353 16,955 33,542
State................................................. 4,056 2,580 5,352
------- ------- -------
30,409 19,535 38,894
------- ------- -------
$68,480 $66,096 $57,594
======= ======= =======
</TABLE>
II-21
<PAGE> 35
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation.............................................. $156,807 $144,054
Inventories............................................... 11,128 11,573
Other..................................................... 14,545 5,431
-------- --------
Total deferred tax liabilities.................... 182,480 161,058
-------- --------
Deferred Tax Assets:
Other accounting accruals................................. 5,665 5,387
GSR and other transition costs............................ 8,531 10,210
Other..................................................... 3,802 11,388
-------- --------
Total deferred tax assets......................... 17,998 26,985
-------- --------
Net Deferred Tax Liabilities.............................. $164,482 $134,073
======== ========
</TABLE>
Southern has not provided a valuation allowance to offset deferred tax
assets because, based on the weight of available evidence, it is more likely
than not that all deferred tax assets will be realized.
Consolidated income tax expense is different from the amount computed by
applying the U.S. federal income tax rate to income before income tax. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income Tax Expense at Statutory Federal Income Tax
Rates................................................... $62,351 $60,026 $52,577
Increases (Decreases) in Tax Resulting From:
State income taxes, net of federal income tax benefit... 6,052 5,962 5,116
Other................................................... 77 108 (99)
------- ------- -------
Income Tax Expense........................................ $68,480 $66,096 $57,594
======= ======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Rate Matters -- Periodically, Southern makes general rate filings with the
Federal Energy Regulatory Commission (FERC) to provide for the recovery of cost
of service and a return on equity. The FERC normally allows the filed rates to
become effective, subject to refund, until it rules on the approved level of
rates. Southern provides reserves relating to such amounts collected subject to
refund, as appropriate, and make refunds upon establishment of the final rates.
At December 31, 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.
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
II-22
<PAGE> 36
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
recovered from or refunded to customers. Information regarding Southern's
regulatory assets and liabilities is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Regulatory Assets:
SFAS No. 109 Tax Gross-Up................................. $23,319 $19,801
Unrecovered Depreciation.................................. 14,053 13,853
Work Force Reduction...................................... 5,574 8,608
Charitable Donation....................................... 6,994 7,897
Cash Out Differential..................................... 4,511 12,449
Other..................................................... 6,987 8,398
------- -------
$61,438 $71,006
======= =======
Regulatory Liabilities:
Excess Deferred Taxes Due Customers....................... $ 3,735 $ 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 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.
Leases -- Southern has operating lease commitments expiring at various
dates, principally for office space and equipment. Southern has no significant
capital leases.
Rental expense for all operating leases is summarized below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-Affiliated Operating Leases............................. $1,418 $1,241 $1,292
Affiliated Operating Leases................................. 4,451 3,724 4,351
------ ------ ------
Total............................................. $5,869 $4,965 $5,643
====== ====== ======
</TABLE>
At December 31, 1998, future minimum payments for non-cancelable operating
leases for the years 1999 through 2003 are less than $3 million per year.
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
The following table shows revenues from major customers:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Atlanta Gas Light Company.............................. $134,045 $130,425 $134,062
Alabama Gas Corporation................................ 47,956 48,300 38,662
</TABLE>
II-23
<PAGE> 37
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES (CONTINUED)
Southern enters into transactions with other Sonat subsidiaries and
unconsolidated affiliates to transport, sell and purchase natural gas. Services
provided by these affiliates for the benefit of Southern are based on the same
terms as nonaffiliates.
The following table shows revenues and charges from Southern's affiliates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from Affiliates.................................. $25,551 $68,292 $83,323
Charges from Affiliates................................... 26,695 28,120 45,737
</TABLE>
10. RETIREMENT PLANS AND OTHER BENEFITS
Retirement Plans -- Sonat has a trusteed, non-contributory, tax qualified
defined benefit retirement plan (the Retirement Plan) covering substantially all
employees of Southern. A supplemental benefit plan (the Supplemental Plan) that
provides retirement benefits in excess of those allowed under Sonat's tax
qualified retirement plan is also in effect. Benefits under the plans are based
on a combination of years of service and a percentage of compensation. Benefits
vest after a period of five years.
