UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549
  ________________
  Form 10-Q
 
 (Mark One)
 
 R
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended September 30, 2009OR£
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For the transition period
      from                                                      to
 
 Commission
File Number 1-2745
 ________________
 Southern
Natural Gas Company
 (Exact Name of
Registrant as Specified in Its Charter)
 
 Delaware
                63-0196650(State or
      Other Jurisdiction of
      Incorporation or Organization)
                (I.R.S.
      Employer Identification
      No.)El Paso
      Building1001
      Louisiana StreetHouston,
      Texas
                77002(Address of
      Principal Executive Offices)
                (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 R   No £
 
 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 £  No
£
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or 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 £                Accelerated
filer £                    Non-accelerated
filer R   Smaller reporting company £
 (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 £ No R
 
  
  
 SOUTHERN
NATURAL GAS COMPANY
 
 TABLE OF CONTENTS
 
 Caption
                PagePART I — Financial InformationItem  1.
                Financial Statements
                1Item  2.
                Management’s Discussion and Analysis of Financial Condition
      and  Results of Operations
                9Item  3.
                Quantitative and Qualitative Disclosures About
      Market  Risk
                15Item  4T.
                Controls and Procedures
                15PART II — Other InformationItem  1.
                Legal Proceedings
                16Item  1A.
                Risk Factors
                16Item  2.
                Unregistered Sales of Equity  Securities and Use
      of Proceeds
                16Item  3.
                Defaults Upon Senior Securities
                16Item  4.
                Submission of Matters to a Vote of Security
      Holders
                16Item  5.
                Other Information
                16Item  6.
                Exhibits
                17Signatures
                18
 ____________
 Below is a list of
terms that are common to our industry and used throughout this
document:
 
 /d
                  = per
      day
                  MMcf
                  = million
      cubic feetBBtu
                  = billion
      British thermal units
                  Tonne
                  = metric
      ton
 
 When
we refer to cubic feet measurements, all measurements are at a pressure of
14.73 pounds per square inch.
 
 When we
refer to “us,” “we,” “our,” or “ours,” we are describing Southern Natural Gas
Company and/or our subsidiaries.
 
 i
 Table of Contents
 
 PART I — FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 SOUTHERN
NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (In
millions)
 (Unaudited)
 
 Quarter
      Ended
                  September 30,
                
                
                Nine
      Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      revenues
                
                $
                124
                
                
                $
                123
                
                
                $
                369
                
                
                $
                411Operating
      expensesOperation
      and maintenance
                
                
                48
                
                
                
                49
                
                
                
                130
                
                
                
                134Depreciation
      and amortization
                
                
                14
                
                
                
                13
                
                
                
                41
                
                
                
                40Taxes,
      other than income taxes
                
                
                5
                
                
                
                7
                
                
                
                20
                
                
                
                2167
                
                
                
                69
                
                
                
                191
                
                
                
                195Operating
      income
                
                
                57
                
                
                
                54
                
                
                
                178
                
                
                
                216Earnings from
      unconsolidated affiliate
                
                
                3
                
                
                
                2
                
                
                
                8
                
                
                
                10Other income,
      net
                
                
                1
                
                
                
                3
                
                
                
                2
                
                
                
                10Interest and
      debt expense
                
                
                (16
                )
                
                
                (17
                )
                
                
                (48
                )
                
                
                (56
                )Affiliated
      interest income
                
                
                —
                
                
                
                2
                
                
                
                1
                
                
                
                12Net
      income
                
                $
                45
                
                
                $
                44
                
                
                $
                141
                
                
                $
                192
 
 See accompanying
notes.
          
 1
 Table of Contents
 
 SOUTHERN
NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
millions)
 (Unaudited)
 
 September
      30,
                  2009
                
                
                December 31,
                  2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                —
                
                
                $
                —Accounts
      and notes receivableCustomer
                
                
                15
                
                
                
                3Affiliates
                
                
                30
                
                
                
                71Other
                
                
                —
                
                
                
                2Other
                
                
                17
                
                
                
                29Total
      current assets
                
                
                62
                
                
                
                105Property,
      plant and equipment, at cost
                
                
                3,738
                
                
                
                3,636Less
      accumulated depreciation and amortization
                
                
                1,399
                
                
                
                1,373Total
      property, plant and equipment, net
                
                
                2,339
                
                
                
                2,263Other
      assetsInvestment
      in unconsolidated affiliate
                
                
                79
                
                
                
                81Note
      receivable from affiliate
                
                
                74
                
                
                
                95Other
                
                
                79
                
                
                
                85232
                
                
                
                261Total
      assets
                
                $
                2,633
                
                
                $
                2,629LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilitiesAccounts
      payableTrade
                
                $
                4
                
                
                $
                28Affiliates
                
                
                26
                
                
                
                10Other
                
                
                15
                
                
                
                18Taxes
      payable
                
                
                18
                
                
                
                8Other
                
                
                25
                
                
                
                28Total
      current liabilities
                
                
                88
                
                
                
                92Long-term
      debt
                
                
                910
                
                
                
                910Other
      liabilities
                
                
                46
                
                
                
                50Commitments
      and contingencies (Note 4)Partners’
      capital
                
                
                1,589
                
                
                
                1,577Total
      liabilities and partners’ capital
                
                $
                2,633
                
                
                $
                2,629
 
 See accompanying
notes.
 
