ITEM 1. BUSINESS
The principal business of Southern Natural Gas Company ("Southern" or the "Company"), which is a wholly owned subsidiary of Sonat Inc. ("Sonat"), is the transmission and storage of natural gas in interstate commerce. Southern owns approximately 7,300 miles of interstate natural gas pipelines. Southern's interstate pipeline system extends from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. Southern is the principal pipeline supplier to the growing Southeastern markets of Alabama and Georgia. Southern's interstate pipeline system has a certificated daily delivery capacity of 2.5 billion cubic feet ("Bcf") of natural gas. A map of Southern's pipeline system, including pipelines of its subsidiaries appears on page I-8.
Southern's interstate pipeline business is subject to regulation by the Federal Energy Regulatory Commission ("FERC"), the U.S. Department of Transportation under the terms of the Natural Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act (the "NGA"), and various pipeline safety and environmental laws. See "Governmental Regulation" below for information concerning the regulation of natural gas transmission operations.
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 incorporated herein by reference.
At March 1, 1999, Southern and its subsidiaries employed approximately 770 people.
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.
SEA ROBIN PIPELINE COMPANY
Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of Southern, owns an approximately 430-mile interstate natural gas pipeline system located in the Gulf of Mexico. Sea Robin gathers natural gas and condensate for others and delivers those products to shore for condensate removal and gas processing and redelivery to one independent storage company and five downstream transmission pipelines, including Southern. See the system map on page I-8. Sea Robin transported approximately 238 Bcf of natural gas in 1998 compared to 278 Bcf in 1997. These Sea Robin volumes are included within the Southern transportation volumes discussed below.
SOUTH GEORGIA NATURAL GAS COMPANY
South Georgia Natural Gas Company ("South Georgia"), a wholly owned subsidiary of Southern, owns an approximately 910-mile interstate natural gas transmission system located in eastern Alabama, southern Georgia, and the Florida Panhandle. See the system map on page I-8. South Georgia transported approximately 39 Bcf of natural gas in 1998 compared to 38 Bcf in 1997. These South Georgia volumes are included within the Southern transportation volumes discussed below.
DESTIN PIPELINE COMPANY, L.L.C.
Destin Pipeline Company, L.L.C. ("Destin"), is owned one-third each by Southern and subsidiaries of Shell Oil Company ("Shell") and BP Amoco Corporation ("BP Amoco"). Destin owns a 223-mile interstate pipeline system that transports natural gas from the growing eastern Gulf of Mexico production area, with an additional 31-mile extension scheduled to go in service in the second quarter of 1999. Destin's pipeline system extends northward into Mississippi, where it connects with five other interstate pipelines, including Southern. See the system map on page I-8. The pipeline has a firm daily delivery capacity of 1.0 Bcf of natural gas. Southern is the operator of the system. Destin's pipeline system was partially completed and in service in September 1998 and was fully in service in March 1999. As of March 1999, the total capital to be expended by
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Destin is estimated to be $475 million, including two substantial extensions of the original mainline system that were constructed in late 1998 and early 1999.
Destin's FERC Gas Tariff includes a flexible firm transportation service, which provides for levels of firm transportation capacity that may vary quarterly, with the transportation provided at a volumetric rate provided certain minimum throughput levels are maintained. Under the flexible firm service, Destin's transportation revenue will fluctuate based on the levels of gas production from its shippers. To be eligible for Destin's flexible firm service, a shipper must make a life-of-reserves commitment of production from offshore leases with estimated proven recoverable reserves of 100 Bcf or more.
Shell, BP Amoco, and other shippers have dedicated their production from certain leases in the Eastern Gulf of Mexico to Destin for transportation under Destin's flexible firm rate schedule. Discussions are underway with other prospective shippers.
ETOWAH LNG COMPANY, L.L.C.
In December 1997 an affiliate of AGL Resources, Inc., an unaffiliated company ("AGL Resources"), and Southern formed a new entity, Etowah LNG Company, L.L.C. ("Etowah"), to jointly construct, own, and operate a new liquefied natural gas ("LNG") peaking facility in Polk County, Georgia. Peaking services provide supplemental gas supplies on days when demand is highest, typically during the winter. Under the agreement, AGL Resources and Southern each will own 50 percent of Etowah, which will be regulated by the FERC. The proposed plant will connect directly into AGL Resources' principal natural gas distribution subsidiary, Atlanta Gas Light Company ("AGLC"), and Southern's pipeline. Etowah will provide natural gas storage and peaking services to AGLC and the city of Austell, Georgia. The new facility will cost approximately $90 million. AGLC has subscribed for 200 MMcf per day of deliverability capacity from Etowah, which represents two-thirds of its anticipated available capacity, for a term of 20 years. The agreement for Etowah to provide services to AGLC includes, however, provisions allowing AGLC to terminate the agreement in the event it does not receive, with respect to the agreement, a satisfactory order from the Georgia Public Service Commission ("Georgia PSC") or if AGLC determines it should not proceed with the agreement. In September 1998 the Georgia PSC issued an order approving the agreement, but allowed for further review of it. The parties extended the time period during which AGLC may terminate the agreement. AGLC has advised Southern that it is reevaluating the timing and extent of its needs for firm peaking services and will advise Southern whether it will proceed with this project during the third quarter of 1999. If AGLC exercises its option to terminate its service agreement with Etowah, the project would not go forward and AGLC would be obligated to reimburse Etowah for all of its costs incurred in the project.
SOUTHERN LNG INC.
Southern LNG Inc. ("Southern LNG"), formerly known as Southern Energy Company, a wholly owned subsidiary of Southern, owns an LNG receiving and regasification 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. In 1992 the FERC approved a settlement relating to Southern LNG's facilities. The settlement resolved a number of outstanding rate and accounting issues. Southern LNG must determine by the end of 1999, however, whether to file with the FERC to abandon its facility. If it abandons the facility, Southern LNG would nevertheless be allowed to recover most of its remaining investment in the facility pursuant to the settlement.
MARKETS -- TRANSPORTATION
Southern and its subsidiaries provide natural gas transportation services for their distribution customers, primarily for residential and commercial end use, industrial customers, electric generation companies, gas producers, other gas pipelines, and gas marketing and trading companies. Southern provides transportation service in both its gas supply and market areas. The principal industries served directly by Southern's pipeline
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systems and indirectly through their customers' distribution systems include the electric generation, fertilizer, chemical, pulp and paper, textile, primary metals, stone, clay, and glass industries.
Transportation volumes in 1998 for Southern and all of its subsidiaries were 984 Bcf, compared with transportation volumes in 1997 of 1,007 Bcf. Sales to distribution customers, including municipalities and gas districts, accounted for most of 1998 sales of 12 Bcf and 1997 sales of 65 Bcf. In each of 1998 and 1997, the volumes associated with the 1998 and 1997 sales are not accounted for as sales volumes, but rather are included in transportation volumes because all sales are made at the receipt points where the gas enters Southern's pipeline system.
Southern and its subsidiaries' pipelines provide transportation service under rate schedules that are subject to FERC regulatory authority. Rates for transportation service depend on whether service is on a firm or interruptible basis and the location of the service on Southern's pipeline system. Firm service is transportation service for which the shipper pays a fixed monthly fee to reserve capacity in the pipeline system (the "Reservation Fee"). The shipper may not use this capacity it has reserved at all times, but the firm transportation customers of Southern (with the exception of certain small customers) must pay the monthly Reservation Fee regardless of the volumes shipped. Shippers are able to resell their unused firm capacity pursuant to FERC rules and regulations. Interruptible service is only available when pipeline capacity is available and may be interrupted by the pipeline as needed when use of the pipeline is at its greatest, typically during winter periods. For most pipelines, including Southern, FERC requires a rate design, known as straight-fixed-variable ("SFV"), that is designed to allow pipelines to recover substantially all of their fixed costs, a return on their equity investment in facilities, and income taxes in the Reservation Fee. Pipelines charge transportation rates for interruptible service for actual volumes transported. Rates for transportation service are discounted by Southern in individual instances to respond to competition in the markets they serve.
