<PAGE> 1
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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, 2000
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)
<TABLE>
<S> <C>
DELAWARE 63-0196650
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET 77002
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
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, par value $3.75 per share. Shares outstanding on November 6,
2000: 1,000
SOUTHERN NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating revenues.......................................... $85 $94 $267 $289
--- --- ---- ----
Operating expenses
Operation and maintenance................................. 33 54 92 124
Depreciation, depletion, and amortization................. 10 15 23 44
Taxes, other than income taxes............................ 5 5 16 17
--- --- ---- ----
48 74 131 185
--- --- ---- ----
Operating income............................................ 37 20 136 104
Other income
Equity investment earnings................................ 2 2 11 7
Other, net................................................ -- 4 (2) 10
--- --- ---- ----
2 6 9 17
--- --- ---- ----
Income before interest and income taxes..................... 39 26 145 121
--- --- ---- ----
Interest and debt expense................................... 10 9 29 28
Affiliated interest income, net............................. (5) -- (5) --
Income tax expense.......................................... 13 7 47 36
--- --- ---- ----
18 16 71 64
--- --- ---- ----
Income before extraordinary gain............................ 21 10 74 57
Extraordinary gain, net of income taxes..................... -- -- 12 --
--- --- ---- ----
Net income.................................................. $21 $10 $ 86 $ 57
=== === ==== ====
</TABLE>
See accompanying notes.
1
<PAGE> 3
SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ 1
Accounts and notes receivable, net........................ 336 75
Materials and supplies.................................... 16 20
Other..................................................... 28 27
------ ------
Total current assets.............................. 380 123
Property, plant, and equipment, net......................... 1,218 1,256
Other....................................................... 126 365
------ ------
Total assets...................................... $1,724 $1,744
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 44 $ 121
Current maturities of long-term debt...................... 100 --
Taxes payable............................................. 99 29
Other..................................................... 21 28
------ ------
Total current liabilities......................... 264 178
Long-term debt, less current maturities..................... 399 499
Deferred income taxes....................................... 124 153
Other....................................................... 68 131
Commitments and contingencies
Stockholder's equity
Common stock, par value $3.75 per share; authorized and
issued 1,000 shares.................................... -- --
Additional paid-in capital................................ 80 80
Retained earnings......................................... 789 703
------ ------
Total stockholder's equity........................ 869 783
------ ------
Total liabilities and stockholder's equity........ $1,724 $1,744
====== ======
</TABLE>
See accompanying notes.
2
<PAGE> 4
SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
2000 1999
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 86 $ 57
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 23 44
Deferred income tax expense (benefit).................. (10) 16
Extraordinary gain on sales............................ (21) --
Undistributed earnings in equity investees............. (11) (1)
Working capital changes, net of non-cash transactions..... 74 (2)
Other..................................................... 27 13
----- -----
Net cash provided by operating activities......... 168 127
----- -----
Cash flows from investing activities
Purchases of property, plant, and equipment............... (58) (145)
Additions to investments.................................. -- (11)
Proceeds from the sale of investments..................... 159 --
Net change in other affiliated advances receivable........ (274) 22
Proceeds from the sale of assets, net..................... 74 --
----- -----
Net cash used in investing activities............. (99) (134)
----- -----
Cash flows from financing activities
Payments to retire long-term debt......................... -- (5)
Dividends paid............................................ -- (12)
Net change in other affiliated advances payable........... (70) 24
----- -----
Net cash provided by (used in) financing
activities....................................... (70) 7
----- -----
Decrease in cash and cash equivalents....................... (1) --
Cash and cash equivalents
Beginning of period............................... 1 --
----- -----
End of period..................................... $ -- $ --
===== =====
</TABLE>
See accompanying notes.