Sonat determines the amount of funding to the Retirement Plan on a
year-to-year basis, with amounts consistent with minimum and maximum funding
requirements established by various governmental bodies. Sonat has a trust to
provide benefits under the Supplemental Plan. However, it is not subject to any
funding requirements.
The following tables set forth the benefit obligation and assets of the
plans and the changes in the benefit obligation and plan assets:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1,.......................... $251,785 $264,240
Service cost.............................................. 3,220 2,802
Interest cost............................................. 18,082 18,198
Amendments................................................ (61) --
Actuarial loss (gain)..................................... 10,573 (15,144)
Effect of curtailment..................................... -- (3,096)
Effect of special termination benefits.................... -- 3,252
Benefits paid............................................. (17,949) (18,467)
-------- --------
Benefit obligation at December 31,........................ $265,650 $251,785
======== ========
Change in Plan Assets:
Fair value at January 1,.................................. $382,355 $321,492
Return on plan assets..................................... 52,730 78,037
Contributions............................................. 411 1,293
Benefits paid............................................. (17,949) (18,467)
-------- --------
Fair value at December 31,................................ $417,547 $382,355
======== ========
</TABLE>
II-24
<PAGE> 38
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
The following table sets forth the funded status of the plans and the
amount of the net pension asset recognized in Southern's Consolidated Balance
Sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Funded Status............................................... $ 151,897 $ 130,570
Unrecognized Net Assets at Transition....................... (5,344) (6,544)
Unrecognized Net Gain....................................... (118,819) (114,225)
Unrecognized Prior Service Cost............................. 2,733 5,097
Net Unamortized Deferred Charge from Early Retirement
Termination Benefits...................................... 453 598
--------- ---------
Net Pension Asset Recognized in the Consolidated Balance
Sheets.................................................... $ 30,920 $ 15,496
========= =========
Total Recognized Amounts in the Consolidated Balance Sheets
Consist of:
Prepaid benefit cost................................... $ 40,529 $ 24,176
Accrued benefit liability.............................. (10,062) (9,278)
Net unamortized deferred charge from early retirement
termination benefits................................. 453 598
--------- ---------
$ 30,920 $ 15,496
========= =========
</TABLE>
The projected benefit obligation and accumulated benefit obligation for the
pension plan with accumulated benefit obligations in excess of plan assets were
$11.9 million and $7.1 million, respectively, as of December 31, 1998 and $12.7
million and $7.9 million, respectively, as of December 31, 1997.
The assumed rates used to measure the projected benefit obligations and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount Rate............................................... 7.0% 7.5% 7.0%
Long-Term Rate of Return.................................... 10.5% 9.5% 9.5%
Increase in Future Compensation Levels (Composite Rate):
Retirement and Supplemental Plans......................... 5.0% 5.0% 5.0%
</TABLE>
II-25
<PAGE> 39
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
Southern's net periodic pension income consists of the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost........................................... $ 3,220 $ 2,802 $ 3,296
Interest Cost.......................................... 18,082 18,198 18,096
Expected Return........................................ (33,576) (28,291) (27,090)
Amortization of Prior Service Cost..................... 557 577 577
Amortization of Net Asset at Transition................ (1,188) (1,188) (1,204)
Amortization of Net Gain............................... (2,253) (1,603) (194)
Curtailment Gain....................................... -- (2,959) --
Special Termination Benefits Loss...................... -- 3,252 --
-------- -------- --------
Net Periodic Pension Income............................ $(15,158) $ (9,212) $ (6,519)
======== ======== ========
</TABLE>
Other Postemployment Benefits -- Southern has benefit plans that provide
for postretirement health care and life insurance benefits to substantially all
of its employees when they retire. Southern accrues the cost of postretirement
health care and life insurance benefits within the employees' active service
periods. Southern has elected to amortize the transition obligation over a
20-year period.