Southern's contracts to provide firm transportation service for their customers are for varying amounts and periods of time. The following chart describes the expiration dates and amounts of service covered under the various firm transportation agreements of Southern with their firm transportation customers.
EXPIRATION DATES OF SOUTHERN'S FIRM TRANSPORTATION CONTRACTS
Substantially all of the firm transportation capacity currently available in Southern's two largest market areas is fully subscribed. Nearly all of Southern's firm transportation contracts contain evergreen provisions that automatically extend the term for additional months or years unless notice of termination is given by one of the parties. There can be no assurance that the existing customers of Southern will extend their firm service agreements at the same levels when their current service agreements expire.
Transportation capacity reservation fees to Southern from AGLC and its subsidiary, Chattanooga Gas Company, accounted for approximately 34 percent of Southern's 1998 consolidated revenues. Reservation fees
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to Southern from Alabama Gas Corporation accounted for approximately 12 percent of Southern's 1998 consolidated revenues. No other customer accounted for as much as ten percent of Southern's consolidated revenues for 1998.
Southern and its subsidiaries' pipelines hold easements acquired through either purchase or condemnation for all of their pipeline rights-of-way. Such easements remain valid until the pipeline traversing it is abandoned. Each company has the power to eminent domain if needed in connection with acquiring additional rights-of-way for expansion projects.
Southern's pipeline businesses are subject to operating risks associated with the transmission of natural gas through a pipeline system, which could result in property damage and personal injury. Southern has a comprehensive safety program to address these risks. Southern has consistently ranked at or near the top of its industry peer group in safety performance. Sonat maintains broad insurance coverage on behalf of Southern and its subsidiaries insuring against financial loss resulting from these operating risks.
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.
MARKETS -- SYSTEM EXPANSIONS
Southern continually seeks to expand its pipeline system (i) to reach new markets, (ii) to increase delivery capacity to existing markets to serve the increasing gas demands in its market area, and (iii) to connect new gas supplies, principally in the Gulf of Mexico, to deliver gas not only into Southern's system but also into the interstate pipeline grid.
Demand for natural gas in the six Southeastern states that comprise Southern's principal market area, Alabama, Florida, Georgia, Mississippi, South Carolina, and Tennessee, has grown at an annual average rate of 3.5 percent in the last ten years, compared to the national annual average growth rate for gas demand of 2.6 percent during such period.
In November 1998 Southern placed in service an expansion to its pipeline system that will serve firm transportation commitments totaling 65 million cubic feet of natural gas per day from customers in eastern Tennessee, Georgia, and Alabama. Another expansion to North Alabama, which originally received FERC approval in May 1997, has now received the necessary FERC and other regulatory authorizations to change the route of the pipeline as it crosses the Wheeler National Wildlife Refuge, although the certificate order from the FERC is on appeal for judicial review and the permit from the U.S. Fish & Wildlife Service is on administrative appeal. Barring further unforeseen delays, it is expected that the pipeline will be completed and ready for service for the 1999-2000 winter heating season. The 122-mile expansion will provide 78 million cubic-feet-per-day capacity to the participating customers.
In addition to the general growth in gas demand throughout the Southeast, the use of natural gas to generate electric power represents a significant growth prospect in the market areas of Southern. Since 1994, electric utilities served by Southern have added 23 gas-fired combustion turbine generation units with generating capacity of 1,980 megawatts. These units, which have consumed in excess of 200 MMcf of natural gas on a peak day, are used primarily to meet the utilities' peak generation loads in the summer and winter months.
In late 1998 Southern completed a $10 million, 34 million cubic-feet-per-day expansion in Alabama that primarily provides firm service to a 100-megawatt base load gas-fired electric generation plant operated by Alabama Power Company, a subsidiary of Southern Company. Units of Southern Company had previously installed 19 natural gas-fired peaking turbines that are served by Southern's pipeline, but this is the first natural gas-fired electric generation facility in Southern's market designed for year-round use.
On March 3, 1999, Carolina Power & Light Company ("CP&L") and Southern announced plans to form a 50/50 joint venture to construct, own, and operate a 175-mile, 30-inch, natural gas pipeline from the terminus of Southern's pipeline system in Aiken, South Carolina, to an interconnect with the pipeline system of North Carolina Natural Gas Corporation ("NCNG") in Robeson County, North Carolina. The new
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Palmetto Interstate Pipeline ("Palmetto") will provide a significant interstate natural gas pipeline connection in eastern North Carolina.
Palmetto has a planned initial capacity of 200 million to 300 million cubic feet of natural gas per day and will be expanded to accommodate future growth. CP&L plans to subscribe for a substantial portion of the capacity in Palmetto to fuel new electric generation being developed for its customers in the Carolinas, with the remainder to be used to increase the region's natural gas availability. An open season will start soon for customers to subscribe to firm capacity on the pipeline. Depending upon the resulting firm subscription, the capital cost for Palmetto is expected to be $200 million to $250 million.
The proposed schedule calls for the new pipeline to be operational in April 2002. Construction is scheduled to begin in the summer of 2001, following the completion of engineering and environmental preparation and federal and state permitting. The exact route of the pipeline has not yet been determined, but the pipeline route likely will cross portions of Aiken, Lexington, Richland, Sumter, Lee, Darlington, Marlboro, and Dillon counties in South Carolina and Robeson County, North Carolina. A detailed environmental analysis is under way to establish the most environmentally sound path.
As part of the project Southern will undertake a major expansion of its existing interstate pipeline system, consisting of extensive pipeline looping and additional compression at points from Mississippi to Aiken. The extent of Southern's pipeline expansion, which is expected to cost in excess of $200 million, will depend on capacity requirements. This expansion will provide significant rate and operational benefits to Southern's existing customers.
CP&L is considering sites in North Carolina and northeastern South Carolina for new electric generation to be fueled by the new pipeline. CP&L plans to build about 4,000 megawatts of natural gas-fueled generation by 2007. Some of the new electric generation will be served in conjunction with NCNG, a natural gas distribution company headquartered in Fayetteville, North Carolina, which owns natural gas pipelines that currently serve eastern North Carolina. CP&L is in the process of acquiring NCNG.
The construction of Palmetto and expansion of the Southern system require approval by the FERC as well as other federal and state agencies and is likely to be challenged on both environmental grounds and economic grounds by certain of its competitors, environmental groups, or landowners. Construction is also subject to execution of definitive agreements between CP&L and Southern.
Another growth area for Southern's pipeline business is in expanding production area pipeline capacity to receive and transport projected increases in gas production from the Gulf of Mexico, driven by deep water developments. In March 1997 Southern placed in service a $14 million expansion project that allows producers to transport, under 10-year contracts, 140 MMcf per day of natural gas from offshore Louisiana to interconnections between Southern and other pipelines in South Louisiana. In addition, as described above, the initial construction of the Destin pipeline system has been completed. Destin, which connects with five interstate pipelines in Mississippi, including Southern, enables producers to deliver gas from the eastern deepwater Gulf of Mexico to interstate markets. In June 1998 the FERC approved Destin's application to extend its pipeline system approximately 12 miles to transport additional gas reserves committed by other producers to Destin's system. This extension was partially completed and in service in December 1998 and was placed fully in service in January 1999. In July 1998 the FERC also approved another Destin application to extend its pipeline by approximately 31 miles to transport additional gas reserves committed by other producers to Destin's system. This extension is expected to be in service in the second quarter of 1999.
