Southern Natural Gas closed a major deal with its customers lastweek that will give them a $44 million rate cut in exchange forlong-term contracts that lock up the majority of Sonat’s firmtransportation and storage capacity through 2005. The rate cutamounts to an overall 4.5%-5% reduction in systemwide demandcharges.

“With the contract extensions we felt we could take more risk inachieving cost reductions,” said Jim Cleary, Sonat’s executive vicepresident. “The rates that we had proposed to be effective March 1,would have resulted in.probably close to a $29 million increasefrom the settlement rates that were in effect for all partiesthrough February — the rates established under the March 1995settlement,” he said. “Through this settlement we are avoiding that$29 million increase and taking the settlement rates close to $15million below the rates that were in effect in February. So youhave a swing of $44 million.”

According to Cleary, major changes were made in several areas:there was a $10 million decrease from Sonat accepting a 12% returnon equity as opposed to the 13% sought in August; there was a $14million depreciation reduction; $10 million was cut fromadministrative and general expenses; and another $10 million camefrom operating cost reductions.

The deal includes significant cuts for affiliate South GeorgiaGas customers. Southern plans to swallow South Georgia’s pipelineoperations to eliminate rate stacking with its affiliate. SouthGeorgia, a separate 910-mile interstate pipeline, will be mergedinto the Southern Natural system following FERC authorization.

“The customers on South Georgia wanted lower rates. MergingSouth Georgia into Southern Natural is a way to do that,” saidCleary. “Currently customers on the South Georgia segment pay$5.41/Dth/month. That will go down to $4.75. Currently on SouthernNatural, they pay $8.62 so they pay $14.03 in combined demandcharges currently, but that will go down to $12.85/Dth/month.

“We think all of the active parties to the settlement are inagreement,” said Cleary. “Customers representing over 95% of ourrevenues have told us affirmatively that they would support thesettlement. We may have one small marketer protest it. Thismarketer probably represents probably less than one half of 1% ofour revenues.” He declined to name the marketer, however, saying,”We are still in discussions with them so I would prefer not to dothat.”

The $103 million North Alabama Pipeline, which went 50% overbudget, is rolled into rates, but other expansion projects and costreductions led to the systemwide rate improvement. “It’s a verypositive development for Southern and its customers, who will seeimmediate rate reductions and stable rates for the next four yearsat least.” The settlement provides Sonat customers a four-yearmoratorium on future rate increases by Southern Natural except incertain limited circumstances. It also requires Southern Natural tofile a new rate case with the FERC to be effective no later thanMarch 2005.

Through the settlement, Sonat has locked in contracts for amajority of its 2.6 Bcf/d of firm transportation capacity and 60Bcf of working storage through 2005.

“We are pleased to have been able to achieve an acceptablecommercial resolution with our customers that settles our rateproceeding and provides for immediate rate reductions andsignificant extensions of contracts,” said James C. Yardley,president of Southern Natural.

Rocco Canonica

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