 2
 Table of Contents
 
 SOUTHERN
NATURAL GAS COMPANY
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
millions)
 (Unaudited)
 
 
 Nine
      Months Ended
                  September 30,2009
                
                
                2008Cash flows
      from operating activitiesNet
      income
                
                $
                141
                
                
                $
                192Adjustments
      to reconcile net income to net cash from operating
    activitiesDepreciation
      and amortization
                
                
                41
                
                
                
                40Earnings
      from unconsolidated affiliate, adjusted for cash
    distributions
                
                
                2
                
                
                
                3Other
      non-cash income items
                
                
                (2
                )
                
                
                (5
                )Asset
      and liability changes
                
                
                13
                
                
                
                3Net
      cash provided by operating activities
                
                
                195
                
                
                
                233Cash flows
      from investing activitiesAdditions
      to property, plant and equipment
                
                
                (117
                )
                
                
                (107
                )Net
      change in note receivable from affiliate
                
                
                51
                
                
                
                269Net
      cash provided by (used in) investing activities
                
                
                (66
                )
                
                
                162Cash flows
      from financing activitiesDistributions
      to partners
                
                
                (129
                )
                
                
                (159
                )Payments
      to retire long-term debt
                
                
                —
                
                
                
                (236
                )Net
      cash used in financing activities
                
                
                (129
                )
                
                
                (395
                )Net change in
      cash and cash equivalents
                
                
                —
                
                
                
                —Cash and cash
      equivalentsBeginning
      of period
                
                
                —
                
                
                
                —End
      of period
                
                $
                —
                
                
                $
                —
 
 See accompanying
notes.
      
 
 3
 Table of Contents
 
 SOUTHERN
NATURAL GAS COMPANY
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (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 (SEC). Because this is 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. You
should read this Quarterly Report on Form 10-Q along with our 2008 Annual Report
on Form 10-K, which contains a summary of our significant accounting policies
and other disclosures. The financial statements as of September 30, 2009, and
for the quarters and nine months ended September 30, 2009 and 2008, are
unaudited. We derived the condensed consolidated balance sheet as of
December 31, 2008, from the audited balance sheet filed in our 2008
Annual Report on Form 10-K. In our opinion, we have made all adjustments,
which are of a normal recurring nature, to fairly present our interim period
results. We have evaluated subsequent events through the time of filing on
November 6, 2009, the date of issuance of our financial statements. Due to the
seasonal nature of our business, information for interim periods may not be
indicative of our operating results for the entire year.
 
 Significant
Accounting Policies
 
 The information
below provides an update of our significant accounting policies and accounting
pronouncements as discussed in our 2008 Annual Report on Form
10-K.
 
 Fair Value Measurements. On
January 1, 2009, we adopted new accounting and reporting standards related to
our non-financial assets and liabilities that are measured at fair value on a
non-recurring basis, which primarily relates to any impairment of long-lived
assets or investments. During the nine months ended September 30, 2009, there
were no fair value measurements recorded on a non-recurring basis.
 
 Business Combinations and
Noncontrolling Interests.On January 1, 2009, we adopted accounting
standard updates that clarify how to account for and report acquisitions of
businesses and transactions involving noncontrolling interests. These updates
require that all acquired assets, liabilities, noncontrolling interests and
certain contingencies be measured at fair value, and certain
other  acquisition-related costs be expensed rather than capitalized.
Additionally, all transactions with noncontrolling interest holders after
adoption, including the issuance and repurchase of noncontrolling interests,
should be accounted for as equity transactions unless a change in control of the
subsidiary occurs. The adoption of these accounting standard updates did not
have an impact on our financial statements. Application of these updates impacts
transactions that are entered into after December 31, 2008.
 
 Transfers of Financial Assets.In June 2009, the Financial Accounting Standards Board (FASB) issued
updates to the existing accounting standards on financial asset transfers.Among otheritems,these accounting
standard updates eliminate the concept of a qualifying special-purpose entity
(QSPE) for purposes of evaluating whether an entity should be consolidated as a
variable interest entity and are effective for existing QSPEs as of January 1,
2010 and for transactions entered into on or after January 1, 2010. We are
currently assessing the impact that these accounting standard updates may have
on our financial statements, including any impacts it may have on accounting for
our accounts receivable sales program and the related senior beneficial
interests (see Note 5).
 