The following tables set forth the benefit obligation and assets of
Southern's postretirement health care and life insurance plans and the changes
in the benefit obligation and plan assets:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1,.......................... $62,881 $71,556
Service cost.............................................. 630 801
Interest cost............................................. 4,321 5,033
Plan participants' contributions.......................... 345 375
Actuarial loss (gain)..................................... 353 (9,035)
Effect of curtailment..................................... -- 233
Effect of special termination benefits.................... -- 100
Benefits paid............................................. (5,522) (6,182)
------- -------
Benefit obligation at December 31,........................ $63,008 $62,881
======= =======
Change in Plan Assets:
Fair value at January 1,.................................. $35,921 $30,211
Return on plan assets..................................... 6,077 3,678
Employer's contribution................................... 9,082 7,839
Plan participants' contributions.......................... 345 375
Benefits paid............................................. (5,522) (6,182)
------- -------
Fair value at December 31,................................ $45,903 $35,921
======= =======
</TABLE>
II-26
<PAGE> 40
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
The following table sets forth the funded status and amount of the net
pension liability at December 31, 1998 and 1997, for Southern's postretirement
health care and life insurance plans:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Funded Status............................................... $(17,105) $(26,960)
Unrecognized Net Obligation at Transition................... 31,418 41,487
Unrecognized Net Gain....................................... (19,413) (24,426)
Net Unamortized Deferred Charge From Early Retirement
Termination Benefit....................................... 1,442 1,980
-------- --------
Accrued Postretirement Benefit Liability.................... $ (3,658) $ (7,919)
======== ========
Total Recognized Amounts in the Consolidated Balance Sheets
Consist of:
Prepaid benefit cost...................................... $ 851 $ 357
Accrued benefit liability................................. (5,951) (10,256)
Net unamortized deferred charge from early retirement
termination benefit.................................... 1,442 1,980
-------- --------
$ (3,658) $ (7,919)
======== ========
</TABLE>
The assumed rates used to measure the projected benefit obligation and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount Rate............................................... 7.0% 7.5% 7.0%
Long-Term Rate of Return:
Medical assets (after tax)................................ 6.5% 5.5% 5.5%
Life insurance assets..................................... 10.5% 7.5% 7.5%
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 4.5 percent in 1999 and for all future years.
Southern's net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost.............................................. $ 630 $ 801 $ 854
Interest Cost............................................. 4,321 5,033 4,905
Expected Return on Plan Assets............................ (2,469) (1,881) (1,461)
Amortization of Net Obligation at Transition.............. 2,768 2,896 2,915
Amortization of Net Gain.................................. (1,312) (600) (312)
Curtailment Loss.......................................... -- 1,866 --
Special Termination Benefits Loss......................... -- 100 --
------- ------- -------
$ 3,938 $ 8,215 $ 6,901
======= ======= =======
</TABLE>
II-27
<PAGE> 41
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED)
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components..... $ 613 $ (515)
Effect on postretirement benefit obligation................. 6,038 (5,261)
</TABLE>
Executive Award Plan -- Sonat has an Executive Award Plan that provides
awards to certain key employees in the form of stock options, restricted stock,
and stock appreciation rights (SARs) in tandem with any or all stock options. In
years prior to 1991, tax offset payments were generally provided in conjunction
with these awards. SARs permit the holder of an exercisable option to surrender
that option for an amount equal to the excess of the market price of the common
stock on the date of exercise over the option price (appreciation). The
appreciation is payable in cash, common stock, or a combination of both. SARs
are subject to the same terms and conditions as the options to which they are
related. Commencing in November 1995, Sonat has issued, in tandem with its
regular stock options, SARs that are exercisable only in the event of a change
in control (limited SARs). In November 1995, limited SARs were issued to certain
key employees of Southern with respect to all of their then outstanding options.
No other SARs have been issued since 1990.
Sonat issued to employees of Southern 1,500 shares of restricted stock with
a market value of $43 7/8 per share during 1998, 4,600 shares with a market
value of $43 13/16 per share during 1997 and 16,400 shares with a market value
of $52.00 per share during 1996. The shares generally vest 10 years from the
date of grant, unless the closing price of Sonat's common stock achieves certain
specified levels. At December 31, 1998, 41,432 of the 68,200 cumulative
restricted shares issued have vested.
Stock-based compensation expense increased Southern's pretax income by $2.4
million in 1998, $0.9 million in 1997 and decreased Southern's pretax income by
$6.0 million in 1996.
