UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-2745
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
El Paso Energy Building
1001 Louisiana Street
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (713) 420-2131
AmSouth-Sonat Tower
Birmingham, Alabama 35203
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $3.75 PAR VALUE:
1,000 SHARES OUTSTANDING ON OCTOBER 31, 1999
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)--September 30, 1999 and
<S> <C>
December 31, 1998 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Nine Months Ended
September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 17
PART II. Other Information
Item 5. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 23 $ 107
Notes receivable from affiliates 45,040 67,329
Accounts receivable 84,187 72,692
Inventories 19,557 20,190
Gas imbalance receivables 9,863 5,675
Other 2,817 232
---------- ----------
Total Current Assets 161,487 166,225
---------- ----------
Investments in Unconsolidated Affiliates and Other 168,602 154,743
---------- ----------
Plant, Property and Equipment 2,770,460 2,672,225
Less accumulated depreciation and amortization 1,548,694 1,533,990
---------- ----------
1,221,766 1,138,235
---------- ----------
Deferred Charges and Other 110,974 106,924
---------- ----------
$1,662,829 $1,566,127
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 206 $ 5,000
Notes to affiliates 24,214 -
Accounts payable 22,735 25,463
Accrued income taxes 4,792 3,123
Other accrued taxes 16,543 4,782
Accrued interest 21,681 23,688
Gas imbalance payables 16,742 9,231
Other 9,741 11,082
---------- ----------
Total Current Liabilities 116,654 82,369
---------- ----------
Long-Term Debt 500,234 500,000
---------- ----------
Deferred Credits and Other:
Deferred income taxes 180,071 164,482
Other 59,010 57,531
---------- ----------
239,081 222,013
---------- ----------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other capital 79,797 79,722
Retained earnings 727,063 682,023
---------- ----------
Total Stockholder's Equity 806,860 761,745
---------- ----------
$1,662,829 $1,566,127
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Transportation and storage $ 90,942 $88,822 $278,221 $273,918
Other 4,423 4,527 13,034 20,432
-------- ------- -------- --------
95,365 93,349 291,255 294,350
-------- ------- -------- --------
Costs and Expenses:
Operating and maintenance 33,594 21,054 71,628 59,649
General and administrative 20,598 14,812 52,159 42,510
Depreciation and amortization 15,307 13,647 44,252 32,186
Taxes, other than income 5,683 5,335 17,345 16,055
-------- ------- -------- --------
75,182 54,848 185,384 150,400
-------- ------- -------- --------
Operating Income 20,183 38,501 105,871 143,950
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 2,694 5,938 7,544 15,675
Other, net 2,327 2,002 5,262 3,749
-------- ------- -------- --------
5,021 7,940 12,806 19,424
-------- ------- -------- --------
Earnings Before Interest and Taxes 25,204 46,441 118,677 163,374
Interest:
Interest income, primarily
from affiliates 990 269 3,096 2,838
Interest expense (9,758) (9,210) (29,573) (27,485)
Interest capitalized 698 850 1,631 1,816
-------- ------- -------- --------
(8,070) (8,091) (24,846) (22,831)
-------- ------- -------- --------
Income before Income Taxes 17,134 38,350 93,831 140,543
Income Tax Expense 6,644 14,599 36,391 53,944
-------- ------- -------- --------
Net Income $ 10,490 $23,751 $ 57,440 $ 86,599
======== ======= ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 57,440 $ 86,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 44,252 32,186
Deferred income taxes 15,590 21,676
Equity in earnings of unconsolidated
affiliates, less distributions (1,294) (12,175)
Reserves for regulatory matters (194) (4,431)
Change in working capital (2,770) (2,560)
Other 13,391 (12,766)
--------- ---------
Net cash provided by operating
activities 126,415 108,529
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (145,351) (160,297)
Notes receivable from affiliates 22,289 25,895
Investments in unconsolidated affiliates and other (10,691) (70,657)
--------- ---------
Net cash used in investing activities (133,753) (205,059)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt - 100,000
Payments of long-term debt (4,560) (6,220)
Changes in short-term borrowings from affiliates 24,214 -
Dividends paid (12,400) -
--------- ---------
Net cash provided by financing activities 7,254 93,780
--------- ---------
Net Decrease in Cash (84) (2,750)
Cash at Beginning of Period 107 2,905
--------- ---------
Cash at End of Period $ 23 $ 155
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 29,024 $ 23,705
Income taxes paid, net 19,057 29,119
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Southern Natural Gas Company (Southern) became a wholly owned
subsidiary of El Paso Energy Corporation (El Paso Energy) effective October 25,
1999. Prior to this date, Southern was a wholly owned subsidiary of Sonat Inc.
(Sonat).
