<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 to
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 30, 1999
(Date of earliest event reported: March 13, 1999)
EL PASO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-14365 76-0568816
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 420-2131
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
This Amendment No. 1 to Current Report on Form 8-K amends the Current
Report on Form 8-K filed by El Paso Energy Corporation on April 23, 1999 to
reflect changes to the pro forma financial information included therein and to
include historical financial statements of Sonat Inc.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
<PAGE> 3
Report of Ernst & Young LLP, Independent Auditors
Sonat Inc. and Subsidiaries
The Board of Directors and Stockholders
Sonat Inc.
We have audited the accompanying consolidated balance sheets of Sonat Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 financial statements of Zilkha Energy
Company, a wholly owned subsidiary, which statements reflect net income
constituting approximately 17 percent of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Zilkha Energy
Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and, for 1996, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sonat
Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in
1998 the Company changed its method of accounting for oil and gas operations.
/s/ Ernst & Young LLP
Birmingham, Alabama
January 19, 1999
2
<PAGE> 4
Consolidated Balance Sheets
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997(*)
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,104 $ 27,278
Restricted cash (Note 1) -- 115,956
Notes receivable from affiliates 50,359 64
Accounts receivable 388,075 619,517
Inventories (Note 5) 69,093 65,161
Gas imbalance receivables 7,673 16,644
Assets from trading activities (Note 4) 229,801 92,150
Other 48,404 44,037
- ---------------------------------------------------------------------------
Total Current Assets 800,509 980,807
- ---------------------------------------------------------------------------
Investments and Advances:
Unconsolidated affiliates (Note 6) 635,692 495,234
Other investments 61,316 58,384
- ---------------------------------------------------------------------------
697,008 553,618
- ---------------------------------------------------------------------------
Plant, Property and Equipment, including
$148,615,000 in 1998 and $201,208,000
in 1997, excluded from full-cost
amortization base used for oil and
gas properties (Notes 7 and 14) 8,399,934 7,830,697
Less Accumulated Depreciation,
Depletion and Amortization 5,703,767 4,264,917
- ---------------------------------------------------------------------------
2,696,167 3,565,780
- ---------------------------------------------------------------------------
Deferred Charges and Other:
Assets from trading activities (Note 4) 25,694 9,638
Other 141,716 142,271
- ---------------------------------------------------------------------------
167,410 151,909
- ---------------------------------------------------------------------------
Total Assets $4,361,094 $5,252,114
===========================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
3
<PAGE> 5
Consolidated Balance Sheets
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
December 31, 1998 1997(*)
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year (Note 8) $ 109,835 $ 14,508
Unsecured notes (Note 8) 720,361 446,721
Accounts payable 401,357 615,322
Accrued income taxes 21,700 18,274
Accrued interest 47,864 37,242
Accrued long-term compensation -- 73,799
Gas imbalance payables 11,497 14,320
Liabilities from trading activities (Note 4) 223,628 85,398
Other 40,357 75,299
- --------------------------------------------------------------------------------
Total Current Liabilities 1,576,599 1,380,883
- --------------------------------------------------------------------------------
Long-Term Debt (Note 8) 1,099,484 1,235,984
- --------------------------------------------------------------------------------
Deferred Credits and Other:
Deferred income taxes (Note 9) 163,964 485,950
Liabilities from trading activities (Note 4) 12,564 5,014
Other 179,232 182,507
- --------------------------------------------------------------------------------
355,760 673,471
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, $1.00 par; 400,000,000 shares
authorized, 111,387,520 and 111,385,858
shares issued in 1998 and 1997, respectively
(Note 11) 111,388 111,385
Other capital 68,804 56,401
Retained earnings 1,209,527 1,858,871
- --------------------------------------------------------------------------------
1,389,719 2,026,657
- --------------------------------------------------------------------------------
Less treasury stock at cost, 1,345,673
and 1,438,793 shares in 1998 and
1997, respectively (Note 11) 60,468 64,881
- --------------------------------------------------------------------------------
Total Stockholders' Equity 1,329,251 1,961,776
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $4,361,094 $5,252,114
================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
4
<PAGE> 6
Consolidated Statements of Operations
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
----------------------------------------------------
