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EXCEL - IDEA: XBRL DOCUMENT - SOUTHERN NATURAL GAS COMPANY, L.L.C. | Financial_Report.xls |
EX-32.A - EX-32.A - SOUTHERN NATURAL GAS COMPANY, L.L.C. | h84815exv32wa.htm |
EX-32.B - EX-32.B - SOUTHERN NATURAL GAS COMPANY, L.L.C. | h84815exv32wb.htm |
EX-31.A - EX-31.A - SOUTHERN NATURAL GAS COMPANY, L.L.C. | h84815exv31wa.htm |
EX-31.B - EX-31.B - SOUTHERN NATURAL GAS COMPANY, L.L.C. | h84815exv31wb.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-2745
Southern Natural Gas Company, L.L.C.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
63-0196650 (I.R.S. Employer Identification No.) |
|
El Paso Building 1001 Louisiana Street Houston, Texas (Address of Principal Executive Offices) |
77002 (Zip Code) |
Telephone Number: (713) 420-2600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
SOUTHERN NATURAL GAS COMPANY, L.L.C. MEETS THE CONDITIONS OF GENERAL INSTRUCTION H(1)(a) AND
(b) TO FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED DISCLOSURE FORMAT AS PERMITTED
BY SUCH INSTRUCTION.
SOUTHERN NATURAL GAS COMPANY, L.L.C.
TABLE OF CONTENTS
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EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32.A | ||||||||
EX-32.B | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
* | We have not included a response to this item in this document since no response is required pursuant to the reduced disclosure format permitted by General Instruction H to Form 10-Q. |
Below is a list of terms that are common to our industry and used throughout this document:
/d = per day
|
BBtu = billion British thermal units |
When we refer to us, we, our, or ours, we are describing Southern Natural Gas Company,
L.L.C. and/or our subsidiaries.
i
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating revenues |
$ | 139 | $ | 134 | $ | 417 | $ | 410 | ||||||||
Operating expenses |
||||||||||||||||
Operation and maintenance |
44 | 41 | 116 | 116 | ||||||||||||
Depreciation and amortization |
15 | 15 | 46 | 44 | ||||||||||||
Taxes, other than income taxes |
8 | 7 | 23 | 21 | ||||||||||||
67 | 63 | 185 | 181 | |||||||||||||
Operating income |
72 | 71 | 232 | 229 | ||||||||||||
Earnings from unconsolidated affiliate |
4 | 4 | 11 | 11 | ||||||||||||
Other income, net |
1 | 1 | 5 | 3 | ||||||||||||
Interest and debt expense |
(20 | ) | (16 | ) | (52 | ) | (48 | ) | ||||||||
Affiliated interest income, net |
2 | | 2 | 1 | ||||||||||||
Net income |
$ | 59 | $ | 60 | $ | 198 | $ | 196 | ||||||||
See accompanying notes.
1
Table of Contents
SOUTHERN NATURAL GAS COMPANY, L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
(In millions)
(Unaudited)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 5 | $ | 4 | ||||
Accounts and note receivable |
||||||||
Customer, net of allowance |
5 | 3 | ||||||
Affiliates |
57 | | ||||||
Other |
20 | 26 | ||||||
Materials and supplies |
16 | 16 | ||||||
Assets held for sale |
50 | | ||||||
Regulatory assets |
13 | 14 | ||||||
Other |
2 | | ||||||
Total current assets |
168 | 63 | ||||||
Property, plant and equipment, at cost |
3,640 | 3,885 | ||||||
Less accumulated depreciation and amortization |
1,135 | 1,390 | ||||||
Total property, plant and equipment, net |
2,505 | 2,495 | ||||||
Other long-term assets |
||||||||
Investment in unconsolidated affiliate |
58 | 56 | ||||||
Note receivable from affiliate |
205 | | ||||||
Regulatory assets |
70 | 34 | ||||||
Other |
39 | 39 | ||||||
372 | 129 | |||||||
Total assets |
$ | 3,045 | $ | 2,687 | ||||
LIABILITIES AND MEMBERS EQUITY/PARTNERS CAPITAL |
||||||||
Current liabilities |
||||||||
Accounts and note payable |
||||||||
Trade |
$ | 23 | $ | 25 | ||||
Affiliates |
14 | 28 | ||||||
Other |
20 | 31 | ||||||
Taxes payable |
21 | 13 | ||||||
Accrued interest |
22 | 18 | ||||||
Contractual deposits |
9 | 6 | ||||||
Other |
2 | 1 | ||||||
Total current liabilities |
111 | 122 | ||||||
Long-term debt |
1,210 | 910 | ||||||
Other long-term liabilities |
31 | 31 | ||||||
Commitments and contingencies (Note 5) |
||||||||
Members equity/partners capital |
1,693 | 1,624 | ||||||
Total liabilities and members equity/partners capital |
$ | 3,045 | $ | 2,687 | ||||
See accompanying notes.
