SOUTHERN NATURAL GAS CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-2745

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SOUTHERN NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 63-0196650
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET 77002
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)

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 [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common stock, par value $1 per share. Shares outstanding on November 13,
2002: 1,000

SOUTHERN NATURAL GAS COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A REDUCED
DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHERN NATURAL GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

1

SOUTHERN NATURAL GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

SOUTHERN NATURAL GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

See accompanying notes.

3

SOUTHERN NATURAL GAS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. 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 generally accepted
accounting principles. You should read it along with our 2001 Annual Report on
Form 10-K which includes a summary of our significant accounting policies and
other disclosures. The financial statements as of September 30, 2002, and for
the quarters and nine months ended September 30, 2002 and 2001, are unaudited.
We derived the balance sheet as of December 31, 2001, from the audited balance
sheet filed in our Form 10-K. In our opinion, we have made all 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 indicate the results of operations for the entire year. In
addition, prior period information presented in these financial statements
includes reclassifications which were made to conform to the current period
presentation. These reclassifications have no effect on our previously reported
net income or stockholder's equity.

Our accounting policies are consistent with those discussed in our Form
10-K, except as discussed below:

Asset Impairments

On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 changed the accounting requirements related to when an asset
qualifies as held for sale or as a discontinued operation and the way in which
we evaluate assets for impairment. It also changed accounting for discontinued
operations such that we can no longer accrue future operating losses in these
operations. There was no initial financial statement impact of adopting this
statement.

2. DEBT AND OTHER CREDIT FACILITIES

In January 2002, we repaid $100 million of our 7.85% notes due 2002. We
also filed a new shelf registration statement, increasing the amount of debt we
could issue from $100 million to $300 million. In February 2002, we issued $300
million aggregate principal amount of 8.0% notes, due 2032. Proceeds were
approximately $297 million, net of issuance costs. This issuance used all the
capacity on our shelf registration statement on file with the SEC. In May 2002,
we repaid $100 million of our 8.625% notes due 2002.

3. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Grynberg. In 1997, we and a number of our affiliates were named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, these complaints allege an industry-wide conspiracy
to underreport the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and heating value of
natural gas produced from royalty properties been differently measured,
analyzed, calculated and reported, together with interest, treble damages, civil
penalties, expenses and future injunctive relief to require the defendants to
adopt allegedly appropriate gas measurement practices. No monetary relief has
been specified in this case. These matters have been consolidated for pretrial
purposes (In re: Natural Gas Royalties Qui Tam Litigation, U.S. District Court
for the District of Wyoming, filed June 1997). In May 2001, the court denied the
defendants' motions to dismiss.

4

Will Price (formerly Quinque). We and a number of our affiliates were named
defendants in Quinque Operating Company, et al v. Gas Pipelines and Their
Predecessors, et al, filed in 1999 in the District Court of Stevens County,
Kansas. Quinque has been dropped as a plaintiff and Will Price has been added.
This class action complaint alleges that the defendants mismeasured natural gas
volumes and heating content of natural gas on non-federal and non-Native
American lands. The plaintiff in this case seeks certification of a nationwide
class of gas working interest owners and gas royalty owners to recover royalties
that the plaintiff contends these owners should have received had the volume and
heating value of natural gas produced from their properties been differently
measured, analyzed, calculated and reported, together with prejudgment and
postjudgment interest, punitive damages, treble damages, attorney's fees, costs
and expenses, and future injunctive relief to require the defendants to adopt
allegedly appropriate gas measurement practices. No monetary relief has been
specified in this case. Plaintiffs' motion for class certification has been
filed and we have filed our response.

In addition to the above matters, we are also a named defendant in numerous
lawsuits and governmental proceedings that arise in the ordinary course of our
business.

For each of our outstanding legal 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.
As of September 30, 2002, we had no accruals for our outstanding legal matters.

Environmental Matters

We are subject to extensive federal, state and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations require us to remove or remedy the effect on the environment of the
disposal or release of specified substances at current and former operating
sites. As of September 30, 2002, we had approximately $6 million accrued for
expected remediation costs and associated onsite, offsite and groundwater
technical studies and for related environmental legal costs, which we anticipate
incurring through 2027. Below is a reconciliation of our environmental
remediation liability as of December 31, 2001 to our liability as of September
30, 2002 (in millions):

Balance as of December 31, 2001............................. $11
Payments for remediation activities......................... (5)
---
Balance as of September 30, 2002............................ $ 6
===

In addition, we expect to make capital expenditures for environmental
matters of approximately $6 million in the aggregate for the years 2002 through
2007. These expenditures primarily relate to compliance with clean air
regulations. For the fourth quarter of 2002, we estimate that our total
expenditures will be approximately $1 million, which primarily will be expended
under government directed clean-up plans.