Years Ended December 31, 1998 1997(*) 1996(*)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Notes 1 and 13) $ 3,709,818 $ 4,372,497 $ 3,203,610
- ----------------------------------------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 2,393,027 2,949,766 1,973,147
Electric power cost 351,942 224,294 65,699
Operating and maintenance 163,386 181,911 155,781
General and administrative 117,749 202,754 145,571
Depreciation, depletion and amortization 349,465 397,955 383,903
Ceiling test charges (Note 2) 1,035,178 -- --
Restructuring costs (Note 3) 15,017 -- --
Taxes, other than income 47,418 43,800 47,447
- ----------------------------------------------------------------------------------------------------
4,473,182 4,000,480 2,771,548
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) (763,364) 372,017 432,062
- ----------------------------------------------------------------------------------------------------
Other Income (Loss), Net:
Equity in earnings of unconsolidated
affiliates (Note 6) 48,777 43,021 34,211
Minority interest 4,082 (4,395) (4,907)
Other income, net 8,495 10,296 6,525
- ----------------------------------------------------------------------------------------------------
61,354 48,922 35,829
- ----------------------------------------------------------------------------------------------------
Earnings (Loss) Before Interest and Taxes (702,010) 420,939 467,891
- ----------------------------------------------------------------------------------------------------
Interest:
Interest income 5,459 4,908 4,874
Interest expense (136,837) (109,548) (101,403)
Interest capitalized 5,123 7,448 7,642
- ----------------------------------------------------------------------------------------------------
(126,255) (97,192) (88,887)
- ----------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (828,265) 323,747 379,004
Income Tax Expense (Benefit) (Note 9) (297,748) 105,751 123,164
- ----------------------------------------------------------------------------------------------------
Net Income (Loss) $ (530,517) $ 217,996 $ 255,840
====================================================================================================
Earnings (Loss) Per Share of Common
Stock (Note 11) $ (4.82) $ 1.98 $ 2.32
Earnings (Loss) Per Share of Common
Stock - Assuming Dilution (Note 11) (4.82) 1.95 2.29
====================================================================================================
Weighted Average Shares Outstanding 110,020 110,099 110,370
Weighted Average Shares Outstanding
- Assuming Dilution 110,020 111,669 111,722
====================================================================================================
Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.08
====================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
5
<PAGE> 7
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------------------------------------
1998 1997(*) 1996(*)
--------------------------------------------------------------------------------
Years Ended December 31, Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock, $1.00 Par; 400,000,000
Shares Authorized (Note 11):
Balance at beginning of year 111,385 $ 111,385 111,391 $ 111,391 111,402 $ 111,402
Issued (canceled) 3 3 (6) (6) (11) (11)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 111,388 111,388 111,385 111,385 111,391 111,391
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income:
Balance at beginning of year 3,222 10,140 6,614
Realized net (gains)/losses in value of
securities (net of tax expense/(benefit)
of $683,000, $1,216,000, and $(86,000)) (1,269) (2,259) 160
Change in unrealized gains (losses)
on securities, (net of tax expense/
(benefit) of $(202,000), $(2,509,000),
and $1,812,000) (376) (4,659) 3,366
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,577 3,222 10,140
- ------------------------------------------------------------------------------------------------------------------------------------
Other Capital:
Balance at beginning of year 53,179 50,522 58,643
Tax benefit from utilization of NOL
carryforward 11,505 -- --
Other 2,543 2,657 (8,121)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 67,227 53,179 50,522
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year 1,858,871 1,733,653 1,371,757
Adjustment to beginning balance for Sonat
Exploration's change to full cost (Note 2) -- -- 199,196
Net income (loss) (530,517) 217,996 255,840
Cash dividends paid by Sonat at
$1.08 per share (118,827) (92,778) (93,140)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,209,527 1,858,871 1,733,653
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock, at cost:
Balance at beginning of year (1,438) (64,881) (831) (29,703) (1,077) (31,534)
Additions (56) (2,284) (1,058) (54,056) (775) (30,966)
Issued 148 6,697 451 18,878 1,021 32,797
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,346) (60,468) (1,438) (64,881) (831) (29,703)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 110,042 $1,329,251 109,947 $1,961,776 110,560 $1,876,003
====================================================================================================================================
Comprehensive Income (Loss) $ (532,162) $ 211,078 $ 259,366
====================================================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
6
<PAGE> 8
Consolidated Statements of Cash Flows
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------