In connection with the merger of its parent, Sonat, with El Paso
Energy, Southern has been required by the Federal Trade Commission (FTC) to
divest its wholly owned subsidiary, Sea Robin Pipeline Company (Sea Robin) and
its one-third interest in Destin Pipeline Company, L.L.C. (Destin). These
divestitures are expected to be completed by the end of the first quarter of
2000, and are not material to Southern's operations.
The accompanying condensed consolidated financial statements of
Southern have been prepared in accordance with the instructions to Form 10-Q and
include the information and footnotes required by such instructions. In the
opinion of management, all adjustments, including those of a normal recurring
nature, have been made that are necessary for a fair presentation of the results
for the interim periods presented herein.
Certain amounts in the 1998 condensed consolidated financial statements
and notes have been reclassified to conform with the 1999 presentation.
2. Unconsolidated Affiliates
Southern owns a one-third interest in Destin and a subsidiary of
Southern owns 50 percent of Bear Creek Storage Company (Bear Creek).
The following is summarized income statement information for Bear
Creek. No provision for income taxes has been included since its income taxes
are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,995 $8,882 $27,018 $26,732
Expenses:
Operating expenses 1,071 1,533 3,332 5,286
Depreciation 1,366 1,361 4,090 4,080
Other expenses, net 972 1,112 2,880 3,420
------ ------ ------ -------
Income Reported $5,586 $4,876 $16,716 $13,946
====== ====== ======= =======
</TABLE>
<PAGE>
2. Unconsolidated Affiliates (Cont'd)
The following are summarized results of operations for Destin. No
provision for income taxes has been included since its income taxes are paid
directly by joint venture participants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,766 $ 3,632 $18,692 $ 8,425
Expenses:
Operating expenses 1,606 222 4,985 222
Depreciation 4,732 95 9,547 95
Interest and other 2,631 (6,829) 6,527 (17,437)
------ ------- ------- --------
Income (Loss) Reported $ (203) $10,144 $(2,367) $ 25,545
====== ======= ======= ========
</TABLE>
3. Debt and Notes To and From Affiliates
As part of Sonat's cash management program, Southern could either loan
funds to or borrow funds from Sonat. Notes receivable and payable were 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 were subordinated in right of payment to
amounts payable by Sonat under certain long-term credit agreements. As of the
date of the merger described in Note 1, a similar program was established with
El Paso Energy.
At September 30, 1999, Southern had available short-term lines of
credit of $42.0 million available through May 29, 2000. Borrowings are available
for a period of not more than 364 days and are in the form of unsecured
promissory notes that bear interest at rates based on the banks' prevailing
prime, international or money-market lending rates. At September 30, 1999, no
amounts were outstanding under these lines of credit.
4. Rate Matters and Contingencies
In August 1999 Southern filed a $17 million rate increase with the
Federal Energy Regulatory Commission (FERC) based on system costs and throughput
during the base period ended April 30, 1999. The filing complies with a
moratorium provision contained in a comprehensive rate settlement approved by
the FERC in September 1995 that required Southern to file a general rate case no
earlier than March 1, 1998, and no later than September 1, 1999. A primary
reason for the proposed rate increase is an increase in rate base attributable
to non-expansion capital expenditures for facilities that have entered or will
enter into service before the end of the test period on January 31, 2000.
<PAGE>
4. Rate Matters and Contingencies (Cont'd)
In the filing, Southern proposed to continue to use the
straight-fixed-variable rate design method, zone of delivery reservation rates
calculated with reference to current zonal boundaries, derivation of
interruptible transportation rates based on firm rates at 100 percent load
factor (using a zone matrix methodology), and allocation of total storage costs
between pipeline transportation services and unbundled storage services based on
the so-called Equitable methodology. In addition, Southern proposed to roll in
the costs of certain expansion facilities, reduce the depreciation rates for
offshore transmission and underground storage plant, reduce the load factor used
in deriving small shipper rates, and remove certain tariff provisions that have
expired or become obsolete.
