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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 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
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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 May 10,
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>
FIRST QUARTER
ENDED
MARCH 31,
--------------
2000 1999
---- ----
<S> <C> <C>
Operating revenues.......................................... $ 96 $100
---- ----
Operating expenses
Operation and maintenance................................. 29 35
Depreciation, depletion, and amortization................. 3 14
Taxes, other than income taxes............................ 5 6
---- ----
37 55
---- ----
Operating income............................................ 59 45
Other income, net........................................... 2 6
---- ----
Income before interest and income taxes..................... 61 51
---- ----
Non-affiliated interest and debt expense.................... 10 10
Affiliated interest expense, net............................ 1 --
Income tax expense.......................................... 19 16
---- ----
30 26
---- ----
Income before extraordinary gain............................ 31 25
Extraordinary gain, net of income taxes..................... 12 --
---- ----
Net income.................................................. $ 43 $ 25
==== ====
</TABLE>
See accompanying notes.
1
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SOUTHERN NATURAL GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ 1
Accounts and notes receivable, net........................ 124 75
Materials and supplies.................................... 15 20
Regulatory assets......................................... 27 27
Other..................................................... 2 --
------ ------
Total current assets.............................. 168 123
Property, plant, and equipment, net......................... 1,201 1,256
Investments in unconsolidated affiliates.................... 255 250
Other....................................................... 32 115
------ ------
Total assets...................................... $1,656 $1,744
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 44 $ 121
Current maturities of long-term debt...................... 100 --
Taxes payable............................................. 52 29
Other..................................................... 21 28
------ ------
Total current liabilities......................... 217 178
Long-term debt, less current maturities..................... 399 499
Deferred income taxes....................................... 135 153
Other....................................................... 79 131
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......................................... 746 703
------ ------
Total stockholder's equity........................ 826 783
------ ------
Total liabilities and stockholder's equity........ $1,656 $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>
FIRST QUARTER
ENDED
MARCH 31,
--------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 43 $ 25
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion, and amortization.............. 3 14
Extraordinary gain on sale............................. (21) --
Deferred income taxes.................................. 2 8
Undistributed earnings in equity investees............. (5) (2)
Working capital changes, net of non-cash transactions..... 95 (11)
Other..................................................... (29) (11)
---- ----
Net cash provided by operating activities......... 88 23
---- ----
Cash flows from investing activities
Purchases of property, plant, and equipment............... (27) (20)
Net change in other affiliated advances receivable........ (66) 11
Proceeds from sale of assets, net......................... 74 (9)
---- ----
Net cash used in investing activities............. (19) (18)
---- ----
Cash flows from financing activities
Payments to retire long-term debt......................... -- (5)
Net change in other affiliated advances payable........... (70) --
---- ----
Net cash used in financing activities............. (70) (5)
---- ----
Decrease in cash and cash equivalents....................... (1) --
Cash and cash equivalents
Beginning of period............................... 1 --
---- ----
End of period..................................... $ -- $ --
==== ====
</TABLE>
See accompanying notes.
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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 March 31, 2000, and for the quarters ended March 31, 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 generally accepted
accounting principles, 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 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. We received proceeds
of $161 million from the sale and recognized no material gain or loss on this
transaction.
3. PROPERTY, PLANT AND EQUIPMENT
Our property, plant, and equipment consisted of the following at March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Property, plant, and equipment, at cost..................... $2,505 $2,818
Less accumulated depreciation............................... 1,304 1,562
------ ------
Total property, plant, and equipment, net......... $1,201 $1,256
====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Rates and Regulatory Matters
In March 2000, we filed with the Federal Energy Regulatory Commission
(FERC) a comprehensive settlement agreement that, if approved, will settle 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.
All shippers and other intervenors either supported or did not oppose the
settlement. However, one shipper raised concerns related to the conversion of
our storage transportation service. We filed comments addressing these issues.
Even though the shipper raised this issue, it supported the overall settlement.
The settlement is pending before FERC.
As our rate and regulatory matters are fully and unconditionally resolved,
we may either recognize an additional refund obligation or a non-cash benefit to
finalize previously estimated liabilities. While we cannot predict with
certainty the final outcome or timing of the final resolution of our rates and
regulatory matters, the outcome of our future re-contracting efforts, or the
outcome of ongoing industry trends and initiatives, we believe that the ultimate
resolution of these pending rate and regulatory matters will not have a material
adverse effect on our financial position, results of operations, or cash flows.