Rates and Regulatory Matters

Order No. 637. In February 2000, the Federal Energy Regulatory Commission
(FERC) issued Order No. 637. Order 637 impacts the way pipelines conduct their
operational activities, including how they release capacity, segment capacity
and manage imbalance services, operational flow orders and pipeline penalties.
In July 2001, we filed a settlement addressing our compliance with Order No. 637
and we received an order on the settlement from the FERC in April 2002. The FERC
approved our settlement, subject to modifications related to our capacity
segmentation proposal, and rejected our proposed changes to our cash-out
mechanism. In response, we sought a rehearing and have made another compliance
filing. We cannot predict the outcome of the compliance filing or the request
for rehearing.

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Elba Island. In March 2000, the FERC issued an order which authorized the
recommissioning of our Elba Island liquefied natural gas (LNG) receiving
terminal near Savannah, Georgia. In July 2001, the FERC issued a final order
approving a modification of the sendout facilities at the terminal subject to
several conditions. In October 2001, we received an initial cargo of LNG in
order to test the facilities, and also applied to increase Elba Island's initial
rates to reflect an increase in capital and expenses, primarily associated with
expenditures mandated by the FERC. In November 2001, the FERC authorized us to
commence service, but denied our request to amend the initial rates, indicating
that the increase should be filed in a separate limited proceeding. In December
2001, we filed the limited proceeding with the FERC, and received an order
accepting the new rates effective March 1, 2002, subject to refund. On October
10, 2002, the FERC approved a settlement that permits us to track certain
dredging costs but otherwise preserves the filed rates that became effective on
March 1, 2002.

South System I Expansion. In May 2000, we applied to expand our pipeline
system by 336 million cubic feet per day (MMcf/d), at an estimated cost of $141
million, to serve new power generation loads being sited adjacent to our south
system (South System I Expansion). We received a certificate order from the FERC
in March 2001. In July 2001, the FERC approved an amendment to the South System
I Expansion, which reduced its cost slightly. The first phase of the new
facilities was completed and placed in-service in June 2002. The Alabama
Municipal Distributors Group and others filed appeals of the FERC's orders
authorizing this project in the D.C. Circuit Court of Appeals. On July 26, 2002,
we filed a brief in support of the FERC's order and an oral argument was held on
November 1, 2002.

Marketing Affiliate NOPR. In September 2001, the FERC issued a Notice of
Proposed Rulemaking (NOPR). The NOPR proposes to apply the standards of conduct
governing the relationship between interstate pipelines and marketing affiliates
to all energy affiliates. The proposed regulations, if adopted by the FERC,
would dictate how we conduct business and interact with our energy affiliates.
In December 2001, we filed comments with the FERC addressing our concerns with
the proposed rules. A public hearing was held on May 21, 2002, providing an
opportunity to comment further on the NOPR. Following the conference, additional
comments were filed by El Paso's pipelines and others. At this time, we cannot
predict the outcome of the NOPR, but adoption of the regulations in their
proposed form would, at a minimum, place additional administrative and
operational burdens on us.

Negotiated Rate NOI. In July 2002, the FERC issued a Notice of Inquiry
(NOI) that seeks comments regarding its 1996 policy of permitting pipelines to
enter into negotiated rate transactions. The FERC is now reviewing whether
negotiated rates should be capped, whether or not a pipeline's "recourse rate"
(a cost-of-service based rate) continues to safeguard against a pipeline
exercising market power, as well as other issues related to negotiated rate
programs. On September 25, 2002, El Paso's pipelines and others filed comments.
Reply comments were filed on October 25, 2002. At this time, we cannot predict
the outcome of this NOI.