2
Table of Contents
SOUTHERN NATURAL GAS COMPANY, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 198 | $ | 196 | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Depreciation and amortization |
46 | 44 | ||||||
Earnings from unconsolidated affiliate, adjusted for cash distributions |
(2 | ) | 22 | |||||
Other non-cash income items |
(1 | ) | | |||||
Asset and liability changes |
14 | (21 | ) | |||||
Net cash provided by operating activities |
255 | 241 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(150 | ) | (120 | ) | ||||
Net change in note receivable from affiliate |
(262 | ) | 100 | |||||
Acquisition |
| (18 | ) | |||||
Proceeds from the sale of assets |
| 8 | ||||||
Other |
2 | | ||||||
Net cash used in investing activities |
(410 | ) | (30 | ) | ||||
Cash flows from financing activities |
||||||||
Net change in note payable to affiliate |
(12 | ) | | |||||
Net proceeds from issuance of debt |
297 | | ||||||
Contributions from partners |
60 | | ||||||
Distributions to member/partners |
(189 | ) | (205 | ) | ||||
Net cash provided by (used in) financing activities |
156 | (205 | ) | |||||
Net change in cash and cash equivalents |
1 | 6 | ||||||
Cash and cash equivalents |
||||||||
Beginning of period |
4 | | ||||||
End of period |
$ | 5 | $ | 6 | ||||
See accompanying notes.
3
Table of Contents
SOUTHERN NATURAL GAS COMPANY, L.L.C.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United
States Securities and Exchange Commission. As an interim period filing presented using a condensed
format, it does not include all of the disclosures required by U.S. generally accepted accounting
principles, and should be read along with our 2010 Annual Report on Form 10-K. The financial
statements as of September 30, 2011, and for the quarters and nine months ended September 30, 2011
and 2010, are unaudited. The condensed consolidated balance sheet as of December 31, 2010 was
derived from the audited balance sheet filed in our 2010 Annual Report on Form 10-K. In our
opinion, we have made adjustments, all of which are of a normal, recurring nature, to fairly
present our interim period results. Due to the seasonal nature of our business, information for
interim periods may not be indicative of our operating results for the entire year. Our disclosures
in this Form 10-Q are an update to those provided in our 2010 Annual Report on Form 10-K.
During 2011, El Paso Pipeline Partners, L.P. (EPB) acquired the remaining 40 percent interest
(25 percent in March and 15 percent in June) in us from El Paso Corporation (El Paso) and we became
an indirect wholly owned subsidiary of EPB. EPB is controlled by its general partner, El Paso
Pipeline GP Company, L.L.C., a wholly-owned subsidiary of El Paso.
Effective August 1, 2011, we converted our legal structure to a limited liability company and
changed our name to Southern Natural Gas Company, L.L.C.
On October 16, 2011, El Paso announced a definitive agreement with Kinder Morgan, Inc. (KMI)
whereby KMI will acquire El Paso in a transaction that values El Paso at approximately $38 billion
including the assumption of debt. The transaction has been approved by each companys board of
directors but remains subject to approvals of El Paso shareholders, the Federal Trade Commission
(FTC) and other customary regulatory and other approvals. The approval of KMI shareholders will
also be required, but a voting agreement has been executed by the majority of the shareholders of
KMI to support the transaction.
Significant Accounting Policies
There were no changes in the significant accounting policies described in our 2010 Annual
Report on Form 10-K and no significant accounting pronouncements issued but not yet adopted as of
September 30, 2011.
