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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 JUNE 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 August 7,
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
ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------ --------------
2000 1999 2000 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
Operating revenues.......................................... $86 $95 $182 $195
--- --- ---- ----
Operating expenses
Operation and maintenance................................. 30 35 59 70
Depreciation, depletion, and amortization................. 10 15 13 29
Taxes, other than income taxes............................ 6 6 11 12
--- --- ---- ----
46 56 83 111
--- --- ---- ----
Operating income............................................ 40 39 99 84
Other income
Equity investment earnings................................ 4 2 9 5
Other, net................................................ 1 3 (2) 6
--- --- ---- ----
5 5 7 11
--- --- ---- ----
Income before interest and income taxes..................... 45 44 106 95
--- --- ---- ----
Interest and debt expense................................... 9 9 19 19
Affiliated interest income, net............................. (1) -- -- --
Income tax expense.......................................... 15 13 34 29
--- --- ---- ----
23 22 53 48
--- --- ---- ----
Income before extraordinary gain............................ 22 22 53 47
Extraordinary gain, net of income taxes..................... -- -- 12 --
--- --- ---- ----
Net income.................................................. $22 $22 $ 65 $ 47
=== === ==== ====
</TABLE>
See accompanying notes.
1
<PAGE> 3
SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ 1
Accounts and notes receivable, net........................ 320 75
Materials and supplies.................................... 16 20
Other..................................................... 28 27
------ ------
Total current assets.............................. 364 123
Property, plant, and equipment, net......................... 1,212 1,256
Other....................................................... 129 365
------ ------
Total assets...................................... 1,705 $1,744
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 51 $ 121
Current maturities of long-term debt...................... 100 --
Taxes payable............................................. 83 29
Other..................................................... 26 28
------ ------
Total current liabilities......................... 260 178
Long-term debt, less current maturities..................... 399 499
Deferred income taxes....................................... 122 153
Other....................................................... 76 131
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......................................... 768 703
------ ------
Total stockholder's equity........................ 848 783
------ ------
Total liabilities and stockholder's equity........ $1,705 $1,744
====== ======
</TABLE>
See accompanying notes.
2
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SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 65 $ 47
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 13 29
Deferred income tax expense (benefit).................. (12) 15
Extraordinary gain on sale............................. (21) --
Undistributed earnings in equity investees............. (9) 1
Working capital changes, net of non-cash transactions..... 123 --
Other..................................................... (23) (8)
---- ----
Net cash provided by operating activities......... 136 84
---- ----
Cash flows from investing activities
Purchases of property, plant, and equipment............... (39) (63)
Additions to investments.................................. -- (12)
Proceeds from sale of investments......................... 159 --
Net change in other affiliated advances receivable........ (261) 8
Proceeds from sale of assets, net......................... 74 --
---- ----
Net cash used in investing activities............. (67) (67)
---- ----
Cash flows from financing activities
Payments to retire long-term debt......................... -- (5)
Dividends paid............................................ -- (12)
Net change in other affiliated advances payable........... (70) --
---- ----
Net cash used in financing activities............. (70) (17)
---- ----
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 June 30, 2000, and for the quarters and six months ended June 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 do not include all disclosures required by accounting
principles generally accepted in the United States, but have been prepared
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission. In our opinion, all material adjustments, all of which are of a
normal, recurring nature, have been made to fairly present our results of
operations. Information for any interim period 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. We received net proceeds of
$71 million and 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 we recognized no material gain or loss on this
transaction.
3. PROPERTY, PLANT, AND EQUIPMENT
Our property, plant, and equipment consisted of the following at June 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,525 $2,818
Less accumulated depreciation............................... 1,313 1,562
------ ------
Total property, plant, and equipment, net................... $1,212 $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 will be 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;
- a protocol to follow before making changes to the general terms and
conditions of service;
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- 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.
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 June 30, 2000, we had reserved $15 million for expected
environmental costs.
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, to establish accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. This pronouncement requires us
to classify derivatives as either
5
<PAGE> 7
assets or liabilities on the balance sheet, with a corresponding offset to
income or other comprehensive income, and measure those instruments at fair
value. If certain conditions are met, we may specifically designate a derivative
as a hedge of:
- the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment;
- the exposure to variable cash flows of a forecasted transaction; or
- the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
The accounting for the changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation.