Cash Management NOPR. On August 1, 2002, the FERC issued a NOPR requiring
that all cash management or money pool arrangements between a FERC regulated
subsidiary (like us) and a non-FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires specified documentation for all deposits
into, borrowings from, interest income from, and interest expenses related to,
these arrangements. Finally, the NOPR proposed that as a condition of
participating in a cash management or money pool arrangement, the FERC regulated
entity maintain a minimum proprietary capital balance of 30 percent, and the
FERC regulated entity and its parent maintain investment grade credit ratings.
On August 28, 2002, comments were filed. The FERC held a public conference on
September 25, 2002 to discuss the issues raised in the comments. Representatives
of companies from the gas and electric industries participated on a panel and
uniformly agreed that the proposed regulations should be revised substantially
and that the proposed capital balance and investment grade credit rating
requirements would be excessive. At this time, we cannot predict the outcome of
this NOPR.

6

Also on August 1, 2002, the FERC's Chief Accountant issued an Accounting
Release, to be effective immediately, providing guidance on how companies should
account for money pool arrangements and the types of documentation that should
be maintained for these arrangements. However, the Accounting Release did not
address the proposed requirement that the FERC regulated entity maintain a
minimum proprietary capital balance of 30 percent and that the entity and its
parent have investment grade credit ratings. Requests for rehearing were filed
on August 30, 2002. The FERC has not yet acted on the rehearing requests.

South System II Expansion. In October 2001, we applied with the FERC to
expand our south system by 360 MMcf/d at an estimated cost of $247 million, to
serve existing, new and expanded gas-fired electric generation facilities. The
construction will occur in two phases, with target in-service dates of June 1,
2003 for the Phase I facilities, and May 1, 2004 for the Phase II facilities.
Two shippers requested a delay in the commencement of their services and one
shipper requested to reduce service quantity. As a result, in April 2002, we
filed an amendment to the certificate application to reflect these changes. On
September 20, 2002, the FERC issued a certificate authorizing the project, as
modified. Subsequently, another shipper requested a delay in its in-service
date. We have executed an agreement setting forth the terms under which we would
agree to the requested delay and will soon file an amendment to the certificate
application with the FERC.

Elba Island LNG Expansion. On May 31, 2002, we applied to expand the Elba
Island LNG terminal based on an agreement for new firm terminalling service we
entered into with Shell NA LNG in December 2001. This expansion adds a new
marine slip, a fourth storage tank with a capacity of 3.3 billion cubic feet
equivalent, and new pumps and vaporizers that increase the design sendout rate
from 446 MMcf/d to 806 MMcf/d and the maximum sendout rate from 675 MMcf/d to
1,215 MMcf/d. This application is currently pending before the FERC.

While the outcome of our outstanding legal matters, environmental matters
and rates and regulatory matters cannot be predicted with certainty, based on
the information we know now and our existing accruals, we do not expect the
ultimate resolution of these matters to have a material adverse effect on our
financial position, operating results or cash flows. It is possible that new
information or future developments could require us to reassess our potential
exposure related to these matters. Further, for environmental matters, it is
also possible that other developments, such as increasingly strict environmental
laws and regulations and claims for damages to property, employees, other
persons and the environment resulting from our current or past operations, could
result in substantial costs and liabilities in the future. As new information
for our outstanding legal matters, environmental matters and rates and
regulatory matters becomes available, or relevant developments occur, we will
review our accruals and make any appropriate adjustments. The impact of these
changes may have a material effect on our results of operations and on our cash
flows in the period the event occurs.

4. COMMON STOCK

On March 7, 2002, our Board of Directors approved and we filed an amended
and restated certificate of incorporation changing our authorized shares of
stock to 1,000 shares of common stock, with a par value of $1 per share. This
action and the reclassification did not impact our total equity. As of December
31, 2001, we had 1,000 authorized and issued shares with a par value of $3.75
per share.

5. RELATED PARTY TRANSACTIONS

We participate in El Paso Corporation's (El Paso) cash management program
which matches short-term cash surpluses and needs of participating affiliates,
thus minimizing total borrowing from outside sources. As of September 30, 2002
and December 31, 2001, we had advanced $441 million and $371 million. The market
rate of interest at September 30, 2002 was 1.8% and at December 31, 2001, it was
2.1%.

At September 30, 2002 and December 31, 2001, we had accounts receivable
from related parties of $29 million and $1 million. In addition, we had accounts
payable to affiliates of $19 million at September 30, 2002, and $7 million at
December 31, 2001. These balances arose in the normal course of business.

