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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 1-2745
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SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-7410
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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7.85 percent Notes due 2002 New York Stock Exchange, Inc.
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
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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. /X/
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1994 -- NONE (ALL VOTING STOCK OF THE REGISTRANT
IS HELD BY ITS PARENT COMPANY, SONAT INC.)
NUMBER OF SHARES OF COMMON STOCK, $3.75 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1994 -- 1,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SOUTHERN NATURAL GAS COMPANY
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1993
ITEM PAGE
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PART I
Item 1. Business............................................................... I-1
Order No. 636 Restructuring............................................ I-2
Markets -- Transportation and Sales.................................... I-3
Gas Supplies........................................................... I-5
Potential Royalty Claims............................................... I-6
Southern Energy Company................................................ I-6
Sea Robin Pipeline Company............................................. I-7
Competition and Current Business Conditions............................ I-7
Governmental Regulation................................................ I-9
Rate and Regulatory Proceedings........................................ I-9
Environmental Matters.................................................. I-9
Item 2. Properties............................................................. I-11
Item 3. Legal Proceedings...................................................... I-11
Item 4. Submission of Matters to a Vote of Security Holders.................... Omitted*
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ II-1
Item 6. Selected Financial Data................................................ II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... II-3
Item 8. Financial Statements and Supplementary Data............................ II-11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... II-36
PART III
Item 10. Directors and Executive Officers of the Registrant..................... Omitted*
Item 11. Executive Compensation................................................. Omitted*
Item 12. Security Ownership of Certain Beneficial Owners and Management......... Omitted*
Item 13. Certain Relationships and Related Transactions......................... Omitted*
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... IV-1
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* Item Nos. 4, 10, 11, 12 and 13 have been omitted in reliance upon General
Instruction J(1) and (2) of Form 10-K.
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PART I
ITEM 1. BUSINESS
The principal business of Southern Natural Gas Company ("Southern"), which
is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the transmission of
natural gas in interstate commerce. Southern, including its subsidiaries, owns
approximately 9,230 miles of interstate pipeline. Its pipeline system has a
certificated daily delivery capacity of approximately 2.4 billion cubic feet
("Bcf") of natural gas. Southern's pipeline system extends from gas fields in
Texas, Louisiana, Mississippi, Alabama, and the Gulf of Mexico to markets in
Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and
Tennessee. Southern also has pipeline facilities offshore Texas connecting gas
supplies to other pipelines that transport such gas to Southern's system. A map
of Southern's pipeline system, including pipelines of its subsidiaries, appears
on page I-8.
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. Based on operating experience, Southern recently sought to have the
working storage capacity of Muldon reduced from 52 to 31 billion cubic feet of
gas. The Federal Energy Regulatory Commission ("FERC") approved this reduction
for a one-year period ending November 1, 1994, subject to a further review of
Muldon's operations during the 1993-94 winter period.
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is
a 50-percent participant, owns a large underground natural gas storage field
located in Louisiana that is operated by Southern and provides storage service
to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc. The
Bear Creek Storage Field has a total certificated working storage capacity of
approximately 65 billion cubic feet of gas, half of which is committed to
Southern. At December 31, 1993, Bear Creek's gross facilities cost was
approximately $246,923,000 and its participants' equity was $90,907,000.
Southern had an investment in Bear Creek, including its equity in undistributed
earnings, of $45,453,000 at December 31, 1993.
Under the terms of Order No. 636, discussed below, effective November 1,
1993, Southern commenced providing contract storage services as part of its
unbundled and restructured services. Consequently, most of Southern's working
storage capacity at Muldon and its half of Bear Creek are now used for such
services. As a part of making this new service available, effective November 1,
1993, Southern sold at its cost $123 million of its working storage gas
inventory to its new storage customers.
Southern's interstate pipeline business is subject to regulation by the
FERC, the U.S. Department of Energy's Economic Regulatory Administration (the
"ERA"), and the U.S. Department of Transportation under the terms of the Natural
Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act, and various pipeline
safety and environmental laws. See "Governmental Regulation" below for
information concerning the regulation of natural gas transmission operations.
Southern's business is subject to the usual operating risks associated with
the transmission of natural gas through a pipeline system, which could result in
property damage and personal injury. Sonat maintains broad insurance coverage on
behalf of Southern limiting financial loss resulting from these operating risks.
Additional business information concerning Southern and its wholly owned
subsidiaries is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial
Statements in Part II of this report and is hereby incorporated herein by
reference.
At January 1, 1994, Southern and its subsidiaries employed approximately
1,170 persons.
Southern's principal executive offices are located at 1900 Fifth Avenue
North, AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number
is (205) 325-7410.
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Order No. 636 Restructuring
In 1992 the FERC issued its Order No. 636 (the "Order"). As required by the
Order, interstate natural gas pipeline companies, including Southern and South
Georgia Natural Gas Company ("South Georgia"), a wholly owned interstate
pipeline subsidiary of Southern, have made significant changes in the way they
operate. The Order required pipelines, among other things, to (1) separate
(unbundle) their sales, transportation, and storage services; (2) provide a
variety of transportation services, including a "no-notice" service pursuant to
which the customer is entitled to receive gas from the pipeline to meet
fluctuating requirements without having previously scheduled delivery of that
gas; (3) adopt a straight-fixed-variable method for rate design (which assigns
more costs to the demand component of the rates than do other rate-design
methodologies previously utilized by pipelines); and (4) implement a pipeline
capacity release program under which firm customers have the ability to "broker"
the pipeline capacity for which they have contracted. The Order also authorizes
pipelines to offer unbundled sales services at market-based rates and allows for
pregranted abandonment of some services.
Interstate pipeline companies, including Southern, are incurring certain
costs ("transition costs") as a result of the Order, the principal one being
costs related to amendment or termination of existing gas purchase contracts,
which are referred to as gas supply realignment ("GSR") costs. The Order
provides for the recovery of 100 percent of the GSR costs and other transition
costs to the extent the pipeline can prove that they are eligible, that is,
incurred as a result of customers' service choices in the implementation of the
Order, and were incurred prudently.
In its restructuring settlement discussions, Southern has advised its
customers that the amount of GSR costs that it actually incurs will depend on a
number of variables, including future natural gas and fuel oil prices, future
deliverability under Southern's existing gas purchase contracts, and Southern's
ability to renegotiate certain of these contracts. While the level of GSR costs
is impossible to predict with certainty because of these numerous variables,
based on current spot-market prices, a range of estimates of future oil and gas
prices, and recent contract renegotiations, the amount of GSR costs would be
approximately $275-$325 million on a present-value basis. This amount includes
the payments made to amend or terminate gas purchase contracts described below.
On September 3, 1993, the FERC generally approved a compliance plan for
Southern and directed Southern to implement its restructured services pursuant
to the Order on November 1, 1993 (the "September 3 order"). Pursuant to
Southern's compliance plan, GSR costs that are eligible for recovery include
payments to reform or terminate gas purchase contracts. Where Southern can show
that it can minimize transition costs by continuing to purchase gas under the
contract (i.e., it is more economic to continue to perform), eligible GSR costs
would also include the difference between the contract price and the higher of
(a) the sales price for gas purchased under the contract or (b) a price
established by an objective index of spot-market prices. Recovery of these
latter costs is permitted for an initial period of two years.
Southern's compliance plan contains two mechanisms pursuant to which
Southern is permitted to recover 100 percent of its GSR costs. The first
mechanism is a monthly fixed charge designed to recover 90 percent of the GSR
costs from Southern's firm transportation customers. The second mechanism is a
volumetric surcharge designed to collect the remaining ten percent of such costs
from Southern's interruptible transportation customers. This funding will
continue until the GSR costs are fully recovered or funded. The FERC also
indicated that Southern could file to recover any GSR costs not recovered
through the volumetric surcharge after a period of two years. In addition,
Southern's compliance plan provides for the recovery of other transition costs
as they are incurred and any remaining transition costs may be recovered through
a regular rate filing. Southern's customers have generally opposed the recovery
of its GSR costs.
The September 3 order rejected the argument of certain customers that a
1988 take-or-pay recovery settlement bars Southern from recovering GSR costs
under gas purchase contracts executed before March 31, 1989, which comprise most
of Southern's GSR costs. Those customers subsequently filed motions urging the
FERC to reverse its ruling on that issue. On December 16, 1993, the FERC
affirmed its September 3 ruling with respect to the 1988 take-or-pay recovery
settlement (the "December 16 order"). The December 16 order generally approved
Southern's restructuring tariff submitted pursuant to the September 3 order.
Various parties have filed motions urging the FERC to modify the December 16
order and have sought judicial review
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of the September 3 order. Southern and its customers engaged in settlement
discussions regarding Southern's restructuring filing prior to the September 3
order, but the parties were unable to reach a settlement. Those discussions are
continuing.
During 1993 Southern reached agreements to reduce significantly the price
payable under a number of high cost gas purchase contracts in exchange for
payments of approximately $114 million. On December 1, 1993, Southern filed with
the FERC to recover such costs and approximately $3 million of prefiling
interest (the "December 1 filing"). On December 30, 1993, the FERC accepted such
filing to become effective January 1, 1994, subject to refund, and subject to a
determination through a hearing before an administrative law judge that such
costs were prudently incurred and eligible under Order No. 636. Southern's
customers are opposing its recovery of these GSR costs in this proceeding. The
December 30 order rejected arguments of various parties that a pipeline's
payments to affiliates, in this case Southern's payment to a subsidiary of Sonat
Exploration Company, that represented approximately $34 million of the December
1 filing, may not be recovered under Order No. 636.
In December 1993 Southern reached agreement to reduce the price under
another contract in exchange for payments having a present value of
approximately $52 million. Payments will be made in equal monthly installments
over an eight-year period ending December 31, 2001. On February 14, 1994,
Southern made a rate filing to recover, beginning March 1, 1994, those costs as
well as approximately $2 million of other settlement costs and $800,000 of
prefiling interest. Southern also incurred approximately $17.5 million of GSR
costs, plus prefiling interest, from November 1, 1993, through January 31, 1994,
from continuing to purchase gas under contracts that are in excess of current
market prices. On March 1, 1994, Southern made a rate filing to recover those
costs beginning April 1, 1994. Southern plans to make additional rate filings
quarterly to recover these "price differential" costs and any other GSR costs.
Southern is unable to predict all of the elements of the ultimate outcome
of its Order No. 636 restructuring proceeding, its settlement discussions with
its customers regarding all of the pending issues arising in connection with the
proceeding, or its rate filings to recover its transition costs.
In requiring that Southern provide unbundled storage service, the Order
resulted in a substantial reduction of Southern's working storage gas inventory
and consequently a reduction in its rate base. This reduction was effective on
November 1, 1993, when Southern restructured pursuant to the Order and sold at
its cost $123 million of its working storage gas inventory to its customers. The
Order also resulted in rates that are less seasonal, thereby shifting revenues
and earnings for Southern out of the winter months.
Markets -- Transportation and Sales
As described above, effective November 1, 1993, Southern and South Georgia
restructured their services in compliance with FERC Order No. 636 by separating
their transportation, storage, and merchant services. With the exception of some
limited sales necessary to dispose of its gas supply remaining under contract,
Southern essentially became solely a transporter of natural gas. Effective May
5, 1992, South Georgia had converted all its sales service to
transportation-only service and Southern had begun to provide a gas sales
service to South Georgia's former sales customers.
Southern transports or sells gas at wholesale for distribution for
domestic, commercial, and industrial uses to nine gas distributing companies, to
114 municipalities and gas districts, and to nine connecting interstate pipeline
companies. Southern also transported or sold gas directly to 55 industrial
end-users in 1993. Southern principally transports gas to resale and industrial
customers and to other pipelines, sells some limited volumes of gas at wholesale
for distribution, and sells very minimal volumes of gas directly to industrial
customers. The principal industries served directly by Southern's pipeline
system and indirectly through its resale customers' distribution systems include
the chemical, pulp and paper, textile, primary metals, stone, clay and glass
industries.
Transportation volumes in 1993 were 763 Bcf or 91 percent of Southern's
total throughput of 836 Bcf, compared with 733 Bcf or 87 percent of Southern's
total 1992 throughput of 842 Bcf. Sales to resale distribution customers,
including municipalities and gas districts, accounted for virtually all of 1993
sales of
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73 Bcf (excluding the sale of storage inventory) and 1992 sales of 109 Bcf.
Southern's sales to direct sales customers and interstate pipeline companies in
both years were negligible. Southern had sales of 19 Bcf during November and
December 1993 (following implementation of its Order No. 636 restructuring) that
were made at receipt points where the gas entered its pipeline system;
consequently, those volumes are included within the 763 Bcf of transportation
volumes for 1993.