SFAS No. 137, Deferral of the Effective Date of SFAS 133, amended the
standard in June 1999 to defer the effective date. Consequently, SFAS No. 133
will be effective for us January 1, 2001.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
which also amended SFAS No. 133. The amendment:
- expands the normal purchases and sales exception;
- redefines specific risks that can be designated as hedges;
- allows recognition of foreign-currency-denominated assets and liabilities
as hedged items; and
- permits intercompany derivatives to be designated as hedging instruments
for foreign currency risk if the hedge is offset by an unrelated third
party on a net basis (netting risks is permitted only for foreign
currency transactions).
We are currently evaluating the effects these pronouncements will have on our
financial position, results of operations, or cash flows.
Staff Accounting Bulletin No. 101
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 uncertain 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.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and you should read it 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 completed our sale of Sea Robin
Pipeline Company to comply with a FTC order. In May 2000, we also disposed of
our one-third interest in Destin Pipeline Company to comply with the same FTC
order. We received net proceeds of $159 million from this sale and recognized no
material gain or loss on this transaction.
<TABLE>
<CAPTION>
SIX MONTHS
QUARTER ENDED ENDED
JUNE 30, JUNE 30,
----------------- ----------------
2000 1999 2000 1999
------- ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating revenues...................................... $ 86 $ 95 $ 182 $ 195
Operating expenses...................................... (46) (56) (83) (111)
Other income, net....................................... 5 5 7 11
------- ------- ------ -------
EBIT............................................... $ 45 $ 44 $ 106 $ 95
======= ======= ====== =======
Throughput volumes (BBtu/d)(1)
SNG................................................... 2,037 2,524 2,425 2,767
Equity investments.................................... 187 385 378 293
------- ------- ------ -------
Total throughput................................... 2,224 2,909 2,803 3,060
======= ======= ====== =======
</TABLE>
---------------
(1) BBtu/d means billion British thermal units per day.
Second Quarter 2000 Compared to Second Quarter 1999
Operating revenues for the quarter ended June 30, 2000, were $9 million
lower than 1999. The decrease was due to the impact of the sale of our Sea Robin
system, lower rates as a result of our 2000 rate case settlement, and the
elimination of the minimum bill on our Elba Island liquid natural gas facility
which is undergoing reactivation. All of these events occurred in March of 2000.
The decrease was partially offset by increased transportation revenues from the
North Alabama Pipeline expansion.
Operating expenses for the quarter ended June 30, 2000, were $10 million
lower than 1999. The decrease was due to lower expenses related to our Sea Robin
system, lower system operating costs, and lower depreciation and amortization
resulting from lower depreciation rates following our rate case settlement and
the FERC's order authorizing reactivation of the Elba Island facility.
Six Months Ended 2000 Compared to Six Months Ended 1999
Operating revenues for the six months ended June 30, 2000, were $13 million
lower than 1999. The decrease was due to the impact of the sale of our Sea Robin
system, lower rates as a result of our 2000 rate case settlement, and the
elimination of the minimum bill on our Elba Island facility which is undergoing
reactivation. All these events occurred in March of 2000. The decrease was
partially offset by increased transportation and storage revenues.
Operating expenses for the six months ended June 30, 2000, were $28 million
lower than 1999. The decrease was due to lower expenses related to our Sea Robin
system, lower system operating costs, and lower depreciation and amortization
resulting from lower depreciation rates following our rate case settlement and
FERC's order authorizing reactivation of the Elba Island facility.
7
<PAGE> 9
Other income for the six months ended June 30, 2000, was $4 million lower
than 1999. The decrease was due to the elimination of an asset for the future
recovery of costs established for the Elba Island facility and lower allowance
for funds used during construction as a result of our completion of the North
Alabama Pipeline expansion in 2000. The decrease was partially offset by an
increase in equity earnings related to our investment in Destin from the first
quarter of 2000.
INCOME TAX EXPENSE
Income tax expense for the quarters ended June 30, 2000 and 1999, was $15
million and $13 million, resulting in an effective tax rate of 41% and 37%.
Income tax expense for the six months ended June 30, 2000 and 1999, was $34
million and $29 million, resulting in an effective tax rate of 39% and 38%. The
effective tax rates were higher than the statutory rate of 35% due to state
income taxes.
OTHER
In May 2000, we filed an application with FERC to expand our pipeline
system by 336 million cubic feet of natural gas per day. The project will be
placed partially in service in January 2002 and partially in service in January
2003. We expect the project to cost approximately $147 million.
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<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 you should read it 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
<PAGE> 11
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: August 9, 2000
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
Date: August 9, 2000
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