 Variable Interest Entities.In June 2009, the FASB issued updates to existing accounting standards
for variable interest entities which revise how companies determine their
primary beneficiaries, among other changes. These updates require companies to
use a qualitative approach based on their responsibilities and controlling power
over the variable interest entities’ operations rather than a quantitative
approach in determining the primary beneficiary as previously required. We are
currently assessing the impact that these accounting standard updates, effective
January 1, 2010, may have on our financial statements, including any impact it
may have on accounting for our accounts receivable sales program (see Note
5).
    4
 Table of Contents
   
 2.
Fair Value of Financial Instruments
 
 At September 30,
2009 and December 31, 2008, the carrying amounts of trade and other receivables
and payables are representative of their fair value because of the short-term
nature of these instruments. At September 30, 2009 and December 31, 2008, we had
a note receivable from El Paso of approximately $85 million and $136 million due
upon demand, with a variable interest rate of 1.5% and 3.2%. While we are
exposed to changes in interest income based on changes to the variable interest
rate, the fair value of this note receivable approximates its carrying value due
to the note being due on demand and the market-based nature of its interest
rate.
 
 In addition, the
carrying amounts and estimated fair values of our long-term debt are based on
quoted market prices for the same or similar issues and are as
follows:
 
 September 30, 2009
                
                
                December 31, 2008Carrying
                  Amount
                
                
                Fair
                  Value
                
                
                Carrying
                  Amount
                
                
                Fair
                  Value(In
      millions)Long-term
      debt
                
                $
                910
                
                
                $
                984
                
                
                $
                910
                
                
                $
                726
 
 3.
Long-Term Debt
 
 In March 2009, we,
Southern Natural Issuing Corporation (SNIC), El Paso Corporation (El Paso) and
certain other El Paso subsidiaries filed a registration statement on Form S-3
under which we and SNIC may co-issue debt securities in the future. SNIC is a
wholly owned finance subsidiary of us and is the co-issuer of certain of our
outstanding debt securities. 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.
 
 4. Commitments
and Contingencies
 
 Legal
Proceedings
 
 Gas Measurement
Cases.  We and a number of our affiliates were named defendants
in actions that generally allege mismeasurement of natural gas volumes and/or
heating content resulting in the underpayment of royalties. These cases were
filed in 1997 by an individual under the False Claims Act, which have been
consolidated for pretrial purposes (In re: Natural Gas Royalties Qui Tam
Litigation, U.S. District Court for the District of Wyoming). These
complaints allege an industry-wide conspiracy to underreport the heating value
as well as the volumes of the natural gas produced from federal and Native
American lands.  In October 2006, the U.S. District Judge issued an
order dismissing all claims against all defendants. In March 2009, the Tenth
Circuit Court of Appeals affirmed the dismissals and in October 2009, the
plaintiff’s petition for writ of certiorari to the United States Supreme Court
was denied.
 
 In addition to the
above proceedings, we and our subsidiaries and affiliates are named defendants
in numerous lawsuits and governmental proceedings that arise in the ordinary
course of our business. For each of these matters, we evaluate the merits of the
case, 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, including those discussed above, 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. At September 30, 2009,
we had accrued approximately $2 million for our outstanding legal
matters.
 
     
 
 5
 Table of Contents
  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 on the environment of the disposal or release of specified substances
at current and former operating sites. At September 30, 2009 and December 31,
2008, we had accrued approximately $1 million for expected remediation costs and
associated onsite, offsite and groundwater technical studies. Our accrual
represents a combination of two estimation methodologies. First, where the most
likely outcome can be reasonably estimated, that cost has been accrued. Second,
where the most likely outcome cannot be estimated, a range of costs is
established and if no one amount in that range is more likely than any other,
the lower end of the expected range has been accrued.
 
 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.
 
 Regulatory
Matters
 
 Notice of Proposed
Rulemaking. In October 2007, the Minerals Management Service (MMS) issued
a notice of proposed rulemaking that is applicable to pipelines located in the
Outer Continental Shelf (OCS). If adopted, the proposed rules would
substantially revise MMS OCS pipeline and rights-of-way regulations. The
proposed rules would have the effect of (i) increasing the financial obligations
of entities which have pipelines and pipeline rights-of-way in the OCS, (ii)
increasing the regulatory requirements imposed on the operation and maintenance
of existing pipelines and rights-of-way in the OCS, and (iii) increasing the
requirements and preconditions for obtaining new rights-of-way in the
OCS.
 
 Rate Case.In March 2009, we
filed a rate case with the Federal Energy Regulation Commission (FERC) as
permitted under the settlement of our previous rate case. The filing proposed an
increase in our base tariff rates. In April 2009, the FERC issued an order
accepting the proposed rates effective September 1, 2009, subject to refund
pending the outcome of a hearing. On October 5, 2009, we filed with the FERC a
settlement of the rate case.  The settlement resolved all issues set
for hearing and was supported by the FERC Staff and not opposed by the
participants associated with the rate case. On October 20, 2009, the
Administrative Law Judge assigned to the case certified that the settlement was
uncontested. Under the terms of the settlement, we (i) increased our base tariff
rates, (ii) implemented a volume tracker for gas used in operations, (iii)
agreed to file our next general rate case to be effective no earlier than
September 1, 2012 and no later than September 1, 2013, and (iv) the vast
majority of our firm transportation contracts expiring prior to September 1,
2013 will be extended until August 31, 2013. We expect the FERC to approve the
settlement in early 2010.
 