Legal Proceedings
We are a named defendant 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 Indian lands, which
deprived the U.S. Government of royalties. We have also been named as a
defendant 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 March 31, 2000, we had reserved $15 million for expected
environmental costs.
In addition, we expect to make capital expenditures of $21 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 discontinued 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.
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5. NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 assets or liabilities on the balance sheet 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. Statement of
Financial Accounting Standards No. 137 amended the standard in June 1999. The
amendment defers the effective date to fiscal years beginning after June 15,
2000. We are currently evaluating the effects of this pronouncement.
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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 interim 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 Federal Trade Commission (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 proceeds of $161 million from this
sale and recognized no material gain or loss on this transaction.
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
MARCH 31,
-------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating revenues.......................................... $ 96 $ 100
Operating expenses.......................................... (37) (55)
Other income, net........................................... 2 6
----- -----
EBIT................................................... $ 61 $ 51
===== =====
Throughput volumes (BBtu/d)(1)
SNG....................................................... 2,813 3,013
Equity investments........................................ 568 199
----- -----
Total throughput....................................... 3,381 3,212
===== =====
</TABLE>
- ---------------
(1) BBtu/d means billion British thermal units per day.
In March 2000, FERC issued an order allowing us to reactivate our Elba
Island liquefied natural gas facility. Following the reactivation, we made
adjustments that were previously approved under a FERC order including
re-establishing costs related to the facility, which we were previously ordered
to write off, and eliminating a regulatory asset for future recoveries of our
Elba Island facility costs. As of January 1, 2000, we also stopped recovering
amounts under a minimum bill provision under a prior settlement order.
Operating revenues for the quarter ended March 31, 2000, were $4 million
lower than 1999. The decrease was due to lower revenues on our Sea Robin system
and the elimination of our Elba Island facility minimum bill.
Operating expenses for the quarter ended March 31, 2000, were $18 million
lower than 1999. The decrease was due to lower expenses related to our Sea Robin
system and lower system operating costs in 2000. Also contributing to the
decrease was lower depreciation and amortization resulting from the FERC's order
authorizing reactivation of the Elba Island facility.
Other income for the quarter ended March 31, 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. These decreases were partially offset by an
increase in equity earnings related to our investment in Destin.
INCOME TAX EXPENSE
Our income tax expense for the quarters ended March 31, 2000 and 1999, was
$19 million and $16 million, respectively, resulting in an effective tax rate of
38 percent and 39 percent, respectively. The effective tax rates are higher than
the statutory rate of 35 percent due to state income taxes.
7
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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, which will
be placed partially in service in June 2002 and partially in service in June
2003, includes 73 miles of pipeline loop and more than 34,000 horsepower of
mainline compression. We expect the project to cost approximately $147 million.
8
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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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Financial Information, Note 4, which is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Each exhibit identified below is filed as a part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
Undertaking
The undersigned hereby undertakes, pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of long-term debt of Southern Natural Gas Company and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not
exceed 10 percent of the total consolidated assets of Southern Natural Gas
Company and its consolidated subsidiaries.
b. Reports on Form 8-K
None.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN NATURAL GAS COMPANY
/s/ H. BRENT AUSTIN
------------------------------------
H. Brent Austin
Executive Vice President and
Chief Financial Officer
Date: May 11, 2000
/s/ JEFFREY I. BEASON
------------------------------------
Jeffrey I. Beason
Senior Vice President and Controller
(Chief Accounting Officer)
Date: May 11, 2000
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 124
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 168
<PP&E> 1,201
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 1,656
<CURRENT-LIABILITIES> 217
<BONDS> 399
0
0
<COMMON> 0
<OTHER-SE> 826
<TOTAL-LIABILITY-AND-EQUITY> 1,656
<SALES> 0
<TOTAL-REVENUES> 96
<CGS> 0
<TOTAL-COSTS> 37
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 50
<INCOME-TAX> 19
<INCOME-CONTINUING> 31
<DISCONTINUED> 0
<EXTRAORDINARY> 12
<CHANGES> 0
<NET-INCOME> 43
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Not separately identified in the consolidated financial statements or
accompanying notes thereto.
</FN>
</TABLE>