7

In September of 2002, we sold approximately $28 million of our trade
accounts receivable at a discount to El Paso Energy Finance Company, an
unconsolidated affiliate, as part of an accounts receivable sales program. El
Paso Energy Finance Company, in turn, sold those receivables to a bank. The
program was initiated to accelerate the collection of funds for El Paso, and the
proceeds we received from the sale were advanced to our parent company through
our cash management program described above.

6. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Accounting for Asset Retirement Obligations

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This statement requires
companies to record a liability for the estimated retirement and removal costs
of assets used in their business. The liability is recorded at its fair value,
with a corresponding asset which is depreciated over the remaining useful life
of the long-lived asset to which the liability relates. An on-going expense will
also be recognized for changes in the value of the liability as a result of the
passage of time. The provisions of SFAS No. 143 are effective for fiscal years
beginning after June 15, 2002. We are currently assessing and quantifying the
asset retirement obligations associated with our long-lived assets. We expect to
complete our assessment of these asset retirement obligations and be able to
estimate their effect on our financial statements in the fourth quarter of 2002.

Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement will require us to recognize
costs associated with exit or disposal activities when they are incurred rather
than when we commit to an exit or disposal plan. Examples of costs covered by
this guidance include lease termination costs, employee severance costs
associated with a restructuring, discontinued operations, plant closings or
other exit or disposal activities. This statement is effective for fiscal years
beginning after December 31, 2002, and will impact any exit or disposal
activities we initiate after January 1, 2003.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in our Annual Report on Form 10-K filed
March 20, 2002, in addition to the financial statements and notes presented in
Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

RECENT DEVELOPMENTS

Since the fourth quarter of 2001, a number of recent developments in our
business and industry have impacted our operations and liquidity. These have
included:

- The bankruptcy of Enron Corp. and the resulting decline of the energy
trading industry; and

- The modification of credit standards by the rating agencies.

Credit rating agencies have recently re-evaluated the credit ratings of
companies involved in energy trading activities, which included our parent and
our affiliates. The recent developments referenced above, as well as the
Administrative Law Judge's decision dated September 23, 2002 in the FERC
proceeding entitled Public Utilities Commission of the State of California v. El
Paso Natural Gas Company, et al., appear to have influenced both Moody's and
Standard & Poor's in downgrading our parent's credit rating, and it remains on
negative credit watch by both. Our senior unsecured debt was downgraded from
Baa1 to Baa2 by Moody's and from BBB+ to BBB by Standard & Poor's and we remain
on negative credit watch by both rating agencies.

While these developments do not have an immediate impact on our financial
position or results of operations, a further downgrade of our debt securities
could result in higher cash requirements to conduct our operations (through cash
collateral requirements). If this were to occur, we would have less cash
available to use for capital expenditures and other purposes, although we do
believe we would have sufficient operating resources to fund our ongoing
operating activities.

In addition, as a result of the rating agencies' downgrading the credit
rating of several members of the energy sector, including energy trading
companies, and placing them on negative credit watch, the credit-worthiness of
these companies has been questioned. We have taken actions to mitigate our
exposure by requesting these companies to provide us with a letter of credit or
prepayments as permitted by our tariff. Our tariff permits us to request
additional credit assurance from our shippers equal to the cost of performing
transportation services for a three month period. If these companies file for
Chapter 11 bankruptcy protection and our contracts are not assumed by other
counterparties, or if the capacity is unavailable for resale, it could have an
adverse effect on our financial position, operating results or cash flows.

RESULTS OF OPERATIONS

Our business consists of interstate natural gas transmission and gas
storage operations. Our interstate natural gas transmission system faces varying
degrees of competition from other pipelines, as well as alternate energy
sources, such as electricity, hydroelectric power, coal and fuel oil. We are
regulated by the Federal Energy Regulatory Commission. The FERC sets the rates
we can recover from our customers. These rates are generally a function of our
costs of providing services to our customers, as well as a reasonable return on
our invested capital. As a result, our results have historically been relatively
stable. However, they can be subject to volatility due to factors such as
weather, changes in natural gas prices, regulatory actions and the
credit-worthiness of our customers. In addition, our ability to extend our
existing contracts or re-market expiring capacity is dependent on competitive
alternatives, the regulatory environment and supply and demand factors at the
relevant extension or expiration dates. While we make every attempt to negotiate
contract terms at fully-subscribed quantities and at maximum rates allowed under
our tariffs, we must, in some cases, discount our rates to remain competitive.