3
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SOUTHERN NATURAL GAS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Our 1999 Annual Report on Form 10-K includes a summary of our significant
accounting policies and other disclosures. You should read it in conjunction
with this Quarterly Report on Form 10-Q. The condensed consolidated financial
statements at September 30, 2000, and for the quarters and nine months ended
September 30, 2000 and 1999, are unaudited. The condensed consolidated balance
sheet at December 31, 1999, is derived from the audited financial statements.
These financial statements have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission and do not include
all disclosures required by accounting principles generally accepted in the
United States. In our opinion, we have made all adjustments, all of which are of
a normal, recurring nature, to fairly present our interim period results.
Information for interim periods may not necessarily indicate the results of
operations for the entire year due to the seasonal nature of our businesses. The
prior period information includes reclassifications which were made to conform
to the current presentation. These reclassifications have no effect on our
reported net income or stockholder's equity.
2. EXTRAORDINARY GAIN
During the first quarter of 2000, we sold Sea Robin Pipeline Company to
comply with a Federal Trade Commission (FTC) order related to our former parent
company's merger with El Paso Energy Corporation. Net proceeds from this sale
were $71 million and we recognized an extraordinary gain of $12 million, net of
income taxes of $9 million. In May 2000, we also disposed of our one-third
interest in Destin Pipeline Company to comply with the same FTC order. Net
proceeds from this sale were $159 million and no material gain or loss was
recognized on the transaction.
3. PROPERTY, PLANT, AND EQUIPMENT
Our property, plant, and equipment consisted of the following at September
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,540 $2,818
Less accumulated depreciation............................... 1,322 1,562
------ ------
Total property, plant, and equipment, net................... $1,218 $1,256
====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In May 2000, the Federal Energy Regulatory Commission (FERC) approved a
comprehensive settlement agreement that settles all issues in our current rate
proceeding. As part of the settlement, all of our firm transportation and
storage contracts that end between now and 2003 will be extended until 2005 or
later. Substantially all of these extended contracts are at or near maximum
tariff rates based on rates provided by our settlement. The settlement provides
our customers with reduced rates effective March 1, 2000, as well as a four-year
moratorium on future rate increases, except in certain limited circumstances,
and requires that we file a new rate case with FERC to be effective no later
than March 2005.
The settlement specifically includes:
- reduced reservation charges;
- a cap of the North Alabama Pipeline project capital costs at $104
million;
4
<PAGE> 6
- a protocol to follow before making changes to the general terms and
conditions of service;
- a three-year extension of certain storage transportation service
contracts and a phased-in conversion of these contracts to a seasonal
firm transportation service arrangement;
- the merger of South Georgia Natural Gas Company, our subsidiary, into
our pipeline system with the addition of an incremental lateral rate
less than South Georgia's current rate; and
- the construction of a new compressor at the Wrens, Georgia compressor
station.
In October 2000, Atlanta Gas Light Company elected to turn back its summer
firm capacity of 141,000 decatherms per day under the terms of our rate case
settlement. We are aggressively remarketing this excess capacity; however, we
cannot predict the ultimate outcome of our effort or that the terms of future
contracts will be as favorable to us as those that currently exist.
In May 2000, we filed an application with the FERC to expand our pipeline
system by 336 million cubic feet of natural gas per day, to serve new power
generation loads being sited by Southern Company Services in Alabama at an
estimated cost of $141 million. Phase I of the project is expected to be in
service in January 2002, and Phase II is expected to be in service in January
2003.
As changes in the regulatory and economic environment evolve, we will
continue to evaluate the application of regulatory accounting principles.
Factors which could impact this assessment include an inability to recover cost
increases under rate caps and rate case moratoriums, an inability to recover
capitalized costs, including an adequate return on those costs through the
ratemaking process, excess capacity or significant discounting of rates in the
markets we serve, and the impacts of ongoing initiatives in, and deregulation
of, the natural gas industry.
While we cannot predict with certainty the final outcome of our future
re-contracting efforts, or the outcome of ongoing industry trends and
initiatives, we believe that the ultimate resolution of these matters will not
have a material adverse effect on our financial position, results of operations,
or cash flows.