Transportation service is rendered by Southern for its resale customers,
direct industrial customers and other end-users, gas producers, other gas
pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. Transportation
service is provided under rate schedules that are subject to FERC regulatory
authority. Rates for transportation service depend on whether such service is on
a firm or interruptible basis and the location of such service on Southern's
pipeline system. Transportation rates for interruptible service (i.e., service
of a lower priority than firm transportation) are charged for actual volumes
transported. Firm transportation service also includes a demand charge designed
so that the customer pays for a significant portion of the service each month
based on a contract demand volume regardless of the actual volume transported.
Rates for transportation service are discounted by Southern in individual
instances to respond to competition in the markets it serves. Continued
discounting could, under certain circumstances, increase the risk that Southern
may not recover all of its costs allocated to transportation services.
Sales by Southern are anticipated to continue only until Southern's
remaining supply contracts expire, are terminated, or are assigned. As a result
of Order No. 636 Southern is attempting to terminate its remaining gas purchase
contracts through which it had traditionally obtained its long-term gas supply.
Some of these contracts contain clauses requiring Southern either to purchase
minimum volumes of gas under the contract or to pay for it ("take-or-pay"
clauses). Although Southern currently is incurring essentially no take-or-pay
liabilities under these contracts, the annual weighted average cost of gas under
these contracts is in excess of current spot-market prices. Pending the
termination of these remaining supply contracts, Southern has agreed to sell a
portion of its remaining gas supply to a number of its firm transportation
customers for a one-year term that began November 1, 1993. Recently, the sales
agreements with Atlanta Gas Light Company and its subsidiary, Chattanooga Gas
Company (collectively "Atlanta") were extended through March 31, 1995. The rest
of Southern's remaining supply will be sold on a month-to-month basis. Southern
will file to recover as a GSR cost pursuant to Order No. 636 the difference
between the cost associated with the gas supply contracts and the revenue from
the sale agreements and month-to-month sales and also any cost incurred to
reduce the price under or to terminate Southern's remaining gas supply
contracts.
When long-term sales service agreements with substantially all of
Southern's resale customers expired or were terminated in 1989, Southern entered
into a series of short-term agreements on an annual basis with virtually all of
such customers. Prior to the implementation of Order No. 636, several customers
had already reduced their firm sales contract demand volumes or converted a
portion of their firm sales volumes to firm transportation volumes. From 1988
until Southern's implementation of Order No. 636, total daily delivery
obligations under firm sales contracts (the "contract demand" upon which monthly
demand charges are based) were reduced by approximately 689 million cubic feet
("MMcf") from their level at the end of 1987 of approximately 2.1 Bcf. Prior to
Southern's implementation of Order No. 636, approximately 74 percent of this
reduction had been replaced with firm transportation volumes under contracts of
varying terms and durations, which also provided for fixed monthly charges.
In accordance with the September 3 order approving Southern's Order No. 636
compliance plan, Southern solicited service elections from its customers in
order to implement its restructured services on November 1, 1993. Southern's
largest customer, Atlanta, bid for firm transportation service on Southern at
prices significantly below Southern's filed tariff rates. Southern rejected
Atlanta's bids. Southern and Atlanta subsequently entered into an interim
agreement under which Atlanta signed firm transportation service agreements with
transportation demands of 582 million cubic feet per day for a minimum term of
four months beginning November 1, 1993, and 118 million cubic feet per day for a
term extending until April 30, 2007, at the maximum FERC-approved rates. This
represented an aggregate reduction of 100 million cubic feet per day from
Atlanta's level of service prior to November 1, 1993. In January 1994 Atlanta
provided notice that it had elected to continue that level of firm service until
October 31, 1994. Southern's other customers elected in
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aggregate to obtain an amount of firm transportation services that represented a
slight increase from their level of firm sales and transportation services from
Southern prior to Southern's implementation of Order No. 636, at the maximum
FERC-approved tariff rates, for terms ranging from one to ten or more years.
Although management believes that most of Southern's former resale
customers ultimately will commit to some type of new long-term firm
transportation agreements with Southern under its restructuring program, it is
unable to predict at what total volume level or for what duration such
commitments will be made.
Transportation and sales by Southern to three unaffiliated distribution
customers, Atlanta, Alabama Gas Corporation, and South Carolina Pipeline
Corporation, accounted for approximately 40 percent, 18 percent, and nine
percent, respectively, of Southern's 1993 consolidated revenues. Atlanta and
Alabama Gas Corporation were the only two customers that accounted for ten
percent or more of Southern's consolidated revenues for 1993.
Southern is continuing to pursue growth opportunities to expand the level
of services in its traditional market area and to connect new gas supplies. On
May 13, 1993, Southern and South Georgia received approval from the FERC for a
$27 million expansion of South Georgia's pipeline system into northern Florida
and southwestern Georgia that will increase firm daily capacity by 40 million
cubic feet per day. Construction on this project is under way and should be
completed in mid-1994. In January 1994 Southern reached tentative agreement with
a group of new customers to expand its service in the growing eastern Tennessee
area. The proposed project entails a 20-mile pipeline extension that would
deliver approximately nine million cubic feet of natural gas per day to a
delivery point near Chattanooga.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
Gas Supplies
During 1993 Southern purchased its gas supply from the following areas: 51
percent from southern Louisiana and from the Gulf of Mexico, offshore Louisiana,
and Texas; three percent from northern Louisiana and Texas; and 46 percent from
Mississippi and Alabama. Southern has approximately 60 gas purchase contracts
remaining with gas producers that commit proved recoverable reserves to
Southern. As described above, pursuant to Order No. 636, Southern is attempting
to terminate its remaining gas purchase contracts.
The following table contains information as to Southern's gas supply and
the general sources from which that supply was obtained during the years 1991
through 1993.
MMCF*
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1993 1992 1991
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Purchased from non-affiliated field producers............ 102,438 109,481 102,822
Purchased from affiliate................................. 7,317 11,003 9,653
Other.................................................... 54 97 2
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Total Purchases................................ 109,809 120,581 112,477
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* As used in this report, the term "Mcf" means thousand cubic feet; the term
"MMcf" means million cubic feet; and the term "Bcf" means billion cubic feet.
All volumes of natural gas referred to in this report are stated at a pressure
base of 14.73 pounds per square inch absolute ("psia") and at 60 degrees
Fahrenheit.
Southern entered into no new long-term gas purchase agreements in 1993, due
to the cessation of its merchant role because of Order No. 636 as discussed
above. Since Order No. 636 prohibits Southern from providing its traditional
bundled merchant service, Southern does not anticipate at this time that it will
need to contract for the long-term purchase of any additional natural gas
supplies in the future. Southern will purchase minimal volumes of gas from time
to time as may be required for system management purposes. Southern does expect,
however, that adequate gas supplies will need to continue to be available to its
system; consequently, Southern has continued its efforts to have new gas
supplies attached to its system.
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Potential Royalty Claims
In connection with its settlements of take-or-pay claims made by producers
over the past few years, Southern has in certain limited instances indemnified,
to varying degrees, the producer from certain potential claims made by royalty
owners. Southern has thus far been notified of 12 potential royalty claims under
the indemnity provisions of various settlement agreements. The claims for which
Southern may have to indemnify these producers have been asserted by both
private lessors with respect to onshore leases and the Minerals Management
Service Division of the U.S. Department of the Interior (the "MMS") with respect
to offshore and Indian leases. Southern settled four of these claims during 1993
for approximately $1.2 million.
In addition to the claims for which Southern has been put on notice, it is
possible that other producers may make future claims against Southern for
royalty indemnification. The June 26, 1992 decision of the Louisiana Supreme
Court in Frey v. Amoco, in which the court held that royalty was due on
take-or-pay payments, may form a basis for royalty claims for a share of
take-or-pay settlements by private lessors in Louisiana and in other states that
may follow the Frey decision. Because courts typically require that interest be
paid on the royalty back to the date of settlement, the amount owed can
substantially exceed the royalty amount. Management believes that Southern's
maximum exposure under all of its various royalty indemnities in onshore
take-or-pay settlements, including interest, approximates $15 million.
Management is unable to state whether any additional royalty claims based on
Southern's indemnification provisions in its take-or-pay settlements will be
asserted or to predict the outcome of any such claims or resulting litigation.
In addition to the potential royalty claims related to onshore production,
Southern also faces exposure in connection with indemnifications in take-or-pay
settlements with producers who have federal offshore or Indian leases. The MMS
issued a policy statement and guidelines on May 3, 1993, declaring its intention
to collect royalty payments for contract buy-downs, buy-outs, pricing disputes,
and on any portion of take-or-pay settlement payments that are subject to future
recoupment. In June 1993 the MMS began to issue letters to producers requiring
payment of royalty on all such payments received under take-or-pay settlements,
along with interest back to the date of payment. The MMS has been aggressively
auditing producers since this time and issuing orders to pay. A lawsuit filed by
the Independent Petroleum Association of America against the MMS and others
challenging the validity of the MMS' new policy is pending in federal district
court for the District of Columbia. Management is unable to predict the outcome
of this litigation or the ultimate outcome of any collection efforts by the MMS.
Management believes that Southern's maximum exposure for all royalty claims
related to offshore production, including interest, approximates $10 million if
no recovery from its customers is allowed. Under the terms of a 1988 take-or-pay
recovery settlement with Southern's customers, Southern is entitled to seek
recovery of these costs under the FERC's Order No. 500 cost-sharing procedures.
The customers, however, are entitled to challenge any effort by Southern to
recover those costs. Management is unable to predict the outcome of the efforts
of the MMS to collect royalty on a portion of any offshore settlement or of
Southern's efforts to recover any amounts it may ultimately pay from its
customers.
Southern believes that it is adequately reserved for any royalty claims
that it may ultimately have to pay or to settle and that, in any event, such
claims will not have a material adverse effect on its financial condition or
results of operations.
Southern Energy Company
Southern Energy Company ("Southern Energy"), a wholly owned subsidiary of
Southern, owns a liquefied natural gas ("LNG") receiving terminal near Savannah,
Georgia, which was constructed for a project, now terminated, to import LNG from
Algeria. The terminal has been inactive since the early 1980s. On July 22, 1992,
the FERC issued an order approving a settlement relating to Southern Energy's
LNG facilities. The settlement resolved a number of outstanding rate and
accounting issues on a favorable basis and preserved an option for customers of
Southern Energy to obtain LNG through this facility at least through the year
1999.
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Sea Robin Pipeline Company
For many years Southern was a 50-percent participant, through a wholly
owned subsidiary, with a wholly owned subsidiary of United Gas Pipe Line Company
("United"), in Sea Robin Pipeline Company ("Sea Robin"), an unincorporated gas
supply pipeline joint venture. Sea Robin was originally constructed to obtain
Gulf of Mexico gas supplies for Southern's and United's respective pipeline
systems and was operated by United. In December 1990 Southern, through a newly
formed subsidiary, acquired the 50-percent interest in Sea Robin formerly owned
by the subsidiary of United. As a result of the acquisition, two wholly owned
subsidiaries of Southern own 100 percent of Sea Robin, which is now being
operated by Southern. Sea Robin has a 436-mile pipeline system located in the
Gulf of Mexico through which it transports gas for others under its
FERC-regulated tariffs. Sea Robin is a transportation-only pipeline that has
restructured in compliance with FERC Order No. 636. Sea Robin's compliance
filing has been accepted by the FERC. Sea Robin transported approximately 287
Bcf of natural gas in 1993. These Sea Robin volumes are included within the
Southern transportation volumes discussed earlier. See Note 8 of the Notes to
Consolidated Financial Statements in Part II of this report for additional
information regarding Sea Robin.
Competition and Current Business Conditions
The natural gas transmission industry, although regulated, is very
competitive. During the period from the mid-1980s until the Order No. 636
restructuring, customers had switched much of their volumes from a bundled
merchant service to transportation service, reflecting an increased willingness
to rely on gas supply under unregulated arrangements. Southern competes with
several pipelines for the transportation business of its customers and at times
discounts its transportation rates in order to maintain market share. Southern
continues to provide a limited merchant service with gas supply remaining under
contract and, in this capacity, competes with other suppliers, pipelines, gas
producers, marketers, and alternate fuels.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, and electricity. An important consideration in
Southern's markets is the ability of natural gas to compete with alternate
fuels. Residual fuel oil, the principal competitive alternate fuel in Southern's
market area, was at certain times in 1993, and currently is, priced at or below
the comparable price of natural gas in industrial and electric generation
markets. Some parts of Southern's market area are also served by one or more
other pipeline systems that can provide transportation as well as sales service
in competition with Southern. Southern's two largest customers are both able to
obtain a portion of their natural gas requirements through transportation by
other pipelines.
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[SOUTHERN NATURAL PIPELINE MAP GOES HERE]
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Governmental Regulation
Southern is subject to regulation by the FERC and by the Secretary of
Energy under the Natural Gas Act, the NGPA, and the Department of Energy
Organization Act of 1977 (the "DOE Act"). Southern's operating subsidiaries are
also subject to such regulation.