We use earnings before interest and income taxes (EBIT) to assess the
operating results and effectiveness of our business. We define EBIT as operating
income, adjusted for equity earnings from unconsolidated investments, gains and
losses on sales of assets and other miscellaneous non-operating items. Items
that are not included in this measure are financing costs, including interest
and debt expense and

9

income taxes. We believe this measurement is useful to our investors because it
allows them to evaluate the effectiveness of our businesses and operations and
our investments from an operational perspective, exclusive of the costs to
finance those activities and exclusive of income taxes, neither of which are
directly relevant to the efficiency of those operations. This measurement may
not be comparable to measurements used by other companies and should not be used
as a substitute for net income or other performance measures such as operating
cash flow.

Below are the operating results and an analysis of these results for the
periods ended September 30:

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(1) BBtu/d means billion British thermal units per day.

In March 2000, the FERC issued an order allowing us to reactivate our Elba
Island LNG facility. The facility received its first LNG shipment in October
2001 and was officially placed in service on December 1, 2001.

Third Quarter 2002 Compared to Third Quarter 2001

Operating revenues for the quarter ended September 30, 2002, were $12
million higher than the same period in 2001. The increase was primarily due to
revenues of $8 million in 2002 from our Elba Island facility, which was placed
in service in December 2001, and $4 million in 2002 from our South System I
(Phase 1) expansion, which was placed in service in June 2002. Also contributing
to the increase was a $2 million impact of higher remarketing rates and volumes
in the third quarter of 2002 on seasonal turned-back capacity that resulted from
our 2000 rate case settlement. These increases were partially offset by $2
million from lower volumes on sales under natural gas purchase contracts in
2002.

Operating expenses for the quarter ended September 30, 2002, were $5
million higher than the same period in 2001. The increase was due to higher
operating expenses of $3 million, higher depreciation and amortization of $1
million, both due to our Elba Island facility being in service in 2002 and an
increase in ad valorem and franchise taxes in 2002 of $1 million. These
increases were partially offset by $2 million from lower purchased natural gas
costs due to lower volumes purchased in 2002.

Other income for the quarter ended September 30, 2002, was $2 million lower
than the same period in 2001 primarily as a result of higher capitalization of
interest in 2001 during the reactivation of our Elba Island facility.

Nine Months Ended 2002 Compared to Nine Months Ended 2001

Operating revenues for the nine months ended September 30, 2002, were $10
million higher than the same period in 2001 primarily due to revenues in 2002 of
$22 million from our Elba Island facility, which was placed in service in
December 2001, and revenues of $4 million from our South System I (Phase 1)
expansion, which was placed in service in June 2002. Also contributing to the
increase was a $4 million impact of higher remarketing rates and volumes in 2002
on seasonal turned-back capacity that resulted from our 2000 rate case
settlement. These increases were partially offset by $18 million from lower
prices and volumes on sales under natural gas purchase contracts in 2002 and
sales of excess natural gas recoveries in 2001 of $4 million that did not recur
in 2002.

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Operating expenses for the nine months ended September 30, 2002, were $5
million lower than the same period in 2001 primarily as a result of lower
purchased natural gas costs of $18 million due to lower prices and volumes in
2002. These decreases were partially offset by higher operation and maintenance
expenses of $9 million, higher depreciation and amortization of $3 million, both
due to our Elba Island facility being in service in 2002 and higher ad valorem
and franchise taxes in 2002 of $2 million.

Other income for the nine months ended September 30, 2002, was $4 million
lower than the same period in 2001 primarily as a result of higher
capitalization of interest during the reactivation of our Elba Island facility
during 2001 of $3 million and a contract termination fee of $2 million received
in the first quarter of 2001. Also contributing to the decrease were lower gains
of $1 million on sales of non-pipeline assets in 2002 compared to 2001. These
decreases were partially offset by increased interest capitalization of $3
million due to capital spending for expansion projects in 2002.

New Expansion Project. In the third quarter of 2002, the FERC approved our
South System II project and related compressor facilities. This expansion has a
design capacity of 330 million cubic feet per day. The construction will be
undertaken in two phases, with a target in-service date for the Phase I
facilities of June 1, 2003, and for the Phase II facilities of May 1, 2004. The
South System II project will increase our firm transportation capacity along our
south mainline to Alabama, Georgia and South Carolina.