Legal Proceedings
We, and a number of our subsidiaries, are named defendants in actions
brought by Jack Grynberg on behalf of the U.S. Government under the False Claims
Act. Generally, these complaints allege an industry-wide conspiracy to under
report the heating value as well as the volumes of the natural gas produced from
federal and Native American lands, which deprived the U.S. Government of
royalties. We have also been named defendants in a similar class action suit,
Quinque Operating Company v. Gas Pipelines. This complaint alleges that the
defendants mismeasured natural gas volumes and heating content of natural gas on
non-federal and non-Native American lands. The Quinque complaint was transferred
to the same court handling the Grynberg complaint. We believe both complaints
are without merit.
We are also a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of our
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, we do not expect the ultimate resolution of these matters to have a
material adverse effect on our financial position, results of operations, or
cash flows.
Environmental
We are subject to extensive federal, state, and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations require us to remove or remedy the effect on the environment of the
disposal or release of specified substances at current and former operating
sites. As of September 30, 2000, we had reserved $15 million for expected
environmental costs.
5
<PAGE> 7
In addition, we expect to make capital expenditures of approximately $22
million for the years 2001 through 2007 for environmental matters primarily
relating to compliance with air regulations and control of water discharges.
It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws and regulations, and claims for
damages to property, employees, other persons and the environment resulting from
our current or past operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will adjust our accrual amounts accordingly.
While there are still uncertainties relating to the ultimate costs we may incur,
based upon our evaluation and experience to date, we believe the recorded
reserves are adequate.
5. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities
In June of 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June of 1999, the FASB
extended the adoption date of SFAS No. 133 through the issuance of SFAS No. 137,
Deferral of the Effective Date of SFAS 133. In June 2000, the FASB issued SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, which also amended SFAS No. 133. SFAS No. 133, and its amendments
and interpretations, establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and derivative instruments used for hedging activities. It will
require that we measure all derivative instruments at their fair value, and
classify them as either assets or liabilities on our balance sheet, with a
corresponding offset to income or other comprehensive income depending on their
designation, their intended use, or their ability to qualify as hedges under the
standard.
We will adopt SFAS No. 133 beginning January 1, 2001, and do not believe it
will have a material impact on our financial position, results of operations, or
cash flows.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for certain matters
relating to the recognition of revenue and will be effective for us in the
fourth quarter of 2000. We do not believe the adoption of SAB No. 101 will have
a material impact on our financial position, results of operations, or cash
flows.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS No. 125. This statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of SFAS No. 125's provisions
without reconsideration. This standard has various effective dates, the earliest
of which is for fiscal years ending after December 15, 2000. We are currently
evaluating the effects of this pronouncement.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section updates, and should be read in
conjunction with, information disclosed in Part II, Items 7, 7A, and 8, in our
Annual Report on Form 10-K for the year ended December 31, 1999, in addition to
the financial statements and notes presented in Item 1 of this Quarterly Report
on Form 10-Q.
RESULTS OF OPERATIONS
During the first quarter of 2000, we sold Sea Robin Pipeline Company to
comply with an FTC order related to our former parent company's merger with El
Paso Energy. Net proceeds from this sale were $71 million and we recognized an
extraordinary gain of $12 million, net of income taxes of $9 million. In May
2000, we also disposed of our one-third interest in Destin Pipeline Company to
comply with the same FTC order. Net proceeds from this sale were $159 million
and no material gain or loss was recognized on the transaction.
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues...................................... $ 85 $ 94 $ 267 $ 289
Operating expenses...................................... (48) (74) (131) (185)
Other income............................................ 2 6 9 17
------ ------ ------ ------
EBIT............................................... $ 39 $ 26 $ 145 $ 121
====== ====== ====== ======
Throughput volumes (BBtu/d)(1)
SNG................................................... 1,848 2,562 2,231 2,698
Equity investments (our share)........................ -- 533 251 374
------ ------ ------ ------
Total throughput................................... 1,848 3,095 2,482 3,072
====== ====== ====== ======
</TABLE>
---------------
(1) BBtu/d means billion British thermal units per day.