The Natural Gas Act, modified by the DOE Act, grants to the FERC authority
to regulate the construction and operation of pipeline and related facilities
utilized in the transportation and sale of natural gas in interstate commerce,
including the extension, enlargement, or abandonment of such facilities.
Southern and its operating subsidiaries hold required certificates of public
convenience and necessity issued by the FERC authorizing them to construct and
operate all pipelines, facilities, and properties now in operation for which
certificates are required, and to transport and sell natural gas in interstate
commerce.
The FERC also has authority to regulate the transportation of natural gas
in interstate commerce and the sale of natural gas in interstate commerce for
resale. Although the FERC still retains jurisdiction over their resale rates,
following the implementation of Order No. 636, Southern and other interstate
pipeline companies are now permitted to charge market-based rates for gas sold
in interstate commerce for resale. Gas sold by marketing companies is not
regulated by the FERC. Transportation rates remain fully regulated. The price at
which gas is sold to direct industrial customers is not subject to the FERC's
jurisdiction. As necessary, Southern and its operating subsidiaries file with
the FERC applications for changes in their transportation rates and charges
designed to allow them to recover fully their costs of providing such service to
their customers, including a reasonable rate of return. These rates are normally
allowed to become effective, subject to refund, until such time as the FERC
rules on the actual level of rates. See "Rate and Regulatory Proceedings" below.
The Natural Gas Wellhead Decontrol Act of 1989, enacted on July 26, 1989,
phased in decontrol of the wellhead price of all gas then remaining subject to
maximum lawful price limitations by January 1, 1993. Thus, the price of all gas
sold at the wellhead is no longer regulated.
Regulation of the importation of natural gas is vested in the Secretary of
Energy, who has delegated various aspects of this import jurisdiction to the
FERC and the ERA.
Southern and its operating subsidiaries are subject to the Natural Gas
Pipeline Safety Act of 1968, as amended, which regulates pipeline and LNG plant
safety requirements, and to the National Environmental Policy Act and other
environmental legislation. Southern and its operating subsidiaries have a
continuing program of inspection designed to keep all of their facilities in
compliance with pollution control and pipeline safety requirements and believe
that they are in substantial compliance with applicable requirements. Southern's
capital expenditures to comply with environmental and pipeline safety
regulations were approximately $14 million in 1993. It is anticipated that such
expenditures will be approximately $11 million in 1994 and approximately $10
million in 1995. For more information regarding environmental matters, see the
discussion below.
Rate and Regulatory Proceedings. Various matters pending before the FERC,
or before the courts on appeal from the FERC, relating to, or that could affect,
Southern or one or more of its subsidiaries are described in Part II of this
report in Note 8 of the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are incorporated herein by reference. As described in Note 8,
several general rate changes have been implemented by Southern and remain
subject to refund.
Environmental Matters
Southern and certain of its subsidiaries are subject to extensive federal,
state, and local environmental laws and regulations that affect their
operations. Governmental authorities may enforce these laws and regulations with
a variety of civil and criminal enforcement measures, including monetary
penalties, assessment and remediation requirements, and injunctions as to future
activities. Southern and certain of its subsidiaries' use and disposal of
hazardous materials and toxic substances are subject to the requirements of the
federal Toxic Substances Control Act ("TSCA") and the federal Resource
Conservation and Recovery
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Act ("RCRA"), among others, and comparable state and local statutes. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
also known as "Superfund," imposes liability, without regard to fault or the
legality of the original act, for release of a "hazardous substance" into the
environment.
Southern is named as a potentially responsible party ("PRP") at three
Superfund sites, at two of which it is a de minimis party. Based on the number
of other financially responsible PRPs at each of the sites, the estimated
relative volume of material contributed to the sites by Southern, the
information that it currently possesses regarding the expected costs required to
remediate the sites, and the amounts already contributed to remediation,
Southern currently estimates that it should not ultimately be required to
contribute in excess of $200,000 in the aggregate to the costs of remediation of
all three sites.
In addition, Southern has been advised by a joint defense group of PRPs
("JDG") at another Superfund site that the JDG might seek to add it as a PRP,
but Southern has received no notification from the Environmental Protection
Agency ("EPA") asserting that it is a PRP. Southern has been informed by
representatives of the JDG that no characterization of soil or groundwater
contamination at this site has yet taken place and, therefore, the extent of
such contamination, if any, is not currently known. Southern has thus far
elected not to join the JDG, because it believes that it has significant
potential defenses to liability for this site and that, in any event, it shipped
de minimis amounts of material to this site. Based on the number of other
financially responsible PRPs and other information that it currently possesses,
Southern currently estimates that it will not incur liabilities related to this
site in an amount material to Southern.
Liability under CERCLA (and applicable state law) can be joint and several
with other PRPs. Although volumetric allocation is a factor in assessing
liability, it is not necessarily determinative; thus, the ultimate liability at
any of these sites could be substantially greater than the amounts described
above. Southern does not believe that its status as a PRP at any of these sites
will have a material adverse effect on its financial condition or results of
operations.
Southern has in the past used lubricating oils containing polychlorinated
biphenyls ("PCBs") in conjunction with auxiliary compressed air systems at
Southern's natural gas compressor stations. Although the use of such oils was
discontinued in the early 1970's, Southern has discovered residual PCB
contamination at certain of its gas compressor station sites. For some time,
Southern has had an ongoing internal project to identify and deal with the
presence of PCBs at these sites. A total of thirteen stations evidenced some
level of on-site PCB contamination ranging from low to moderate. Southern has
completed the characterization and clean-up of twelve of these sites based on
the guidelines of the TSCA at a total cost of approximately $6 million. Southern
has partially completed the characterization and clean-up of the remaining site
and believes that it should be able to complete the remediation of this site for
a total cost of less than $5 million.
In the operation of their natural gas pipeline systems, Southern and South
Georgia have used, and continue to use at several locations, gas meters
containing elemental mercury. Many of these meters have been removed from
service. Southern and South Georgia plan to remove the remaining mercury meters
during the course of regularly scheduled facilities upgrades, but until such
time, the meters are handled pursuant to established procedures that protect
employees and comply with Occupational Safety and Health Administration
standards. It is generally believed in the natural gas pipeline industry that,
in the course of normal maintenance and replacement operations, elemental
mercury may have been released from mercury meters. Although at this time
neither the EPA nor any state in which Southern or South Georgia operates has
yet issued clean-up levels or guidelines with respect to contamination from past
releases or spills of mercury, Southern expects that guidelines will be
forthcoming. Southern and South Georgia have nonetheless begun preliminary
efforts to address this situation and plan to begin remediation if contamination
is detected upon characterization of these sites. Because the number of sites
involved and the extent of contamination at any site are not yet known, Southern
is unable at this time to estimate the cost of remediation. Based on its
experience with other remediation projects, the industry experience to date with
remediation of mercury, and its preliminary analysis of the possible extent of
the contamination, however, Southern believes that its remediation of any
mercury contamination will not have a material adverse effect on its financial
condition or results of operations.
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Southern generally considers environmental assessment and remediation costs
and costs associated with compliance with environmental standards incurred by
Southern and South Georgia to be recoverable through rates since they are
prudent costs incurred in the ordinary course of business and, accordingly, will
seek recovery of such costs through rate filings, although no assurance can be
given with regard to their ultimate recovery.
Southern and its subsidiaries are subject to the federal Clean Air Act and
the federal Clean Air Act Amendments of 1990 ("1990 Amendments"), which added
significantly to the existing requirements established by the federal Clean Air
Act. The 1990 Amendments require that the EPA issue new regulations, mainly
related to mobile sources, air toxics, ozone non-attainment areas, acid rain,
permitting, and enhanced monitoring. While it will not be possible to estimate
the additional costs of compliance with these new requirements until the EPA and
the states complete their regulations, management expects that the regulations
when issued may require significant capital spending to modify certain of the
facilities of Southern and its subsidiaries, particularly with regard to
modifications that may be required for certain natural gas compressor stations
to reduce their emission of oxides of nitrogen.
In the opinion of management, based on information currently possessed by
Southern, the probability is remote that Southern or any of its subsidiaries
will incur a liability as a result of the presently identified environmental
contingencies described above in an amount material to Southern. While the
nature of environmental contingencies makes complete evaluation impractical,
Southern is currently aware of no other environmental matter that could
reasonably be expected to have a material impact on its results of operations or
financial condition. Southern has an active and ongoing environmental program at
all levels of its organization and believes responsible environmental management
is integral to its business. Southern believes that it and its subsidiaries have
conducted their operations in substantial compliance with applicable
environmental laws and regulations governing their activities.
ITEM 2. PROPERTIES
A description of Southern's and its subsidiaries' properties is included
under Item 1. Business above and is hereby incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding certain proceedings pending before federal
regulatory agencies, see Note 8 of the Notes to Consolidated Financial
Statements in Part II of this report.
Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light
Company was filed in January 1992 in the U.S. District Court for the Southern
District of Georgia. In this lawsuit against Southern and Atlanta Gas Light
Company for alleged violation of the antitrust laws in connection with
Southern's refusal to provide direct service to the Plaintiff, Arcadian
Corporation ("Arcadian"), Arcadian claims actual damages of at least $15
million, which could be trebled under the antitrust laws. Southern and Arcadian
executed an agreement settling this lawsuit on November 30, 1993. The settlement
provides that the lawsuit will be dismissed with prejudice upon final,
nonappealable approval by the FERC of the direct connection and transportation
service requested by Arcadian. Pending such approval, the lawsuit has been
stayed. While management believes it has meritorious defenses and intends to
defend the suit vigorously if the stay were to be lifted, given the inherently
unpredictable nature of litigation and the relatively early state of discovery
in the case, management is unable to predict the ultimate outcome of the
proceeding if it were to go forward, but believes that it will not have a
material adverse effect on Southern's financial position.
Exxon Corporation v. Southern Natural Gas Company was filed in February
1994 in the U.S. District Court for the Southern District of Texas. Exxon
Corporation ("Exxon"), the plaintiff in this suit, asked the court to declare
that Southern has no right to terminate a gas purchase contract with Exxon
providing for the sale and purchase of gas produced from Mississippi Canyon and
Ewing Bank Area Blocks, offshore Louisiana (the "Contract"), which Southern gave
notice of termination effective March 1, 1994. In the alternative, Exxon alleged
that Southern has repudiated and breached the Contract and asked for an
unspecified amount
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of monetary damages. Management is unable to predict the outcome of this
litigation and whether its position that it has the right to terminate this
contract will be sustained.
Southern and its subsidiaries are involved in several other lawsuits, all
of which have arisen in the ordinary course of business. Southern does not
believe that any ultimate liability resulting from any of these other pending
lawsuits will have a material adverse effect on the financial position or
results of operations of Southern.
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` PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
All of the common stock of Southern is held by its parent company,
Sonat Inc.; accordingly, there is no market for the stock. The following table
shows the quarterly dividends paid on Southern's common stock during the past
two years.
Quarter Total Dividends Paid
------- --------------------
1993
----
First $ 12,400,000
Second 12,400,000
Third 12,400,000
Fourth 12,400,000
------------
$ 49,600,000
============
1992
----
First $ 12,400,000
Second 112,400,000(1)
Third 12,400,000
Fourth 12,400,000
------------
$149,600,000
============
(1) In May 1992, Southern completed the restructuring of its capital
structure by issuing $100 million in Notes and dividending the proceeds
to Sonat.
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Item 6. SELECTED FINANCIAL DATA
Shown below is selected consolidated financial data for Southern and
its subsidiaries.
Years Ended December 31,
-------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In Millions)
Revenues $ 832.6 $ 728.6 $ 760.4 $ 703.3 $1,163.9
Costs and Expenses 686.0 578.0 623.9 594.3 998.3
-------- -------- -------- -------- --------
Operating Income 146.6 150.6 136.5 109.0 165.6
Other Income, Net 9.4 8.9 10.4 26.0 16.7
Interest Expense, Net (28.4) (32.8) (27.6) (31.2) (29.4)
-------- -------- -------- -------- --------
Income Before Income Taxes 127.6 126.7 119.3 103.8 152.9
Income Taxes 43.5 47.3 45.9 36.5 61.1
-------- -------- -------- -------- --------
Net Income $ 84.1 $ 79.4 $ 73.4 $ 67.3 $ 91.8
======== ======== ======== ======== ========
Assets $1,531.2 $1,425.7 $1,426.5 $1,424.1 $1,525.9
Debt Maturing Within One Year $ 107.3 $ 6.8 $ 6.1 $ 9.3 $ 83.7
Long-Term Debt 329.4 435.5 340.1 341.6 349.5
Stockholder's Equity 620.0 585.5 655.7 631.7 635.3
-------- -------- -------- -------- --------
Total Capitalization $1,056.7 $1,027.8 $1,001.9 $ 982.6 $1,068.5
======== ======== ======== ======== ========
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
SOUTHERN NATURAL GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Southern Natural Gas Company and its subsidiaries (Southern)
participate in the interstate transmission and sale of natural gas in the
southeastern United States and are regulated by the Federal Energy Regulatory
Commission (FERC). The natural gas transmission industry, although regulated,
is very competitive. Effective November 1, 1993, Southern separated its
transportation, storage and merchant services to comply with Order No. 636 (see
following discussion) and essentially became solely a gas transporter. Even
before the Order No. 636 restructuring, customers had switched much of their
volumes from a bundled merchant service to transportation service, reflecting
an increased willingness to rely on gas supply under unregulated arrangements.
