<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 NO. 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.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 420-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
7.85% Notes due 2002.................. New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT: .............................NONE
INDICATE THE NUMBER OF SHARE OUTSTANDING AT EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Common Stock, par value $3.75 per share. Shares outstanding on March 3,
2000: 1,000
SOUTHERN NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
DOCUMENTS INCORPORATED BY REFERENCE: None
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SOUTHERN NATURAL GAS COMPANY
TABLE OF CONTENTS
<TABLE>
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CAPTION PAGE
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<S> <C> <C>
Glossary.............................................................. ii
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders......... *
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 5
Item 6. Selected Financial Data..................................... *
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995..................................................... 7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 8
Item 8. Financial Statements and Supplementary Data................. 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... *
Item 11. Executive Compensation...................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. *
Item 13. Certain Relationships and Related Transactions.............. *
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 26
Signatures.................................................. 28
</TABLE>
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* No response to this item is included herein for the reason that no response is
required pursuant to the reduced disclosure format permitted by General
Instruction I to Form 10-K.
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<PAGE> 3
GLOSSARY
The following abbreviations, acronyms, or defined terms used in this Form
10-K are defined below:
<TABLE>
<S> <C>
Company........................... Southern Natural Gas Company and its subsidiaries
Bcf............................... Billion cubic feet
El Paso........................... El Paso Energy Corporation, the parent company of Southern Natural
Gas Company
FERC.............................. Federal Energy Regulatory Commission
MMcf(/d).......................... Million cubic feet (per day)
SNG............................... Southern Natural Gas Company, a wholly owned subsidiary of El Paso
Energy Corporation after its merger with Sonat Inc. in October 1999
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
SNG, a Delaware corporation, is a wholly owned subsidiary of El Paso. Prior
to El Paso's October 1999 merger with Sonat Inc., SNG was a wholly owned
subsidiary of Sonat Inc. The major business of the Company consists of the
interstate transportation and storage of natural gas. It conducts its business
activities through four natural gas pipeline systems, a storage and a
terminalling facility, each of which is discussed below:
The SNG system. The SNG system consists of approximately 7,300 miles of
interstate natural gas pipelines with a design capacity of 2,632 MMcf/d. During
1999, SNG transported volumes averaging approximately 73 percent of its
capacity. SNG's interstate pipeline system extends from gas fields in Texas,
Louisiana, Mississippi, Alabama and the Gulf of Mexico to markets in Louisiana,
Mississippi, Alabama, Florida, Georgia, including the city of Atlanta, South
Carolina and Tennessee. SNG is the principal pipeline supplier to the growing
southeastern markets of Alabama and Georgia.
South Georgia Natural Gas system. The South Georgia Natural Gas system
("South Georgia"), consists of 910 miles of interstate natural gas pipelines
with a design capacity of 130 MMcf/d. During 1999, South Georgia transported
volumes averaging approximately 80 percent of its capacity. The South Georgia
system interconnects with the SNG system in eastern Alabama and extends from
eastern Alabama through southern Georgia to the Florida panhandle.
Sea Robin Pipeline Company. The Sea Robin Pipeline ("Sea Robin") system
consists of a 430 mile interstate natural gas pipeline system with a design
capacity of 1,000 MMcf/d located off shore Louisiana in the Gulf of Mexico.
During 1999, Sea Robin transported volumes averaging 57 percent of its capacity.
Destin Pipeline Company, L.L.C. Destin Pipeline Company ("Destin") is owned
one-third by SNG. Destin owns a 254 mile interstate pipeline system with a
design capacity of 1,000 MMcf/d that transports natural gas from the growing
eastern Gulf of Mexico production area. Destin's pipeline system was partially
completed and in service in September 1998 and was fully in service in March
1999. During 1999, Destin transported volumes averaging 40 percent of its
capacity.
Southern LNG, Inc. Southern LNG is a liquified natural gas receiving
terminal, located on Elba Island, near Savannah, Georgia, capable of achieving a
peak sendout of 540 MMcf/d and a base load sendout of 333 MMcf/d. Inactive since
the early 1980s, Southern LNG filed an application with FERC in July 1999 to
reactivate the receiving terminal.
Bear Creek Storage. The Company and Tennessee Gas Pipeline Company, a
wholly owned subsidiary of El Paso, each own a 50 percent interest in Bear Creek
Storage Company ("Bear Creek"), which owns and operates an underground natural
gas storage facility located in Louisiana. Services are provided pursuant to the
authorization and subject to the jurisdiction of FERC. Bear Creek has a capacity
of 50 Bcf of base gas and 57 Bcf of working storage capacity. Bear Creek's
storage capacity is committed equally to Tennessee Gas Pipeline Company and SNG
under long-term contracts.
During the first quarter of 2000, the Company will complete the sale of Sea
Robin as well as its one-third interest in Destin to comply with a Federal Trade
Commission order related to El Paso's merger with Sonat Inc.
REGULATORY ENVIRONMENT
SNG and its subsidiaries, Destin and Bear Creek, are subject to the
jurisdiction of FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978 and each operates under separate FERC approved
tariffs. These FERC approved tariffs establish rules, terms, and conditions
under which each system provides services to its customers.
1
<PAGE> 5
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. On
February 9, 2000, the FERC issued a final ruling in response to the NOPR. Among
other things, the rule (i) allows pipelines to file to implement peak and
off-peak rates; (ii) removes the price cap for released capacity; (iii) requires
pipelines to make changes to their tariffs regarding customer imbalances,
penalties and pipeline operations; and (iv) increases the amount and type of
information that pipelines must make available to the FERC and its customers.
In August 1999, SNG filed a $17 million rate increase with FERC based on
system costs and throughput during the base period ended April 30, 1999. The
matter is pending before FERC.
The Company's interstate systems are also subject to the Natural Gas
Pipeline Safety Act of 1968, as amended, which establishes pipeline and
liquified natural gas plant safety requirements, and the National Environmental
Policy Act and other environmental legislation. Each of the systems has a
continuing program of inspection designed to keep all of the facilities in
compliance with pollution control and pipeline safety requirements, and the
Company believes that its systems are in substantial compliance with applicable
requirements.
MARKETS AND COMPETITION
The Company's interstate systems face varying degrees of competition from
alternative energy sources, such as electricity, hydroelectric power, coal, and
fuel oil. Also, the potential consequences of proposed and ongoing restructuring
and deregulation of the electric power industry are currently unclear. Such
restructuring and deregulation may benefit the natural gas industry by creating
more demand for natural gas turbine generated electric power, or it may hamper
demand by allowing a more effective use of surplus electric capacity through
increased wheeling as a result of open access.