2. Acquisition and Divestiture
Acquisition and Divestiture
In 2010, we purchased certain pipeline assets from Elba Express Company, L.L.C. (Elba
Express), our affiliate, for $18 million and sold certain pipeline assets to Elba Express for net
proceeds of $8 million. We recorded both the purchase and sale at their historical cost and
accordingly, we recognized no gain or loss on these transactions.
Assets Held for Sale
In September 2011, we entered into an agreement to sell certain offshore and onshore assets
(including pipeline, platforms and other related assets located in the Gulf of Mexico and
Louisiana) for approximately $50 million. At
September 30, 2011, we classified these assets as held for sale
at fair value which approximates the sales price. The fair value is
based on observable market data which is a Level 2 measurement. We deferred the estimated loss of
approximately $35 million as a regulatory asset. The sale is contingent upon receiving an
acceptable FERC approval of the abandonment application including the ability to recover the
regulatory asset in our future rates, which we believe is probable.
4
Table of Contents
3. Financial Instruments
At September 30, 2011 and December 31, 2010, the carrying amounts of cash and cash equivalents
and trade receivables and payables represent fair value because of the short-term nature of these
instruments. At September 30, 2011, we had an interest bearing note receivable from EPB of
approximately $262 million. At December 31, 2010, this note carried a payable balance to EPB of
approximately $12 million. The interest rate on this note is variable and was 2.2% and 0.8% at
September 30, 2011 and December 31, 2010. While we are exposed to changes in interest income or
expense based on changes to the variable interest rate, the fair value of this note approximates
its carrying value due to the note being due or payable on demand and the market-based nature of
the interest rate.
In addition, the carrying amounts of our long-term debt and their estimated fair values, which
are based on quoted market prices for the same or similar issues, are as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(In millions) | ||||||||||||||||
Long-term debt |
$ | 1,210 | $ | 1,373 | $ | 910 | $ | 984 |
4. Debt
In June 2011, we and our wholly owned finance subsidiary, Southern Natural Issuing Corporation
(SNIC), issued $300 million aggregate principal amount of senior unsecured notes at 4.4 percent,
due June 15, 2021. The net proceeds of $297 million from this offering were advanced to EPB under
its cash management program and will be subsequently utilized to fund our growth capital
expenditures and for general corporate purposes. The indenture governing these notes contains
restrictions and covenants, none of which are more restrictive than those of our existing debt
covenants.
SNIC as the co-issuer of the debt securities is jointly and severally liable for the
obligation. SNIC has no material assets, operations, revenues or cash flows other than those
related to its service as a co-issuer of our debt securities. Accordingly, it has no ability to
service obligations on our debt securities.
5. Commitments and Contingencies
Legal Proceedings
We and our affiliates are named defendants in numerous legal proceedings and claims that arise
in the ordinary course of our business. For each of these matters, we evaluate the merits of the
case or claim, our exposure to the matter, possible legal or settlement strategies and the
likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and
can be estimated, we establish the necessary accruals. While the outcome of these matters cannot be
predicted with certainty, and there are still uncertainties related to the costs we may incur,
based upon our evaluation and experience to date, we believe we have established appropriate
reserves for these matters. It is possible, however, that new information or future developments
could require us to reassess our potential exposure related to these matters and adjust our
accruals accordingly, and these adjustments could be material. As of September 30, 2011, we had
approximately $2 million accrued for all of our outstanding legal proceedings.
Environmental Matters
We are subject to federal, state and local laws and regulations governing environmental
quality and pollution control. These laws and regulations require us to remove or remedy the effect
of the disposal or release of specified substances at current and former operating sites. At
September 30, 2011, our accrual was less than $1 million for our environmental matters.
Our environmental remediation projects are in various stages of completion. Our recorded
liabilities reflect our current estimates of amounts we will spend to remediate these sites.
However, depending on the stage of completion or assessment, the ultimate extent of contamination
or remediation required may not be known. As additional assessments occur or remediation efforts
continue, we may incur additional liabilities.