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Under FERC regulations, a pipeline is allowed to charge rates that are designed to recover fully its cost of providing service to the pipeline's customers, including a reasonable rate of return on its investment in the facilities it uses to provide its service, which is referred to as the rate base of the pipeline. The allowed rate of return includes both a cost of debt component and a return on equity component. The cumulative effect of capital investment required to serve the existing and pending projects in the three growth segments of Southern's pipeline business described above -- market area, electric generation, and production area demand -- together with capital investment for necessary pipeline repair and replacements, has resulted in the growth in rate base for Southern's pipeline businesses as shown in the table below.
RATE BASE (IN MILLIONS OF DOLLARS)
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(1) Includes rate bases of Destin, Etowah, and other joint ventures attributable to Southern's ownership interests.
The amounts estimated for 1999 and 2000 in the foregoing table include (i) currently planned capital expenditures for those years for maintenance, repair, and replacement of the pipeline system, (ii) projects that have received FERC approval and are currently under construction, and (iii) projects that have been agreed to but for which FERC approval has not yet been obtained. The above numbers include no amounts for Palmetto or for the related expansion capital to be spent by Southern. No assurance can be given that such projects, which are subject to protest by customers, competitors, the staff of the FERC, and other interested parties, such as environmental groups and landowners, will be approved by the FERC or, if approved, that such construction will not be delayed for environmental, weather, or other reasons. A pipeline cannot reflect a change in its rate base in its rates until it files a new rate case and a pipeline's rate of return is subject to change every time it files a new rate case. Consequently, there can also be no assurance that the rate of return a pipeline is permitted by the FERC to earn on its rate base in the future will be equal to the returns effectively earned in the past. Thus, the changes in rate base projected above do not necessarily equate to an expected change in earnings.
GAS SALES AND SUPPLIES
As a result of its restructuring pursuant to FERC directive, Southern terminated or renegotiated to market pricing substantially all of its gas supply contracts through which it had historically obtained its long-term gas supply. At December 31, 1998, Southern had five remaining long-term gas supply contracts. Pending the termination or expiration of the few remaining supply contracts, Southern's remaining gas supply is being sold on a month-to-month basis. Except for such sales, Southern's participation in gas supply activities will be limited to the purchase and sale of volumes of gas from time to time as may be required for system management purposes.
RATE AND REGULATORY PROCEEDINGS
Periodically, Southern and its subsidiaries make 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.
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At December 31, 1998, Southern's currently effective rates are established by a settlement that was approved by a FERC order issued in 1995, which order is now final and nonappealable. All of Southern's customers are parties to the settlement. Under the terms of the settlement, Southern is required to file a new rate case no later than September 1, 1999, to become effective, after normal suspension by the FERC, by March 1, 2000
STORAGE FIELDS
Southern owns and operates Muldon Storage Field ("Muldon"), a large underground natural gas storage field in Mississippi connected to its pipeline system. The certificated working storage capacity of Muldon is 31 Bcf of gas. Southern and Tennessee Gas Pipeline Company ("Tennessee"), a subsidiary of El Paso Energy Corporation, an unaffiliated company, each owns 50-percent of the Bear Creek Storage Field ("Bear Creek"), an underground natural gas storage field located in Louisiana. Southern operates Bear Creek, which provides storage service to Southern, Tennessee, and their customers. Bear Creek has a total certificated working storage capacity of 65 Bcf of gas, half of which is committed to Southern.
COMPETITION AND CURRENT BUSINESS CONDITIONS
The natural gas transmission industry, although regulated, is very competitive. Customers purchase gas supply from producers and gas marketing companies in unregulated transactions and contract with Southern for transportation and storage services to deliver such gas supply to their markets. Southern's three largest customers are each able to obtain a significant portion of their natural gas requirements through transportation by other pipelines. In addition, Southern competes with several pipelines for the transportation and storage business of many of its other customers. The competition with such pipelines is intense, and Southern must at times discount their transportation rates in order to maintain market share and revenues.
Natural gas is sold in competition principally with fuel oil, coal, liquefied petroleum gases, electricity, and heavy crude oil. An important consideration in the markets of Southern is the ability of natural gas to compete with alternate fuels, which are fuels to which a potential end user of gas may switch depending on the price of the fuel and other factors. Residual fuel oil, the principal competitive alternate fuel in the market area of Southern, has been at certain times in the past, and may be at times in the future, 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 service in competition with Southern.
As described above, for most pipelines the FERC requires the SFV rate design that permits pipelines to recover substantially all of their fixed costs, a return on equity, and income taxes in the capacity reservation component of their rates. The firm transportation customers of Southern (with the exception of certain small customers) must pay these reservation charges regardless of the volumes shipped. Accordingly, the SFV rate design should result in relative stability in the revenues, earnings, and cash flows of interstate pipelines, including Southern, compared to other rate design methodologies. There can be no assurance, however, that the existing customers of Southern will extend their firm service agreements at the same levels when their current service agreements expire. As described above, Destin's rates are designed to recover all of its fixed and variable costs, including a return on equity and income taxes, through a volumetric rate design. In order to receive firm service at a volumetric rate, Destin's customers must commit to Destin all of their gas production from certain specified areas. Sea Robin's customers principally subscribe for interruptible service, so its revenues are highly dependent on the volumes of gas it transports.
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SOUTHERN PIPELINE SYSTEMS (SOUTHERN PIPELINE SYSTEMS MAP)
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GOVERNMENT REGULATIONS
Southern and its interstate transmission subsidiaries are subject to regulation by the FERC under the NGA and the NGPA.
The NGA 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 interstate transmission 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 regulates rates for the transportation of natural gas in interstate commerce. As necessary, Southern and its interstate transmission 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 on their investment in facilities. 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" above.
In July 1998 FERC issued a Notice of Proposed Rulemaking ("NOPR") in which it seeks comments on a wide range of initiatives to change the manner in which short-term (less than one year) transportation markets are regulated. Among other things, the NOPR proposes the following: (i) removing the price cap for the short-term capacity market; (ii) establishing procedures to make pipeline and shipper-owned capacity more comparable; (iii) auctioning all available short-term pipeline capacity on a daily basis with the pipeline unable to set a reserve price above variable costs; (iv) changing policies on pipeline penalties, nomination procedures, and services; (v) permitting the negotiation of terms and conditions of service; and (vi) potentially modifying the procedures for certificating new pipeline construction. Also in July 1998 FERC issued a Notice of Inquiry ("NOI") seeking comments on FERC's policy for pricing long-term capacity. Comments on the NOPR and NOI are due in April 1999. It is unclear when and what action, if any, FERC will take in connection with the NOPR and NOI and the comments received in response to them, but the resulting regulatory changes could have a significant impact on the businesses of Southern and its natural gas transmission subsidiaries.
Southern and its natural gas transmission 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. Each of them has 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 $23 million in 1998 and $23 million in 1997. Southern anticipates that such expenditures will be approximately $4 million in 1999.
ENVIRONMENTAL MATTERS
Various environmental matters relating to, or that could affect, Southern or one or more of its subsidiaries are described in Part II of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Environmental Issues," which is incorporated herein by reference.
YEAR 2000 PROJECT
The year 2000 issues as they relate to Southern are discussed in Part II of this report in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Year 2000 Project," which is incorporated herein by reference.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report, including the information incorporated by reference herein, contains forward-looking statements regarding the Company's business plans and prospects, objectives, future drilling plans, expansion projects, proposed capital expenditures, and expected performance or results. These forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties and, as a result, actual results may differ materially from those expressed in such forward-looking statements. Such statements are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results to differ include changes in oil and gas prices and underlying demand, which would affect profitability and might cause the Company to alter its plans; the success of the Company's internal cost reduction activities; and the requirements to receive various governmental approvals to proceed with pipeline and storage projects, and unanticipated construction delays in connection with such projects. Realization of the Company's objectives and expected performance can also be adversely affected by the actions of customers and competitors, changes in governmental regulation of the Company's businesses, and changes in general economic conditions and the state of domestic capital markets.