 Guarantees
 
 We are or have been
involved in various ownership and other contractual arrangements that sometimes
require us to provide additional financial support that results in the issuance
of performance guarantees that are not recorded in our financial statements. As
of September 30, 2009, we have a performance guarantee related to contracts
held by Southern LNG Inc., an entity formerly owned by us, with a maximum
exposure of $225 million and a performance guarantee related to contracts
held by Elba Express, an entity formerly owned by us, with no stated maximum
limit. We estimate our potential exposure related to these guarantees is
approximately $181 million, which is based on their remaining estimated
obligations under the contracts.
    
 6
 Table of Contents
 
 
 Purchase
Obligations
 
 During 2009, we
have entered into purchase obligations for products and services related to our
South System III expansion totaling approximately $44 million, of which
approximately $31 million is anticipated to be paid in 2010 and the remainder in
2011.
 
 Other
Commitments
 
 During the third
quarter of 2009, we entered into a $57 million letter of credit associated with
our projected construction costs related to the Southeast Supply Header
project.
 
 5. Investment
in Unconsolidated Affiliate and Transactions with Affiliates
 
 Investment
in Unconsolidated Affiliate
 
 We have a 50
percent ownership interest in Bear Creek Storage Company (Bear Creek), a joint
venture with Tennessee Gas Storage Company, our affiliate, and we received $10
million and $13 million in dividends from Bear Creek for the nine months ended
September 30, 2009 and 2008. Summarized income statement information of our
proportionate share of the income of this investment for the periods ended
September 30 is as follows:
 
 Quarter
      Ended
                  September 30,
                
                
                Nine
      Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(In
      millions)Operating
      results data:Operating
      revenues
                
                $
                5
                
                
                $
                4
                
                
                $
                14
                
                
                $
                15Operating
      expenses
                
                
                2
                
                
                
                2
                
                
                
                6
                
                
                
                6Income
      from continuing operations and net income
                
                
                3
                
                
                
                2
                
                
                
                8
                
                
                
                10
 
 Transactions
with Affiliates
 
 Distributions.We are
required to make distributions of available cash as defined in our partnership
agreement on a quarterly basis to our partners. During the nine months ended
September 30, 2009 and 2008, we paid cash distributions of approximately $129
million and $159 million to our partners. In addition, in October 2009 we paid a
cash distribution to our partners of approximately $42 million.
 
 Cash Management Program.We
participate in El Paso’s cash management program which matches short-term cash
surpluses and needs of participating affiliates, thus minimizing total
borrowings from outside sources. El Paso uses the cash management program to
settle intercompany transactions between participating affiliates. At September 30, 2009
and December 31, 2008, we had a note receivable from El Paso of $85 million and
$136 million. We classified $11 million and $41 million of this receivable as
current on our balance sheet at September 30, 2009 and December 31, 2008, based
on the net amount we anticipate using in the next twelve months considering
available cash sources and needs. The interest rate on this variable rate note
was 1.5% at September 30, 2009 and 3.2% at  December 31,
2008.
 
 7
 Table of Contents
 
 
 Accounts Receivable Sales Program.We sell certain accounts receivable to a QSPE whose purpose is solely to
invest in our receivables, which are short-term assets that generally settle
within 60 days. During the quarter and nine months ended September 30,
2009, we received net proceeds of approximately $0.1 billion and $0.4 billion
related to sales of receivables to the QSPE and changes in our subordinated
beneficial interests, and recognized losses of less than $1 million on these
transactions. As of September 30, 2009 and December 31, 2008, we had
approximately $42 million and $48 million of receivables outstanding with
the QSPE, for which we received cash of $29 million and $24 million and
received subordinated beneficial interests of approximately $13 million and
$23 million. The QSPE also issued senior beneficial interests on the receivables
sold to a third party financial institution, which totaled $29 million and
$25 million as of September 30, 2009 and December 31, 2008. We reflect
the subordinated beneficial interest in receivables sold  at their
fair value on the date they are issued. These amounts (adjusted for subsequent
collections) are recorded as accounts receivable from affiliate in our balance
sheets. Our ability to recover our carrying value of our subordinated beneficial
interests is based on the collectibility of the underlying receivables sold to
the QSPE. We reflect accounts receivable sold under this program and changes in
the subordinated beneficial interests as operating cash flows in our statement
of cash flows. Under the agreements, we earn a fee for servicing the accounts
receivable and performing all administrative duties for the QSPE which is
reflected as a reduction of operation and maintenance expense in our income
statement. The fair value of these servicing and administrative agreements as
well as the fees earned were not material to our financial statements for the
quarters and nine months ended September 30, 2009 and 2008.
 