5
Table of Contents
Superfund Matters. Included in our recorded environmental liabilities are projects where we
have received notice that we have been designated or could be designated as a Potentially
Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), commonly known as Superfund, or state equivalents for one active site. Liability
under the federal CERCLA statute may be joint and several, meaning that we could be required to pay
in excess of our pro rata share of remediation costs. We consider the financial strength of other
PRPs in estimating our liabilities.
We expect to make capital expenditures for environmental matters of approximately $3 million
in the aggregate for the remainder of 2011 through 2015, including capital expenditures associated
with the impact of the Environmental Protection Agency rule on emissions of hazardous air
pollutants from reciprocating internal combustion engines which are subject to regulations with
which we have to be in compliance by October 2013.
It is possible that new information or future developments could require us to reassess our
potential exposure related to environmental matters. We may incur significant costs and liabilities
in order to comply with existing environmental laws and regulations. It is also possible that other
developments, such as increasingly strict environmental laws, regulations and orders of regulatory
agencies, as well as claims for damages to property and the environment or injuries to other
persons resulting from our current or past operations, could result in substantial costs and
liabilities in the future. As this information becomes available, or other relevant developments
occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related
to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe
our reserves are adequate.
Other Commitment
During 2009, we entered into a $57 million letter of credit associated with our estimated
construction cost related to the Southeast Supply Header project. As invoices are paid under the
contract, we are able to reduce the value of the letter of credit. At September 30, 2011, the
letter of credit has been reduced to approximately $18 million.
6. Accounts Receivable Sales Program
We participate in an accounts receivable sales program where we sell receivables in their
entirety to a third party financial institution (through a wholly-owned special purpose entity).
The sale of these accounts receivable (which are short-term assets that generally settle within 60
days) qualify for sale accounting. The third party financial institution involved in our accounts
receivable sales program acquires interests in various financial assets and issues commercial paper
to fund those acquisitions. We do not consolidate the third party financial institution because we
do not have the power to control, direct, or exert significant influence over its overall
activities since our receivables do not comprise a significant portion of its operations.
In connection with our accounts receivable sales, we receive a portion of the sales proceeds
up front and receive an additional amount upon the collection of the underlying receivables (which
we refer to as a deferred purchase price). Our ability to recover the deferred purchase price is
based solely on the collection of the underlying receivables. The tables below contain information
related to our accounts receivable sales program.
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Accounts receivable sold to the third-party financial institution(1) |
$ | 143 | $ | 144 | $ | 443 | $ | 427 | ||||||||
Cash received for accounts receivable sold under the program |
86 | 91 | 270 | 302 | ||||||||||||
Deferred purchase price related to accounts receivable sold |
57 | 53 | 173 | 125 | ||||||||||||
Cash received related to the deferred purchase price |
53 | 51 | 179 | 160 | ||||||||||||
Amount paid in conjunction with terminated program(2) |
| | | 30 |
(1) | During the quarters and nine months ended September 30, 2011 and 2010, losses recognized on the sale of accounts receivable were immaterial. | |
(2) | In January 2010, we terminated our previous accounts receivable sales program and paid $30 million to acquire the related senior interests in certain receivables under that program. See our 2010 Annual Report on Form 10-K for further information. |
6
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September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Accounts receivable sold and held by third-party financial institution |
$ | 47 | $ | 56 | ||||
Uncollected deferred purchase price related to accounts receivable sold(1) |
20 | 26 |
(1) | Initially recorded at an amount which approximates its fair value using observable inputs other than quoted prices in active markets. |
The deferred purchase price related to the accounts receivable sold is reflected as other
accounts receivable on our balance sheet. Because the cash received up front and the deferred
purchase price relate to the sale or ultimate collection of the underlying receivables, and are not
subject to significant other risks given their short term nature, we reflect all cash flows under
the accounts receivable sales program as operating cash flows on our statement of cash flows. Under
the accounts receivable sales program, we service the underlying receivables for a fee. The fair
value of this servicing agreement, as well as the fees earned, were not material to our financial
statements for the quarters and nine months ended September 30, 2011 and 2010.