ITEM 2.
ITEM 2. PROPERTIES
A description of Southern's and its subsidiaries' principal properties is included under Item 1. Business above and is hereby incorporated by reference herein.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For information regarding various environmental matters relating to, or that could affect, Southern or one or more of its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this report under the caption "Environmental Issues."
Aline Moye v. Exxon Corporation, et al., CV No. 98-20, is a class action lawsuit filed in state court in Monroe County, Alabama in January 1998 on behalf of royalty owners in the Big Escambia Creek Gas Field ("Field") in Alabama, against Exxon Corporation, a gas producer in the Field, Southern, which purchased or transported gas from the Field, and five other named defendants, alleging that the methods used by the defendants to measure the heating content and volume of natural gas produced from the Field have caused the producer(s) of this gas to underpay royalties owed to the royalty owners. The complaint seeks recovery of actual damages based upon the allegedly unpaid royalties as well as punitive damages, the amount of which are not specified in the complaint. Although it cannot predict the outcome, Southern believes that the methods of measurement were appropriate and intends to defend the suit vigorously.
United States of America ex rel. Jack J. Grynberg v. Southern Natural Gas Company, et al., U.S. District Court, E.D. La., CV No. 97-2087. Southern received a letter from the United States Department of Justice on August 31, 1998, enclosing a copy of a complaint that was filed, but not served, by Jack J. Grynberg in 1997 against Southern, its wholly owned subsidiary, Sea Robin, and a number of affiliated companies in the United States District Court for the Eastern District of Louisiana. Grynberg filed the suit on behalf of the United States Government under 31 U.S.C. sec.3729, et seq., commonly known as the False Claims Act, alleging that the methods used by the defendants to measure the heating content and volume of gas purchased or transported by them have caused producers of natural gas to underpay royalties owed by the producers to the United States. The complaint also alleges that the defendants deprived the United States of appropriate royalties by selling gas to affiliated companies at artificially low prices, which were the basis for payment of royalties to the United States, and that the affiliates resold the gas to third parties at higher prices. The complaint seeks recovery of actual damages based upon the unpaid royalties owed, the amount of which is not specified in the complaint. Such damages may be trebled under the False Claims Act. The Complaint is similar to 76 other complaints that Grynberg has filed in various federal district courts against virtually every firm that has purchased gas from federal leases in the past ten years.
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The complaint makes allegations similar to those in a 1995 complaint that Grynberg filed under the False Claims Act against Southern, Sea Robin, and 68 other defendants in the United States District Court for the District of Columbia, which was dismissed on procedural grounds. The Justice Department has requested Southern and the defendants in the other 76 cases to address the allegations in the complaints in order for the Justice Department to determine whether to intervene and take over the cases as provided by the False Claims Act, which Southern and the other defendants have done. Southern believes that its and Sea Robin's measurement practices conformed to Department of Interior regulations, industry standards, and the terms of the applicable tariffs, which are filed with the FERC. Southern also believes that the prices its affiliates paid were equal to the prices paid in comparable arms-length transactions and are in compliance with applicable Department of Interior regulations. As a result, Southern believes that it and its affiliates have meritorious defenses to the complaint and intends to defend the suit vigorously whenever it is served and the suit goes forward.
Southern Natural Gas Company v. O. D. Chafin, et al., Circuit Court of Cullman County, CV No. 96-217. Southern initiated a proceeding in 1996 to obtain a right-of-entry to the subject property in order to perform pipeline surveys. In September 1997, Chafin, et al., filed a class-action counterclaim against Southern that seeks (i) to keep any condemnation action in state court (Southern had filed condemnation actions in federal court), (ii) to enjoin construction of the North Alabama pipeline project, and (iii) unspecified compensatory and punitive damages. Chafin, et al. also filed a motion for conditional class certification, which the Court granted ex parte. In October 1997, Southern filed to dismiss the counterclaim and to reconsider the class certification. The court did not rule on Southern's motion, but placed the case on its administrative (inactive) docket, where it remains. Southern believes that it is procedurally incorrect for a counterclaim to be filed to a right-of-entry action and that Southern has meritorious defenses to the counterclaim and class certification. Since the filing of the motion for conditional class certification, the Alabama Supreme Court has decided several cases that would prevent the type of ex parte action taken by the Cullman County Circuit Court.
Southern and its subsidiaries are involved in a number of 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 it.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the common stock of Southern Natural Gas Company is held by its parent company, Sonat Inc. (see Note 12 of the Notes to Consolidated Financial Statements); accordingly, there is no market for the stock. No dividends were paid in either 1998 or 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for Southern Natural Gas Company and its subsidiaries is shown below:
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(1) Net income in 1995 includes a loss of $6.8 million on unrecoverable gas contract realignment costs at Southern Natural Gas. (2) Net income in 1994 includes a charge of $16.6 million related to Southern Natural Gas' Customer Settlement and gas supply realignment costs (GSR) and $20.6 million related to a reduction in work force and other matters.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The principal business of Southern Natural Gas Company and its subsidiaries (Southern) is the transmission and storage of natural gas in interstate commerce in the southeastern United States. Southern is actively pursuing opportunities to expand its pipeline system in its traditional market areas and to connect new gas supplies.
In April 1997, units of Shell Oil Company (Shell) and BP Amoco Corporation (BP Amoco) joined with Southern Natural Gas in the ownership of Destin Pipeline Company L.L.C. (Destin), a 1 billion-cubic-feet-per-day pipeline designed to transport natural gas from growing production areas in the eastern Gulf of Mexico. Southern Natural Gas has a one-third interest in this pipeline. Shell, BP Amoco, and other shippers have dedicated their production from certain leases in the eastern Gulf of Mexico to Destin for transportation under Destin's flexible firm rate schedule. Construction of the pipeline began in December 1997. The pipeline was partially completed and in service in September 1998, and was fully in service in March 1999. In June 1998, the Federal Energy Regulatory Commission (FERC) approved Destin's application to extend its
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pipeline system approximately 12 miles to transport additional gas reserves committed by other producers to Destin's system. This extension was partially completed and in service in December 1998 and was placed fully in service in January 1999. In July 1998, the FERC also approved another Destin application to extend its pipeline by approximately 31 miles to transport additional gas reserves committed by other producers to Destin's system. This extension is expected to be in service in the second quarter of 1999. As of March 1999, the total capital to be expended by Destin is estimated to be $475 million.
Southern Natural Gas placed in service two expansions to its pipeline system during 1998 and expects to place a 122-mile, 78 million-cubic-foot-per-day expansion to North Alabama in service this year barring further unforeseen delays. The two expansions placed in service during 1998 include firm transportation commitments totaling 65 million cubic feet of natural gas per day from customers in eastern Tennessee, Georgia and Alabama and 34 million cubic feet per day from Alabama Power Company and two other customers.
OPERATIONS
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(1) Southern's investment in Sonat Intrastate-Alabama Inc., a small intrastate pipeline subsidiary, was transferred to Sonat Inc. on January 1, 1997.
1998 Versus 1997. Earnings before interest and taxes (EBIT) was $210.0 million in 1998 compared with $197.8 million in 1997. EBIT improved primarily due to lower general and administrative expenses and higher equity in earnings of unconsolidated affiliates. System expansions also increased operating results,
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partly offset by declining results at Sea Robin Pipeline Company (Sea Robin) as a result of lower interruptible throughput.