 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 2008 Annual Report on Form 10-K. The following
table shows revenues and charges from our affiliates for the periods ended
September 30:
 
 Quarter
      Ended
                  September 30,
                
                
                Nine
      Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(In
      millions)Revenues from
      affiliates
                
                $
                1
                
                
                $
                1
                
                
                $
                4
                
                
                $
                4Operation and
      maintenance expenses from affiliates
                
                
                33
                
                
                
                30
                
                
                
                95
                
                
                
                90Reimbursement
      of operating expenses charged to affiliates
                
                
                3
                
                
                
                4
                
                
                
                11
                
                
                
                10
       8
 Table of Contents
 
 Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 The information
contained in Item 2 updates, and should be read in conjunction with, information
disclosed in our 2008 Annual Report on Form 10-K, and our condensed
consolidated financial statements and the accompanying footnotes presented in
Item 1 of this Quarterly Report on Form 10-Q.
 
 Results
of Operations
 
 Our management uses
earnings before interest expense and income taxes (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 EBIT is useful to investors to provide them with the same measure
used by El Paso to evaluate our performance. We define EBIT as net income
adjusted for items such as (i) interest and debt expense, (ii) affiliated
interest income, and (iii) income taxes. We exclude interest and debt
expense from this measure so that investors may evaluate our operating results
without regard to our financing methods. EBIT may not be comparable to measures
used by other companies. Additionally, EBIT should be considered in conjunction
with net income, income before income taxes and other performance measures such
as operating income or operating cash flows. Below is a reconciliation of our
EBIT to net income, our throughput volumes and an analysis and discussion of our
results for the quarter and nine months ended September 30, 2009 compared with
the same periods in 2008.
 
 Operating
Results:
 Quarter
      Ended
                  September 30,
                
                
                Nine
      Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(In
      millions, except for volumes)Operating
      revenues
                
                $
                124
                
                
                $
                123
                
                
                $
                369
                
                
                $
                411Operating
      expenses
                
                
                (67
                )
                
                
                (69
                )
                
                
                (191
                )
                
                
                (195
                )Operating
      income
                
                
                57
                
                
                
                54
                
                
                
                178
                
                
                
                216Earnings from
      unconsolidated affiliate
                
                
                3
                
                
                
                2
                
                
                
                8
                
                
                
                10Other income,
      net
                
                
                1
                
                
                
                3
                
                
                
                2
                
                
                
                10EBIT
                
                
                61
                
                
                
                59
                
                
                
                188
                
                
                
                236Interest and
      debt expense
                
                
                (16
                )
                
                
                (17
                )
                
                
                (48
                )
                
                
                (56
                )Affiliated
      interest income
                
                
                —
                
                
                
                2
                
                
                
                1
                
                
                
                12Net
      income
                
                $
                45
                
                
                $
                44
                
                
                $
                141
                
                
                $
                192Throughput
      volumes (BBtu/d)(1)
                
                
                2,210
                
                
                
                2,343
                
                
                
                2,319
                
                
                
                2,376
 ____________
 
 (1)
                Throughput
      volumes include billable transportation throughput for storage
      injection.
 
 EBIT
Analysis:
 Quarter
      Ended
                  September 30, 2009
                
                
                Nine
      Months Ended
                  September 30, 2009Revenue
                
                
                Expense
                
                
                Other
                
                
                EBIT
                  Impact
                
                
                Revenue
                
                
                Expense
                
                
                Other
                
                
                EBIT
                  ImpactFavorable/(Unfavorable)
                  (In
      millions)Expansions
                
                $
                —
                
                
                $
                (1
                )
                
                $
                (2
                )
                
                $
                (3
                )
                
                $
                1
                
                
                $
                (2
                )
                
                $
                (13
                )
                
                $
                (14
                )Service
      revenues
                
                
                3
                
                
                
                –
                
                
                
                –
                
                
                
                3
                
                
                
                5
                
                
                
                –
                
                
                
                –
                
                
                
                5Gas not used
      in operations and other natural gas sales and purchases
                
                
                –
                
                
                
                5
                
                
                
                –
                
                
                
                5
                
                
                
                (8
                )
                
                
                8
                
                
                
                –
                
                
                
                —Calpine
      bankruptcy settlement
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (35
                )
                
                
                –
                
                
                
                –
                
                
                
                (35
                )Other(1)
                
                
                (2
                )
                
                
                (2
                )
                
                
                1
                
                
                
                (3
                )
                
                
                (5
                )
                
                
                (2
                )
                
                
                3
                
                
                
                (4
                )Total impact
      on EBIT
                
                $
                1
                
                
                $
                2
                
                
                $
                (1
                )
                
                $
                2
                
                
                $
                (42
                )
                
                $
                4
                
                
                $
                (10
                )
                
                $
                (48
                )
 ____________
 (1)Consists of individually insignificant
  items.
 