Southern competes with several pipelines for the transportation business of its
customers and at times discounts its transportation rates in order to maintain
market share. Although it is now predominantly a transporter of gas, Southern
continues to provide a limited merchant service with gas supply remaining under
contract and, in this capacity, competes with other suppliers, gas producers,
marketers and alternate fuels.
Southern is pursuing growth opportunities to expand the level of
services in its traditional market area and to connect new gas supplies. South
Georgia Natural Gas Company, a wholly owned subsidiary of Southern, received
approval from the FERC on May 13, 1993, for an expansion of its pipeline system
into northern Florida and southwestern Georgia that will increase firm daily
capacity by 40 million cubic feet per day. Construction on this project is
under way and should be completed by mid-1994. Southern has entered into an
agreement in principle to expand its system to Chattanooga, Tennessee.
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OPERATIONS
Years Ended December 31, 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
(In Millions)
Revenues:
Gas sold $579 $529 $574
Market transportation 194 145 136
Supply transportation 50 51 47
Storage and other 10 4 3
---- ---- ----
Total Revenues $833 $729 $760
==== ==== ====
Natural Gas Cost:
Purchased from others $393 $300 $335
Purchased from affiliates 23 23 26
---- ---- ----
Total Natural Gas Cost $416 $323 $361
==== ==== ====
Depreciation and Amortization $ 64 $ 74 $ 59
==== ==== ====
Operating Income $147 $151 $136
==== ==== ====
Equity in Earnings of Joint Venture $ 9 $ 8 $ 8
==== ==== ====
(Billion Cubic Feet)
Volumes:
Gas sold (excludes storage gas) 73 109 118
Market transportation 435 391 371
--- --- ---
Total Market Throughput 508 500 489
Supply transportation 328 342 289
--- --- ---
Total Volumes 836 842 778
=== === ===
1993 Versus 1992. Southern's operating results for 1993 were down
primarily due to a favorable settlement of $9.6 million in 1992 relating to
Southern Energy Company's idle liquified natural gas (LNG) facility. A
settlement at Sea Robin Pipeline Company increased 1993 results by $4.5
million. General and administrative expenses were up in 1993 due to a $4
million increase in health insurance expense and an increase in stock-based
employee compensation.
Gas sales revenue and gas cost increased at Southern due to the sale of
$123 million of storage gas inventory pursuant to the implementation of Order
No. 636 on November 1, 1993. Total market throughput increased 2 percent;
however, Order No. 636 resulted in a shift in volumes from sales to market
transportation. Supply transportation volumes decreased due to competition
from other pipelines.
1992 Versus 1991. Operating income for 1992 includes the effect of a
favorable settlement of $9.6 million relating to Southern Energy's LNG
facility, while 1991 was negatively affected by one-time charges totaling $11
million related to a cost-containment program and the cancellation of the
Mobile Bay project. Excluding these items, operating income was lower
primarily as a result of a $7 million increase in stock-based employee
compensation.
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Southern's total volumes increased 8 percent in 1992. Market
throughput was higher because of colder weather and new markets, offsetting the
loss of a competitive load to coal that was served in 1991 when gas prices were
substantially lower and losses to other pipeline competition. The 18 percent
increase in supply transportation is primarily the result of higher
deliverability and an aggressive program of hooking up new gas supply to the
Sea Robin system.
ORDER NO. 636
In 1992 the FERC issued its Order No. 636 (the Order). As required by
the Order, interstate natural gas pipeline companies have made significant
changes in the way they operate. The Order required pipelines, among other
things, to: (1) separate (unbundle) their sales, transportation and storage
services; (2) provide a variety of transportation services, including a "no-
notice" service pursuant to which the customer will be entitled to receive gas
from the pipeline to meet fluctuating requirements without having previously
scheduled delivery of that gas; (3) adopt a straight fixed variable (SFV)
method for rate design (which assigns more costs to the demand component of the
rates than do other rate design methodologies previously utilized by
pipelines); and (4) implement a pipeline capacity release program under which
firm customers will have the ability to "broker" the pipeline capacity for
which they have contracted. The Order also authorizes pipelines to offer
unbundled sales services at market-based rates and allowed for pregranted
abandonment of some services.
As discussed in Note 8 of the Notes to Consolidated Financial
Statements, Southern is incurring certain transition costs as a result of
implementing Order No. 636, and for Southern, those are primarily gas supply
realignment (GSR) costs relating to existing gas purchase contracts. In its
restructuring settlement discussions, Southern has advised its customers that
the amount of GSR costs that it actually incurs will depend on a number of
variables, including future natural gas and fuel oil prices, future
deliverability under Southern's existing gas purchase contracts and Southern's
ability to renegotiate certain of these contracts. While the level of GSR
costs is impossible to predict with certainty because of these numerous
variables, based on current spot-market prices, a range of estimates of future
oil and gas prices, and recent contract renegotiations, the amount of GSR costs
would be approximately $275 million-$325 million on a present value basis.
This includes the $168 million of settlements discussed below.
In requiring that Southern provide unbundled storage service, the Order
resulted in a substantial reduction of Southern's working storage gas inventory
and consequently a reduction in its rate base. The reduction in rate base was
effective on November 1, 1993, when Southern restructured pursuant to the Order
and sold $123 million of its storage gas inventory to its customers. The Order
also resulted in rates that are less seasonal, thereby shifting revenues and
earnings for Southern out of the winter months.
The FERC issued an order on September 3, 1993 (the September 3 order),
that generally approved a compliance plan for Southern and directed it to
implement restructured services on November 1, 1993. In accordance with the
September 3 order, Southern solicited service elections from its customers in
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order to implement its restructure services on November 1, 1993. Southern's
largest customer, Atlanta Gas Light Company and its subsidiary, Chattanooga Gas
Company (collectively Atlanta), bid for firm transportation service on Southern
at prices significantly below Southern's filed tariff rates. Southern rejected
Atlanta's bids. Southern and Atlanta subsequently entered into an interim
agreement under which Atlanta signed firm transportation service agreements
with transportation demands of 582 million cubic feet per day for a minimum
term of four months beginning November 1, 1993, and 118 million cubic feet per
day for a term extending until April 30, 2007, at the maximum FERC-approved
rates. This represented an aggregate reduction of 100 million cubic feet per
day from Atlanta's level of services prior to November 1, 1993. In January
1994, Atlanta provided notice that it had elected to continue that level of
firm service until October 31, 1994. Southern's other customers elected in
aggregate to obtain an amount of firm transportation services that represented
a slight increase from their previous level of firm sales and transportation
services from Southern, at the maximum FERC-approved tariff rates, for terms
ranging from one to 10 or more years.
Southern is unable to predict all of the elements of the ultimate
outcome of its Order No. 636 restructuring proceeding, its settlement
discussions with Atlanta and its other customers, and the limited rate filings
to recover its transition costs.
NATURAL GAS SALES AND SUPPLY
As a result of Order No. 636, Southern is attempting to terminate its
remaining gas purchase contracts through which it had traditionally obtained
its long-term gas supply. Some of these contracts contain clauses requiring
Southern either to purchase minimum volumes of gas under the contract or to pay
for it (take-or-pay clauses). Although Southern currently is incurring
essentially no take-or-pay liabilities under these contracts, the annual
weighted average cost of gas under these contracts is in excess of current
spot-market prices. Pending the termination of these remaining supply
contracts, Southern has agreed to sell a portion of its remaining gas supply to
a number of its firm transportation customers for a one-year term which began
November 1, 1993. The rest of Southern's remaining supply will be sold on a
month-to-month basis. The difference between the cost associated with the gas
supply contracts and the revenue from the sale agreements and month-to-month
sales should be recoverable as a GSR cost pursuant to Order No. 636. In
addition, any cost to terminate or reduce the price under Southern's remaining
contracts should also be recoverable as a GSR cost pursuant to Order No. 636.
During 1993 Southern reached agreements to reduce significantly the price
payable under a number of high-cost gas purchase contracts in exchange for
payments with a present value of approximately $168 million.
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Southern's purchase commitments under its remaining gas supply
contracts for the years 1994 through 1998 are estimated as follows:
Estimated
Purchase
Commitments
-------------
(In Millions)
1994 $230
1995 150
1996 85
1997 70
1998 65
These estimates are subject to significant uncertainty due both to the
number of assumptions inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the three major factors which
determine purchase commitments (underlying reserves, future deliverability and
future price) is known today with certainty. As explained above, Southern
expects to recover all of these costs, including its costs to terminate these
purchase commitments, either through the sale of the gas or as a GSR cost.
RATE MATTERS
Several general rate changes have been implemented by Southern and
remain subject to refund. See Note 8 of the Notes to Consolidated Financial
Statements for a discussion of rate matters.
________________________
Years Ended December 31, 1993 1992 1991
- ----------------------------------------------------------------------------------------------
(In Millions)
Interest Income (Expense), Net $(28) $(33) $(28)
1993 Versus 1992. Interest income was higher in 1993 due to an
increase in average levels and rates on notes from affiliates. The increase in
interest income was largely offset by an increase in accrued interest expense
of $8 million provided on certain income tax issues and to higher average debt
levels.
1992 Versus 1991. Interest expense on debt increased due to an
increase in average debt outstanding, resulting from the restructuring of
Southern's capital structure in May 1992, partially offset by lower average
interest rates.
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Years Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
(In Millions)
Income Taxes $ 44 $ 47 $ 46
1993 Versus 1992. Income taxes were lower in 1993 due to tax
adjustments.
1992 Versus 1991. Income taxes were higher primarily due to higher
pretax income.
FINANCIAL CONDITION
CASH FLOWS
Years Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
(In Millions)
Net Cash Provided by
Operating Activities $ 197 $ 166 $ 204
1993 Versus 1992. Net cash provided by operating activities increased
due to the sale of storage gas inventory pursuant to Order No. 636 and lower
cash outflows relating to gas imbalances. Partially offsetting the increase
were GSR payments of approximately $128 million made in 1993.
1992 Versus 1991. Net cash provided by operating activities decreased
as a result of lower cash outflows relating to gas imbalances.
Years Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
(In Millions)
Net Cash Used in
Investing Activities $(140) $(112) $(151)
1993 Versus 1992. Net cash used in investing activities was higher due
to a $17 million increase in capital expenditures and increased loans to
Southern's parent.
1992 Versus 1991. Net cash used in investing activities was lower due
primarily to a $62 million decrease in capital expenditures partially offset by
an increase in notes to Southern's parent.
Years Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
(In Millions)
Net Cash Used in
Financing Activities $ (55) $ (54) $ (54)
1993 Versus 1992. Net cash used in financing activities increased
slightly due to scheduled loan repayments. Southern did not refinance any debt
during 1993.
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1992 Versus 1991. Net cash used in financing activities in 1992 was
flat with 1991. In May 1992, Southern completed the restructuring of its
capital structure by issuing $100 million in Notes and dividending the proceeds
to Sonat. As a result, the debt to capitalization ratio increased 8 percent
when compared to December 31, 1991.
CAPITAL EXPENDITURES
Capital expenditures for 1994, including joint ventures, are expected
to be approximately $68 million, primarily for pipeline additions and
replacements and other projects, some of which have not yet received regulatory
approval.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1993, Southern had available $50 million under lines of
credit. Southern expects to use cash from operations, borrowing in the public
or private markets or loans from affiliates to finance future capital or other
corporate expenditures.
CAPITALIZATION INFORMATION
Years Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
Cash Flow from Operating Activities
to Weighted Average Debt 45% 40% 57%
Debt to Capitalization -
End of Year 41% 43% 35%
===========================================================================================================
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
Although the rate of inflation in the United States has been moderate
over the past several years, its potential impact should be considered when
analyzing historical financial information. In past times of high general
inflation, oil and gas prices have increased at comparable, and at times,
higher rates. The changing regulatory environment in which the natural gas
business operates, along with other competitive factors, would currently make
it difficult to increase prices enough to recover significantly higher costs of
operations. Southern's results of operations will be affected by future
changes in domestic and international oil and gas prices and the
interrelationship between oil, gas and other energy prices.