The market transportation and storage revenue increase was due to higher firm transportation revenues associated with expansion projects completed in 1998. Supply transportation revenues decreased primarily due to lower interruptible throughput on the Sea Robin system. Other revenues decreased due to a favorable $10 million reserve adjustment in 1997 relating to Southern Natural Gas' obligation to pay royalty claims in connection with take-or-pay settlements entered into in the 1980's, offset partially by the reversal of the remaining $4.2 million of royalty reserves in 1998. Such reversal was made because management determined that the likelihood of Southern Natural Gas making any significant royalty payments as a result of its prior take-or-pay settlements was remote. Operating and maintenance expense increased primarily due to the difference in proceeds recognized on the disposition of assets between 1997 and 1998, offset by favorable fuel expenses in 1998. Both 1998 and 1997 periods include positive effects related to the sale of assets. General and administrative expenses decreased primarily due to lower stock-based compensation, employee benefit, insurance and professional services expenses.
Equity in earnings of unconsolidated affiliates increased primarily due to the inclusion of Southern's share of earnings in Destin, slightly offset by lower earnings from Bear Creek Storage Company. Destin's earnings increase was the result of higher allowance for funds used during construction (AFUDC) capitalized in 1998 as compared with 1997 levels. The Company expects Destin's 1999 earnings will be lower than 1998 as operating revenues are adversely affected by currently anticipated delays in the development of the substantial offshore discoveries of Shell and BP Amoco that are dedicated to the Destin system. Other, net decreased in 1998 compared to 1997 primarily due to a non-recurring gain in 1997 on the termination of Southern's interest rate forward agreement of $2.4 million. This decrease was slightly offset by higher AFUDC.
1997 Versus 1996. EBIT for Southern was $197.8 million in 1997 compared with $182.2 million in 1996. EBIT improved primarily due to lower general and administrative expenses. Also favorably impacting EBIT were expansions and improved results at Sea Robin. Partly offsetting was warmer winter weather during 1997 which negatively affected operating results.
Market transportation revenues decreased primarily due to lower volumes resulting from warmer weather and the transfer of Southern's ownership of a small intrastate pipeline to Sonat, which was immaterial to operating results, partially offset by increased revenues from expansions. Supply transportation revenues increased due to higher volumes. Other revenues in 1997 includes the favorable $10 million reserve adjustment discussed above. Operating and maintenance expense increased slightly primarily due to higher fuel expense. Operating and maintenance expense in both periods included positive effects related to the disposition of assets. General and administrative expenses decreased primarily due to lower stock-based compensation and employee benefit expenses in 1997 and a $9.0 million donation to the Sonat Foundation in 1996.
Equity in earnings of unconsolidated affiliates increased primarily due to the inclusion of Southern's share of earnings in the Destin Pipeline joint venture and slightly higher earnings from Bear Creek Storage Company. Other, net increased in 1997 compared to 1996 primarily due to higher levels of AFUDC at Southern recognized during construction of its expansions, offset slightly by lower gains recognized on the termination of an interest rate forward agreement associated with an anticipated financing that did not occur.
Natural Gas Sales and Supply
Sales by Southern of natural gas are anticipated to continue only until Southern's remaining supply contracts expire, are terminated, or are assigned. As a result of its restructuring pursuant to FERC directives in past years, Southern terminated or renegotiated to market pricing substantially all of its gas supply contracts through which it had historically obtained its long-term gas supply. Pending the termination or expiration of the few remaining supply contracts, Southern's remaining gas supply is being sold on a month-to-month basis. Because Southern is primarily a gas transporter and does not realize significant margins on gas sales, the net of gas sales revenues and natural gas cost is included in other revenue.
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Except for the sale of its remaining gas supply described above, Southern's participation in gas supply activities will be limited to the purchase and sale of gas from time to time as may be required for system management purposes.
Southern's annual purchase commitments total less than $21 million per year for 1999 and subsequent years. Based on Southern's current expectations with respect to natural gas prices in 1999 and the years following, an immaterial volume of gas is expected to be at prices above market.
Rate Matters
Under terms of a customer settlement approved by the FERC (the Customer Settlement), all of Southern Natural Gas' previously pending rate proceedings and proceedings to recover gas supply realignment and other transition costs associated with the implementation of FERC Order No. 636 were resolved. The settlement requires Southern Natural Gas to file a new rate case no later than September 1, 1999. Southern expects the rates filed in that rate case to become effective after normal suspension by the FERC on March 1, 2000, subject to refund upon conclusion of the rate case. ---------------------
Other Income Statement Items
1998 Versus 1997. Net interest expense increased in 1998 compared to 1997 due to higher average levels of outside debt and higher accruals for interest on taxes. The increase was partially offset by a slight decline in average interest rates on debt and higher interest income resulting from higher loan balances to Southern Natural Gas Company's parent, Sonat Inc. (see Note 12 of the Notes to Consolidated Financial Statements). In addition, interest capitalized increased due to Southern's expansion programs.
1997 Versus 1996. Net interest expense decreased in 1997 compared to 1996 due to lower interest expense, slightly offset by lower interest income. Interest expense decreased due to lower average regulatory reserve balances, and lower average debt levels with Sonat Inc. The decline was slightly offset by higher average levels of outside debt. Interest income was lower due to lower average balances of loans to affiliates and lower GSR related interest income due to the recording of the Customer Settlement in the second quarter of 1996. Interest capitalized increased due to Southern's expansion programs.
1998 Versus 1997. Income tax expense increased $2.3 million in 1998 compared to 1997 due to higher pretax income (see Note 7 of the Notes to Consolidated Financial Statements).
1997 Versus 1996. Income tax expense increased $8.5 million in 1997 compared to 1996 due to higher pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
1998 Versus 1997. Cash flows from operations decreased $25.3 million compared to the 1997 period. The primary reasons for the decrease were a $16.6 million decrease in the change in accounts receivable II-4
primarily due to lower receipts from the sale of microwave rights and a $13.6 million decrease in the change in accounts payable primarily due to lower gas purchases related to declining transition gas sales, and the timing of storage gas purchases and intercompany settlements.
The change in deferred taxes was primarily attributable to an increase in plant in service and the adjustment of the salvage value of certain fixed assets (see Note 5 of the Notes to the Consolidated Financial Statements). Equity in the earnings of unconsolidated affiliates increased due to higher earnings of Destin. The change in reserves for regulatory matters reflects the royalty reserve adjustments in 1998 and 1997, which were discussed earlier. The change in GSR costs was due to lower recovery levels from customers.
1997 Versus 1996. Cash flow from operations increased $32.7 million compared to the 1996 period. The primary reason for the increase was $34.0 million of cash refunds paid to customers in 1996.
Other than the refunds discussed above, the change in GSR costs and the change in reserves for regulatory matters were attributable to the Customer Settlement in 1996. In addition, the change in deferred income taxes and accrued income taxes is also primarily due to the Customer Settlement. The expiration of two gas purchase contracts in 1997 was the primary reason for the change in both accounts receivable and accounts payable.
The change in Other, net is primarily due to $41.2 million of accrual reversals related to the Customer Settlement and interruptible transportation revenue refunds of $13.5 million, both of which occurred in 1996.
1998 Versus 1997. Net cash used in investing activities was $21.0 million less compared with the 1997 period. The decrease was attributable to repayments to Southern Natural Gas of loans in the current period by Southern's parent, Sonat Inc. Sonat had borrowed funds from Southern Natural Gas in the prior period. Partially offsetting the change in intercompany loans were higher capital expenditures related to Southern Natural Gas' expansion programs in 1998, and higher investments in unconsolidated affiliates, primarily for the Destin Pipeline joint venture.
1997 Versus 1996. Net cash used in investing activities was $246.6 million higher in 1997 compared to 1996. The increase was primarily attributable to increased loans by Southern Natural Gas to Sonat in the 1997 period, including the net proceeds of the issuance of $100.0 million in notes, compared to repayments in the 1996 period. The increase in investments in unconsolidated affiliates primarily reflects Southern's investment of $39.1 million in the Destin Pipeline joint venture during 1997.
1998 Versus 1997. Net cash provided by financing activities was essentially unchanged in 1998 compared to the 1997 period. Southern Natural borrowed $100.0 million in the public market in both periods.