 
 9
 Table of Contents
 
 Expansions.During
the quarter and nine months ended September 30, 2009, we recorded a lower
allowance for funds used during construction due to lower capital expenditures
as compared to the same periods in 2008. This decrease is attributable to the
completion of the Cypress Phase II and Southeast Supply Header Phase I projects
placed into service in May 2008 and September 2008.
 
 During the second
quarter of 2009, BG LNG Services (BG) informed us of their intent not to
exercise their option to have us construct the Cypress Phase III expansion.
However, BG has made alternative commitments to subscribe to certain other firm
capacity on another of El Paso’s pipeline systems and to provide certain rate
considerations on its existing transportation contract for Cypress Phases I and
II. These alternative arrangements are pending FERC approval. In August 2009, we
received certificates of authorization from the FERC on the South System III and
Southeast Supply Header Phase II projects. For a further discussion of our
significant growth projects, see our 2008 Annual Report on Form
10-K.
 
 In addition to our
backlog of contracted organic growth projects, we have other projects that are
in various phases of commercial development. Many of the potential projects
involve expansion capacity to serve increased natural gas-fired generation
loads.  For example, in early 2009, we executed a non-binding letter of
intent (LOI) with Florida Power & Light Company (FPL) to expand our system
by approximately 600 MMcf/d by constructing approximately 375 miles of 36-inch
pipeline from western Alabama to northern Florida.  This expansion project
was subject to the Florida Public Service Commission’s (PSC) approval for FPL to
build an intrastate pipeline which would connect to our system. The PSC rejected
FPL’s proposal and our LOI with FPL has expired.  The future of this
project is uncertain.  Although we pursue the development of these
potential projects from time to time, there can be no assurance that we will be
successful in negotiating the definitive binding contracts necessary for such
projects to be included in our backlog of contracted organic growth
projects.
 
 Service
Revenues.During 2009, our service revenue increased primarily
due to higher tariff rates placed into service on September 1, 2009 pursuant to
our rate case settlement which is further discussed below.
 
 Gas Not Used in Operations and Other
Natural Gas Sales and Purchases.  Prior to September 1, 2009,
the financial impacts of our operational gas, net of gas used in operations, was
based on the price of natural gas and the amount of natural gas we were allowed
to retain and dispose of according to our tariff, relative to the amounts of
natural gas we used for operating purposes and the cost of operating our
electric compression facilities. Effective September 1, 2009, a volume tracker
was implemented as part of our rate case settlement as further discussed below,
therefore we no longer share retained gas not used in operations. However,
through August 31, 2009, our share of retained gas not used in operations
resulted in revenues to us, which were impacted by volumes and prices during a
given period. For the quarter and nine months ended September 30, 2009, our
operating expense was $5 million and $8 million lower than the same periods in
2008 primarily due to favorable revaluation of retained volumes on our
system.  Offsetting this favorable impact during the nine months ended
September 30, 2009 was an $8 million reduction in revenue primarily related to
favorable sales in 2008.
 
 Calpine Bankruptcy
Settlement. During the nine months ended September 30, 2008, we
recognized revenue of $35 million related to distributions received under
Calpine’s approved plan of reorganization.
 
 Rate Case.In March 2009, we
filed a rate case with the FERC as permitted under the settlement of our
previous rate case. The filing proposed an increase in our base tariff rates. In
April 2009, the FERC issued an order accepting the proposed rates effective
September 1, 2009, subject to refund pending the outcome of a hearing. On
October 5, 2009, we filed with the FERC a settlement of the rate
case.  The settlement resolved all issues set for hearing and was
supported by the FERC Staff and not opposed by the participants associated with
the rate case.  On October 20, 2009, the Administrative Law Judge
assigned to the case certified that the settlement was
uncontested.  Under the terms of the settlement we, (i) increased our
base tariff rates, (ii) implemented a volume tracker for gas used in operations,
(iii) agreed to file our next general rate case to be effective no earlier than
September 1, 2012 and no later than September 1, 2013, and (iv) the vast
majority of our firm transportation contracts expiring prior to September 1,
2013 will be extended until August 31, 2013. We expect the FERC to approve the
settlement in early 2010.
 
 
 
 10
 Table of Contents
 
 
 Interest
and Debt Expense
 
 Interest and debt
expense for the quarter and nine months ended September 30, 2009, was $1 million
and $8 million lower than the same periods in 2008 primarily due to lower
average outstanding debt balances resulting from the retirement and repurchases
of debt in June and September 2008. For a further discussion of our debt
retirement an repurchase activities, see our 2008 Annual Report on Form
10-K.
 