SNG's customers include distribution and industrial customers, electric
generation companies, gas producers, other gas pipelines and gas marketing and
trading companies. SNG provides transportation services in both its gas supply
and market areas. SNG's contracts to provide firm transportation service for its
customers are for varying amounts and periods of time. Substantially all of the
firm transportation capacity currently available in SNG's two largest market
areas is fully subscribed. The significant customers served by SNG during 1999
included (i) Atlanta Gas Light Company, with capacity of 954 MMcf/d under
contracts that expire beginning in 2001 through 2007, with the majority expiring
in 2002, (ii) Alabama Gas Corporation with capacity of 384 MMcf/d under
contracts that expire beginning in 2002 through 2008, with the majority expiring
in 2008, and (iii) South Carolina Pipeline Corporation with capacity of 188
MMcf/d under contract which expires primarily in 2003. Nearly all of SNG's firm
transportation contracts contain evergreen provisions that automatically extend
the term for additional months or years unless notice of termination is given by
one of the parties. Contracts representing approximately 43 percent of SNG's
firm transportation capacity are due to expire during 2002 or 2003. This
capacity is expected to be placed under a combination of long-term and
short-term contracts.
Competition among pipelines is strong in a number of SNG's key markets.
Customers purchase gas supply from producers and gas marketing companies in
unregulated transactions and contract with SNG for transportation services to
deliver this supply to their markets. SNG's three largest customers are able to
obtain a significant portion of their natural gas requirements through
transportation from other pipelines. In addition, SNG competes with several
pipelines for the transportation business of many of its other customers. The
competition with such pipelines is intense, and SNG has at times discounted its
transportation rates in order to maintain market share.
2
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ENVIRONMENTAL
A description of the Company's environmental activities is included in Item
8, Financial Statements and Supplementary Data, Note 7, which is incorporated
herein by reference.
EMPLOYEES
The Company had approximately 600 full-time employees on December 31, 1999.
The Company has no collective bargaining arrangements, and no significant
changes in the workforce have occurred since December 31, 1999.
3
<PAGE> 7
ITEM 2. PROPERTIES
A description of the Company's properties is included in Item 1, Business
and is incorporated herein by reference.
The Company is of the opinion that it has satisfactory title to the
properties owned and used in its businesses, subject to liens for current taxes,
liens incident to minor encumbrances, and easements and restrictions that do not
materially detract from the value of such property or the interests therein or
the use of such properties in its businesses. The Company believes that its
physical properties are adequate and suitable for the conduct of its business in
the future.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, Financial Statements and Supplementary Data, Note 7, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4, Submission of Matters to a Vote of Security Holders, has been
omitted from this report pursuant to the reduced disclosure format permitted by
General Instruction I to Form 10-K.
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of SNG's common stock, par value $3.75 per share (the "Common Stock"),
is owned by El Paso and, accordingly, there is no public trading market for such
securities.
Dividends in such amounts as may be determined by the Board of Directors of
SNG may be declared and paid on the Common Stock from time to time out of any
funds legally available therefore. During 1999, the Company paid cash dividends
on its common stock of $12 million to its parent.
ITEM 6. SELECTED FINANCIAL DATA
Item 6, Selected Financial Data, has been omitted from this report pursuant
to the reduced disclosure format permitted by General Instruction I to Form
10-K.
5
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This item is presented pursuant to the reduced disclosure format permitted
by General Instruction I to Form 10-K.
GENERAL
The Company has incurred $90 million of charges related to El Paso's
October 1999 merger with Sonat Inc., as well as certain other asset impairment
charges. See Item 8, Financial Statements and Supplementary Data, Note 2, for a
further discussion of these charges.
During the first quarter of 2000, the Company will complete the sales of
its Destin and Sea Robin systems to comply with a Federal Trade Commission order
related to El Paso's October 1999 merger with Sonat. The Company expects to
treat any material gain arising from the sale as an extraordinary item. After
reflecting any expected gain, the Company believes that the future impact of
these dispositions will not, individually or in the aggregate, have a material
effect on the Company's overall financial position, results of operations or
cash flows.
RESULTS OF OPERATIONS
The Company evaluates performance based on earnings before interest expense
and income taxes, excluding affiliated interest income ("EBIT"). Accordingly,
results of operations presented herein are on that basis. The results presented
include the merger related and asset impairment charges discussed above.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $ 386 $ 389
Operating expenses.......................................... (318) (209)
Other income................................................ 24 31
----- -----
EBIT...................................................... $ 92 $ 211
===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Operating revenues for the year ended December 31, 1999, were $3 million
lower than 1998, primarily as a result of lower interruptible transportation and
non-transportation revenues in 1999 coupled with decreased revenues from lower
throughput on the Sea Robin system in 1999. These decreases were partially
offset by an increase in firm transportation revenues in 1999 associated with
expansion projects.
Operating expenses for the year ended December 31, 1999, were $109 million
higher than 1998. This increase was primarily due to merger-related charges
resulting from El Paso's October 1999 merger with Sonat Inc., including employee
termination charges, the impact of conforming accounting policies and practices
within the transmission segment and impairment charges for redundant assets and
inventory. Also contributing to the increase were reserves established in 1999
for lower anticipated recoveries of the North Alabama and Palmetto pipeline
projects, and higher depreciation from expansion projects.
Other income for the year ended December 31, 1999, was $7 million lower
than for the same period of 1998. The decrease was primarily due to lower equity
earnings from Destin in 1999 partially offset by an increase in interest income
on a Destin-related debt issuance during the latter part of 1998.
6
<PAGE> 10
INTEREST AND DEBT EXPENSE
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Interest and debt expense for the year ended December 31, 1999 was $5
million higher than for the same period of 1998 primarily due to higher average
debt outstanding in 1999 as a result of the September 1998 issuance of an
additional $100 million in long-term debt.
COMMITMENTS AND CONTINGENCIES
See Item 8, Financial Statements and Supplementary Data, Note 7, for a
discussion of the Company's Commitments and Contingencies which is incorporated
herein by reference.
OTHER
Year 2000
To coordinate the phases of the Year 2000 project, El Paso established an
executive steering committee and a project team. The phases of the project were:
(i) awareness; (ii) assessment; (iii) remediation; (iv) testing; (v)
implementation of the necessary modifications, and (vi) contingency planning.