1997 Versus 1996. Financing activities provided $92.4 million in 1997 compared to requiring $120.5 million in 1996. The change primarily reflects the issuance of $100.0 million in notes under Southern's shelf registration statement in the 1997 period and dividend payments to Sonat of $99.6 million in the 1996 period.
Capital Resources
At December 31, 1998, Southern Natural Gas had bank lines of credit with a total capacity of $50.0 million, all of which was available. Southern Natural Gas also has a shelf registration statement with the Securities and Exchange Commission which provides for the issuance of up to $500.0 million in debt securities of which $100.0 million has been issued.
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Southern's capital expenditures and other investing requirements for 1999 are budgeted to aggregate approximately $171.0 million. This amount reflects investments in unconsolidated affiliates, expansions and other projects.
Southern expects to continue to use cash from operations and borrowings in either the public or private markets or loans from affiliates to finance its capital and other corporate expenditures.
MARKET RISK
Financial instruments of Southern expose it to interest rate risk. Southern's entire portfolio of interest rate risk instruments is classified as non-trading.
Southern's interest income is sensitive to changes in the level of short-term interest rates in the United States. In general, Southern Natural Gas either loans excess funds to Sonat or repays its short-term borrowings. Excess cash generated by or contributed to joint venture projects is invested on a short-term basis pending distribution or expenditure on capital projects.
At December 31, 1998, Southern had no variable rate debt. Fixed-rate long-term debt, which was $411.2 million (fair value of $434.9 million) at December 31, 1997, increased 23 percent. Southern Natural Gas' note receivable from its parent, Sonat Inc. decreased from $89.3 million at December 31, 1997 to $22.3 million at December 31, 1998. In 1998, Southern Natural Gas purchased a $45.0 million note receivable from Mississippi Business Finance Corporation (see Note 4 of the Notes to Consolidated Financial Statements). In 1996, Southern entered into an interest rate forward agreement to hedge the interest rate risk of an anticipated future borrowing. The agreement has been terminated and Southern has no other derivative instruments (see Note 3 of the Notes to Consolidated Financial Statements).
The following table provides information about Southern's financial instruments that are sensitive to changes in interest rates. The table presents long-term debt maturity amounts and related weighted-average interest rates by expected maturity dates.
INTEREST RATE RISK INSTRUMENTS
PRINCIPAL AMOUNT BY EXPECTED MATURITY AND AVERAGE INTEREST RATE
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the past several years and has not significantly affected the profitability of Southern. To be able to recover higher costs of operations, Southern has to file general rate cases. Southern Natural Gas' Customer Settlement requires it to file a new rate case no later than September 1, 1999.
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ENVIRONMENTAL ISSUES
The operations and properties of Southern are subject to extensive and changing federal, state, and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation, and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may require the acquisition of a permit or other authorization before construction commences and for certain other activities, limit or prohibit construction, and other activities on certain lands lying within wilderness or wetlands and other protected areas and impose substantial liabilities for pollution resulting from operations. The permits required for various operations are subject to revocation, modification, and renewal by issuing authorities. Southern believes that its operations currently are in substantial compliance with applicable environmental regulations.
Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines or injunction, or both. Southern does not expect environmental compliance matters to have a material adverse effect on its financial position or results of operations. It is also not anticipated that Southern will be required in the near future to expend amounts that are material to its financial condition or operations by reason of environmental laws and regulations, but because such laws and regulations are frequently changed, and may impose increasingly stricter requirements, Southern is unable to predict the ultimate cost of complying with such laws and regulations.
In the operation of their natural gas pipeline systems, Southern Natural Gas and its wholly owned subsidiaries, South Georgia Natural Gas Company (South Georgia) and Sea Robin, have used, and continue to use at several locations, gas meters containing elemental mercury. Southern Natural Gas, South Georgia and Sea Robin plan to remove all remaining mercury meters during the course of regularly scheduled facilities upgrades. Mercury and mercury meters are handled pursuant to procedures that are designed to protect employees and the environment and to 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. Based on its previous determination that its pipeline meters may in the past have been the source of small releases of elemental mercury, Southern Natural Gas and Sea Robin have completed the characterization of their sites in Alabama, Georgia, Louisiana, and Mississippi. Characterization of potential sites on the pipeline system of South Georgia has not yet commenced. At this time, only the State of Georgia has issued formal guidelines for remediation of mercury sites, although the State of Louisiana has issued informal guidance. Southern filed copies of the characterization reports with the State of Georgia and the State is evaluating what remediation actions, if any, are necessary. Southern is unable to estimate the cost of mercury remediation because costs will vary based on a number of factors particular to each site and because regulatory guidance is still uncertain for all sites. Based on its experience with other remediation projects, industry experience to date with remediation of mercury, and its preliminary characterization data, Southern believes that the cost of its characterization and remediation of any mercury contamination will not be material to Southern's financial position or results of operations.
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, generally will seek recovery of such costs through rate filings, although no assurance can be given with regard to their ultimate recovery.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income as changes occur. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other
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comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS No. 133 becomes effective for fiscal years beginning after June 15, 1999. As a result, calendar year-end companies have until January 1, 2000, to adopt. Early application is encouraged, but only permitted as of the beginning of any fiscal quarter. Retroactive application to previous periods, even previous quarters within the same fiscal year, is not permitted. Southern does not currently have any derivative instruments.
YEAR 2000 PROJECT
The following disclosure contains forward-looking statements. Southern's ability to meet its objectives identified below is dependent upon several factors that could cause actual results to differ materially from those set forth below, including the timely provision of necessary upgrades and modifications by suppliers. In addition, Southern cannot guarantee that third parties on whom it depends for essential services will convert their critical systems and processes in a timely manner. Each of the phases of Southern's Year 2000 project is progressing and Southern believes that it is taking all reasonable and appropriate steps necessary to be able to operate in the Year 2000 and beyond.
To answer the Year 2000 challenge, the Sonat Board of Directors directed that a corporate-wide initiative be undertaken of which Southern's effort is a component. A consulting firm was engaged to assist in this effort. Southern has divided its Year 2000 project into assessment, remediation, testing, and contingency planning phases. During the assessment phase, Southern completed a comprehensive inventory of IT systems, embedded systems, equipment, computer hardware, and software that rely on a computer chip as well as service providers that could be impacted by the Year 2000 problem. For vendor supplied items, Southern has contacted its vendors seeking written verification of Year 2000 readiness. In addition, Southern continues to contact entities with whom it has a material relationship, such as natural gas suppliers, pipelines, electric utilities, telecommunication service providers, banks, and other suppliers of goods and services, to determine the extent to which Southern is vulnerable to the failure of those third parties to remediate their Year 2000 issue.
Southern is currently engaged in the remediation and testing phases of the Year 2000 project. The remediation phase includes completing the replacement of mainframe systems with Year 2000-ready vendor packages on new client/server platforms and performing any required modifications and upgrades identified during the assessment phase. The testing phase involves testing systems for Year 2000 readiness. Southern has completed remediation and testing for all of its critical systems. Non-critical systems are scheduled to be remediated and tested by June 30, 1999.
Southern relies on producers of natural gas, natural gas pipelines, natural gas distribution companies, and natural gas marketing companies. External infrastructure, such as electric, telecommunication, and water service is also necessary for Southern's basic operations. Should any third party with which Southern has a material relationship fail, the impact could become a significant challenge to Southern's ability to perform its basic operations. Due to the nature of Southern's business, extensive contingency plans are already in place, including plans to provide pipeline system reliability. Because of the additional uncertainties caused by the Year 2000 problem, Southern is developing additional contingency plans as practicable for critical systems, service providers, and business partners. A consulting firm has been engaged to assist in this effort. These plans involve developing contingencies for failures that may result from the Year 2000 problem, and include plans to establish control centers to facilitate communications in the event of a telecommunications failure and staffing at selected locations on Southern's pipeline system. Southern is scheduled to have these plans completed by June 30, 1999.