ENVIRONMENTAL ISSUES
Southern is involved in various environmental compliance and cleanup
activities, and has been notified that it is one of many potentially
responsible parties at certain federal Superfund sites. Southern does not
expect costs relating to these activities, including any responsibility for
cleanup of such sites, to be material, taken either separately or in the
aggregate, with respect to the financial position or results of operations of
Southern.
In addition, Southern has taken steps to test for the presence of
polychlorinated biphenyls (PCB) at its natural gas compressor stations. A
total of 13 stations evidenced some level of on-site PCB contamination ranging
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from low to moderate. Southern has completed the characterization and cleanup
of 12 of these sites at a cost of approximately $6 million. Southern has
partially completed the characterization and cleanup of the 13th site and
believes that it should be able to complete the remediation of this site for a
total cost of less than $5 million, approximately half of which had been
incurred at December 31, 1993.
Southern generally considers environmental assessment and remediation
costs and costs associated with compliance with environmental standards to be
recoverable through rates since they are prudent costs incurred in the ordinary
course of business, and accordingly, will seek recovery of such costs through
rate filings, although no assurance can be given with regard to their ultimate
recovery.
Southern has an active and ongoing environmental program and believes
responsible environmental management is integral to its business.
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Item 8. Financial Statements and Supplementary Data
Report of Ernst & Young, Independent Auditors
The Board of Directors
Southern Natural Gas Company
We have audited the accompanying consolidated balance sheets of Southern
Natural Gas Company and Subsidiaries as of December 31, 1993 and 1992, and the
related statements of income, changes in retained earnings and cash flows for
each of the three years in the period ended December 31, 1993. Our audits also
included the financial statement schedules listed in the Index at Item 14(a)2.
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southern Natural
Gas Company and Subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young
ERNST & YOUNG
Birmingham, Alabama
January 20, 1994
II-11
26
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
1993 1992
---- ----
(In Thousands)
ASSETS
Current Assets:
Cash $ 4,243 $ 1,961
Notes receivable from affiliates 269,661 187,510
Accounts receivable, including $14,461,000 in
1993 and $5,863,000 in 1992 from affiliates 128,610 135,297
Inventories (Note 3) 23,646 146,213
Gas supply realignment costs (Note 8) 59,862 -
Recoverable natural gas purchase contract
settlement costs (Note 8) 18,535 52,936
Gas imbalance receivables (Note 1) 43,125 75,065
Other 2,622 4,552
---------- ----------
Total Current Assets 550,304 603,534
---------- ----------
Investments:
Joint venture (Note 4) 45,454 44,816
Other investments 975 809
---------- ----------
46,429 45,625
---------- ----------
Plant, Property and Equipment (Note 5) 2,206,672 2,094,286
Less accumulated depreciation
and amortization 1,419,771 1,366,386
---------- ----------
786,901 727,900
---------- ----------
Deferred Charges:
Gas supply realignment costs (Note 8) 119,724 -
Recoverable natural gas purchase
contract settlement costs (Note 8) - 17,546
Other 27,806 31,077
---------- ----------
147,530 48,623
---------- ----------
$1,531,164 $1,425,682
========== ==========
See accompanying notes.
II-12
27
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
1993 1992
---- ----
(In Thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year (Note 6) $ 107,298 $ 6,816
Accounts payable, including $9,418,000 in 1993
and $16,536,000 in 1992 to affiliates 70,298 58,715
Accrued income taxes 14,695 22,008
Accrued interest 19,851 10,213
Deferred income taxes (Note 7) 1,452 13,200
Gas imbalance payables (Note 1) 51,007 55,052
Other 18,695 18,019
---------- ----------
Total Current Liabilities 283,296 184,023
---------- ----------
Long-Term Debt (Note 6) 329,403 435,520
---------- ----------
Deferred Credits and Other:
Deferred income taxes (Note 7) 84,726 94,037
Reserves for regulatory matters (Note 8) 120,771 100,217
Operating and other reserves 69,168 11,384
Other 23,830 15,000
---------- ----------
298,495 220,638
---------- ----------
Commitments and Contingencies (Note 8)
Stockholder's Equity:
Common stock, $3.75 par value; 1,000 shares
authorized and outstanding 4 4
Capital in excess of par value 77,601 77,601
Retained earnings 542,365 507,896
---------- ----------
619,970 585,501
---------- ----------
$1,531,164 $1,425,682
========== ==========
See accompanying notes.
II-13
28
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(In Thousands)
Revenues (Note 9):
Natural gas sales $578,947 $529,265 $573,900
Transportation and other 253,702 199,363 186,444
-------- -------- --------
832,649 728,628 760,344
-------- -------- --------
Costs and Expenses:
Natural gas cost 416,378 322,532 361,140
Operating and maintenance 102,666 87,806 115,807
General and administrative 85,256 78,587 70,819
Depreciation and amortization 63,611 73,713 59,393
Taxes, other than income 18,120 15,392 16,715
-------- -------- --------
686,031 578,030 623,874
-------- -------- --------
Operating Income 146,618 150,598 136,470
-------- -------- --------
Other Income, Net:
Equity in earnings of joint venture
(Note 4) 8,638 8,002 7,822
Other 810 866 2,604
-------- -------- --------
9,448 8,868 10,426
-------- -------- --------
Interest Income (Expense):
Interest income from affiliates 20,204 7,825 8,435
Interest income 3,621 395 209
Interest expense (52,598) (41,167) (37,300)
Interest capitalized 324 172 1,086
-------- -------- --------
(28,449) (32,775) (27,570)
-------- -------- --------
Income Before Income Taxes 127,617 126,691 119,326
Income Taxes (Note 7) 43,548 47,284 45,877
-------- -------- --------
Net Income $ 84,069 $ 79,407 $ 73,449
======== ======== ========
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(In Thousands)
Balance at Beginning of Year $507,896 $578,089 $554,240
Add:
Net income 84,069 79,407 73,449
Deduct:
Dividends 49,600 149,600 49,600
-------- -------- --------
Balance at End of Year $542,365 $507,896 $578,089
======== ======== ========
See accompanying notes.
II-14
29
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(In Thousands)
Cash Flows from Operating Activities:
Net income $ 84,069 $ 79,407 $ 73,449
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 63,611 73,713 59,393
Deferred income taxes (21,241) (14,403) (13,397)
Equity in earnings of joint
venture, less distributions (638) (1,002) (1,072)
Reserves for regulatory matters 20,554 23,649 25,160
Gas supply realignment costs (127,986) - -
Natural gas purchase
contract settlement costs 51,947 52,619 68,626
Change in:
Accounts receivable 6,687 (5,227) (8,133)
Inventories 51,446 2,572 24,121
Accounts payable 11,583 1,557 (19,776)
Accrued interest and
income taxes, net 1,085 4,295 903
Other current assets 35,263 (12,152) 9,197
Other current liabilities (3,522) (14,748) (9,781)
Other 24,523 (23,783) (4,410)
---------- ---------- ---------
Net cash provided by
operating activities 197,381 166,497 204,280
---------- ---------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (59,907) (43,053) (104,743)
Notes receivable from affiliates (82,151) (71,586) (48,673)
Proceeds from disposal of assets 2,360 2,831 2,281
Other, net (166) (79) (128)
---------- ---------- ---------
Net cash used in
investing activities (139,864) (111,887) (151,263)
---------- ---------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of
long-term debt 675 201,881 104,280
Payments of long-term debt (6,310) (105,895) (107,873)
Notes payable to affiliates - - (1,231)
---------- ---------- ---------
Net changes in debt (5,635) 95,986 (4,824)
Dividends paid (49,600) (149,600) (49,600)
---------- ---------- ---------
Net cash used in
financing activities (55,235) (53,614) (54,424)
---------- ---------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents 2,282 996 (1,407)
Cash and Cash Equivalents at Beginning
of Year 1,961 965 2,372
---------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 4,243 $ 1,961 $ 965
========== ========== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 37,521 $ 30,814 $ 30,863
Income taxes, net 73,591 62,872 65,979
See accompanying notes.
II-15
30
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of Southern Natural Gas Company and its subsidiaries,
which is a wholly owned subsidiary of Sonat Inc. Intercompany transactions and
accounts have been eliminated in consolidation. The equity method of
accounting is used for investments in joint ventures owned 50 percent or less.
Certain amounts in the 1992 and 1991 Consolidated Financial Statements
have been reclassified to conform with the 1993 presentation.
Inventories - At December 31, 1993, inventories consist primarily of
materials and supplies, and are carried at cost.
Gas Imbalance Receivables and Payables - Gas imbalances represent the
difference between gas receipts from and gas deliveries to Southern's
transportation and storage customers. Gas imbalances arise when these
customers deliver more or less gas into the pipeline than they take out. Under
the provisions of Order No. 636, these amounts are settled monthly.
Plant, Property and Equipment, and Depreciation - Plant, property and
equipment is carried at cost. Southern generally provides for depreciation on
a composite basis. (See Note 5.)
Revenue Recognition - Southern recognizes revenue from both natural gas
sales and transportation in the period the service is provided. Reserves are
provided on revenues collected subject to refund when appropriate.
Income Taxes - Southern and its subsidiaries file federal income tax
returns on a consolidated basis with its parent and other members of its
affiliated group. For financial statement purposes, income taxes are provided
as though Southern and its subsidiaries file separate income tax returns;
however, those companies incurring losses are allocated the tax benefit of such
losses due to the consolidated return.
Southern and its subsidiaries follow an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are
determined using the tax rate for the period in which those amounts are
expected to be received or paid.
II-16
31
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Financial Instruments
The carrying amounts and fair values of Southern's financial
instruments are as follows:
Carrying Amounts Fair Value
---------------- ----------
(In Thousands)
DECEMBER 31, 1993
Notes Receivable from Affiliates $269,661 $269,661
Gas Supply Realignment Costs 179,586 179,586
Recoverable Natural Gas Purchase
Contract Settlement Costs 18,535 18,535
Long-Term Debt 436,701 481,934
DECEMBER 31, 1992
Notes Receivable from Affiliates $187,510 $187,510
Recoverable Natural Gas Purchase
Contract Settlement Costs 70,482 70,482
Long-Term Debt 442,336 466,052
The following methods and assumptions were used by Southern in
estimating its fair value disclosures for financial instruments:
Notes receivable from affiliates, gas supply realignment costs and
recoverable natural gas purchase contract settlement costs: The carrying
amount reported in the balance sheets approximates its fair value.
Long-term debt: The fair values of Southern's long-term debt are based
on quoted market values.
II-17
32
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
The table below shows the values of various categories of Southern's
inventories.
December 31,
--------------------------
1993 1992
---- ----
(In Thousands)
Gas Stored Underground $ - $120,072
Materials and Supplies 23,646 26,141
------- --------
$23,646 $146,213
======= ========
Southern sold its inventory of gas stored underground pursuant to the
implementation of Order No. 636 on November 1, 1993. (See Note 8.)
4. Joint Venture
Southern owns 50 percent of Bear Creek Storage Company, an underground
gas storage company. At December 31, 1993, Southern's investment in Bear Creek,
accounted for by the equity method, equaled its share of underlying equity in
net assets of the investee. Through December 31, 1993, Southern's cumulative
equity in earnings of its joint venture was $126.2 million and cumulative
dividends received from it totaled $117.3 million.
II-18
33
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Joint Ventures (Cont'd)
The following is summarized financial information for Bear Creek. No
provision for income taxes has been included since its income taxes are paid
directly by the joint-venture participants.
Years Ended December 31,
--------------------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Revenues $36,566 $36,528 $37,067
Operating Expenses 6,137 5,156 9,673
Depreciation 5,397 5,397 857
Other Expenses, Net 7,756 9,971 10,893
------- ------- -------
Income Reported $17,276 $16,004 $15,644
======= ======= =======
December 31,
-------------------------------
1993 1992
---- ----
(In Thousands)
ASSETS
Current $ 5,916 $ 6,337
Net plant and property 169,521 174,793
Other 594 647
-------- --------
$176,031 $181,777
======== ========
LIABILITIES AND EQUITY
Current $ 8,607 $ 8,700
Long-term debt and other liabilities 76,517 83,446
Participants' equity 90,907 89,631
-------- --------
$176,031 $181,777
======== ========
II-19
34
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Plant, Property and Equipment and Depreciation
A summary of plant, property and equipment by classification follows:
December 31,
--------------------------
1993 1992
---- ----
(In Thousands)
Mainline Transmission Property $ 994,774 $ 981,915
Gas Supply 705,889 700,296
Gas Gathering 19,364 19,763
Underground Storage Facilities 57,924 57,871
Liquefied Natural Gas Facilities 154,090 154,149
Other 274,631 180,292
---------- ----------
$2,206,672 $2,094,286
========== ==========
Plant, property and equipment includes construction work in progress of
$23.3 million and $4.1 million at December 31, 1993 and 1992, respectively.