 Affiliated
Interest Income
 
 Affiliated interest
income for the quarter and nine months ended September 30, 2009, was $2 million
and $11 million lower than the same periods in 2008 due to lower average
advances to El Paso under its cash management program and lower average
short-term interest rates. The average advances due from El Paso decreased
primarily due to debt retirement and repurchases in June and September 2008 with
recoveries of our note receivable. The following table shows the average
advances due from El Paso and the average short-term interest rates for the
quarters and nine months ended September 30:
 
 Quarter
      Ended
                  September 30,
                
                
                Nine
      Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(In
      millions, except for rates)Average
      advance due from El Paso
                
                $
                60
                
                
                $
                221
                
                
                $
                84
                
                
                $
                357Average
      short-term interest rate
                
                
                1.6
                %
                
                
                3.7
                %
                
                
                1.8
                %
                
                
                4.5
                %
          
 11
 Table of Contents
 
 Liquidity
and Capital Expenditures
 
 Liquidity
Overview.  Our primary sources of liquidity are cash flows from
operating activities, El Paso’s cash management program and capital
contributions from our partners. At September 30, 2009, we had a note receivable
from El Paso of approximately $85 million of which approximately $11 million was
classified as current 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 5 for a further discussion of El Paso’s cash
management program. Our primary uses of cash are for working capital, capital
expenditures and for required distributions to our partners.
 
 Volatility in the
financial markets, the energy industry and the global economy will likely
continue through the remainder of 2009 and beyond.  Although recent
financial market conditions have shown signs of improvement, continued
volatility in the financial markets could impact our longer-term access to
capital for future growth projects as well as the cost of such capital.
Additionally, although the impacts are difficult to quantify at this point, a
prolonged recovery of the global economy could have adverse impacts on natural
gas consumption and demand. However, we believe our exposure to changes in
natural gas consumption and demand is largely mitigated by a revenue base that
is significantly comprised of long-term contracts that are based on firm demand
charges and are less affected by a potential reduction in the actual usage or
consumption of natural gas.
 
 We believe we have
adequate liquidity available to us to meet our capital requirements and our
existing operating needs through cash flow from operating activities, amounts
available to us under El Paso’s cash management program and capital
contributions from our partners. As of September 30, 2009, El Paso had
approximately $2.4 billion of available liquidity, including approximately
$1.4 billion of capacity available to it under various committed credit
facilities. While we do not anticipate a need to directly access the
financial markets in the remainder of 2009 for any of our operating activities
or expansion capital needs based on liquidity available to us, volatility in the
financial markets could impact our or El Paso’s ability to access these markets
at reasonable rates in the future.
 
 2009 Cash Flow Activities.Our cash flows for the nine months ended September 30 are summarized as
follows (in millions):
 
 Cash
      Flow from OperationsNet
      income
                
                $
                141Non-cash
      income adjustments
                
                
                41Change in
      other assets and liabilities
                
                
                13Total cash
      flow from operations
                
                
                195Cash
      InflowsInvesting
      activitiesNet
      change in note receivable from affiliate
                
                
                51Total
      other cash inflows
                
                
                51Cash
      OutflowsInvesting
      activitiesAdditions to
      property, plant and equipment
                
                
                117Financing
      activitiesDistributions
      to partners
                
                
                129Total cash
      outflows
                
                
                246Net change in
      cash
                
                $
                —
 
 
 12
 Table of Contents
 
 During the first nine
months of 2009, we generated $195 million of operating cash flow. We utilize
these amounts to fund maintenance and expansion of our system as well as pay
distributions to our partners. During the nine months ended September 30, 2009,
we paid cash distributions of approximately $129 million to our partners. In
addition, in October 2009 we paid a cash distribution to our partners of
approximately $42 million. Our cash capital expenditures for the nine months
ended September 30, 2009, and our estimated capital expenditures for the
remainder of this year to expand and maintain our system are listed
below:
 
 Nine
      Months Ended
                  September 30, 2009
                
                
                2009
                  Remaining
                
                
                Total(In
      millions)Maintenance
                
                $
                42
                
                
                $
                23
                
                
                $
                65Expansion
                
                
                75
                
                
                
                6
                
                
                
                81$
                117
                
                
                $
                29
                
                
                $
                146
 
             
 13
 Table of Contents
 
 
 Commitments
and Contingencies
 
 For a further
discussion of our commitments and contingencies, see Item 1, Financial
Statements, Note 4 which is incorporated herein by reference.
 
 Climate Change and Energy
Legislation.There are various legislative and regulatory measures
relating to climate change and energy policies that have been proposed that, if
enacted, will likely impact our business.
 
 Climate Change
Regulation.Measures to address climate change and greenhouse
gas (GHG) emissions are in various phases of discussions or implementation at
international, federal, regional and state levels. It is likely that federal
legislation requiring GHG controls will be enacted in the next few years in the
United States.  Although it is uncertain what legislation will
ultimately be enacted, it is our belief that cap-and-trade or other legislation
that sets a price on carbon emissions will increase demand for natural gas,
particularly in the power sector.  We believe this increased demand
will occur due to substantially less carbon emissions associated with the use of
natural gas compared with alternate fuel sources for power generation, including
coal and oil-fired power generation.  However, the actual impact on
demand will depend on the legislative provisions that are ultimately adopted,
including the level of emission caps, allowances granted and the cost of
emission credits.
 