Years Ended December 31, 1998 1997(*) 1996(*)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (530,517) $ 217,996 $ 255,840
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization,
including ceiling test charges 1,384,643 397,955 383,903
Deferred income taxes (321,986) 85,249 100,302
Equity in earnings of unconsolidated
affiliates, less distributions (38,255) (31,914) (23,040)
Reserves for regulatory matters (4,237) (10,212) (167,154)
Gas supply realignment costs 1,067 7,514 187,929
Change in:
Accounts receivable 231,442 (7,781) (261,932)
Inventories (3,932) (34,111) (7,002)
Accounts payable (213,965) 79,947 226,370
Accrued interest and income taxes, net 14,319 (2,248) 30,695
Accrued long-term compensation (73,799) 57,493 1,266
Other current assets 4,333 (4,256) (3,589)
Other current liabilities (37,765) 13,452 6,534
Net change from trading activities (7,927) (11,376) --
Net change in restricted cash 115,956 (115,956) --
Other, net (9,515) (8,114) (73,385)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 509,862 633,638 656,737
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Plant, property and equipment additions (819,135) (1,022,353) (761,211)
Net proceeds from disposal of assets 325,333 49,842 149,367
Investments in unconsolidated affiliates and other (153,048) (47,127) (9,143)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (646,850) (1,019,638) (620,987)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 500,000 2,025,041 987,088
Payments of long-term debt (539,500) (1,812,023) (862,877)
Changes in short-term borrowings 273,640 288,691 (60,870)
- -------------------------------------------------------------------------------------------------------------
Net changes in debt 234,140 501,709 63,341
Dividends paid (118,827) (92,778) (93,140)
Treasury stock purchases (1,289) (53,176) (30,914)
Other 2,790 9,514 22,264
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 116,814 365,269 (38,449)
- -------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (20,174) (20,731) (2,699)
Cash and Cash Equivalents at Beginning of Year 27,278 48,009 50,708
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 7,104 $ 27,278 $ 48,009
=============================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid For:
Interest, net of amount capitalized $ 119,898 $ 99,426 $ 75,870
Income taxes paid (refunds received), net 7,408 20,124 (4,914)
=============================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
7
<PAGE> 9
Notes to Consolidated Financial Statements
Sonat Inc. and Subsidiaries
NOTE 1 Business Description and Significant
Accounting Policies
Business Description - The Consolidated Financial Statements of Sonat Inc.
(Sonat) and its subsidiaries (the Company) reflect operations in the Exploration
and Production, Natural Gas Transmission and Energy Services segments. The
Exploration and Production segment is engaged in exploration, development and
production of domestic oil and natural gas. The Natural Gas Transmission segment
is primarily engaged in the interstate transmission and storage of natural gas.
The Energy Services segment is primarily engaged in the marketing of natural gas
and electric power and in power generation. For further description of business
segments, see Note 13. For a description of financial instruments, credit risk
and contingencies, see Notes 4 and 10.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of Sonat and its subsidiaries. The Consolidated Financial
Statements have been restated for a change to the full cost method of accounting
for the Company's oil and gas operations (see Note 2). Intercompany transactions
and accounts have been eliminated in consolidation. The equity method of
accounting is used for investments in affiliates owned 50 percent or less.
Use of Estimates in the Preparation of Financial Statements - In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - Cash equivalents are typically money-market
investments in the form of repurchase agreements, certificates of deposit and
time deposits with maturities of three months or less at the time of purchase.
These investments are accounted for at cost.
Restricted Cash - At December 31, 1997, the Company had $116.0 million
of restricted cash. The restricted cash was held in trust by the issuing bank,
was restricted as to withdrawal and use, and was invested in cash equivalents.
The restricted cash was used to pay certain merger expenses in 1998 (see Note
3).
Inventories - Inventories consist primarily of materials and supplies
and gas stored underground. Gas stored underground is carried at fair value,
which approximates average cost. Inventories of materials and supplies utilized
for ongoing replacements and expansions are reviewed regularly and adjusted to
their net realizable value.
Gas Imbalance Receivables and Payables - For the Natural Gas
Transmission segment, gas imbalances represent the difference between gas
receipts from and gas deliveries to the Company's transportation and storage
customers. Gas imbalances arise when these customers deliver more or less gas
into the pipeline than they take out. Imbalances incurred prior to
implementation of Order No. 636 are settled through exchange of gas. Imbalances
incurred after implementation of Order No. 636 are settled monthly. For the
Energy Services segment, imbalances are subject to the terms of the various
pipelines.
Plant, Property and Equipment and Depreciation - Plant, property and
equipment is carried at cost. The Company provides for depreciation on a
composite or straight-line basis, except for oil and gas properties. (See Notes
7 and 14.)
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Other than for oil and gas properties no impairment was required
in any of the three years in the period ended December 31, 1998. See Notes 2 and
16 for ceiling test charges related to oil and gas properties.
Oil and Gas Properties - The Company utilizes the full cost method of
accounting for its oil and gas properties. Under the full cost method, all
productive and non-productive costs incurred in connection with the acquisition,
exploration and development of oil and gas reserves are capitalized and
amortized on the unit-of-production method using proved reserves. Certain
unevaluated properties are excluded from the amortization base until a
determination has been made as to the existence of proved reserves. Since the
Company's operations are limited to the United States, it utilizes a single cost
center for amortization purposes. Capitalized costs are subject to a ceiling
test which limits such costs to the aggregate of the present value of future net
revenues plus the lower of cost or fair market value of unproved properties. Any
conveyances of properties are treated as adjustments to the cost of oil and gas
properties with no gain or loss recognized.
Accounting for Regulated Operations - The regulated operations of the
Company are subject to the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of
Regulation. Accordingly, the Company records certain assets and liabilities that
result from the effects of the rate-making process that would not be recorded
under generally accepted accounting principles for non-regulated entities. The
regulatory assets and regulatory liabilities of the Company are primarily
classified as Deferred Charges and Other
8
<PAGE> 10
Notes to Consolidated Financial Statements
Note 1 (continued)
and Deferred Credits and Other, respectively, in the Consolidated Balance
Sheets.
Revenue Recognition - Revenue is recognized in the Exploration and
Production segment when deliveries of oil and natural gas are made. The
Company's Natural Gas Transmission segment recognizes revenue from natural gas
transportation in the period the service is provided. Reserves are provided on
revenues collected subject to refund when appropriate. Revenues are recognized
in the Energy Services segment when deliveries of the physical commodities are
made and, for the segment's trading portfolio, as changes in the fair value of
items in the portfolio occur.
Commodity Price-Risk Management Activities - The Company uses
derivative instruments (commodity futures contracts, options and price swap
agreements) both to hedge its commodity price risk on natural gas, crude oil and
electricity, and as a market maker (trading activity) in natural gas and crude
oil.
Natural gas, crude oil and electricity futures contracts are traded on
the New York Mercantile Exchange (NYMEX). Natural gas contracts are for fixed
units of 10,000 MMBtu and are available for up to 36 months in the future. Crude
oil contracts are for fixed units of 1,000 barrels and are available for periods
up to 30 months in the future. Electricity contracts are for 736 megawatt hours
and are available for up to 18 months in the future.
Price swap agreements call for one party to make monthly payments to
(or receive payments from) another party based upon the differential between a
fixed and a variable price (fixed-price swap) or two variable prices (basis
swap) for a notional volume specified by the contract.
Options can be exchange traded on the NYMEX or traded over-the-counter.
Exchange traded and over-the-counter options give the owner the right, but not
the obligation, to a futures contract or to buy or sell an underlying commodity
at a given price, respectively.
Non-Trading Activities - Derivative positions taken specifically to
mitigate market price risk associated with significant physical transactions are
accounted for using hedge accounting provided they meet hedge accounting
criteria. Under hedge accounting, gains and losses from futures are deferred in
the Consolidated Balance Sheets in Deferred Credits and Other and recognized in
earnings in conjunction with the earnings recognition of the underlying
physical. Each net payment/receipt due or owed under the swap agreement is
recognized in earnings during the period to which the payment/receipt relates,
and there is no recognition in the Consolidated Balance Sheets for changes in
the swap's fair value. Gains or losses resulting from settlement of swaps are
amortized over their original terms. Cash flows from hedging activities are
recognized in the same section of the Consolidated Statements of Cash Flows as
the hedged transaction.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. In the event that correlation is not maintained, the gains or
losses associated with the hedging instruments are immediately recognized to the
extent that correlation is lost.