7. Investment in Unconsolidated Affiliate and Transactions with Affiliates
Investment in Unconsolidated Affiliate
We have a 50 percent ownership interest in Bear Creek Storage Company, L.L.C. (Bear Creek), a
joint venture with Tennessee Gas Pipeline Company, L.L.C., our affiliate. For the nine months ended
September 30, 2011 and 2010, we received $9 million and $10 million in cash distributions from Bear
Creek. Also, during the third quarter of 2010, Bear Creek utilized its note receivable balance
under the cash management program with El Paso to pay a cash distribution to its partners,
including $23 million to us.
Summarized financial information for our proportionate share of Bear Creek is presented as
follows:
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Operating results data: |
||||||||||||||||
Operating revenues |
$ | 5 | $ | 5 | $ | 15 | $ | 15 | ||||||||
Operating expenses |
1 | 1 | 4 | 4 | ||||||||||||
Income from continuing operations and net income |
4 | 4 | 11 | 11 |
Transactions with Affiliates
EPB Acquisition. During 2011, EPB acquired the remaining 40 percent interest (25 percent in
March and 15 percent in June) in us from El Paso and we became an indirect wholly owned subsidiary
of EPB.
Distributions and Contributions. We are required to make distributions
to our owners as defined in our partnership and limited liability company agreements on a
quarterly basis. During the nine months ended September 30, 2011 and 2010, we paid cash
distributions of approximately $189 million and $205 million to our member/partners. In addition,
in October 2011, we paid a cash distribution to our member of approximately $62 million. During the
nine months ended September 30, 2011, we received cash contributions of approximately $60 million
from our partners to fund our expansion projects.
Cash Management Program. We participate in EPBs cash management program which matches
short-term cash surpluses and needs of participating affiliates, thus minimizing total borrowings
from outside sources. EPB uses the cash management program to settle intercompany transactions
between participating affiliates. At September 30, 2011, we had a note receivable from EPB of
approximately $262 million. We classified $57 million of this receivable as current on our balance
sheet at September 30, 2011 based on the net amount we anticipate using in the next twelve months
considering available cash sources and needs. At December 31, 2010 this note carried a payable
balance to EPB of approximately $12 million which was classified as current on our balance sheet.
The interest rate on this note is variable and was 2.2% and 0.8% at September 30, 2011 and December
31, 2010.
7
Table of Contents
Affiliate Revenues and Expenses. We enter into transactions with our affiliates within the
ordinary course of business. For a further discussion of our affiliated transactions, see our 2010
Annual Report on Form 10-K. The following table shows revenues and charges from our affiliates.
Quarter Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues |
$ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||
Operation and maintenance expenses |
30 | 28 | 86 | 87 | ||||||||||||
Reimbursement of operating expenses |
1 | 1 | 3 | 3 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is presented in a reduced disclosure format pursuant to
General Instruction H to Form 10-Q. In addition, this Item updates, and should be read in
conjunction with, the information disclosed in our 2010 Annual Report on Form 10-K, and the
financial statements and notes presented in Item 1 of this Quarterly Report on Form 10-Q.
On October 16, 2011, El Paso announced a definitive agreement with KMI whereby KMI will
acquire El Paso in a transaction that values El Paso at approximately $38 billion including the
assumption of debt. The transaction has been approved by each companys board of directors but
remains subject to the approvals of El Paso shareholders, the FTC and other customary regulatory
and other approvals. The approval of KMI shareholders will also be required, but a voting agreement
has been executed by the majority of the shareholders of KMI to support the transaction.
Results of Operations
Beginning January 1, 2011, our management uses segment earnings before interest expense and
income taxes (Segment EBIT) as a measure to assess the operating results and effectiveness of our
business, which consists of consolidated operations as well as an investment in an unconsolidated
affiliate. We believe Segment EBIT is useful to investors to provide them with the same measure
used by our management to evaluate our performance and so that investors may evaluate our operating
results without regard to our financing methods. Segment EBIT is defined as net income adjusted for
items such as interest and debt expense, and affiliated interest income. Segment EBIT may not be
comparable to measures used by other companies. Additionally, Segment EBIT should be considered in
conjunction with net income and other performance measures such as operating income or operating
cash flows. Below is a reconciliation of our Segment EBIT to net income, our throughput volumes and
an analysis and discussion of our results for the nine months ended September 30, 2011 compared
with the same period in 2010.