 It is also likely
that any federal legislation enacted would increase our cost of environmental
compliance by requiring us to install additional equipment to reduce carbon
emissions from our larger facilities as well as to potentially purchase emission
credits. Based on 2007 data we reported to the California Climate Action
Registry (CCAR), our operations in the United States emitted approximately 1.9
million tonnes of carbon dioxide equivalent emissions in 2007. We believe that
approximately 1.6 million tonnes of the GHG emissions that we reported to CCAR
would be subject to regulations under the climate change legislation that passed
in the U.S. House of Representatives in July 2009, with approximately 21 percent
of this amount being subject to the cap-and-trade rules contained in the
proposed legislation and the remainder being subject to performance standards.
As proposed, the portion of our GHG emissions that would be subject to
performance standards could require us to install additional equipment or
initiate new work practice standards to reduce emission levels at many of our
facilities, the costs of which would likely be material.  Although we
believe that many of these costs should be recoverable in the rates charged to
our customers, recovery is still uncertain at this time.
 
 The Environmental
Protection Agency (EPA) finalized regulations to monitor and report GHG
emissions on an annual basis and recently proposed new regulations to regulate
GHGs under the Clean Air Act, which EPA has indicated could be finalized as
early as March 2010.  In addition, various lawsuits have been filed
seeking to force further regulation of GHG emissions, as well as to require
specific companies to reduce GHG emissions from their operations. Enactment of
additional regulations, as well as lawsuits, could result in
delays  and have negative impacts on our ability to obtain permits and
other regulatory approvals with regard to existing and new facilities, could
impact our costs of operations, as well as require us to install new equipment
to control emissions from our facilities, the costs of which would likely be
material.
 
 Energy
Legislation.In conjunction with these climate change
proposals, there have been various federal and state legislative and regulatory
proposals that would create additional incentives to move to a less carbon
intensive “footprint.” These proposals would establish renewable portfolio
standards at both the federal and state level, some of which would require a
material increase in renewable sources, such as wind and solar power generation,
over the next several decades.  Additionally, the proposals would
establish incentives for energy efficiency and conservation.  Although
the ultimate targets that would be established in these areas are uncertain at
this time, such proposals if enacted could negatively impact natural gas usage
over the longer term.
   
 14
 Table of Contents
 
 
 Item 3. Quantitative and Qualitative Disclosures About Market
Risk
 
 There are no
material changes in our quantitative and qualitative disclosures about market
risks from those reported in our 2008 Annual Report on Form 10-K.
 
 Item 4T. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of September 30,
2009, we carried out an evaluation under the supervision and with the
participation of our management, including our President and our Chief Financial
Officer, 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 SEC reports we file or
submit under the Exchange Act is accurate, complete and timely. Our management,
including our President and our Chief Financial Officer, 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
objective and our President and our Chief Financial Officer concluded that our
disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e)) were effective as of September 30, 2009.
 
 Changes
in Internal Control Over Financial Reporting
 
 During the third
quarter of 2009, we implemented a new financial accounting system and
consolidated financial chart of accounts. The system implementation efforts were
carefully planned and executed. Training sessions were administered to
individuals who are impacted by the new system and chart of accounts, and system
controls and functionality were reviewed and successfully tested prior and
subsequent to implementation. Following evaluation, management believes
that  the new system has been successfully implemented. There were no
other changes in our internal control over financial reporting during the third
quarter of 2009 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
         
 
 15
 Table of Contents
 
 PART II — OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 See Part I,
Item 1, Financial Statements, Note 4 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
 
 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 2008
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
 
 None.
 
 Item 3. Defaults Upon Senior Securities
 
 None.
 
 Item 4. Submission of Matters to a Vote of Security
Holders
 
 None.
 
 Item 5. Other Information
 
 None.
       
 
 16
 Table of Contents
 
 Item 6. Exhibits
 
 The
Exhibit Index is hereby incorporated herein by reference and sets forth a
list of those exhibits filed herewith.
 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.
           
 
 17
 Table of Contents
 SIGNATURES
 
 Pursuant to the
requirements of the Securities Exchange Act of 1934, Southern Natural Gas
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
  SOUTHERN NATURAL
      GAS COMPANYDate:  November
      6, 2009
                    /s/
      James C. YardleyJames C.
      YardleyPresident(Principal
      Executive Officer)Date:  November
      6, 2009
                    /s/
      John R. SultJohn R.
      SultSenior Vice President, Chief
      Financial Officer and
    Controller(Principal
      Accounting and Financial Officer)
 
 18
 Table of Contents
 
 SOUTHERN
NATURAL GAS COMPANY
 
 EXHIBIT
INDEX
 
 Each
exhibit identified below is filed as a part of this report.
 
 Exhibit
                  Number
                Description12
                Ratio of
      Earnings to Fixed Charges31.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.
 
         19