A number of customers and other parties filed protests to Southern's
rate increase. The most frequent protests involve the potential for reduction in
rates because of the El Paso/Sonat merger, the reasonableness of Southern's
filed return on common equity, and the rolled-in rate treatment of the North
Alabama Pipeline Project. On September 29, 1999, the FERC issued an order
setting most issues for hearing and suspending Southern's filed rates for five
months, until March 1, 2000. In its order, the FERC also held that Southern
retained the presumption of roll-in for the North Alabama Pipeline Project
because the rate impact remained below five percent despite capital cost
overruns during construction.
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation,
provides that rate-regulated entities account for and report assets and
liabilities consistent with the economic effect of the way in which regulators
establish rates, if the rates established are designed to recover costs of
providing the regulated service and if the competitive environment makes it
reasonable to assume such rates can be charged and collected. Certain expenses
and credits subject to rate determination normally reflected in income are
deferred in the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. Information regarding Southern's regulatory assets and liabilities is
shown below:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(In Thousands)
Regulatory Assets:
<S> <C> <C>
SFAS No. 109 Tax Gross-Up $26,075 $23,319
Unrecovered Depreciation, 14,121 14,053
Work Force Reduction 3,774 5,574
Charitable Donation 6,318 6,994
Cash Out Differential 3,825 4,511
Other 7,115 6,987
------- -------
$61,228 $61,438
======= =======
Regulatory Liabilities:
Excess Deferred Taxes Due Customers $ 2,568 $ 3,735
======= =======
</TABLE>
<PAGE>
4. Rate Matters and Contingencies (Cont'd)
SFAS No. 109 tax gross-up is recorded pursuant to FERC policies
allowing future recovery of taxes associated with the allowance for funds used
during construction (AFUDC). Unrecovered depreciation represents amounts to be
recovered in future rates pursuant to a 1992 FERC settlement. Cash out
differential represents the amount of price differential cost associated with
storage transactions recoverable pursuant to Southern's customer settlement.
Excess deferred tax due customers represents amounts due customers pursuant to
federal tax rate normalization.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southern became a wholly owned subsidiary of El Paso Energy effective
October 25, 1999. Prior to this date, Southern was a wholly owned subsidiary of
Sonat.
In connection with the merger of its parent, Sonat, with El Paso
Energy, Southern has been required by the FTC to divest its wholly owned
subsidiary, Sea Robin and its one-third interest in Destin. These divestitures
are expected to be completed by the end of the first quarter of 2000, and are
not material to Southern's operations.
RESULTS OF OPERATIONS
The principal business of Southern is the transmission and storage of
natural gas in interstate commerce in the southeastern United States. Southern
is actively pursuing opportunities to expand its pipeline system in its
traditional market areas and to connect new gas supplies.
In December 1997 an affiliate of AGL Resources, Inc. (AGL) and Southern
formed a 50/50 joint venture, Etowah LNG Company, L.L.C. (Etowah), to construct,
own, and operate a new LNG peaking facility in Polk County, Georgia. Peaking
services provide supplemental gas supplies on days when demand is highest,
typically during the winter. The proposed plant was to connect directly into
AGL's principal natural gas distribution subsidiary, AGLC, and Southern's
pipeline. Etowah had planned to provide natural gas storage and peaking services
to AGLC and the City of Austell, Georgia. AGLC had subscribed for two-thirds of
the anticipated deliverability capacity from Etowah for a term of 20 years. The
agreement for Etowah to provide services to AGLC included, however, provisions
allowing AGLC to terminate the agreement if it did not receive a satisfactory
order from the Georgia Public Service Commission (Georgia PSC) or if AGLC
otherwise determined 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. At that time the parties extended the time period during which
AGLC may terminate the agreement and suspended work on the project. Etowah has
now given AGLC an extension until October 15, 2000, to make a final decision
whether to terminate the agreement. If the agreement were terminated, AGLC would
be obligated to reimburse Etowah for all of its costs incurred in the project.