Third Quarter 2000 Compared to Third Quarter 1999
Operating revenues for the quarter ended September 30, 2000, were $9
million lower than the same period of 1999. The decrease was due to the impact
of the sale of our Sea Robin system, lower rates following our 2000 rate case
settlement, and the elimination of the minimum bill provisions on our Elba
Island facility that the FERC approved for reactivation in March 2000.
Operating expenses for the quarter ended September 30, 2000, were $26
million lower than the same period of 1999. The decrease was due to lower
expenses as a result of the sale of our Sea Robin system, lower system operating
costs, and the favorable impact of FERC's authorization to reactivate our Elba
Island facility. Also contributing to the decrease was the impairment of several
expansion projects in the third quarter of 1999.
Other income for the quarter ended September 30, 2000, was $4 million lower
than the same period of 1999 resulting from lower interest income and lower
allowance for funds used during construction as a result of the completion of
our North Alabama Pipeline expansion in 2000.
Nine Months Ended 2000 Compared to Nine Months Ended 1999
Operating revenues for the nine months ended September 30, 2000, were $22
million lower than the same period of 1999. The decrease was due to the impact
of the sale of our Sea Robin system, lower rates following our 2000 rate case
settlement, and the elimination of the minimum bill provisions on our Elba
Island facility that the FERC approved for reactivation in March 2000. The
decrease was partially offset by higher transportation and storage revenues.
7
<PAGE> 9
Operating expenses for the nine months ended September 30, 2000, were $54
million lower than the same period of 1999. The decrease was due to lower
expenses as a result of the sale of our Sea Robin system, lower system operating
costs, and the favorable impact of FERC's authorization to reactivate our Elba
Island facility. Also contributing to the decrease was the impairment of several
expansion projects in the third quarter of 1999.
Other income for the nine months ended September 30, 2000, was $8 million
lower than the same period of 1999. The decrease was due to the elimination of
an asset for the future recovery of costs of our Elba Island facility, lower
interest income, and lower allowance for funds used during construction as a
result of the completion of our North Alabama Pipeline expansion in 2000. The
decrease was partially offset by higher equity earnings related to Destin prior
to its sale.
INCOME TAX EXPENSE
The effective income tax rates for the quarters ended September 30, 2000
and 1999, were 38% and 41%. The effective income tax rate for the nine months
ended September 30, 2000 and 1999, was 39% for each period. The effective tax
rates were higher than the statutory rate of 35% due to state income taxes.
8
<PAGE> 10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this document that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations. These statements may relate to information or
assumptions about:
- capital and other expenditures;
- dividends;
- financing plans;
- capital structure;
- cash flow;
- pending legal proceedings and claims, including environmental matters;
- future economic performance;
- operating income;
- cost savings;
- management's plans; and
- goals and objectives for future operations.
Important factors that could cause actual results to differ materially from
estimates or projections contained in forward-looking statements include, among
others, the following:
- the increasing competition within our industry;
- the timing and extent of changes in commodity prices for natural gas and
power;
- the uncertainties associated with customer contract expirations on our
pipeline systems;
- the potential contingent liabilities and tax liabilities related to our
acquisitions; and
- the conditions of equity and other capital markets.
These risk factors are more fully described in our other filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information updates, and should be read in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 1999, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.
There are no material changes in market risks from those reported in our
Annual Report on Form 10-K for the year ended December 31, 1999.
9
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of Southern Natural Gas Company and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not
exceed 10 percent of the total consolidated assets of Southern Natural Gas
Company and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
10
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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
/s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: November 9, 2000
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
Date: November 9, 2000
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