The Company participated in El Paso's Year 2000 project as described below. The
goal of the Year 2000 project was to ensure that all of the critical systems and
processes under the Company's direct control remained functional. As of December
31, 1999, the Company had substantially completed the above phases for all
critical systems. While the Year 2000 rollover date has passed with no apparent
disruptions experienced by the Company's systems and processes, it remains
possible that third parties may have experienced disruptions which have not yet
manifested any impact on the Company, but could in the future. Accordingly, the
Company is prepared to implement any contingency plans should a disruption
occur. While the total cost of the Company's Year 2000 project continues to be
accumulated, the Company does not expect to incur any remaining material costs
in 2000. As of December 31, 1999, the Company has incurred expenses of
approximately $3 million.
The above disclosure is a "YEAR 2000 READINESS DISCLOSURE." 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 FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.
7
<PAGE> 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is exposure to changing interest rates.
The table below presents the weighted average interest rates by expected
maturity dates of those instruments that present interest rate risk to the
Company. As of December 31, 1999 and 1998, the fair value of amounts of fixed
rate long-term debt have been estimated based on quoted market prices for the
same or similar issues.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
EXPECTED FISCAL YEAR OF MATURITY DECEMBER 31, 1998
------------------------------------------------------------- -----------------
FAIR CARRYING FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE AMOUNTS VALUE
---- ---- ---- ---- ---- ---------- ----- ----- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES:
Long-term debt,
including
current portion --
fixed rate........... $100 $200 $200 $500 $493 $503 $532
Average interest
rate............ 8.9% 8.2% 6.4%
</TABLE>
8
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHERN NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Operating revenues
Transportation............................................ $374 $369 $362
Other..................................................... 12 20 26
---- ---- ----
386 389 388
---- ---- ----
Operating expenses
Operation and maintenance................................. 144 142 146
Merger-related and asset impairment charges............... 90 -- --
Depreciation, depletion and amortization.................. 60 46 48
Taxes, other than income taxes............................ 24 21 20
---- ---- ----
318 209 214
---- ---- ----
Operating income............................................ 68 180 174
---- ---- ----
Other income
Equity investment earnings................................ 10 20 12
Other, net................................................ 14 11 12
---- ---- ----
24 31 24
---- ---- ----
Income before interest and income taxes..................... 92 211 198
---- ---- ----
Interest and debt expense................................... 38 33 27
Income tax expense.......................................... 21 68 66
---- ---- ----
59 101 93
---- ---- ----
Net income.................................................. $ 33 $110 $105
==== ==== ====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
9
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SOUTHERN NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1 $ --
Accounts and notes receivable, net
Customer............................................... 58 46
Affiliated companies................................... 15 73
Other.................................................. 2 3
Materials and supplies.................................... 20 20
Regulatory assets......................................... 27 23
------ ------
Total current assets.............................. 123 165
Property, plant and equipment, net.......................... 1,256 1,138
Investments in unconsolidated affiliates.................... 250 154
Other....................................................... 115 106
------ ------
Total assets...................................... $1,744 $1,563
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable
Trade.................................................. $ 22 $ 20
Affiliated companies................................... 74 6
Other.................................................. 25 18
Current maturities of long-term debt...................... -- 5
Taxes payable............................................. 26 8
Accrued interest.......................................... 24 24
Other..................................................... 11 --
------ ------
Total current liabilities......................... 182 81
------ ------
Long-term debt, less current maturities..................... 499 498
------ ------
Deferred income taxes....................................... 153 164
------ ------
Other....................................................... 127 58
------ ------
Commitments and contingencies (See Note 7)
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......................................... 703 682
------ ------
Total stockholder's equity........................ 783 762
------ ------
Total liabilities and stockholder's equity........ $1,744 $1,563
====== ======
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
10
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SOUTHERN NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 33 $ 110 $ 105
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 60 46 48
Deferred income taxes (benefit)........................ (12) 30 20
Undistributed earnings in equity investees............. (4) (13) (2)
Non-cash merger-related and asset impairment charges... 90 -- --
Working capital changes, net of non-cash transactions
Accounts and notes receivable........................ (26) 16 32
Accounts payable..................................... 12 (25) (16)
Taxes payable........................................ 18 (5) 5
Other working capital changes........................ 13 6 6
Other.................................................. (28) (23) (30)
----- ----- -----
Net cash provided by operating activities............ 156 142 168
----- ----- -----
Cash flows from investing activities
Capital expenditures...................................... (189) (222) (144)
Investments in joint ventures and equity investees........ (92) (44) (41)
Proceeds from sales of assets............................. 6 6 13
Net change in other affiliated advances receivable........ 22 67 (87)
Repayment of (investment in) notes receivable with
affiliate.............................................. 45 (45) --
----- ----- -----
Net cash used in investing activities................ (208) (238) (259)
----- ----- -----
Cash flows from financing activities
Long-term debt retirements................................ (5) (6) (6)
Net proceeds from issuance of long-term debt.............. -- 99 99
Net change in other affiliated advances payable........... 70 -- (1)
Dividends paid............................................ (12) -- --
----- ----- -----
Net cash provided by financing activities............ 53 93 92
----- ----- -----
Increase (decrease) in cash and cash equivalents............ 1 (3) 1
Cash and cash equivalents
Beginning of period....................................... -- 3 2
----- ----- -----
End of period............................................. $ 1 $ -- $ 3
===== ===== =====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
11
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SOUTHERN NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF
STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
January 1, 1997........................................... 1,000 $-- $80 $467 $547
Net income.............................................. 105 105
----- --- --- ---- ----
December 31, 1997......................................... 1,000 -- 80 572 652
Net income.............................................. 110 110
----- --- --- ---- ----
December 31, 1998......................................... 1,000 -- 80 682 762
Net income.............................................. 33 33
Cash dividend paid to parent company.................... (12) (12)
----- --- --- ---- ----
December 31, 1999......................................... 1,000 $-- $80 $703 $783
===== === === ==== ====
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
12
<PAGE> 16
SOUTHERN NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of all majority-owned, controlled subsidiaries after the elimination of all
significant intercompany accounts and transactions. Investments in companies
where the Company has the ability to exert significant influence over, but not
control operating and financial policies are accounted for using the equity
method. The consolidated financial statements and the notes for previous periods
include certain reclassifications that were made to conform to the current year
presentation. Such reclassifications have no impact on reported net income or
stockholder's equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities that exist at
the date of the financial statements. Actual results are likely to differ from
those estimates.
Accounting for Regulated Operations
The Company's interstate natural gas systems are subject to the
jurisdiction of FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. Each system operates under separate FERC
approved tariffs which establish rates, terms and conditions under which each
system provides services to its customers. The Company's businesses that are
subject to the regulations and accounting requirements of FERC have followed the
accounting requirements of Statement of Financial Accounting Standards ("SFAS")
No. 71, Accounting for the Effects of Certain Types of Regulation, which may
differ from the accounting requirements of non-regulated entities. Transactions
that have been recorded differently as a result of regulatory accounting
requirements include: the capitalization of an equity return component on
regulated capital projects and certain benefits and other costs and taxes
included in or expected to be included in future rates, including costs to
refinance debt. When the accounting method followed is prescribed by or allowed
by the regulatory authority for rate-making purposes, such method conforms to
the generally accepted accounting principle of matching costs with the revenues
to which they apply.
Changes in the regulatory and economic environment may create, at some
point in the future, circumstances in which the application of regulatory
accounting principles will no longer be appropriate. Factors which could impact
this assessment include an inability to recover cost increases under rate caps
or 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 served by the
Company, and the impacts of ongoing initiatives in and deregulation of the
natural gas industry. Should these factors cause regulatory accounting
principles to no longer be applied, an amount would be charged to earnings as an
extraordinary item. At December 31, 1999, this amount was estimated to be
approximately $32 million, net of income taxes. Any potential charge would be
non-cash and would have no direct effect on the regulated companies' ability to
seek recovery of the underlying deferred costs in their future rate proceedings
or on their ability to collect the rates set thereby.
Cash and Cash Equivalents
Short-term investments purchased with an original maturity of three months
or less are considered cash equivalents.
13
<PAGE> 17
Allowance for Doubtful Accounts and Notes Receivable
The Company establishes provisions for losses on accounts and notes
receivable which may become uncollectible. Collectibility is reviewed regularly,
and the allowance is adjusted as necessary primarily under the specific
identification method. At December 31, 1999 and 1998, the allowance was $2
million.
Gas Imbalances
The Company values gas imbalances due to or due from shippers and operators
at the appropriate index price. Gas imbalances represent the difference between
gas receipts from and gas deliveries to the Company's transportation and storage
customers. Gas imbalances arise when these customers deliver more or less gas
into the pipeline than they take out. Natural gas imbalances are settled in cash
or made up in-kind subject to the pipelines' various terms.
Materials and Supplies
Materials and supplies are valued at the lower of cost or market with cost
determined using the average cost method.
Property, Plant, and Equipment
The Company's regulated property, plant, and equipment is subject to
oversight by the FERC. The objectives of this regulation are to ensure the
proper recovery of capital investments in rates. Such recovery is generally
accomplished by allowing a return of that investment through inclusion of
depreciation expense in the cost of service. Rates also allow for a return on
the net unrecovered rate base. Specific procedures are prescribed by FERC to
control capitalized costs, depreciation, and the disposal of assets. SFAS No. 71
specifically acknowledges the obligation of regulated companies to comply with
regulated accounting procedures, even when they conflict with other generally
accepted accounting principle pronouncements.
Regulated property, plant, and equipment is recorded at original cost of
construction or, on acquisition, the cost to the first party committing the
asset to utility services. Construction cost includes direct labor and
materials, as well as indirect charges such as overhead and an allowance for
both debt and equity funds used during construction. Replacements or betterments
of major units of property are capitalized, while
replacements or additions of minor units of property are expensed.
Depreciation for regulated property, plant, and equipment is calculated
using the composite method. Assets with similar economic characteristics are
grouped. The depreciation rate prescribed in the rate settlement is applied to
the gross investment for the group until net book value of the group is equal to
the salvage value. Currently, depreciation rates vary from 2 percent to 24
percent. This results in remaining economic lives of groups ranging from 2 to 20
years. Depreciation rates are reevaluated in conjunction with the rate making
process.
When regulated property, plant, and equipment is retired, due to
abandonment or replacement, the original cost, plus the cost of retirement, less
salvage, is charged to accumulated depreciation. No gain or loss is recognized
unless an entire operating unit, as defined by FERC, has been retired. Gains or
losses on dispositions of operating units are included in income.
Included in the Company's property, plant, and equipment is construction
work in progress of approximately $27 million and $73 million at December 31,
1999, and 1998, respectively. The capitalized allowance for debt and equity
funds used during construction for the years ended December 31, 1999 and 1998
was $11 million and $12 million, respectively.
The Company evaluates impairment of its property, plant, and equipment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
14
<PAGE> 18
Revenue Recognition
The Company recognizes revenue from natural gas transportation in the
period the service is provided. Reserves are provided on revenues collected
subject to refund when appropriate.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into consideration
the likely effects of inflation and other societal and economic factors, and
include estimates of associated legal costs. These amounts also consider prior
experience in remediating of contaminated sites, other companies' clean-up
experience and data released by the EPA or other organizations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new circumstances, and are included in the balance sheets at their undiscounted
amounts. Recoveries are evaluated separately from the liability and, when
recovery is assured, are recorded and reported separately from the associated
liability in the consolidated financial statements as an asset.
Income Taxes
Income taxes are based on income reported for tax return purposes along
with a provision for deferred income taxes. Deferred income taxes are provided
to reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Tax credits are accounted for under the flow-through method, which reduces the
provision for income taxes in the year the tax credits first become available.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of those
assets will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
El Paso maintains a tax sharing policy which provides, among other things,
that (i) each company in a taxable income position will be currently charged
with an amount equivalent to its federal income tax computed on a separate
return basis, and (ii) each company in a tax loss position will be reimbursed
currently to the extent its deductions, including general business credits, were
utilized in the consolidated return. Under the policy, El Paso pays all federal
income taxes directly to the IRS and will bill or refund, as applicable, its
subsidiaries for their applicable portion of such income tax payments. Prior to
El Paso's October 1999 merger with Sonat Inc., the Company had a similar tax
sharing arrangement with Sonat Inc.
New Accounting Pronouncements Not Yet Adopted
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued by the Financial Accounting Standards Board to
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This pronouncement requires that an entity classify all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset, liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction or (iii) a hedge of 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. Under SFAS No. 133, accounting for the changes in the fair value of
a derivative depends on its intended use and its resulting designation. The
standard was amended by SFAS No. 137 in June 1999. The amendment defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company is currently evaluating the effects of this pronouncement.
15
<PAGE> 19
2. MERGER-RELATED AND ASSET IMPAIRMENT CHARGES
In 1999, the Company incurred $90 million in charges related to El Paso's
October 1999 merger with Sonat Inc. as well as certain other asset impairment
charges. Merger-related costs include $25 million for employee termination
charges, $19 million for conforming the Company's policies and practices with
those of El Paso, $8 million of merger-related asset impairment charges related
to duplicate systems and facilities identified as impaired following the merger,
and $2 million of other merger-related charges. The Company also recorded other
asset impairment charges of $36 million for lower estimated recoveries on
certain regulatory assets related to the Company's pending rate case.
During the first quarter of 2000, the Company will complete the sales of
its Destin and Sea Robin systems to comply with a Federal Trade Commission order
related to El Paso's October 1999 merger with Sonat. The Company expects to
treat any material gain arising from the sale as an extraordinary item. After
reflecting any expected gain, the Company believes that the future impact of
these dispositions will not, individually or in the aggregate, have a material
effect on the Company's overall financial position, results of operations or
cash flows.
3. INCOME TAXES
The following table reflects the components of income tax expense for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal................................................... $ 28 $33 $40
State..................................................... 5 5 6
---- --- ---
33 38 46
---- --- ---
Deferred
Federal................................................... (10) 26 17
State..................................................... (2) 4 3
---- --- ---
(12) 30 20
---- --- ---
Total income tax expense.......................... $ 21 $68 $66
==== === ===
</TABLE>
Income tax expense of the Company differs from the amount computed by
applying the statutory federal income tax rate (35 percent) to income before
taxes. The following table outlines the reasons for the differences for the
periods ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Income tax expense at the statutory federal rate of 35%..... $19 $62 $60
Increase in state income tax, net of federal income tax
benefit................................................... 2 6 6
--- --- ---
Income tax expense.......................................... $21 $68 $66
=== === ===
Effective tax rate.......................................... 39% 38% 39%
=== === ===
</TABLE>
16
<PAGE> 20
The following table reflects the components of the net deferred tax
liability at December 31:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities
Accumulated tax depreciation over book depreciation....... $149 $150
Regulatory issues......................................... 16 16
Prepaid pension costs..................................... 23 16
Investment in affiliates.................................. 15 6
Inventories............................................... 11 10
Other..................................................... 10 6
---- ----
Total deferred tax liabilities.................... 224 204
---- ----
Deferred tax assets
Accrual for regulatory issues............................. 35 18
Postretirement benefit obligations........................ 21 9
U.S. tax credit carryovers................................ 1 --
Other..................................................... 15 13
Valuation allowance....................................... (1) --
---- ----
Total deferred tax assets......................... 71 40
---- ----
Net deferred tax liabilities................................ $153 $164
==== ====
</TABLE>
As of December 31, 1999, the Company has $1 million of general business
credit carryovers. The carry forward periods end at various times from 2007
through 2017. The Company has recorded a valuation allowance to offset the
deferred tax related to these credits.
Prior to El Paso's October 1999 merger with Sonat Inc., Sonat Inc. and its
subsidiaries, including SNG and its subsidiaries, filed a consolidated federal
income tax return. After the merger, SNG and its subsidiaries joined El Paso's
consolidated tax group and will be included in El Paso's consolidated return.
4. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is presented in accordance with the requirements of SFAS No. 107.
The estimated fair value amounts have been determined by the Company using
available market information and valuation methodologies.
As of December 31, 1999 and 1998, the carrying amounts of certain financial
instruments held by the Company, including cash, cash equivalents, short-term
borrowings, and trade receivables and payables are representative of fair value
because of the short-term maturity of these instruments. The fair value of debt
with fixed interest rates has been estimated based on quoted market prices for
the same or similar issues.
The following table reflects the carrying amount and estimated fair value
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
Long-term debt..................................... $499 $493 $503 $532
</TABLE>
17
<PAGE> 21
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost................ $2,818 $2,672
Less accumulated depreciation.......................... 1,562 1,534
------ ------
Total property, plant, and equipment, net.... $1,256 $1,138
====== ======
</TABLE>
6. DEBT AND OTHER CREDIT FACILITIES
Long-term debt outstanding consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
SNG
8.875% Notes due 2001..................................... $100 $100
7.85% Notes due 2002...................................... 100 100
8.625% Notes due 2002..................................... 100 100
6.70% Notes due 2007...................................... 100 100
6.125% Notes due 2008..................................... 100 100
Southern LNG Inc.
Promissory Note (effective rate of 6.75% at December 31,
1998) due 1999......................................... -- 5
---- ----
500 505
Less: Unamortized discount.................................. 1 2
Current maturities.................................... -- 5
---- ----
Total long-term debt, less current maturities..... $499 $498
==== ====
</TABLE>
The following are aggregate maturities of the principal amounts of
long-term debt for the next 5 years and in total thereafter:
<TABLE>
<CAPTION>
YEARS (IN MILLIONS)
- ----- -------------
<S> <C>
2000........................................................ $ --
2001........................................................ 100
2002........................................................ 200
2003........................................................ --
2004........................................................ --
Thereafter.................................................. 200
----
Total long-term debt, including current
maturities....................................... $500
====
</TABLE>
Other Financing Arrangements
SNG has a shelf registration which provides for the issuance of up to $500
million in debt securities. In 1998, SNG issued $100 million aggregate principal
amount of 6.125% notes due 2008. As a result, SNG has $400 million of capacity
remaining under its shelf registration.
7. COMMITMENTS AND CONTINGENCIES
Capital Commitments
At December 31, 1999, the Company had capital and investment commitments of
$39 million. The Company's other planned capital and investment projects are
discretionary in nature, with no substantial capital commitments made in advance
of the actual expenditures.
18
<PAGE> 22
Operating Leases
The Company leases certain property, facilities and equipment under various
operating leases. Minimum annual rental commitments at December 31, 1999, were
$5 million for both 2000 and 2001 with no lease commitments beyond 2001. Rental
expense for operating leases for the years ended December 31, 1999, 1998, and
1997 was $3 million, $2 million, and $2 million, respectively.
Rates and Regulatory Matters
The Company's interstate natural gas pipeline companies are subject to the
regulatory jurisdiction of the FERC with respect to rates, terms and conditions
of service, accounts and records, the addition of facilities, the abandonment of
services and facilities, the curtailment of gas deliveries and other matters.
In August 1999, SNG filed a $17 million rate increase with 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 FERC in September 1995 that required SNG to file a
general rate case no earlier than March 1, 1998, and no later than September 1,
1999.
In the filing, SNG 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, and allocation of total storage
costs between pipeline transportation services and unbundled storage services
utilizing the Equitable methodology. In addition, SNG 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 became obsolete.
A number of customers and other parties filed protests to SNG's rate
increase. On September 29, 1999, FERC issued an order setting most issues for
hearing and suspending SNG's filed rates until March 2000. In its order, FERC
also held that SNG retained the presumption of roll-in for its North Alabama
Pipeline Project because the rate impact remained below five percent despite
capital cost overruns during construction.
SNG's contracts to provide firm transportation service for its customers
are for varying amounts and periods of time. Substantially all of the firm
transportation capacity currently available in SNG's two largest market areas is
fully subscribed. Nearly all of SNG's firm transportation contracts contain
evergreen provisions that automatically extend the term for additional months or
years unless notice of termination is given by one of the parties. However, if
these contracts are not extended, SNG will have approximately 43 percent of its
firm transportation expire during 2002 or 2003.
In July 1998, FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it sought comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. On
February 9, 2000, the FERC issued a final ruling in response to the NOPR. Among
other things, the rule (i) allows pipelines to file to implement peak and
off-peak rates; (ii) removes the price cap for released capacity; (iii) requires
pipelines to make changes to its tariffs regarding customer imbalances,
penalties and pipeline operations; and (iv) increases the amount and type of
information that pipelines must make available to the FERC and its customers.
As the Company's rate and regulatory matters are fully and unconditionally
resolved, the Company may either recognize an additional refund obligation or a
non-cash benefit to finalize previously estimated liabilities. While management
cannot predict with certainty the final outcome, or timing, of the final
resolution of rates and regulatory matters, the outcome of future re-contracting
efforts, or the outcome of industry trends and initiatives, management believes,
based upon its experience to date and after considering appropriate reserves
that have been established, that the ultimate resolution of these pending rate
and regulatory matters will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
19
<PAGE> 23
Legal Proceedings
SNG has been named a defendant in actions brought by Jack Grynberg on
behalf of the U.S. Government under the False Claims Act. Generally, the
complaints allege an industry-wide conspiracy to underreport the heating value
as well as the volumes of the natural gas produced from federal and Indian
lands, thereby depriving the United States Government of royalties. The Company
believes the complaint to be without merit.
SNG has been named a defendant in a class action suit, Quinque Operating
Company v. Gas Pipelines. The plaintiff alleges that the defendants have
mismeasured natural gas volumes and heating content of natural gas on
non-federal and non-Native American lands. This suit is similar to the action
brought by Jack Grynberg on behalf of the United States Government. The Company
believes the complaint to be without merit.
In January 1998, a class action lawsuit was filed in state court in Monroe
County, Alabama on behalf of royalty owners in the Big Escambia Creek Gas Field
("Field") against Exxon Corporation, a gas producer in the Field; SNG, which
purchased or transported gas from the Field; and five other named defendants.
The suit alleges that the methods used by the defendants to measure the heating
content and volume of natural gas produced from the Field have caused the
producer(s) of this gas to underpay royalties owed to the royalty owners. The
complaint seeks recovery of actual damages based upon the allegedly unpaid
royalties as well as punitive damages, the amount of which are not specified in
the complaint.
The Company is also a named defendant in numerous lawsuits and a named
party in numerous governmental proceedings arising in the ordinary course of its
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, management currently does not expect the ultimate resolution of these
matters to have a material adverse effect on the Company's financial position,
its results of operations, or cash flows.
Environmental
The Company is subject to extensive federal, state, and local laws and
regulations governing environmental quality and pollution control. These laws
and regulations require the Company to remove or remedy the effect on the
environment of the disposal or release of specified substances at current and
former operating sites. During the year ended December 31, 1999, the Company
established a reserve of approximately $15 million for expected remediation
costs, including approximately $14 million for associated onsite, offsite and
groundwater technical studies, and approximately $1 million for other costs
which the Company anticipates incurring through 2027.
It is possible that new information or future developments could require
the Company to reassess its potential exposure related to environmental matters.
The Company 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, regulations and
enforcement policies thereunder, and claims for damages to property, employees,
other persons and the environment resulting from current or discontinued
operations, could result in substantial costs and liabilities in the future. As
such information becomes available, or other relevant developments occur,
related accrual amounts will be adjusted accordingly. While there are still
uncertainties relating to the ultimate costs which may be incurred, based upon
the Company's evaluation and experience to date, the Company believes the
recorded reserves are adequate.
8. RETIREMENT BENEFITS
Pension Benefits and Retirement
Prior to El Paso's October 1999 merger with Sonat Inc., Sonat Inc. provided
pension benefits to the Company's employees. Benefits under this plan were
generally determined based on years of service and average salary, as set forth
in the plan's provisions. As a result of El Paso's merger with Sonat Inc., El
Paso
20
<PAGE> 24
offered an early retirement incentive program to SNG employees who were at least
50 years of age with 10 years of service as of December 31, 1999, and who
terminate employment by June 30, 2000. These benefits generally added years of
service onto existing pension benefits of these employees. In addition,
effective January 1, 2000, the Sonat Inc. pension plans were merged into the El
Paso pension plans. SNG employees who were active participants in the Sonat Inc.
pension plans at the merger date receive the greater of cash balance benefits
provided by the El Paso plan or the Sonat Inc. plan through December 31, 2004.
El Paso maintains a defined contribution plan covering all employees,
including those of SNG. El Paso matches 75 percent of participant basic
contributions of up to 6 percent, with the matching contribution being made in
El Paso stock. Prior to the merger, SNG employees participated in Sonat Inc.'s
retirement savings plans. Sonat Inc. matched 100 percent of participant basic
contributions of up to 6 percent.
El Paso is responsible for benefits accrued under its cash balance plan and
allocates the related costs to its affiliates. See Note 9 for a summary of
transactions with affiliates.
Other Postretirement Benefits
Prior to El Paso's October 1999 merger with Sonat Inc., Sonat Inc. provided
post retirement benefits to employees of the Company. As a result of El Paso's
merger with Sonat Inc., eligible SNG employees who elected to participate in the
early retirement incentive program were provided postretirement medical benefits
and life benefits at the later of age 55 or retirement. Costs associated with
the curtailment and special termination benefits of $25 million were accrued as
of December 31, 1999. Medical benefits for this closed group of retirees may be
subject to deductibles, co-payment provisions, and other limitations and dollar
caps on the amount of employer costs. El Paso has reserved the right to change
these benefits. SNG's postretirement benefit plan costs are pre-funded to the
extent such costs are recoverable through rates.
The following table sets forth the change in benefit obligation, change in
plan assets, the components of net periodic benefit cost, and assumptions used
in determining the Company's other postretirement benefits. This information is
presented as of September 30 to conform with the measurement date used by El
Paso.
21
<PAGE> 25
This conforming change had no impact on the financial position, results of
operations or cash flows of the Company.
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of period................. $ 61 $ 61
Interest cost............................................. 5 4
Plan amendments........................................... (6) --
Curtailments and special termination benefits............. 5 --
Actuarial loss............................................ 35 1
Benefits paid............................................. (4) (5)
---- ----
Benefit obligation at end of period....................... $ 96 $ 61
==== ====
Change in plan assets
Fair value of plan assets at beginning period............. $ 44 $ 34
Actual return on plan assets.............................. 2 6
Employer contributions.................................... 6 9
Benefits paid............................................. (4) (5)
---- ----
Fair value of plan assets at end of period................ $ 48 $ 44
==== ====
Reconciliation of funded status
Funded status at end of period............................ $(48) $(17)
Fourth quarter contributions.............................. 2 --
Unrecognized actuarial (gain) or loss..................... 21 (18)
Unrecognized net transition obligation.................... -- 30
---- ----
Net accrued benefit cost at December 31................... $(25) $ (5)
==== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Benefit cost for the plans includes the following components
Interest cost............................................. $ 5 $ 4 $ 5
Expected return on plan assets............................ (3) (2) (2)
Amortization of actuarial gain............................ -- (1) --
Amortization of transition obligation..................... 2 3 3
Curtailments and special termination benefits expense..... 25 -- --
--- ---- ----
Net benefit cost.......................................... $29 $ 4 $ 6
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Weighted average assumptions
Discount rate............................................. 7.50% 7.00%
Expected return on plan assets............................ 7.50% 10.50%
</TABLE>
Actuarial estimates for the Company's postretirement benefits plans assumed
a weighted average annual rate of increase in the per capita costs of covered
health care benefits of 10 percent through 2000, gradually decreasing to 6
percent by the year 2008. In 1998, the Company assumed a health cost trend rate
of 4.5 percent for all years. Assumed health care cost trends have a significant
effect on the amounts reported for
22
<PAGE> 26
other postretirement benefit plans. A one-percentage point change in assumed
health care cost trends would have the following effects:
<TABLE>
<CAPTION>
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
One Percentage Point Increase
Aggregate of Service Cost and Interest Cost............... $ 0.8 $ 0.6
Accumulated Postretirement Benefit Obligation............. $10.7 $ 5.8
One Percentage Point Decrease
Aggregate of Service Cost and Interest Cost............... $(0.7) $(0.5)
Accumulated Postretirement Benefit Obligation............. $(9.5) $(5.1)
</TABLE>
9. TRANSACTIONS WITH AFFILIATES
The Company enters into transactions with other El Paso subsidiaries and
unconsolidated affiliates in the normal course of its business to transport,
sell and purchase natural gas. Services provided by these affiliates for the
benefit of the Company are based on the same terms as nonaffiliates.
The following table shows revenues and costs from SNG's affiliates for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues from affiliates.................................... $22 $26 $68
Charges from affiliates..................................... 35 27 28
</TABLE>
10. TRANSACTIONS WITH MAJOR CUSTOMERS
The following table shows revenues from major customers for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Atlanta Gas Light Company................................. $73 $134 $130
Alabama Gas Corporation................................... 42 48 48
</TABLE>
The decrease in revenues from Atlanta Gas Light Company ("AGL") in 1999 is
due primarily to the release of capacity held by AGL to shippers on the AGL
system as a result of the unbundling of AGL's services. No shipper that acquired
released capacity from AGL represented more than 10 percent of the Company's
revenues.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains supplemental cash flow information for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest payments........................................... $38 $31 $25
Income tax payments......................................... 20 38 41
</TABLE>
12. INVESTMENT IN AFFILIATED COMPANIES (UNAUDITED)
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The Company's principal equity method
investees are its 50 percent ownership in Bear Creek and its 33 percent
ownership in Destin.
23
<PAGE> 27
Summarized financial information of the Company's proportionate share of 50
percent or less owned companies and majority owned unconsolidated subsidiaries
accounted for by the equity method of accounting is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Operating results data:
Revenues and other income................................. $28 $29 $20
Costs and expenses........................................ 18 9 8
Income from continuing operations......................... 10 20 12
Net income................................................ 10 20 12
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Financial position data:
Current assets............................................ $ 26 $ 14
Non-current assets........................................ 227 218
Short-term debt........................................... -- 4
Other current liabilities................................. -- 2
Long-term debt............................................ -- 66
Other non-current liabilities............................. 15 6
Equity in net assets...................................... 250 154
</TABLE>
During 1999, El Paso formed Sabine River Investors, L.L.C., a wholly owned
limited liability company, and other separate legal entities, for the purpose of
generating funds for El Paso to invest in capital projects and other assets. The
proceeds are collateralized by certain assets of El Paso, including 100 percent
of the Company's investment in Bear Creek. At December 31, 1999, the Company's
investment in Bear Creek was $89 million.
13. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING OPERATING NET
QUARTER REVENUES INCOME INCOME
- ------- --------- --------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1999 1st.................................................. $ 99 $ 44 $ 25
2nd.................................................. 94 39 22
3rd.................................................. 94 19 10
4th.................................................. 99 (34) (24)
---- ---- ----
$386 $ 68 $ 33
==== ==== ====
1998 1st.................................................. $105 $ 59 $ 35
2nd.................................................. 94 44 28
3rd.................................................. 92 37 24
4th.................................................. 98 40 23
---- ---- ----
$389 $180 $110
==== ==== ====
</TABLE>
24
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Southern Natural Gas Company:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14. (a) 1. present fairly, in all material respects, the
consolidated financial position of Southern Natural Gas Company as of December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 16, 2000
25
<PAGE> 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10, "Directors and Executive Officers of the Registrant;" Item 11,
"Executive Compensation;" Item 12, 'Security Ownership of Certain Beneficial
Owners and Management;" and Item 13, "Certain Relationships and Related
Transaction," have been omitted from this report pursuant to the reduced
disclosure format permitted by General Instruction I to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial statements.
The following consolidated financial statements of the Company are included
in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Income...................... 9
Consolidated Balance Sheets............................ 10
Consolidated Statements of Cash Flows.................. 11
Consolidated Statements of Stockholder's Equity........ 12
Notes to Consolidated Financial Statements............. 13
Report of Independent Accountants...................... 25
2. Financial Statement schedules and supplementary
information required to be submitted.
Financial statement schedules have been omitted as not
being applicable or because the subject matter is
either not present or is not present in amounts
sufficient to require submission of the schedule, in
accordance with the instructions contained in
Regulation S-X, or the required information is
included in the financial statements or notes thereto.
3. Exhibit list............................................. 27
</TABLE>
(B) REPORTS ON FORM 8-K:
SNG filed a Current Report on Form 8-K, dated November 1, 1999, with
respect to the change in control as a result of El Paso's October 1999 merger
with Sonat Inc.
SNG filed a Current Report on Form 8-K, dated November 4, 1999, with
respect to the change of auditors as a result of El Paso's October 1999 merger
with Sonat Inc.
26
<PAGE> 30
SOUTHERN NATURAL GAS COMPANY
EXHIBIT LIST
DECEMBER 31, 1999
Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.A Restated Certificate of Incorporation of Southern Natural
Gas Company dated as of March 1, 1994 (Exhibit 3-(a) to Form
10-K of Southern Natural Gas Company for the year 1993 filed
March 25, 1994, File No. 001-02745)
3.B By-Laws of Southern Natural Gas Company as amended and in
effect October 1, 1982 (filed as Exhibit 3-(b) to Form 10-K
of Southern Natural Gas Company for the year 1993 filed
March 25, 1994, File No. 001-02745)
4.1 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
First Supplemental Indenture, dated as of September 30,
1997, between Southern Natural Gas Company and The Chase
Manhattan Bank (formerly Chemical Bank, successor by merger
to Manufacturers Hanover Trust Company) (filed as Exhibit
4-(1) to Registration Statement No. 33-47266 of Southern
Natural Gas Company dated April 16, 1992) (filed as Exhibit
4-(2) to Form 8-K of Southern Natural Gas Company dated
September 25, 1997).
4.2 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190 (filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991)
4.3 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit
4-(2)to Form 8-K of Southern Natural Gas Company dated
January 14, 1992
4.4 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266 (filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996)
4.5 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266 (filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997)
4.6 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959 (filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998)
21 Omitted pursuant to the reduced disclosure format permitted
by General Instruction I to Form 10-K.
*23 Consent of Independent Accountants
*27 Financial Data Schedule
</TABLE>
UNDERTAKING.
The undersigned Registrant hereby undertakes, pursuant to Regulation S-K,
Item 601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights of
holders of long-term debt of Registrant 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 Registrant and its consolidated subsidiaries.
27
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, Southern Natural Gas Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 3rd day of March 2000.
SOUTHERN NATURAL GAS COMPANY
By /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, this report has been signed below by the following persons on behalf of
Southern Natural Gas Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S> <C>
/s/ JOHN W. SOMERHALDER II Chairman of the Board and Director March 3, 2000
--------------------------------------------------------
(John W. Somerhalder II)
/s/ JAMES C. YARDLEY President and Director March 3, 2000
--------------------------------------------------------
(James C. Yardley)
/s/ H. BRENT AUSTIN Executive Vice President, Chief March 3, 2000
-------------------------------------------------------- Financial Officer and Director
(H. Brent Austin)
/s/ JEFFREY I. BEASON Senior Vice President and March 3, 2000
-------------------------------------------------------- Controller (Chief Accounting
(Jeffrey I. Beason) Officer)
</TABLE>
28
<PAGE> 32
INDEX TO EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
an asterisk. All exhibits not so designated are incorporated herein by reference
to a prior filing as indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.A Restated Certificate of Incorporation of Southern Natural
Gas Company dated as of March 1, 1994 (Exhibit 3-(a) to Form
10-K of Southern Natural Gas Company for the year 1993 filed
March 25, 1994, File No. 001-02745)
3.B By-Laws of Southern Natural Gas Company as amended and in
effect October 1, 1982 (filed as Exhibit 3-(b) to Form 10-K
of Southern Natural Gas Company for the year 1993 filed
March 25, 1994, File No. 001-02745)
4.1 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
First Supplemental Indenture, dated as of September 30,
1997, between Southern Natural Gas Company and The Chase
Manhattan Bank (formerly Chemical Bank, successor by merger
to Manufacturers Hanover Trust Company) (filed as Exhibit
4-(1) to Registration Statement No. 33-47266 of Southern
Natural Gas Company dated April 16, 1992) (filed as Exhibit
4-(2) to Form 8-K of Southern Natural Gas Company dated
September 25, 1997).
4.2 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190 (filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991)
4.3 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit
4-(2)to Form 8-K of Southern Natural Gas Company dated
January 14, 1992
4.4 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266 (filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996)
4.5 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266 (filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997)
4.6 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959 (filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998)
21 Omitted pursuant to the reduced disclosure format permitted
by General Instruction I to Form 10-K.
*23 Consent of Independent Accountants
*27 Financial Data Schedule
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Southern Natural Gas Company (the "Company") on Form S-3 (File No. 333-47959)
of our report dated February 16, 2000, on our audits of the consolidated
financial statements of the Company as of December 31, 1999 and 1998, and for
the years ended December 31, 1999, 1998 and 1997, which report is included in
this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 75
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 123
<PP&E> 1,256
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 1,744
<CURRENT-LIABILITIES> 182
<BONDS> 499
0
0
<COMMON> 0
<OTHER-SE> 783
<TOTAL-LIABILITY-AND-EQUITY> 1,744
<SALES> 0
<TOTAL-REVENUES> 386
<CGS> 0
<TOTAL-COSTS> 318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 54
<INCOME-TAX> 21
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Not separately identified in the consolidated financial statements or
accompanying notes thereto.
</FN>
</TABLE>