Units of Shell Oil Company (Shell) and BP Amoco Corporation (BP Amoco)
are equal partners with Southern in the ownership of Destin. Destin owns a
223-mile, 1 billion cubic feet per day interstate pipeline system that
transports natural gas from the growing eastern Gulf of Mexico production area,
which was placed fully in service in March 1999. An additional 31-mile extension
was placed in service in May 1999. Pursuant to a settlement with the FTC
relating to Sonat's merger with El Paso Energy, El Paso Energy has agreed to
cause Southern to dispose of its interest in Destin.
<PAGE>
Construction is progressing on Southern's expansion project to North
Alabama. The 122-mile, 78 million-cubic-foot-per-day expansion is expected to be
in service in late 1999.
Southern LNG Inc., a subsidiary of Southern, filed an application with
the FERC in July 1999 to reactivate its liquefied natural gas (LNG) marine
receiving terminal located on Elba Island, near Savannah, Georgia. The Elba
Island terminal has been out of service since 1982. Sonat Energy Services Inc.
(Sonat Energy Services), another El Paso subsidiary, was awarded a 22-year
service agreement for all of Elba Island's terminaling, storage, and
vaporization capacity. The Elba Island terminal is capable of achieving a peak
sendout of 540 million cubic feet of natural gas per day and a baseload sendout
of 330 million cubic feet of natural gas per day. It is estimated that the
capital cost associated with recommissioning the Elba Island terminal will be
approximately $26 million.
Sonat Energy Services plans to import LNG from Trinidad through the
Elba Island terminal. Shipment of the LNG to Elba Island will be arranged by the
sellers of the LNG, who are a group of producers led by British Gas Trinidad and
Tobago Limited. Deliveries are estimated to commence in mid-2002 and will
provide approximately 80 Bcf of natural gas per year through the Elba Island
terminal for a primary term of 17 years. The supply arrangement could be
extended for an additional term of five years. Depending upon operating and
market conditions, Sonat Energy Services can handle additional LNG volumes from
Trinidad or other sources through its contracted capacity in the reactivated
facility. Because of increasing natural gas demand in the Southeast, Southern
expects to initiate several pipeline expansion projects over the next several
years. The Elba Island terminal is located on the eastern end of Southern's
service territory, making it a strategically valuable source of natural gas
supply for Southern's market. Not only is the terminal's reactivation expected
to serve as a source of supply for future expansions within its current service
territory, but it could also serve as a source of supply for the expansion of
the Southern pipeline system to new markets.
Southern's Elba Island reactivation and Sonat Energy Services'
importation project are subject to several conditions, including U.S. and
Trinidadian governmental approvals, the execution of final agreements, the
finalization of plans relating to shipping, and the expansion of its LNG
facility in Trinidad by Atlantic LNG Company of Trinidad and Tobago.
The City of Dalton and Atlanta Gas Light Company (AGLC) filed protests
raising issues regarding the rates on Southern's pipeline. Enron Americas LNG
Company (Enron) challenged the open season conducted by Southern with respect to
the Elba Island reactivation under theories of undue discrimination and
affiliate preference. A term sheet settling Enron's protest was executed on
October 13, 1999, and Enron filed a notice of withdrawal of its protest with the
FERC on the same day. Under the settlement, Southern LNG will be obligated to
file a certificate application to expand vaporization capability and to install
blending facilities following exercise of an option by Enron in 2000.
<PAGE>
Southern had previously announced plans to form a 50/50 joint venture
with Carolina Power & Light Company (CP&L) to construct, own, and operate a
natural gas pipeline, to be known as the Palmetto Interstate Pipeline, from
Southern's pipeline system to a delivery point in North Carolina. CP&L has
advised Southern that its need for additional pipeline transportation have been
delayed and that it will also evaluate other competing pipeline proposals.
Consequently, work on this project has been indefinitely suspended. In the third
quarter of 1999, Southern charged to general and administrative expense
approximately $3 million related to this project. Southern is unable to predict
whether or at what time this project may go forward.
Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $80.2 $77.7 $246.0 $239.1
Supply transportation 10.7 11.1 32.2 34.8
Other 4.5 4.6 13.1 20.5
----- ----- ------ ------
Total Revenues 95.4 93.4 291.3 294.4
----- ----- ------ ------
Costs and Expenses:
Operating and maintenance 33.6 21.0 71.6 59.6
General and administrative 20.6 14.8 52.2 42.5
Depreciation and amortization 15.4 13.6 44.3 32.2
Taxes, other than income 5.6 5.4 17.3 16.1
----- ----- ------ ------
75.2 54.8 185.4 150.4
----- ----- ------ ------
Operating Income 20.2 38.6 105.9 144.0
Other Income:
Equity in earnings of
unconsolidated affiliates 2.6 6.0 7.5 15.7
Other 2.4 1.9 5.3 3.7
----- ----- ------ ------
5.0 7.9 12.8 19.4
----- ----- ------ ------
Earnings Before Interest and Taxes $25.2 $46.5 $118.7 $163.4
===== ===== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 141 140 452 462
Supply transportation 90 85 269 283
----- ----- ------ ------
Total Volumes 231 225 721 745
===== ===== ====== ======
</TABLE>
<PAGE>
Third Quarter 1999 to Third Quarter 1998 Analysis
Earnings before interest and taxes (EBIT) for the third quarter of 1999
decreased $21.3 million compared with the comparable period of the prior year.
The decrease was primarily due to higher operating and maintenance expense
resulting from a $10 million reserve established due to expected lower cost
recovery related to a pipeline expansion, higher general and administrative
expense, higher depreciation expense and lower equity in earnings of
unconsolidated affiliates. General and administrative expense was higher in 1999
primarily due to $3 million of expenses related to Southern's Palmetto project,
$3 million of benefits related charges and higher stock-based compensation.
Depreciation expense increased due to higher plant balances in 1999. Equity in
earnings of unconsolidated affiliates decreased primarily due to lower earnings
at Destin Pipeline as a result of AFUDC capitalized in the 1998 period.
Market transportation revenues increased due to increased volumes
associated with recent expansions. Supply transportation revenues declined due
to lower volumes at Sea Robin, partially offset by the effect of higher volumes
at Southern.
Nine Months 1999 to Nine Months 1998 Analysis
EBIT decreased $44.7 million for the nine months ending September 30,
1999 compared with the 1998 period. The decrease was primarily due to higher
operating and maintenance expense, higher depreciation expense, higher general
and administrative expense, and lower equity in earnings of unconsolidated
affiliates. Operating and maintenance expense increased primarily due to the
establishment of the $10 million reserve discussed above and the recognition of
a royalty reserve reversal of $4.2 million in the 1998 period. Depreciation
expense increased primarily due to a $7.0 million pretax adjustment of the
salvage value of certain fixed assets in the 1998 period and higher plant
balances in 1999. General and administrative expense increased primarily due to
expenses related to the Palmetto project, benefits related charges and higher
stock-based compensation expense. Equity in earnings of unconsolidated
affiliates decreased primarily due to lower earnings at Destin Pipeline as a
result of higher AFUDC capitalized in the 1998 period.
Partially offsetting the decrease was the effect of higher market
transportation revenues due to increased volumes associated with recent
expansions. Supply transportation revenues declined due to lower volumes at Sea
Robin. Other income increased primarily due to the sale of certain facilities.
Natural Gas Sales and Supply
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated, or are assigned.
As a result of its restructuring pursuant to FERC directives in past years,
Southern terminated or renegotiated to market based pricing virtually all of its
gas supply contracts through which it had historically obtained its long-term
gas supply. Pending the termination or expiration of the few remaining supply
contracts, Southern's remaining gas supply is being sold on a month-to-month
basis. Because Southern is primarily a gas transporter and does not realize
significant margins on gas sales, the net of gas sales revenues and natural gas
cost is included in other revenue.
<PAGE>
Except for the sale of its remaining gas supply described above,
Southern's participation in gas supply activities will be limited to the
purchase and sale of gas from time to time as may be required for system
management purposes.
Southern's annual purchase commitments total less than $21 million per
year for 1999 and subsequent years. Based on Southern's current expectations
with respect to natural gas prices in 1999 and the years following, an
immaterial volume of gas is expected to be at prices above market.