Operating Results:
2011 | 2010 | |||||||
(In millions, | ||||||||
except for volumes) | ||||||||
Operating revenues |
$ | 417 | $ | 410 | ||||
Operating expenses |
(185 | ) | (181 | ) | ||||
Operating income |
232 | 229 | ||||||
Earnings from unconsolidated affiliate |
11 | 11 | ||||||
Other income, net |
5 | 3 | ||||||
Segment EBIT |
248 | 243 | ||||||
Interest and debt expense |
(52 | ) | (48 | ) | ||||
Affiliated interest income, net |
2 | 1 | ||||||
Net income |
$ | 198 | $ | 196 | ||||
Throughput volumes (BBtu/d) (1) |
2,442 | 2,492 | ||||||
(1) | Throughput volumes include billable transportation throughput volumes for storage injection. |
Segment EBIT Analysis:
Variance | ||||||||||||||||
Operating | Operating | |||||||||||||||
Revenue | Expense | Other | Total | |||||||||||||
Favorable/(Unfavorable) | ||||||||||||||||
(In millions) | ||||||||||||||||
Expansions |
$ | 21 | $ | (1 | ) | $ | (1 | ) | $ | 19 | ||||||
Reservation and usage revenues |
(11 | ) | | | (11 | ) | ||||||||||
Other(1) |
(3 | ) | (3 | ) | 3 | (3 | ) | |||||||||
Total impact on Segment EBIT |
$ | 7 | $ | (4 | ) | $ | 2 | $ | 5 | |||||||
(1) | Consists of individually insignificant items. |
Expansions. During 2011, we benefited from increased reservation revenues due to Phases I and
II of the South System III Expansion project being
placed in service.
9
Table of Contents
Reservation and Usage Revenues. Our reservation revenues were lower by approximately $7 million during the nine
months ended September 30, 2011 compared to the same period in 2010 as a result of various contract
changes, primarily turned back capacity on our system due to expiring contracts. Additionally, we experienced a decrease of $4 million in our usage and
interruptible services for the nine months ended September 30, 2011 compared to the same period in
2010, due to unfavorable market conditions.
Interest and Debt Expense
Interest and debt expense for the nine months ended September 30, 2011, was $4 million higher
than the same period in 2010 primarily due to the issuance of $300 million senior unsecured notes
at 4.4 percent in June 2011.
Affiliated Interest Income, Net
The following table shows the average advances due from EPB and El Paso, and the average
short-term interest rates for the periods ended September 30:
2011 | 2010 | |||||||
(In millions, except for rates) | ||||||||
Average advance due from El Paso |
$ | | $ | 106 | ||||
Average advance due from EPB |
198 | | ||||||
Average short-term interest rate |
1.3 | % | 1.5 | % |
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operating activities and amounts
available to us under EPBs cash management program, while our primary uses of cash are for working
capital, capital expenditures and required distributions. At September 30, 2011, we had a note
receivable from EPB of approximately $262 million of which $57 million was classified as current on
our balance sheet based on the net amount we anticipate using in the next twelve months considering
available cash sources and needs. See Item 1, Financial Statements, Note 7, for a further
discussion of EPBs cash management program.
In June 2011, we and our wholly owned finance subsidiary, SNIC, issued $300 million aggregate
principal amount of senior unsecured notes at 4.4 percent, due June 15, 2021. The net proceeds of
$297 million from this offering were advanced to EPB under the cash management program and will be
subsequently utilized to fund our growth capital expenditures and for general corporate purposes.
See Item 1, Financial Statements, Note 4 for a further discussion of our debt issuance.
Our cash capital expenditures for the nine months ended September 30, 2011 and our estimated
capital expenditures for the remainder of this year to expand and maintain our system are listed
below.