INTEREST AND DEBT EXPENSE

Non-Affiliated Interest and Debt Expense

Non-affiliated interest and debt expense for the quarter and nine months
ended September 30, 2002, was $14 million and $42 million, which was $1 million
and $6 million higher than the same periods in 2001 due to increased net
long-term borrowings. We issued $300 million of long-term debt with an interest
rate of 8.0% in February 2002, and repaid $100 million 7.85% long-term debt in
January 2002 and $100 million 8.625% long-term debt in May 2002.

Affiliated Interest Income

Affiliated interest income for the quarter ended September 30, 2002, was $2
million, or $2 million lower than the same period in 2001 due primarily to lower
short-term interest rates in 2002, partially offset by higher average advance
balances to El Paso under our cash management program. The average short-term
interest rate for the third quarter decreased from 3.8% in 2001 to 1.8% in 2002.

Affiliated interest income for the nine months ended September 30, 2002,
was $6 million, or $8 million lower than the same period in 2001 due primarily
to lower short-term interest rates in 2002, partially offset by higher average
advance balances. The average short-term interest rate for the nine months
decreased from 4.9% in 2001 to 1.9% in 2002.

INCOME TAXES

Income tax expense for the quarter and nine months ended September 30,
2002, was $14 million and $44 million, resulting in effective tax rates of 39
percent and 38 percent. Income tax expense for the quarter and nine months ended
September 30, 2001, was $14 million and $47 million, resulting in effective tax
rates of 41 percent and 39 percent. Our effective tax rates were different than
the statutory rate of 35 percent in all periods primarily due to state income
taxes.

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Statements, Note 3, which is incorporated herein by
reference.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

See Item 1, Financial Statements, Note 6, which is incorporated herein by
reference.

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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and to be made in
good faith, assumed facts or bases almost always vary from the actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, 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 statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," "estimate," "anticipate" and similar expressions will
generally identify forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with,
information disclosed in Part II, Item 7A in our Annual Report on Form 10-K for
the year ended December 31, 2001, in addition to the information presented in
Items 1 and 2 of this Quarterly Report on Form 10-Q.

There are no material changes in our quantitative and qualitative
disclosures about market risks from those reported in our Annual Report on Form
10-K for the year ended December 31, 2001.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934 (the "Exchange Act"). Based on that evaluation, our principal executive
officer and principal financial officer have concluded that these controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified under the
Exchange Act. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

The principal executive officer and principal financial officer
certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 have been included herein, or as Exhibits to this Quarterly Report on Form
10-Q, as appropriate.

12

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Financial Statements, Note 3, which is incorporated
herein by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*"; all
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.

4.A Indenture dated June 1, 1987 between Southern Natural Gas
(SNG) and JPMorgan Chase Bank, formerly The Chase Manhattan
Bank, as Trustee; First Supplemental Indenture, dated as of
September 30, 1997, between SNG and the Trustee; and Second
Supplemental Indenture dated as of February 13, 2001,
between SNG and the Trustee (Exhibit 4.1 to our Registration
Statement on Form S-3 (No. 333-76782) dated January 15,
2001).
*99.A Certification of Chief Executive Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.
*99.B Certification of Chief Financial Officer pursuant to 18
U.S.C. sec. 1350 as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the U.S. Securities and Exchange
Commission, upon request, all constituent instruments defining the rights
of holders of our long-term debt not filed herewith for the reason that the
total amount of securities authorized under any of such instruments does
not exceed 10 percent of our total consolidated assets.

b. Reports on Form 8-K

None.

13

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SOUTHERN NATURAL GAS COMPANY

Date: November 13, 2002 /s/ JOHN W. SOMERHALDER II
------------------------------------
John W. Somerhalder II
Chairman of the Board and Director
(Principal Executive Officer)

Date: November 13, 2002 /s/ GREG G. GRUBER
------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)

14

CERTIFICATION

I, John W. Somerhalder II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern
Natural Gas Company;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrants's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 13, 2002

/s/ JOHN W. SOMERHALDER II
--------------------------------------
John W. Somerhalder II
Chairman of the Board
(Principal Executive Officer)
Southern Natural Gas Company

15

CERTIFICATION

I, Greg G. Gruber, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern
Natural Gas Company;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 13, 2002

/s/ GREG G. GRUBER
--------------------------------------
Greg G. Gruber
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Southern Natural Gas Company

16

EXHIBIT INDEX

Each exhibit identified below is filed as a part of this report. Exhibits
not incorporated by reference to a prior filing are designated by an "*"; all
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated.