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Sonat Deal Cuts Rates, Locks in Contracts, Folds in South Georgia

Sonat Deal Cuts Rates, Locks in Contracts, Folds in South Georgia

Southern Natural Gas closed a major deal with its customers last week that will give them a $44 million rate cut in exchange for long-term contracts that lock up the majority of Sonat's firm transportation and storage capacity through 2005. The rate cut amounts to an overall 4.5%-5% reduction in systemwide demand charges.

"With the contract extensions we felt we could take more risk in achieving cost reductions," said Jim Cleary, Sonat's executive vice president. "The rates that we had proposed to be effective March 1, would have resulted in.probably close to a $29 million increase from the settlement rates that were in effect for all parties through February --- the rates established under the March 1995 settlement," he said. "Through this settlement we are avoiding that $29 million increase and taking the settlement rates close to $15 million below the rates that were in effect in February. So you have 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% return on equity as opposed to the 13% sought in August; there was a $14 million depreciation reduction; $10 million was cut from administrative and general expenses; and another $10 million came from operating cost reductions.

The deal includes significant cuts for affiliate South Georgia Gas customers. Southern plans to swallow South Georgia's pipeline operations to eliminate rate stacking with its affiliate. South Georgia, a separate 910-mile interstate pipeline, will be merged into the Southern Natural system following FERC authorization.

"The customers on South Georgia wanted lower rates. Merging South Georgia into Southern Natural is a way to do that," said Cleary. "Currently customers on the South Georgia segment pay $5.41/Dth/month. That will go down to $4.75. Currently on Southern Natural, they pay $8.62 so they pay $14.03 in combined demand charges currently, but that will go down to $12.85/Dth/month.

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

The $103 million North Alabama Pipeline, which went 50% over budget, is rolled into rates, but other expansion projects and cost reductions led to the systemwide rate improvement. "It's a very positive development for Southern and its customers, who will see immediate rate reductions and stable rates for the next four years at least." The settlement provides Sonat customers a four-year moratorium on future rate increases by Southern Natural except in certain limited circumstances. It also requires Southern Natural to file a new rate case with the FERC to be effective no later than March 2005.

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

"We are pleased to have been able to achieve an acceptable commercial resolution with our customers that settles our rate proceeding and provides for immediate rate reductions and significant extensions of contracts," said James C. Yardley, president of Southern Natural.

Rocco Canonica

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