Nine Months Ended | 2011 | |||||||||||
September 30, 2011 | Remaining | Total | ||||||||||
(In millions) | ||||||||||||
Expansion |
$ | 111 | $ | 18 | $ | 129 | ||||||
Maintenance |
39 | 19 | 58 | |||||||||
$ | 150 | $ | 37 | $ | 187 | |||||||
We believe we have adequate liquidity available to us to meet our capital requirements and our
existing operating needs through cash flows from operating activities and amounts available to us
under EPBs cash management program. While we do not anticipate a need to directly access the
financial markets in the remainder of 2011 for any of our operating activities or expansion capital
needs based on liquidity available to us, market conditions may impact our or EPBs ability to act
opportunistically. Our future plans could also be impacted by the completion of El Pasos
announced acquisition by KMI.
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Commitments and Contingencies
For a further discussion of our commitments and contingencies, see Item 1, Financial
Statements, Note 5 which is incorporated herein by reference and our 2010 Annual Report on Form
10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Omitted from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2011, we carried out an evaluation under the supervision and with the
participation of our management, including our President and Chief Financial Officer (CFO), as to
the effectiveness, design and operation of our disclosure controls and procedures. This evaluation
considered the various processes carried out under the direction of our disclosure committee in an
effort to ensure that information required to be disclosed in the U.S. Securities and Exchange
Commission reports we file or submit under the Securities Exchange Act of 1934, as amended
(Exchange Act) is accurate, complete and timely. Our management, including our President and CFO,
does not expect that our disclosure controls and procedures or our internal controls will prevent
and/or detect all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within our company have
been detected. Our disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives and our President and CFO concluded that our disclosure controls and
procedures (as defined in Exchange Act Rules 13a 15(e) and 15d 15(e)) were effective as of
September 30, 2011.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the third
quarter of 2011 that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, Financial Statements, Note 5 which is incorporated herein by reference.
Item 1A. Risk Factors
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on assumptions or beliefs
that we believe to be reasonable; however, assumed facts almost always vary from actual results,
and differences between assumed facts and actual results can be material, depending upon the
circumstances. Where, based on assumptions, we or our management express an expectation or belief
as to future results, that expectation or belief is expressed in good faith and is believed to have
a reasonable basis. We cannot assure you, however, that the stated expectation or belief will
occur, be achieved or accomplished. The words believe, expect, estimate, anticipate, and
similar expressions will generally identify forward-looking statements. All of our forward-looking
statements, whether written or oral, are expressly qualified by these cautionary statements and any
other cautionary statements that may accompany such forward-looking statements. In addition, we
disclaim any obligation to update any forward-looking statements to reflect events or circumstances
after the date of this report.
Important factors that could cause actual results to differ materially from estimates or
projections contained in forward-looking statements are described in our 2010 Annual Report on Form
10-K under Part I, Item 1A, Risk Factors. There have been no material changes in these risk factors
since that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Omitted from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Item 3. Defaults Upon Senior Securities
Omitted from this report pursuant to the reduced disclosure format permitted by General
Instruction H to Form 10-Q.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
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Item 6. Exhibits
The Exhibit Index is hereby incorporated herein by reference.
The agreements included as exhibits to this report are intended to provide information
regarding their terms and not to provide any other factual or disclosure information about us or
the other parties to the agreements. The agreements may contain representations and warranties by
the parties to the agreements, including us, solely for the benefit of the other parties to the
applicable agreement and:
| should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; | ||
| may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; | ||
| may apply standards of materiality in a way that is different from what may be viewed as material to certain investors; and | ||
| were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs
as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Southern Natural Gas
Company, L.L.C. has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SOUTHERN NATURAL GAS COMPANY, L.L.C. |
||||
Date: November 4, 2011 | /s/ Norman G. Holmes | |||
Norman G. Holmes | ||||
President (Principal Executive Officer) |
||||
Date: November 4, 2011 | /s/ John R. Sult | |||
John R. Sult | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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SOUTHERN NATURAL GAS COMPANY, L.L.C.
EXHIBIT INDEX
Each exhibit identified below is filed as a part of this Report.
Exhibit | ||
Number | Description | |
31.A
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.B
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.A
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.B
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS
|
XBRL Instance Document. | |
101.SCH
|
XBRL Schema Document. | |
101.CAL
|
XBRL Calculation Linkbase Document. | |
101.LAB
|
XBRL Labels Linkbase Document. | |
101.PRE
|
XBRL Presentation Linkbase Document. |
15