The annual depreciation rates and the accumulated depreciation and
amortization amounts by classification are as follows:
Primary December 31,
Depreciation --------------------------
Rates 1993 1992
------------ ---- ----
(In Thousands)
Mainline Transmission Property 2.8% $ 615,945 $ 590,591
Gas Supply 5.1% 605,428 585,921
Gas Gathering 6.25% 16,571 17,382
Underground Storage Facilities 3.3% 38,437 36,600
Liquefied Natural Gas Facilities 3.2% 99,733 94,970
Other 2.8 - 24% 43,657 40,922
---------- ----------
$1,419,771 $1,366,386
========== ==========
II-20
35
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt and Lines of Credit
Long-Term Debt - Long-term debt consisted of:
December 31,
-------------------------
1993 1992
---- ----
(In Thousands)
Southern Natural Gas Company
7.85% Notes due January 15, 2002 $100,000 $100,000
8-5/8% Notes due May 2, 2002 100,000 100,000
9-5/8% Notes due June 15, 1994 100,000 100,000
8-7/8% Notes due February 15, 2001 100,000 100,000
Other 1,581 936
Southern Energy Company
Promissory Note (an effective rate of
6.75% at December 31, 1993) due
through April 1999 30,000 35,000
South Georgia Natural Gas Company
9.85% Term Loan due through December 31, 1997 3,520 4,400
7.80% Term Loan due through December 31, 1997 1,600 2,000
-------- --------
Total Outstanding 436,701 442,336
Less Long-Term Debt Due Within One Year 107,298 6,816
-------- --------
$329,403 $435,520
======== ========
II-21
36
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt and Lines of Credit (Cont'd)
Southern had no restrictions on the payment of dividends at December 31,
1993.
Annual maturities of long-term debt at December 31, 1993, are as follows:
Years (In Thousands)
-----
1994 $107,298
1995 6,550
1996 6,573
1997 6,280
1998 5,000
1999-2002 305,000
--------
$436,701
========
Lines of Credit and Credit Agreement - As part of Sonat's cash
management program, Southern regularly loans funds to or borrows funds from
Sonat. Notes receivable and payable are in the form of demand notes with rates
reflecting Sonat's return on funds loaned to its subsidiaries, average
short-term investment rates and cost of borrowed funds. In certain
circumstances, these notes are subordinated in right of payment to amounts
payable by Sonat under certain long-term credit agreements.
On May 31, 1993, Southern renewed its short-term lines of credit of $50
million for a period of 364 days. Borrowings are in the form of unsecured
promissory notes and bear interest at rates based on the banks' prevailing
prime, international or money-market lending rates.
II-22
37
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
An analysis of Southern's income tax expense (benefit) is as follows:
Years Ended December 31,
------------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Current:
Federal $ 58,995 $ 52,701 $ 50,681
State 5,794 8,986 8,593
-------- -------- --------
64,789 61,687 59,274
-------- -------- --------
Deferred:
Federal (21,427) (10,775) (10,644)
State 186 (3,628) (2,753)
-------- -------- --------
(21,241) (14,403) (13,397)
-------- -------- --------
$ 43,548 $ 47,284 $ 45,877
======== ======== ========
Net deferred tax liabilities are comprised of the following:
December 31,
-----------------------------
1993 1992
---- ----
(In Thousands)
Deferred Tax Liabilities:
Depreciation $133,442 $138,531
Natural gas purchase contract
settlement costs 1,234 16,394
Inventories 10,513 6,979
Other 158 869
-------- --------
Total deferred tax liabilities 145,347 162,773
-------- --------
Deferred Tax Assets:
Revenue reserves 45,986 37,713
Demand charge 3,103 11,085
Employee benefits 5,600 5,486
Other 4,480 1,252
-------- --------
Total deferred tax assets 59,169 55,536
-------- --------
Net Deferred Tax Liabilities $ 86,178 $107,237
======== ========
Southern and its subsidiaries have not provided a valuation allowance
to offset deferred tax assets because, based on the weight of available
evidence, it is more likely than not that all deferred tax assets will be
realized.
II-23
38
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes (Cont'd)
Consolidated income tax expense is different from the amount computed
by applying the U.S. federal income tax rate to income before income tax. The
reasons for this difference are as follows:
Years Ended December 31,
------------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Income Tax Expense at Statutory
Federal Income Tax Rates $44,666 $43,075 $40,571
Increases (Decreases) in Tax
Resulting From:
Provisions for state income
taxes 4,147 4,099 4,235
Refunds and adjustment of
accrued tax position (5,645) 8 (132)
Effect of change in statutory
rate on deferred taxes 199 - -
Other 181 102 1,203
------- ------- -------
Income Tax Expense $43,548 $47,284 $45,877
======= ======= =======
The effect of the deferred tax rate increase to 35 percent due to the
Omnibus Budget Reconciliation Act of 1993 has been reduced by the effect of the
reduction of liabilities established for excess deferred income taxes expected
to be returned over future periods to customers.
II-24
39
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
Leases - Southern has operating lease commitments expiring at various
dates, principally for office space and equipment. Southern has no significant
capital leases.
Rental expense for all operating leases is summarized below:
Years Ended December 31,
---------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Non-Affiliated Operating Leases $1,081 $1,154 $ 1,305
Affiliated Operating Leases 6,634 7,345 9,610
------ ------ -------
Total $7,715 $8,499 $10,915
====== ====== =======
At December 31, 1993, future minimum payments for non-cancelable
operating leases for the years 1994 through 1998 are less than $4 million per
year.
Rate Matters - Periodically, Southern and its subsidiaries file general
rate filings with the FERC to provide for the recovery of cost of service and a
return on equity. The FERC normally allows the filed rates to become
effective, subject to refund, until it rules on the approved level of rates.
Southern and its subsidiaries provide reserves relating to such amounts
collected subject to refund, as appropriate, and make refunds upon
establishment of the final rates.
On September 1, 1989, Southern implemented new rates, subject to refund,
reflecting a general rate decrease of $6 million. In January 1991, Southern
implemented new rates, subject to refund, that restructured its rates
consistent with a FERC policy statement on rate design and increased its sales
and transportation rates by approximately $65 million annually. These two
proceedings have been consolidated for hearing. On October 7, 1993, the
presiding administrative law judge certified to the FERC a contested offer of
settlement pertaining to the consolidated rate cases which (1) resolved all
outstanding issues in the rate decrease proceeding, (2) resolved the cost of
service, throughput, billing determinant and transportation discount issues in
the rate increase proceeding, and (3) provided a method to resolve all other
issues in the latter proceeding, including the appropriate rate design. On
December 16, 1993, the FERC issued an order (December 16 Order) approving the
settlement, but with modifications. On December 22, 1993, Southern filed a
letter with the FERC that outlined certain objections with respect to the
FERC's modifications to the terms and conditions of the settlement. Southern
advised the FERC that the December 16 Order undercut the economic compromise
achieved in the settlement. Southern also filed a request for rehearing of the
December 16 Order but is unable to determine at this time if or to what extent
rehearing will be granted by the FERC.
On September 1, 1992, Southern implemented another general rate change.
The rates reflected the continuing shift in the mix of throughput volumes away
from sales and toward transportation and a $5 million reduction in annual
revenues. On April 30, 1993, Southern submitted a proposed settlement in the
proceeding which, if approved by the FERC, would resolve the throughput and
certain cost of
II-25
40
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
service issues. On June 4, 1993, the presiding administrative law judge
certified the settlement to the FERC. In another order issued on December 16,
1993, the FERC also approved this settlement, but with modifications. Southern
objects to these modifications and has also requested rehearing of this order,
but is unable to determine at this time if rehearing will be granted by the
FERC.
In 1992 Southern placed in service certain facilities constructed to
connect to its pipeline system gas reserves produced from certain Mississippi
Canyon and Ewing Bank Area Blocks, offshore Louisiana. By order dated May 15,
1991, the FERC had authorized Southern, subject to certain conditions affecting
Southern's ability to include the cost of the facilities in its rates, to
construct and operate the pipeline, compression, and related facilities
necessary to connect these reserves. Southern sought rehearing of the
unacceptable certificate conditions, but in an order issued on January 13,
1993, the FERC left intact the conditions contained in its 1991 order. It
deferred the specific application of the conditions to Southern's pending rate
case implemented September 1, 1992. The certificate order itself is now on
appeal. Southern is unable to predict the ultimate rate treatment of the $45
million cost of these facilities, but does not expect such treatment to have a
material adverse effect on its financial position.
On May 1, 1993, Southern implemented a general rate change, subject to
refund, which increased its sales and transportation rates by approximately $57
million annually. The filing is designed to recover increased operating costs
and to reflect the impact of competition on both Southern's level and mix of
services. A hearing regarding various cost allocation and rate design issues
in this proceeding is set for June 14, 1994.
Sea Robin Pipeline Company has previously filed under the provisions of
Order No. 500 to recover $83.1 million in gas purchase contract settlement
payments from its former pipeline sales customers, Koch Gateway Pipeline
Company, successor to United Gas Pipe Line Company (United), and Southern.
Those filings remain subject to refund pending the outcome of any prudence
challenges in the proceedings. Although the eligibility issues have been
resolved, one party has reserved its rights to challenge prudence until such
time as certain take-or-pay allocation issues are resolved with respect to the
flow-through of costs billed to United.
Southern is authorized to flow through to its jurisdictional customers
$38.1 million of the costs allocated to it by Sea Robin as well as the $32.7
million in Order No. 500 costs allocated to it by United. Southern's
flow-through of United and Sea Robin's costs remains subject to refund pending
the outcome of any challenges to the costs or allocation of the costs in those
pipelines' Order No. 500 proceedings. Southern does not believe that the
outcome of any such challenges will have a material adverse effect on its
financial position.
II-26
41
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
On July 2, 1993, the FERC issued an order reaffirming its approval of
the non-take-or-pay aspects of a settlement filed by United in 1988, which
included Southern's phased abandonment of its contract demand with United. The
order rejected the take-or-pay aspects of the settlement, including United's
proposed Order No. 528 allocation methodology. As a consequence, various
parties that had originally supported the settlement are now contesting it.
United has evidenced its intention to honor the non-take-or-pay aspects of the
1988 settlement and has induced several of the parties to withdraw their
judicial appeals of the July 2 order. Southern does not believe that the final
resolution of this matter will have a material adverse effect on its financial
position.
Gas Purchase Contracts - Gas purchase contract settlement payments
(other than the gas supply realignment payments discussed below) made by
Southern and not previously recovered or expensed are included on the
Consolidated Balance Sheet at December 31, 1993, in "Current Assets". Pursuant
to a final and nonappealable FERC order, Southern is entitled to collect these
amounts from its customers over the remainder of a five-year period which
commenced May 1, 1989. Southern currently is incurring essentially no
take-or-pay liabilities under its gas purchase contracts. Southern regularly
evaluates its position relative to gas purchase contract matters, including the
likelihood of loss from asserted or unasserted take-or-pay claims or
above-market prices. When a loss is probable and the amount can be reasonably
estimated, it is accrued.
Order No. 636 - In 1992 the FERC issued its Order No. 636 (the Order).
The Order requires significant changes in interstate natural gas pipeline
services. Interstate pipeline companies, including Southern, are incurring
certain costs (transition costs) as a result of the Order, the principal one
being costs related to amendment or termination of existing gas purchase
contracts, which are referred to as gas supply realignment (GSR) costs. The
Order provides for the recovery of 100 percent of the GSR costs and other
transition costs arising out of the implementation of the Order to the extent
that the pipeline can prove that they were prudently incurred. Numerous
parties have appealed the Order to the Circuit Courts of Appeal.
On September 3, 1993, the FERC generally approved a compliance plan for
Southern and directed Southern to implement its restructured services pursuant
to the Order on November 1, 1993 (the September 3 order). Pursuant to
Southern's compliance plan, GSR costs that are eligible for recovery include
payments to reform or terminate gas purchase contracts or, for contracts where
Southern can show that it can minimize transition costs by continuing to
purchase gas under the contract (i.e., it is more economic to continue to
perform), the difference between the contract price and the higher of (a) the
sales price for gas purchased under the contract, or (b) a price established by
an objective index of spot-market prices. Recovery of these latter costs is
permitted for an initial period of two years.
Southern's compliance plan contains two mechanisms pursuant to which
Southern is permitted to recover 100 percent of its GSR costs. The first
mechanism is a monthly fixed charge designed to recover 90 percent of the GSR
costs from Southern's firm transportation customers. The second mechanism is a
volumetric surcharge designed to collect the remaining 10 percent of such costs
II-27
42
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Cont'd)
from Southern's interruptible transportation customers. This funding will
continue until the GSR costs are fully recovered or funded. The FERC also
permitted Southern to file to recover any GSR costs not recovered through the
volumetric surcharge after a period of two years. In addition, Southern's
compliance plan provides for the recovery of other transition costs as they are
incurred and any remaining transition costs may be recovered through a regular
rate filing.