Rate Matters
Under terms of a settlement approved by the FERC, all of Southern's
previously pending rate proceedings and proceedings to recover gas supply
realignment and other transition costs associated with the implementation of
FERC Order No. 636 were resolved. The settlement required Southern to file a new
rate case no later than September 1, 1999. In accordance with this settlement,
Southern filed a rate case in August 1999. See Note 4 of the Notes to Condensed
Consolidated Financial Statements for a complete description of this rate
proceeding.
In June 1999, in a case on remand from the Fifth Circuit Court of
Appeals and in response to an application filed earlier by Sea Robin, the FERC
determined that Sea Robin performs a nonjurisdictional gathering function in
part and a jurisdictional transmission function in part. Specifically, the FERC
concluded that the two legs of Sea Robin's inverted Y-shaped pipeline system in
the Gulf of Mexico upstream of the Vermilion Block 149 compressor station
constitute gathering facilities, while a 66.3-mile, 36-inch pipeline downstream
from the Vermilion 149 station to Erath, Louisiana is a transmission facility.
In the order, the FERC required Sea Robin to file tariff sheets with separate
gathering rates for the gathering segments of its system. In August 1999, Sea
Robin received an extension of time to make this tariff filing until the FERC
decides on Sea Robin's application for rehearing.
On September 29, 1999, the FERC rejected on procedural grounds proposed
tariff sheets filed by Destin, as a limited Section 4 proceeding, that contained
a rate increase in its FT-1, FT-2, and IT rate schedules to reflect a $78.5
million increase in the actual cost of construction of its facilities, which
rate increase was to be mitigated by a proposed lower depreciation rate. The
Commission's rejection of the proposed changes does not preclude or restrict
Destin from filing to seek such changes under a general Section 4 rate change.
Destin may seek rehearing of the order, but cannot predict the outcome of any
rehearing request.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $(8.1) $(8.1) $(24.8) $(22.8)
</TABLE>
Net interest expense was flat in the three-month period of 1999. The
effect of higher average debt levels was offset by higher interest income
resulting from higher average loan balances to affiliates and a smaller
provision for interest related to income taxes.
Net interest expense increased in the nine-month period of 1999 due to
higher average debt levels. The increase was partially offset by a smaller
provision for interest related to income taxes and the effect of lower average
interest rates.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
(In Millions)
<S> <C> <C> <C> <C>
Income Tax Expense $ 6.6 $14.6 $ 36.4 $ 53.9
</TABLE>
Income tax expense decreased in the 1999 periods due to lower pretax
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
(In Millions)
<S> <C> <C>
Operating Activities $ 126.4 $108.5
</TABLE>
Cash flow from operations increased $17.9 million compared to 1998.
This increase was due to the change in items discussed below. The change in
depreciation is primarily due to the adjustments made in 1998 to reflect salvage
value on certain fixed assets. Equity in earnings of unconsolidated affiliates
was lower in 1999 compared to 1998 due to lower operating results at Destin
(discussed earlier in the operating section). The change in reserves for
regulatory matters is attributable to the reversal of a reserve in 1998
originally established for royalties on take-or-pay contract buyouts. In the
1999 period, the caption Other includes $16 million of reserve provisions
related to pipeline expansions and other charges (discussed earlier in the
operating section).
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
(In Millions)
<S> <C> <C>
Investing Activities $(133.8) $(205.1)
</TABLE>
Net cash used in investing activities was $71.3 million lower in 1999
compared to 1998. The change was primarily attributable to lower investments in
the Destin pipeline joint venture and capital expenditures in the current
period.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
(In Millions)
<S> <C> <C>
Financing Activities $ 7.3 $ 93.8
</TABLE>
Net cash provided by financing activities decreased $86.5 million in
1999 compared to 1998 primarily due to the issuance of $100.0 million in notes
in the prior period and intercompany borrowings and the payment of a dividend to
Southern's parent in the current period.
Capital Resources
At September 30, 1999, Southern had bank lines of credit with a total
capacity of $42.0 million, all of which was available. Southern also has a shelf
registration statement with the Securities and Exchange Commission which
provides for the issuance of up to $500.0 million in debt securities of which
$100.0 million has been issued.