11. QUARTERLY RESULTS (UNAUDITED)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Revenues........................................ $105,501 $ 95,500 $93,349 $99,866
Operating Income................................ 59,631 45,818 38,501 41,273
Earnings Before Interest and Taxes.............. 64,409 52,524 46,441 46,663
Net Income...................................... 35,216 27,632 23,751 23,067
1997
Revenues........................................ $ 99,166 $103,381 $93,154 $97,591
Operating Income................................ 46,642 45,429 39,957 46,860
Earnings Before Interest and Taxes.............. 53,295 49,098 43,659 51,717
Net Income...................................... 28,666 26,022 23,090 27,629
</TABLE>
See Note 5 for a discussion of the effect of a change in salvage values
which occurred in the first quarter of 1998.
II-28
<PAGE> 42
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENT (UNAUDITED)
On March 13, 1999, Southern's parent company, Sonat Inc. and El Paso
Corporation (El Paso) entered into an Agreement and Plan of Merger (the Merger
Agreement), providing for, among other things, the merger of El Paso and Sonat.
Under the terms of the Merger Agreement, Sonat's shareholders will receive one
share of El Paso common stock, par value $3.00 per share, for each share of
common stock, par value $1.00 per share, of Sonat, they own. The merger is
subject to certain customary conditions, including, among others, approval by
the stockholders of Sonat and receipt of certain required government approvals.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Southern has not had a change in accountants within twenty-four months
prior to the date of its most recent consolidated financial statements or in any
period subsequent to such date.
II-29
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules, and
Exhibits
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors......... II-10
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... II-11
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996...................... II-12
Consolidated Statements of Changes in Retained Earnings
for the years ended December 31, 1998, 1997, and
1996................................................... II-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996...................... II-14
Notes to Consolidated Financial Statements................ II-15
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted as not being applicable or
because the subject matter is either not present or is not present in amounts
sufficient to require submission of the schedule, in accordance with the
instructions contained in Regulation S-X, or the required information is
included in the financial statements or notes thereto.
Financial statements of 50-percent-or-less-owned companies and joint
ventures are not presented herein because such companies and joint ventures do
not meet the significance test.
IV-1
<PAGE> 44
3. EXHIBITS(1)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Southern Natural
Gas Company dated as of March 1, 1994, filed as Exhibit
3-(a) to Form 10-K of Southern Natural Gas Company for the
year 1993
3-(b) By-Laws of Southern Natural Gas Company as amended and in
effect October 1, 1982, filed as Exhibit 3-(b) to Form 10-K
of Southern Natural Gas Company for the year 1993
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
as amended by (1) First Supplemental Indenture, dated as of
September 30, 1997, between Southern Natural Gas Company and
The Chase Manhattan Bank (formerly Chemical Bank, successor
by merger to Manufacturers Hanover Trust Company), filed as
Exhibit 4-(1) to Registration Statement No. 33-47266 of
Southern Natural Gas Company dated April 16, 1992, except
(1) which was filed as Exhibit 4-(2) to Form 8-K of Southern
Natural Gas Company dated September 25, 1997
4.2 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4.3 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit
4-(2)to Form 8-K of Southern Natural Gas Company dated
January 14, 1992
4.4 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266, filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996
4.5 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997
4.6 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed
herewith
23 Consent of Ernst & Young LLP, Independent Auditors, dated
March 19, 1999, filed herewith
24 Powers of Attorney authorizing James C. Yardley; Thomas W.
Barker, Jr.; Norman G. Holmes; R. David Hendrickson; and
John C. Griffin to sign the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, on behalf of certain directors and
officers of the registrant, filed herewith
27 Financial Data Schedule for the period ended December 31,
1998, filed herewith, electronically only
</TABLE>
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance
upon General Instruction I(2)(b) of Form 10-K.
- ---------------
(1) Southern will furnish to requesting security holders any exhibit on this
list upon the payment of a fee of $.10 per page up to a maximum of $5.00
per exhibit. Requests must be made in writing and should be addressed to R.
David Hendrickson, Secretary, Southern Natural Gas Company, P. O. Box 2563,
Birmingham, Alabama 35202.
IV-2
<PAGE> 45
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are hereby
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Southern and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of Southern and its subsidiaries on a consolidated basis.