The estimated cost to Southern of the Year 2000 project for capital as well as general and administrative costs is expected to be $2.5 million to $5 million. As of December 31, 1998, Southern has incurred approximately $1.1 million in Year 2000 project costs. Southern expects to fund Year 2000 expenditures from normal operations. The timing of expenditures is not indicative of readiness efforts or progress to date.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements regarding Southern's business plans and prospects, objectives, expansion projects, proposed capital expenditures and expected performance or results. These forward-looking statements are based on assumptions that Southern believes are reasonable, but are subject to a wide range of risks and uncertainties and, as a result, actual results and experience may differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Such statements are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results to differ include the requirements to receive various governmental approvals to proceed with expansion projects and unanticipated construction delays in connection with such projects. Realization of Southern's objectives and expected performance can also be adversely affected by the actions of customers and competitors, changes in governmental regulation of Southern's businesses, and changes in general economic conditions and the state of domestic capital markets. There can be no assurance that Destin will be able to timely connect new fields or that the production from those fields will allow it to meet its planned throughput objectives.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, 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, 1998 and 1997, and the related consolidated statements of income, changes in retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama January 19, 1999
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
See accompanying notes.
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SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description -- Southern Natural Gas Company, which is a wholly owned subsidiary of Sonat Inc. (see Note 12), is primarily engaged in the transmission of natural gas in interstate commerce. Its transmission systems are located in the Southeastern United States. Transportation service is provided for its distribution customers, direct industrial customers and other end-users, gas producers, other gas pipelines, and gas marketing and trading companies. It provides transportation service in both its gas supply and market areas. The principal industries served directly by Southern's pipeline system and indirectly through its distribution customers' systems include the electric generation, fertilizer, chemical, pulp and paper, textile, primary metals, stone, clay and glass industries. For information concerning major customers, see Note 9. For a description of financial instruments and credit risk, see Note 3.
Principles of Consolidation -- The Consolidated Financial Statements include the accounts of Southern Natural Gas Company and its subsidiaries (Southern). Intercompany transactions and accounts have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates owned 50 percent or less.
Certain amounts in the 1997 and 1996 Consolidated Financial Statements and Notes have been reclassified to conform with the 1998 presentation.
Use of Estimates in the Preparation of Financial Statements -- In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventories -- Inventories consist of materials and supplies utilized for ongoing replacements and expansions that are reviewed regularly and adjusted to their net realizable value.
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. Imbalances incurred prior to implementation of Order No. 636 are settled through the exchange of gas. Imbalances incurred after implementation of Order No. 636 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. Southern reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment was required in any of the three years in the period ended December 31, 1998. (See Note 5.)
Gas Supply Realignment (GSR) Costs -- GSR costs were incurred by Southern to amend or terminate, or to purchase gas at above-market prices under, its gas purchase contracts as a result of the separation of its sales, transportation, and storage services mandated by Federal Energy Regulatory Commission (FERC) directive.
Revenue Recognition -- Revenue is recognized from natural gas transportation and storage in the period the service is provided. Reserves are provided on revenues collected subject to refund when appropriate.
Environmental Expenditures -- Southern and its subsidiaries provide for environmental liabilities when environmental assessments and/or remediation are probable and such costs can be reasonably estimated. Accruals for environmental remediation liabilities are not material and have not been discounted.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capitalization of Interest -- Southern capitalizes the costs of debt and equity funds used on major projects during construction. The rates used by regulated companies are calculated pursuant to FERC regulations. The allowance for equity funds is included in Other Income, Net.
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 used in the consolidated return.
Southern and its subsidiaries follow a liability and asset approach in accounting for income taxes. Deferred tax liabilities and assets are determined using the tax rate for the period in which those amounts are expected to be paid or received. (See Note 7.)
2. CHANGES IN OPERATIONS
On January 1, 1997, Southern transferred its investment of $23,612,000, including a retained earnings deficit of $443,000, in Sonat Intrastate-Alabama (SIA) to Sonat. Other Capital in the Consolidated Balance Sheet was adjusted to reflect the transfer. For the year ended December 31, 1996, SIA had revenues of $24,399,000 and a net loss of $630,000.
3. FINANCIAL INSTRUMENTS
Southern's entire portfolio of financial instruments is classified as Other Than Trading. The carrying amounts and fair values of Southern's financial instruments are as follows:
The following methods and assumptions were used by Southern in estimating its fair value disclosures for balance sheet financial instruments:
Cash, notes receivable from affiliates and GSR costs -- The carrying amount reported in the Consolidated Balance Sheets approximates its fair value.
Long-term debt -- The fair values of long-term debt are based on quoted market values or estimated using discounted cash flow analyses, based on Southern's current incremental borrowing rates for similar types of borrowing arrangements.
FINANCIAL RISK
On January 22, 1996, Southern entered into an interest rate forward agreement to hedge the interest rate risk of an anticipated future borrowing under an existing shelf registration statement. In September 1996, due
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCIAL INSTRUMENTS (CONTINUED) to revised expectations of external financing requirements, 50 percent of the interest rate forward agreement was liquidated resulting in a gain of $3.9 million. A gain of $2.4 million was recognized upon final settlement of this agreement in 1997.
CREDIT RISK
Southern's financial instruments from unaffiliated parties that are exposed to concentrations of credit risk consist primarily of accounts receivable and GSR costs which Southern expects to recover from its customers.
Accounts receivable of Southern relate to business conducted with gas distribution companies, municipalities, gas districts, industrial customers and 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. Accounts receivable are stated net of valuation allowances of $2.2 million in 1998 and $1.9 million in 1997.
4. UNCONSOLIDATED AFFILIATES
At December 31, 1998, Southern's investment in unconsolidated affiliates totaled $153.7 million and equaled its share of underlying equity in net assets of the investees. Through December 31, 1998, Southern's cumulative equity in earnings of its unconsolidated affiliates was $185.5 million and cumulative dividends received from them totaled $159.1 million.
A subsidiary of Southern owns 50 percent of Bear Creek Storage Company (Bear Creek), an underground gas storage company. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
In 1995 Southern executed a Capital Contribution Agreement in connection with the project financing for Bear Creek from The Prudential Insurance Company of America. In the event that Bear Creek does not refinance the remaining principal, this agreement provides that Southern and its partner will contribute $21.0 million each to Bear Creek on October 31, 2000, to provide funds to enable Bear Creek to make a principal payment due under the financing.
In April 1997, units of Shell Oil Company and BP Amoco Corporation joined with Southern Natural Gas in the ownership of Destin, a 1 billion-cubic-foot-per-day pipeline designed to transport natural gas from growing production areas in the eastern Gulf of Mexico. Construction of the pipeline began in December 1997. Destin was partially completed and placed in service in September 1998, and was fully in service in March 1999. The FERC has approved two extensions of Destin which extend its pipeline by 43 miles. The following is summarized financial information for Destin.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. UNCONSOLIDATED AFFILIATES (CONTINUED)
In November 1998 Destin issued bonds to the Mississippi Business Finance Corporation (MBFC) in the amount of $135.0 million. The three members of Destin each purchased $45.0 million of these bonds from the MBFC, which loaned the proceeds from the sale of the bonds to Destin. Destin used the proceeds from this loan to finance the construction of its pipeline project, which allowed it to return invested capital to its three members.
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION
A summary of plant, property and equipment by classification follows:
Other plant, property and equipment includes construction work in progress of $70.6 million and $58.6 million at December 31, 1998 and 1997, respectively.
II-19 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED) The accumulated depreciation and amortization amounts by classification are as follows:
The annual depreciation rates by classification are as follows:
During the first quarter of 1998, Southern recognized the effect of a change in salvage values, including reversal of excess depreciation expense, relating to certain fixed assets, primarily aircraft and vehicles. The change, which was to comply with FERC directives, increased net income for the year ended December 31, 1998, by approximately $4.6 million.
6. DEBT AND LINES OF CREDIT
Long-Term Debt -- Long-term debt consists of:
Southern had no restrictions on the payment of dividends at December 31, 1998.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND LINES OF CREDIT (CONTINUED) Annual maturities of long-term debt at December 31, 1998, are as follows:
In September 1998, Southern Natural Gas made a public offering of $100.0 million of its 6.125 percent Notes due September 15, 2008, at 99.531 percent to yield 6.189 percent. The proceeds from the offering were initially loaned to Sonat to be later used for general corporate purposes, including capital expenditures.
Unsecured Notes -- As part of Sonat's cash management program, Southern can either loan funds to or borrow 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.
At December 31, 1998, Southern had available short-term lines of credit of $50.0 million available through May 31, 1999. Borrowings are available for a period of not more than 364 days and are in the form of unsecured promissory notes that bear interest at rates based on the banks' prevailing prime, international or money-market lending rates. At December 31, 1998 and 1997, no amounts were outstanding.
7. INCOME TAXES
An analysis of Southern's income tax expense is as follows:
II-21 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED) Net deferred tax liabilities are comprised of the following:
Southern has 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.
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:
8. COMMITMENTS AND CONTINGENCIES
Rate Matters -- Periodically, Southern makes general rate filings with the Federal Energy Regulatory Commission (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 provides reserves relating to such amounts collected subject to refund, as appropriate, and make refunds upon establishment of the final rates. At December 31, 1998, Southern's rates are established by a settlement that was approved by FERC orders issued in 1995 and 1996. All of its customers are parties to the settlement.
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, provides that rate-regulated entities account for and report assets and liabilities consistent with the economic effect of the way in which regulators establish rates, if the rates established are designed to recover costs of providing the regulated service and if the competitive environment makes it reasonable to assume such rates can be charged and collected. Certain expenses and credits subject to rate determination normally reflected in income are deferred in the balance sheet and are recognized in income as the related amounts are included in service rates and
II-22 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED) recovered from or refunded to customers. Information regarding Southern's regulatory assets and liabilities is shown below:
SFAS No. 109 tax gross-up is recorded pursuant to FERC policies allowing future recovery of taxes associated with the allowance for funds used during construction (AFUDC). Unrecovered depreciation represents amounts to be recovered in future rates pursuant to a 1992 FERC settlement. Cash out differential represents the amount of price differential cost associated with storage transactions recoverable pursuant to Southern Natural Gas' customer settlement. Excess deferred tax due customers represents amounts due customers pursuant to federal tax rate normalization.
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.
At December 31, 1998, future minimum payments for non-cancelable operating leases for the years 1999 through 2003 are less than $3 million per year.
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
The following table shows revenues from major customers:
II-23 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES (CONTINUED) Southern enters 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 are based on the same terms as nonaffiliates.
The following table shows revenues and charges from Southern's affiliates:
10. RETIREMENT PLANS AND OTHER BENEFITS
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 vest after a period of 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. Sonat has a trust to provide benefits under the Supplemental Plan. However, it is not subject to any funding requirements.
The following tables set forth the benefit obligation and assets of the plans and the changes in the benefit obligation and plan assets:
II-24 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED) The following table sets forth the funded status of the plans and the amount of the net pension asset recognized in Southern's Consolidated Balance Sheets:
The projected benefit obligation and accumulated benefit obligation for the pension plan with accumulated benefit obligations in excess of plan assets were $11.9 million and $7.1 million, respectively, as of December 31, 1998 and $12.7 million and $7.9 million, respectively, as of December 31, 1997.
The assumed rates used to measure the projected benefit obligations and the expected earnings of plan assets are:
II-25 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED) Southern's net periodic pension income consists of the following components:
Other Postemployment Benefits -- Southern has benefit plans that provide for postretirement health care and life insurance benefits to substantially all of its employees when they retire. Southern accrues 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.
The following tables set forth the benefit obligation and assets of Southern's postretirement health care and life insurance plans and the changes in the benefit obligation and plan assets:
II-26 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED) The following table sets forth the funded status and amount of the net pension liability at December 31, 1998 and 1997, for Southern's postretirement health care and life insurance plans:
The assumed rates used to measure the projected benefit obligation and the expected earnings of plan assets are:
The rate of increase in the per capita costs of covered health care benefits is assumed to be 4.5 percent in 1999 and for all future years.
Southern's net periodic cost for postretirement health care and life insurance benefits consists of the following components:
II-27 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLANS AND OTHER BENEFITS (CONTINUED) A one-percentage-point change in assumed health care cost trend rates would have the following effects:
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 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. Commencing in November 1995, Sonat has issued, in tandem with its regular stock options, SARs that are exercisable only in the event of a change in control (limited SARs). In November 1995, limited SARs were issued to certain key employees of Southern with respect to all of their then outstanding options. No other SARs have been issued since 1990.
Sonat issued to employees of Southern 1,500 shares of restricted stock with a market value of $43 7/8 per share during 1998, 4,600 shares with a market value of $43 13/16 per share during 1997 and 16,400 shares with a market value of $52.00 per share during 1996. 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, 1998, 41,432 of the 68,200 cumulative restricted shares issued have vested.
Stock-based compensation expense increased Southern's pretax income by $2.4 million in 1998, $0.9 million in 1997 and decreased Southern's pretax income by $6.0 million in 1996.
11. QUARTERLY RESULTS (UNAUDITED)
Selected unaudited quarterly data is shown below:
See Note 5 for a discussion of the effect of a change in salvage values which occurred in the first quarter of 1998.
II-28 SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENT (UNAUDITED)
On March 13, 1999, Southern's parent company, Sonat Inc. and El Paso Corporation (El Paso) entered into an Agreement and Plan of Merger (the Merger Agreement), providing for, among other things, the merger of El Paso and Sonat. Under the terms of the Merger Agreement, Sonat's shareholders will receive one share of El Paso common stock, par value $3.00 per share, for each share of common stock, par value $1.00 per share, of Sonat, they own. The merger is subject to certain customary conditions, including, among others, approval by the stockholders of Sonat and receipt of certain required government approvals.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Southern has not had a change in accountants within twenty-four months prior to the date of its most recent consolidated financial statements or in any period subsequent to such date.
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PART IV
ITEM 14.
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
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted as not being applicable or because the subject matter is either not present or is not present in amounts sufficient to require submission of the schedule, in accordance with the instructions contained in Regulation S-X, or the required information is included in the financial statements or notes thereto.
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
3. EXHIBITS(1)
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance upon General Instruction I(2)(b) of Form 10-K.
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(1) Southern will furnish to requesting security holders any exhibit on this list upon the payment of a fee of $.10 per page up to a maximum of $5.00 per exhibit. Requests must be made in writing and should be addressed to R. David Hendrickson, Secretary, Southern Natural Gas Company, P. O. Box 2563, Birmingham, Alabama 35202. IV-2
Exhibits listed above that 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 ten percent 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, 1998.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed electronically with this report on Form 10-K.
IV-3
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/ JAMES C. YARDLEY ------------------------------------ JAMES C. YARDLEY PRESIDENT
Dated: March 24, 1999
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.
IV-4
APPENDIX TO ANNUAL REPORT ON FORM 10-K OF SOUTHERN NATURAL GAS COMPANY FOR THE YEAR ENDED DECEMBER 31, 1998
In compliance with Section 304 of Regulation S-T, the following information describes pictorial and/or graphic materials contained herein:
Exhibit 21, Subsidiaries of the Registrant, has been omitted in reliance upon General Instruction I(2)(b) of Form 10-K.