Southern's capital expenditures and other investing requirements for
1999 are expected to total approximately $168 million. This amount reflects
investments in unconsolidated affiliates, expansions and other projects.
Southern expects to continue to use cash from operations and borrowings
in either the public or private markets or loans from affiliates to finance its
capital and other corporate expenditures.
<PAGE>
YEAR 2000 PROJECT
The following disclosure contains forward-looking statements. The
Company's ability to meet its objectives identified below is dependent upon
several factors that could cause actual results to differ materially from those
set forth below, including the timely provision of necessary upgrades and
modifications by suppliers. In addition, the Company cannot guarantee that third
parties on whom it depends for essential services will convert their critical
systems and processes in a timely manner. Each of the phases of the Company's
Year 2000 project is progressing and the Company believes that it is taking all
reasonable and appropriate steps necessary to be able to operate in the Year
2000 and beyond.
To answer the Year 2000 challenge, the Sonat Board of Directors
directed that a corporate-wide initiative be undertaken in which the Company is
participating. A consulting firm was engaged to assist in this effort. The
Company has divided its Year 2000 project into assessment, remediation, testing,
and contingency planning phases. During the assessment phase, the Company
completed a comprehensive inventory of IT systems, embedded systems, equipment,
computer hardware, and software that rely on a computer chip as well as service
providers that could be impacted by the Year 2000 problem. For vendor-supplied
items, the Company has contacted its vendors seeking written verification of
Year 2000 readiness. In addition, the Company continues to communicate with its
critical service providers and business partners such as natural gas suppliers,
pipelines, electric utilities, telecommunication service providers, banks, and
other suppliers of goods and services, to determine the extent to which the
Company is vulnerable to the failure of those third-parties to remediate their
Year 2000 issues.
The remediation phase includes completing the replacement of mainframe
systems with Year 2000-ready vendor packages on new client/server platforms and
performing any required modifications and upgrades identified during the
assessment phase. The testing phase involves testing systems for Year 2000
readiness. The Company has completed remediation and testing of its critical
systems and has substantially completed remediation and testing of its
non-critical systems.
The Company relies on producers of natural gas, natural gas pipelines,
natural gas distribution companies, and natural gas marketing companies.
External infrastructure, such as electric, telecommunication and water service
is also necessary for the Company's basic operations. Should any third party
with which the Company has a material relationship fail, the impact could become
a significant challenge to the Company's ability to perform its basic
operations. Due to the nature of the Company's business, contingency plans are
already in place for certain conditions, including plans to provide pipeline
system reliability. The company has reviewed these existing plans and has
developed additional plans as practicable for critical systems, service
providers and business partners. A consulting firm was engaged to assist in this
effort. These plans involve contingencies for failures that may result from the
Year 2000 problem, and include plans to establish control centers to facilitate
communications in the event of a telecommunications failure and staffing at
selected locations on the Company's pipeline system.
The estimated cost to the Company of the Year 2000 project for capital
as well as general and administrative costs is expected to be less than $5
million. As of September 30, 1999, the Company has incurred approximately $2.4
million in Year 2000 project costs. The Company expects to fund Year 2000
expenditures from normal operations. The timing of expenditures is not
indicative of readiness efforts or progress to date.
<PAGE>
The above disclosure is a "Year 2000 Readiness Disclosure" made with
the intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act. To the extent that any reader of the above year 2000
Readiness Disclosure is other than an investor or potential investor in the
company's - or an affiliate's - equity or debt securities, this disclosure is
made for the sole purpose of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements
regarding Southern's business plans and prospects, objectives, expansion
projects, proposed capital expenditures and expected performance or results.
These forward-looking statements are based on assumptions that Southern believes
are reasonable, but are subject to a wide range of risks and uncertainties and,
as a result, actual results and experience may differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. Such statements are made in reliance on the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results to differ include the
requirements to receive various governmental approvals, including the outcome of
current proceedings before the FERC, to proceed with expansion projects and LNG
projects, and the execution of final agreements and unanticipated construction
delays in connection with such projects. Realization of Southern's objectives
and expected performance can also be adversely affected by the actions of
customers and competitors, changes in governmental regulation of Southern's
businesses, and changes in general economic conditions and the state of domestic
capital markets.