The September 3 order rejected the argument of certain customers that a
1988 take-or-pay recovery settlement bars Southern from recovering GSR costs
under gas purchase contracts executed before March 31, 1989. Those customers
have filed motions urging the FERC to reverse its ruling on that issue. On
December 16, 1993, the FERC affirmed its September 3 ruling with respect to the
1988 take-or-pay recovery settlement. The December 16 Order generally approved
Southern's restructuring tariff submitted pursuant to the September 3 order.
Various parties have filed motions urging the FERC to modify the December 16
Order and have sought judicial review of the September 3 order. Southern and
its customers engaged in settlement discussions regarding Southern's
restructuring filing prior to the September 3 order, but the parties were
unable to reach a settlement. Those discussions are continuing.
During 1993 Southern reached agreements to reduce significantly the
price payable under a number of high cost gas purchase contracts in exchange
for payments of approximately $114 million. On December 1, 1993, Southern
filed to recover such costs and approximately $3 million of prefiling interest.
On December 30, 1993, the FERC accepted such filing to become effective January
1, 1994, subject to refund, and subject to a determination that such costs were
prudently incurred and eligible under Order No. 636. The December 30 order
rejected arguments of various parties that a pipeline's payments to affiliates,
which represented approximately $34 million of the December 1, 1993 filing, may
not be recovered under Order No. 636.
In December 1993, Southern reached agreement to reduce the price under
another contract in exchange for payments having a present value of
approximately $52 million which is included in "Deferred Credits and Other" in
the Consolidated Balance Sheet. Payments will be made in equal monthly
installments over an eight-year period ending December 31, 2001. Southern
expects to make a limited rate filing by mid-February 1994 to recover such
costs beginning April 1, 1994. Southern has also incurred approximately $11
million of costs during November and December 1993 from continuing to purchase
gas under contracts that are in excess of current market prices. Southern will
make additional rate filings to recover these costs quarterly. The total costs
of $180 million accrued through December 31, 1993, are included in current and
long-term gas supply realignment costs in the Consolidated Balance Sheet.
Southern is unable to predict all of the elements of the ultimate
outcome of its Order No. 636 restructuring proceeding, its settlement
discussions with its customers, and the limited rate filings to recover its
transition costs.
II-28
43
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Transactions with Major Customers and Affiliates
Revenues and accounts receivable relate to business conducted with gas
distribution companies, municipalities, gas districts, industrial customers and
other interstate pipeline companies in the Southeast. Southern performs
ongoing credit evaluations of its customers' financial condition, and in some
circumstances, requires collateral from its customers.
The following table shows revenues from major unaffiliated customers.
Years Ended December 31,
-----------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Atlanta Gas Light Company $329,040 $294,429 $346,162
Alabama Gas Corporation 147,210 118,243 104,025
South Carolina Pipeline Corporation 75,040 69,650 88,161
Southern and its subsidiaries enter into transactions with other Sonat
subsidiaries and unconsolidated affiliates to transport, sell and purchase
natural gas. Services provided by these affiliates for the benefit of Southern
and its subsidiaries are billed accordingly.
The following table shows revenues and charges from Southern's
affiliates.
Years Ended December 31,
-----------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Revenues from Affiliates $ 39,912 $ 31,717 $ 33,520
Charges from Affiliates 42,666 46,871 40,457
II-29
44
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans
Retirement Plans - Sonat has a trusteed, non-contributory, tax
qualified defined benefit retirement plan (the Retirement Plan) covering
substantially all employees of Southern. A supplemental benefit plan (the
Supplemental Plan) that provides retirement benefits in excess of those allowed
under Sonat's tax qualified retirement plan is also in effect. Benefits under
the plans are based on a combination of years of service and a percentage of
compensation. Benefits are vested over five years.
Sonat determines the amount of funding to the Retirement Plan on a
year-to-year basis, with amounts consistent with minimum and maximum funding
requirements established by various governmental bodies.
Southern's net periodic pension cost consists of the following
components:
Years Ended December 31,
------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Service Cost - Benefits Earned
during the Period $ 4,563 $ 5,198 $ 5,910
Interest Cost on Projected
Benefit Obligation 16,874 17,391 17,715
Gain on Assets (39,181) (14,420) (44,179)
Net Amortization and Deferral 18,564 (5,043) 23,489
-------- -------- --------
$ 820 $ 3,126 $ 2,935
======== ======== ========
For a limited period during 1993 and 1991, Sonat offered special early
retirement programs to certain employees of Southern. The total cost of the
programs applicable to Southern was $5.5 and $6.3 million, respectively. All
of the 1993 costs have been deferred to be collected in future rates.
II-30
45
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
The following table sets forth Southern's allocated portion of the assets
and liabilities of Sonat's plans and the amount of the net pension asset or
liability recognized in Southern's Consolidated Balance Sheets.
Plans with Obligations Plans with Obligations
Less than Assets (1) in Excess of Assets(2)
December 31, December 31,
------------------------- ------------------------
(In Thousands)
1993 1992 1993 1992
---- ---- ---- ----
Actuarial Present Value of
Benefit Obligations:
Vested benefit obligations $191,626 $183,888 $ 6,195 $ 6,049
Non-vested benefit obligations 7,425 7,177 199 147
-------- -------- -------- --------
Accumulated benefit obligations 199,051 191,065 6,394 6,196
Effect of projected future
salary increases 48,680 54,491 1,602 1,535
-------- -------- -------- --------
Projected benefit obligations 247,731 245,556 7,996 7,731
Plan Assets at Fair Value (3) 276,370 253,362 - -
-------- -------- -------- --------
Projected Benefit Obligations
(in Excess of) or Less Than
Plan Assets 28,639 7,806 (7,996) (7,731)
Unrecognized Net (Assets) or
Obligations at Transition (4) (11,413) (12,616) 116 130
Unrecognized Net (Gain) Loss (29,880) (3,500) 711 823
Unrecognized Prior Service Cost 7,681 8,310 762 834
Unamortized Deferred Charge
from Early Retirement
Termination Benefits (5) 6,089 1,113 3,831 4,272
-------- -------- -------- --------
Net Pension Asset (Liability)
Recognized in the
Consolidated Balance Sheets $ 1,116 $ 1,113 $ (2,576) $ (1,672)
======== ======== ======== ========
(1) The Retirement Plan.
(2) The Supplemental Plan.
(3) Plan assets consist of equity securities, commingled funds and debt
securities.
(4) Amortization periods for unrecognized net (asset) or obligation are
16.5 years for the Retirement Plan and 15 years for the
Supplemental Plan.
(5) Amortization periods for early retirement termination benefits are 10
years for the Retirement Plan and five years for the Supplemental
Plan.
II-31
46
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Until July 1993, Sonat set aside assets in fixed income securities such
that values of those assets equal or exceed the present value of benefit
obligations to current retirees (immunized obligations). After that date, a
separate immunized portfolio has not been maintained. The assumed rates used
to measure the projected benefit obligations and the expected earnings of plan
assets are:
Years Ended December 31,
------------------------------------------
1993 1992 1991
---- ---- ----
Weighted Average Discount Rate:
Immunized obligations - 7.4% 7.4%
Non-immunized obligations 7.0% 7.0% 7.0%
Long-Term Rate of Return:
Immunized assets - 7.4% 7.4%
Non-immunized assets 9.0% 9.0% 9.0%
Increase in Future Compensation Levels 6.0% 6.0% 7.0%
Other Post Employment Benefits - Southern participates in plans of
Sonat that provide for postretirement health care and life insurance benefits
to its employees when they retire. Southern adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for all plans as of January 1, 1993. SFAS No.
106 requires companies to accrue the cost of postretirement health care and
life insurance benefits within the employees' active service periods. Southern
has elected to amortize the transition obligation over a 20-year period.
Southern previously expensed the cost of its retiree medical benefits as they
were paid. Expense for retiree life insurance benefits was recognized as
Southern funded its Retiree Life Insurance Plan.
The annual net periodic cost for postretirement health care and life
insurance benefits for the year ended December 31, 1993, includes the following
components:
In Thousands)
Service Cost $1,026
Interest Cost 5,778
Return on Plan Assets (319)
Net Amortization and Deferral 3,237
------
$9,722
======
Prior to the adoption of SFAS No. 106, the cost of providing health
care and life insurance benefits was $3.9 million in 1992 and 1991.
Southern implemented rates effective May 1, 1993, which provide for the
recovery of its SFAS No. 106 costs. Costs incurred in 1993 prior to that date,
amounting to $2.6 million, were deferred to be amortized over a three-year
period commencing when Southern's next rate case becomes effective.
II-32
47
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Southern funds its Retiree Life Insurance Plan with the amount of
funding determined on a year-to-year basis with the objective of having assets
equal plan liabilities. In addition, during 1993 Southern initiated funding of
postretirement health care benefits in an amount generally equal to its SFAS
No. 106 expense.
The following table sets forth the funded status at December 31, 1993,
and at the date of SFAS No. 106 adoption, January 1, 1993, for Southern's
postretirement health care and life insurance plans:
December 31, January 1,
1993 1993
------------ ----------
(In Thousands)
Accumulated Postretirement Benefit Obligation:
Retirees $59,061 $41,662
Fully eligible active plan participants 11,731 10,556
Other active plan participants 16,222 16,482
------- -------
87,014 68,700
Plan Assets at Fair Value (1) 9,358 6,150
------- -------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets 77,656 62,550
Unrecognized Transition Obligation 64,095 62,550
Unrecognized Net Loss 10,981 -
------- -------
Accrued Postretirement Benefit Cost $(2,580) $ -
======= =======
(1) Plan assets are held in a life insurance reserve account and consist
primarily of fixed income securities.
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
December 31, January 1,
1993 1993
------------ ----------
Discount Rate 7.0% 8.0%
Long-Term Rate of Return:
Medical assets 5.5% 6.5%
Life insurance assets 7.0% 7.5%
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 12.3 percent in 1994, decreasing gradually to 6
percent by the year 2002. Increasing the assumed health care cost trend rate
by 1 percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1993, by approximately $7.5 million and increase
the service cost and interest cost components of the net periodic
postretirement benefit cost by approximately $.6 million.
II-33
48
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans (Cont'd)
Executive Award Plan - Sonat has an Executive Award Plan that provides
awards to certain key employees in the form of stock options, restricted stock,
and stock appreciation rights (SARs) in tandem with any or all stock options.
In years prior to 1991, tax offset payments were also generally provided in
conjunction with these awards. SARs permit the holder of an exercisable option
to surrender that option for an amount equal to the excess of the market price
of the common stock on the date of exercise over the option price
(appreciation). The appreciation is payable in cash, common stock, or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. No SARs have been issued since 1990. At
December 31, 1993, 75,000 SARs were outstanding to employees of Southern.
Sonat issued 7,000 shares of restricted stock to employees of Southern during
1993. The shares generally vest 10 years from the date of grant, unless the
closing price of Sonat's common stock achieves certain specified levels. At
December 31, 1993, 7,328 of the 29,400 cumulative restricted shares issued have
vested. Stock-based employee compensation decreased Southern's pretax income
in 1993 by $5.1 million, decreased Southern's pretax income in 1992 by $1.8
million and increased Southern's pretax income in 1991 by $2.3 million.
II-34
49
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Quarterly Results (Unaudited)
Shown below are selected unaudited quarterly data.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
1993
----
Revenues $289,420 $122,189 $121,138 $299,902
Operating Income 59,858 20,449 28,657 37,654
Net Income 29,176 10,657 21,294 22,942
1992(1)
----
Revenues $257,504 $120,865 $118,857 $231,402
Operating Income 67,825 13,226 30,088 39,459
Net Income 38,753 4,900 15,810 19,944
(1) Net income for the third quarter of 1992 includes favorable
adjustments of $6 million, related to a settlement regarding Southern
Energy Company's idle liquified natural gas facilities.
II-35
50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has not had a change in accountants within twenty-four months
prior to the date of its most recent financial statements or in any period
subsequent to such date.
II-36
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules, and
Exhibits
1. FINANCIAL STATEMENTS
PAGE
-----
Included in Part II of this report:
Report of Ernst & Young, Independent Auditors.................................... II-11
Consolidated Balance Sheets at December 31, 1993 and 1992........................ II-12
Consolidated Statements of Income for the years ended December 31, 1993, 1992,
and 1991...................................................................... II-14
Consolidated Statements of Changes in Retained Earnings for the years ended
December 31, 1993, 1992, and 1991............................................. II-14
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1992, and 1991................................................................ II-15
Notes to Consolidated Financial Statements....................................... II-16
2. FINANCIAL STATEMENT SCHEDULES
PAGE
-----
Included in Part IV of this report:
Consolidated Schedules for each of the three years in the period ended December
31, 1993:
V -- Plant, Property, and Equipment.......................................... IV-6
VI -- Accumulated Depreciation, Depletion and Amortization of Plant, Property
and Equipment........................................................... IV-9
X -- Supplementary Income Statement Information.............................. IV-12
All other schedules have been omitted as 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.