Southern agrees to furnish a copy of each such instrument to the Commission
upon request.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-3
<PAGE> 46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SOUTHERN NATURAL GAS COMPANY
By /s/ JAMES C. YARDLEY
------------------------------------
JAMES C. YARDLEY
PRESIDENT
Dated: March 24, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <C> <S> <C>
(i) Principal Executive Officer:
/s/ JAMES C. YARDLEY President March 24, 1999
- -------------------------------------------------------
(JAMES C. YARDLEY)
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Vice March 24, 1999
- ------------------------------------------------------- President -- Finance
(THOMAS W. BARKER, JR.)
Principal Accounting Officer:
/s/ NORMAN G. HOLMES Vice President and March 24, 1999
- ------------------------------------------------------- Controller
(NORMAN G. HOLMES)
(iii) Directors:*
RONALD L. KUEHN, JR.
JAMES E. MOYLAN, JR.
LARRY E. POWELL
JAMES A. RUBRIGHT
JAMES C. YARDLEY
* Signed on behalf of each of these persons
By /s/ R. DAVID HENDRICKSON
------------------------------------------------
R. DAVID HENDRICKSON
SECRETARY, AS AUTHORIZED
BY CERTAIN POWERS OF ATTORNEY DATED
MARCH 2, 1999,
FILED HEREWITH AS EXHIBIT 24
</TABLE>
IV-4
<PAGE> 47
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NATURAL GAS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1998
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
- ---- -----------
<S> <C>
I-8 Map of the Southeastern United States showing the
approximate location of the pipeline systems of Southern and
its subsidiaries, the underground storage facilities of
Southern, and the proposed pipeline projects (each described
on pages I-1, I-2, I-7, and I-4 through I-6, respectively).
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Southern Natural
Gas Company dated as of March 1, 1994, filed as Exhibit
3-(a) to Form 10-K of Southern Natural Gas Company for the
year 1993
3-(b) By-Laws of Southern Natural Gas Company as amended and in
effect October 1, 1982, filed as Exhibit 3-(b) to Form 10-K
of Southern Natural Gas Company for the year 1993
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
as amended by (1) First Supplemental Indenture, dated as of
September 30, 1997, between Southern Natural Gas Company and
The Chase Manhattan Bank (formerly Chemical Bank, successor
by merger to Manufacturers Hanover Trust Company), filed as
Exhibit 4-(1) to Registration Statement No. 33-47266 of
Southern Natural Gas Company dated April 16, 1992, except
(1) which was filed as Exhibit 4-(2) to Form 8-K of Southern
Natural Gas Company dated September 25, 1997
4.2 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4.3 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit
4-(2)to Form 8-K of Southern Natural Gas Company dated
January 14, 1992
4.4 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266, filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996
4.5 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997
4.6 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed
herewith
23 Consent of Ernst & Young LLP, Independent Auditors, dated
March 19, 1999, filed herewith
24 Powers of Attorney authorizing James C. Yardley; Thomas W.
Barker, Jr.; Norman G. Holmes; R. David Hendrickson; and
John C. Griffin to sign the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, on behalf of certain directors and
officers of the registrant, filed herewith
27 Financial Data Schedule for the period ended December 31,
1998, filed herewith, electronically only
</TABLE>
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance
upon General Instruction I(2)(b) of Form 10-K.
<PAGE> 1
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
(In Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $168,177 $170,227 $150,219 $134,124 $ 76,098
Fixed charges (see computation below) 42,326 34,785 43,028 48,779 47,575
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $210,503 $205,012 $193,247 $182,903 $123,673
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 40,369 $ 33,130 $ 41,147 $ 46,859 $ 45,900
Rentals(b) 1,957 1,655 1,881 1,920 1,675
-------- -------- -------- -------- --------
$ 42,326 $ 34,785 $ 43,028 $ 48,779 $ 47,575
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 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
unconsolidated affiliates.
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3, No. 333-47959) of Southern Natural Gas Company and in the related
Prospectus and Prospectus Supplement of our report dated January 19, 1999, with
respect to the consolidated financial statements of Southern Natural Gas Company
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
Birmingham, Alabama Ernst & Young LLP
March 19, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Southern Natural Gas Company, does hereby constitute and appoint James C.