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Financial instruments of Southern expose it to interest rate risk.
Southern's entire portfolio of interest rate risk instruments is classified as
non-trading.
Southern's interest income and interest expense on intercompany loans
are sensitive to changes in the level of short-term interest rates in the United
States. In general, Southern either loans excess funds to El Paso Energy or
repays its short-term borrowings. Excess cash generated by or contributed to
joint venture projects is invested on a short-term basis pending distribution or
expenditure on capital projects.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Legal Proceedings
Quinque Operating Company v. Gas Pipelines is a class action suit filed
in state court in Stevens County, Kansas in September 1999. Plaintiff filed suit
on behalf of itself and all gas producers, royalty owners, overriding royalty
owners, working interest owners, and state taxing authorities against 233
pipeline, gathering, marketing, processing, and exploration and production
companies, including Southern Natural Gas, Sea Robin, Sonat Exploration, and
Sonat Marketing. Plaintiff alleges that the members of the class have been
underpaid by the defendants due to the mismeasurement of gas volumes and the
heating content of gas on non-federal and non-Native American lands. The case
has been removed to federal court. This suit makes similar allegations to those
raised in Grynberg v. Southern Natural Gas, et al. regarding federal and Native
American lands, which is discussed in "Item 3. Legal Proceedings" in Part I of
the Company's Report on Form 10-K for the Year Ended December 31, 1998. As in
Grynberg, management believes these claims are without merit and intends to
defend the suit vigorously and believes that the ultimate resolution of this
matter will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedule for the period ended September 30, 1999
- ------------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on November 1, 1999, reporting
certain information under Item 1 relating to the change of control of the
Company whereby Sonat, formerly the direct parent of the Company, merged into El
Paso Energy pursuant to the Second Amended and Restated Agreement and Plan of
Merger dated March 13, 1999, between Sonat and El Paso Energy.
The Company filed a report on Form 8-K on November 4, 1999, reporting
certain information under Item 4 regarding the change of its certified
accountant.
- ------------------
(1) The Company will furnish to requesting security holders the exhibits on
this list upon the payment of a fee of $.10 per page up to a maximum of
$5.00 per exhibit. Requests must be in writing and should be addressed
to R. David Hendrickson, Secretary, Southern Natural Gas Company, P. O.
Box 2563, Birmingham, Alabama 35202-2563.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date: November 12, 1999 By: /s/ H. Brent Austin
--------------------------- --------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 12, 1999 By: /s/ Jeffrey I. Beason
--------------------------- ----------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Years Ended December 31,
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 94,620 $132,029 $168,177 $170,227 $150,219 $134,124 $ 76,098
Fixed charges (see computation below) 32,832 31,019 42,326 34,785 43,028 48,779 47,575
-------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $127,452 $163,048 $210,503 $205,012 $193,247 $182,903 $123,673
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 31,241 $ 29,380 $ 40,369 $ 33,130 $ 41,147 $ 46,859 $ 45,900
Rentals(b) 1,591 1,639 1,957 1,655 1,881 1,920 1,675
-------- -------- -------- -------- -------- -------- --------
$ 32,832 $ 31,019 $ 42,326 $ 34,785 $ 43,028 $ 48,779 $ 47,575
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 3.9 5.3 5.0 5.9 4.5 3.7 2.6
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 129,227
<ALLOWANCES> 0
<INVENTORY> 19,557
<CURRENT-ASSETS> 161,487
<PP&E> 2,770,460
<DEPRECIATION> 1,548,694
<TOTAL-ASSETS> 1,662,829
<CURRENT-LIABILITIES> 116,654
<BONDS> 500,234
0
0
<COMMON> 4
<OTHER-SE> 806,856
<TOTAL-LIABILITY-AND-EQUITY> 1,662,829
<SALES> 0
<TOTAL-REVENUES> 291,255
<CGS> 0
<TOTAL-COSTS> 71,628
<OTHER-EXPENSES> 44,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,942
<INCOME-PRETAX> 93,831
<INCOME-TAX> 36,391
<INCOME-CONTINUING> 57,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,440
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