Financial statements of 50-percent or less owned companies and joint
ventures are not presented herein because such companies and joint ventures do
not meet the significance test.
IV-1
52
3. EXHIBITS (1)
NUMBER DESCRIPTION METHOD OF FILING
- ------ -------------------------------------------------- ------------------------------
RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Southern Filed herewith
Natural Gas Company dated as of March 15, 1994
3-(b) By-Laws of Southern Natural Gas Company as amended Filed herewith
and in effect October 1, 1982
INSTRUMENTS DEFINING THE RIGHTS
OF SECURITY HOLDERS
4-(1) Form of Indenture dated June 1, 1987 from Southern Filed as Exhibit 4-(1) to
Natural Gas Company to Manufacturers Hanover Trust Registration No. 33-47266 for
Company, Trustee Southern Natural Gas Company
dated July 31, 1987
PRINCIPAL SERVICE AGREEMENTS
OF SOUTHERN NATURAL GAS COMPANY
10-(1) Form of Service Agreements, Nos. 866940, 866941 Filed as Exhibit 10-(2) to
and S10710, between Southern Natural Gas Company Form 10-Q of Sonat Inc. for
and Alabama Gas Corporation, effective November 1, the quarter ended September
1993 30, 1993
10-(2) Form of Service Agreements, Nos. 868005, 868006 Filed as Exhibit 10-(1) to
and S10730, between Southern Natural Gas Company Form 10-Q of Sonat Inc. for
and Atlanta Gas Light Company, effective November the quarter ended September
1, 1993 30, 1993
10-(3) Form of Service Agreements, Nos. 867660, 867661 Filed as Exhibit 10-(3) to
and S10019, between Southern Natural Gas Company Form 10-Q of Sonat Inc. for
and South Carolina Pipeline Corporation, effective the quarter ended September
November 1, 1993 30, 1993
OTHER MATERIAL CONTRACTS
10-(4) Service Agreement dated January 26, 1978 with Filed as Exhibit 10-(20) to
Southern Energy Company Form 10-K of Sonat Inc. for
the year 1991
10-(5) FERC Gas Tariff of Southern Energy Company, Filed as Exhibit 10-(21) to
effective July 7, 1978 Form 10-K of Sonat Inc. for
the year 1991
10-(6) Restated and Amended Joint Venture Agreement dated Filed as Exhibit 10-(22) to
September 1, 1981 between Tennessee Storage Form 10-K of Sonat Inc. for
Company and Southern Gas Storage Company forming the year 1991
Bear Creek Storage Company (with Appendices A-G)
10-(7) Service Agreement dated June 1, 1981 with Bear Filed as Exhibit 10-(23) to
Creek Storage Company, and FERC Gas Tariff of Bear Form 10-K of Sonat Inc. for
Creek Storage Company, effective July 1, 1981 the year 1991
10-(8) Parents Agreement dated September 15, 1981 from Filed as Exhibit 10-(25) to
Southern Natural Gas Company and Tenneco Inc. in Form 10-K of Sonat Inc. for
favor of Manufacturers Hanover Trust Company and the year 1991
T. C. Crane
- ---------------
(1) Southern will furnish to requesting security holders any exhibit on this
list upon the payment of a fee of 10 cents per page up to a maximum of
$5.00 per exhibit. Requests must be in writing and should be addressed
to R. David Hendrickson, Secretary, Southern Natural Gas Company, P. O.
Box 2563, Birmingham, Alabama 35202.
IV-2
53
NUMBER DESCRIPTION METHOD OF FILING
- ------ -------------------------------------------------- ------------------------------
23-(1) Consent of Ernst & Young, Independent Auditors, Filed herewith
dated March 25, 1994
24-(1) Powers of Attorney authorizing William A. Smith; Filed herewith
James E. Moylan, Jr.; James A. Rubright; Thomas W.
Barker, Jr.; R. David Hendrickson; and John C.
Griffin to sign the Southern Natural Gas Company
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 on behalf of certain
directors and officers of the registrant
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance
upon Instruction J(2)(b) of Form 10-K.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are hereby
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Southern and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed 10% of the total
assets of Southern and its subsidiaries on a consolidated basis. Southern agrees
to furnish a copy of each such instrument to the Commission upon request.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1993.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K and filed with this report
on Form 10-K accompany this report in a separate exhibit volume.
IV-3
54
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
By: /s/ WILLIAM A. SMITH
----------------------------
WILLIAM A. SMITH
CHAIRMAN AND PRESIDENT
Dated: March 25, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------------- ---------------
(i) Principal Executive Officer:
/s/ WILLIAM A. SMITH Chairman and President March 25, 1994
- ---------------------------------------------
WILLIAM A. SMITH
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Treasurer March 25, 1994
- ---------------------------------------------
THOMAS W. BARKER, JR.
Principal Accounting Officer:
/s/ G. LAYNE FINLAY Vice President and Controller March 25, 1994
- ---------------------------------------------
G. LAYNE FINLAY
(iii) Directors:
RONALD B. GARDNER* March 25, 1994
- ---------------------------------------------
RONALD B. GARDNER
RONALD L. KUEHN, JR.* March 25, 1994
- ---------------------------------------------
RONALD L. KUEHN, JR.
HENRY R. LINDEN* March 25, 1994
- ---------------------------------------------
HENRY R. LINDEN
L. DAVID MATHEWS* March 25, 1994
- ---------------------------------------------
L. DAVID MATHEWS
JAMES E. MOYLAN, JR.* March 25, 1994
- ---------------------------------------------
JAMES E. MOYLAN, JR.*
JAMES A. RUBRIGHT* March 25, 1994
- ---------------------------------------------
JAMES A. RUBRIGHT
IV-4
55
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------------- ---------------
WILLIAM A. SMITH* March 25, 1994
- ---------------------------------------------
WILLIAM A. SMITH
* By /s/ R. DAVID HENDRICKSON
---------------------------------------
R. DAVID HENDRICKSON
SECRETARY, AS AUTHORIZED
BY CERTAIN POWERS OF
ATTORNEY DATED MARCH 11, 1994,
AND TWO DATED MARCH 16,
1994, ALL OF WHICH ARE FILED HEREWITH
AS EXHIBIT 24-(1)
IV-5
56
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT
YEAR ENDED DECEMBER 31, 1993
Other
Changes
Balance at Additions, Retirements Debit or Balance
Classification Jan. 1, 1993 at Cost(a) or Sales (Credit) Dec. 31,1993
-------------- ------------ ---------- ----------- ---------- ------------
Plant, property and equipment $2,023,511 $35,089 $18,012 $ 1,111 $2,041,699
Gas stored underground - noncurrent 66,681 5,631 - 69,380(b) 141,692
Construction work in progress 4,094 19,187 - - 23,281
---------- ------- ------- ------- ----------
Total $2,094,286 $59,907 $18,012 $70,491 $2,206,672
========== ======= ======= ======= ==========
Notes:
(a) Additions include $739,000 of funds capitalized.
(b) Reflect the transfer of current working storage to noncurrent pursuant
to Order No. 636 (See Notes 3 and 8 of the Notes to Consolidated Financial
Statement located in Item 8.)
57
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT - (CONTINUED)
YEAR ENDED DECEMBER 31, 1992
Other
Changes
Balance at Additions, Retirements Debit or Balance at
Classification Jan. 1, 1992 at Cost(a) or Sales (Credit) (b) Dec. 31, 1992
-------------- ------------ ---------- ----------- ------------ -------------
(In Thousands)
Plant, property and equipment $1,988,753 $46,314 $17,660 $6,104 $2,023,511
Gas stored underground - noncurrent 63,808 2,873 - - 66,681
Construction work in progress 10,228 (6,134) - - 4,094
---------- ------- ------- ------ ----------
Total $2,062,789 $43,053 $17,660 $6,104 $2,094,286
========== ======= ======= ====== ==========
Notes:
(a) Additions include $692,000 of funds capitalized.
(b) Other changes include transfers and reclassifications between plant and
property and other accounts.
58
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE V - PLANT, PROPERTY AND EQUIPMENT - (CONTINUED)
YEAR ENDED DECEMBER 31, 1991
Other
Changes
Balance at Additions, Retirements Debit or Balance at
Classification Jan. 1, 1991 at Cost(a) or Sales (Credit)(b) Dec. 31, 1991
-------------- ------------ ---------- ----------- ----------- -------------
(In Thousands)
Plant, property and equipment $1,884,951 $105,459 $6,500 $4,843 $1,988,753
Gas stored underground - noncurrent 61,875 1,933 - - 63,808
Construction work in progress 12,877 (2,649) - - 10,228
---------- -------- ------ ------ ----------
Total $1,959,703 $104,743 $6,500 $4,843 $2,062,789
========== ======== ====== ====== ==========
Notes:
(a) Additions include $3,386,000 of funds capitalized.
(b) Other changes include transfers and reclassifications between plant and
property and other accounts.
59
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PLANT, PROPERTY AND EQUIPMENT (a)
YEAR ENDED DECEMBER 31, 1993
Additions
--------------------------
Charged to Other
Charged Clearing Changes
Balance at to Accounts, Retirements (Debit) or Balance at
Classification Jan. 1, 1993 Income etc. or Sales Credit(b) Dec. 31, 1993
-------------- ------------ ------- ---------- ----------- ----------- -------------
(In Thousands)
Total Accumulated
Depreciation and Amortization $1,366,386 $63,611 $3,373 $15,686 $2,087 $1,419,771
========== ======= ====== ======= ====== ==========
Notes:
(a) Depreciation is provided as described in Note 1 and Note 5 of the Notes
to Consolidated Financial Statements located in Item 8.
(b) Other changes are either transfers or amounts received as reimbursement
for alterations of facilities.
60
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PLANT, PROPERTY AND EQUIPMENT (a) - (CONTINUED)
YEAR ENDED DECEMBER 31, 1992
Additions
-------------------------
Charged to Other
Charged Clearing Changes
Balance at to Accounts, Retirements (Debit) or Balance at
Classification Jan. 1, 1992 Income etc. or Sales Credit(b) Dec. 31, 1992
-------------- ------------ ------- ---------- ----------- ----------- -------------
(In Thousands)
Total Accumulated
Depreciation and Amortization $1,286,177 $73,713 $11,713(c) $13,502 $8,285 $1,366,386
========== ======= ======= ======= ====== ==========
Notes:
(a) Depreciation is provided as described in Note 1 and Note 5 of the Notes
to Consolidated Financial Statements located in Item 8.
(b) Other changes are either transfers or amounts received as reimbursement
for alterations of facilities.
(c) Includes an adjustment of $9.6 million for a settlement relating
to Southern Energy Company's idle liquefied natural gas facilities.
61
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PLANT, PROPERTY AND EQUIPMENT (a) - (CONTINUED)
YEAR ENDED DECEMBER 31, 1991
Additions
--------------------------
Charged to Other
Charged Clearing Changes
Balance at to Accounts, Retirements (Debit) or Balance at
Classification Jan. 1, 1991 Income etc. or Sales Credit(b) Dec. 31, 1991
-------------- ------------ ------- ---------- ----------- ----------- -------------
(In Thousands)
Total Accumulated
Depreciation and Amortization $1,226,573 $59,393 $2,250 $4,389 $2,350 $1,286,177
========== ======= ====== ====== ====== ==========
Notes:
(a) Depreciation is provided as described in Note 1 and Note 5 of the Notes
to Consolidated Financial Statements located in Item 8.
(b) Other changes are either transfers or amounts received as reimbursement
for alterations of facilities.
62
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 31, 1993, 1992 and 1991
Charged to Costs and Expenses
--------------------------------------------
1993 1992 1991
---- ---- ----
(In Thousands)
Maintenance and Repairs $21,776 $22,474 $21,547
======= ======= =======
Ad Valorem Taxes $11,794 $11,869 $10,533
======= ======= =======
No other information is required to be disclosed because amounts are less than
1% of consolidated revenues or the information has been included elsewhere
herein.
63
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SOUTHERN NATURAL GAS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1993
In compliance with Section 304 of Regulation S-T, the
following information describes pictorial and/or graphic
materials contained herein:
PAGE DESCRIPTION
I-8 Map of the Southeastern
United States showing the
approximate location of the
pipeline systems of Southern
and its subsidiaries and the
underground storage facilities
of Southern (each described on
page I-1); and the approximate
location of Southern Energy's
LNG terminal, as discussed on
page I-6.