Yardley; Thomas W. Barker, Jr.; Norman G. Holmes; R. David Hendrickson; and John
C. Griffin, and each of them, his true and lawful attorneys to execute in his
name (whether on behalf of Southern Natural Gas Company or as a director of
Southern Natural Gas Company) the Southern Natural Gas Company Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 2nd day of March, 1999.
/s/ Ronald L. Kuehn, Jr.
--------------------------------
Ronald L. Kuehn, Jr.
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Southern Natural Gas Company, does hereby constitute and appoint James C.
Yardley; Thomas W. Barker, Jr.; Norman G. Holmes; R. David Hendrickson; and John
C. Griffin, and each of them, his true and lawful attorneys to execute in his
name (whether on behalf of Southern Natural Gas Company or as an officer or
director of Southern Natural Gas Company) the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and any
and all amendments thereto to be filed with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 and to file the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission. The
undersigned does hereby ratify and confirm all that said attorneys and agents,
and each of them, shall do or cause to be done by virtue hereof. Each of such
attorneys shall have and may exercise all powers to act hereunder with or
without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 2nd day of March, 1999.
/s/ James E. Moylan, Jr.
--------------------------------
James E. Moylan, Jr.
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James C. Yardley; Thomas W. Barker, Jr.; Norman G. Holmes; R. David Hendrickson;
and John C. Griffin, and each of them, his true and lawful attorneys to execute
in his name (whether on behalf of Southern Natural Gas Company or as an officer
or director of Southern Natural Gas Company) the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and any
and all amendments thereto to be filed with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 and to file the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission. The
undersigned does hereby ratify and confirm all that said attorneys and agents,
and each of them, shall do or cause to be done by virtue hereof. Each of such
attorneys shall have and may exercise all powers to act hereunder with or
without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 2nd day of March, 1999.
/s/ Larry E. Powell
--------------------------------
Larry E. Powell
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Southern Natural Gas Company, does hereby constitute and appoint James C.
Yardley; Thomas W. Barker, Jr.; Norman G. Holmes; R. David Hendrickson; and John
C. Griffin, and each of them, his true and lawful attorneys to execute in his
name (whether on behalf of Southern Natural Gas Company or as an officer or
director of Southern Natural Gas Company) the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and any
and all amendments thereto to be filed with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 and to file the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission. The
undersigned does hereby ratify and confirm all that said attorneys and agents,
and each of them, shall do or cause to be done by virtue hereof. Each of such
attorneys shall have and may exercise all powers to act hereunder with or
without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 2nd day of March, 1999.
/s/ James A. Rubright
--------------------------------
James A. Rubright
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Southern Natural Gas Company, does hereby constitute and appoint
James C. Yardley; Thomas W. Barker, Jr.; Norman G. Holmes; R. David Hendrickson;
and John C. Griffin, and each of them, his true and lawful attorneys to execute
in his name (whether on behalf of Southern Natural Gas Company or as an officer
or director of Southern Natural Gas Company) the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and any
and all amendments thereto to be filed with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 and to file the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission. The
undersigned does hereby ratify and confirm all that said attorneys and agents,
and each of them, shall do or cause to be done by virtue hereof. Each of such
attorneys shall have and may exercise all powers to act hereunder with or
without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 2nd day of March, 1999.
/s/ James C. Yardley
--------------------------------
James C. Yardley
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHERN NATURAL GAS CO. FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 140,021
<ALLOWANCES> 0
<INVENTORY> 20,190
<CURRENT-ASSETS> 166,225
<PP&E> 2,672,225
<DEPRECIATION> 1,533,990
<TOTAL-ASSETS> 1,566,127
<CURRENT-LIABILITIES> 82,369
<BONDS> 500,000
0
0
<COMMON> 4
<OTHER-SE> 761,741
<TOTAL-LIABILITY-AND-EQUITY> 1,566,127
<SALES> 0
<TOTAL-REVENUES> 394,216
<CGS> 0
<TOTAL-COSTS> 84,393
<OTHER-EXPENSES> 46,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,386
<INCOME-PRETAX> 178,146
<INCOME-TAX> 68,480
<INCOME-CONTINUING> 109,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,666
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