Trading Activities - The Company's trading portfolio consists of short-
and long-term energy-related purchase and sale commitments (physical and
derivative). All of these trading positions are reported at fair value and
recorded under the heading of Assets and Liabilities from Trading Activities
(current and long-term) in the Consolidated Balance Sheets. The change in fair
value is recognized in revenues as it occurs. Fair value is subject to change
and reflects an estimate of market prices considering various factors including
closing exchange and over-the-counter quotations, time value and volatility
factors underlying the commitments. These market prices are adjusted to reflect
the potential impact of liquidating Sonat Marketing's position in an orderly
manner over a reasonable period of time under present market conditions (see
Note 4).
Environmental Expenditures - The Company provides for environmental
liabilities when environmental assessments and/or remediation are probable and
such costs to the Company can be reasonably estimated. Accruals for
environmental remediation liabilities are not material and have not been
discounted.
Stock-Based Compensation - The Company follows the provisions of
Accounting Principles Board Opinion (APB) No. 25 for its stock-based
compensation awards (see Note 11).
Capitalized Interest - The Company capitalizes interest costs
associated with non-producing leases and exploration and major development
projects until the related properties are evaluated and subject to depletion.
The Company also capitalizes interest costs on major projects during
construction. Interest is capitalized on borrowed funds and, where regulation by
the Federal Energy Regulatory Commission (FERC) exists, on internally generated
funds. The weighted average rate used by regulated subsidiaries is calculated in
accordance with FERC rules. Rates used by unregulated subsidiaries approximate
the average interest rate on related debt. Interest capitalized on internally
generated funds is included in Other income, net.
Income Taxes - The Company follows a liability and asset approach in
accounting for income taxes. Deferred tax liabilities
9
<PAGE> 11
and assets are determined using the tax rate for the period in which those
amounts are expected to be paid or received. (See Note 9.)
Gas Supply Realignment Costs - Included in the Consolidated Statements
of Cash Flows are gas supply realignment costs that were incurred by the Company
to amend or terminate, or to purchase gas at above-market prices under its gas
purchase contracts as a result of the separation of its sales, transportation
and storage services mandated by FERC directive.
Recent Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 on
January 1, 1998, and has presented comprehensive income for all periods
presented in the Consolidated Statements of Changes in Stockholders' Equity.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, which establishes standards for the
way public companies report information about operating segments in annual
financial statements. SFAS No. 131, which is based on the management approach to
segment reporting, also establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the countries in which the entity holds assets and
reports revenue. The Company adopted SFAS No. 131 on January 1, 1998. (See Note
13.)
NOTE 2 Change in Method of Accounting for Oil and Gas Operations
In September 1998, the Company changed its accounting method for oil and gas
operations as conducted by its subsidiaries, Sonat Exploration Company and Sonat
Exploration GOM (Sonat Exploration), from the successful efforts method to the
full cost method because its capital spending is focused significantly more on
exploration activity than in the past. Full cost accounting, which amortizes
rather than expenses dry-hole exploration and other related costs, provides a
more appropriate method of matching revenues and expenses for the Company's
exploration strategy.
The Company has restated all prior consolidated financial statements as
a result of the conversion to full cost accounting. As a part of this process,
all previous charges related to the impairment of Sonat Exploration's assets,
including those taken in 1998, were reversed, which significantly raised the
book value of those properties as well as the Company's stockholders' equity.
The full cost method, however, requires quarterly ceiling tests to ensure that
the carrying value of oil and gas properties is not overstated. Sonat
Exploration performed ceiling tests for each of the 1998 quarters. At March 31,
1998, June 30, 1998, and September 30, 1998, it was determined that capitalized
costs exceeded the ceiling test limits by $39.7 million, $540.5 million and
$455.0 million, respectively, which are included as ceiling test charges in the
Consolidated Statement of Operations. Future quarterly full cost ceiling tests
will be based on the then-current NYMEX prices for both natural gas and oil,
after adjustments.
Since the net carrying value of the Company's oil and natural gas
properties has been reduced due to the full cost ceiling limitation such that
the present value of the Company's proved oil and gas reserves does not exceed
the Company's net oil and natural gas properties recorded on its balance sheet,
there is an increased risk of future property write-downs due to factors that
negatively affect the estimated present value of proved oil and gas reserves,
including volatile oil and natural gas prices, downward revisions in estimated
proved oil and natural gas quantities and unsuccessful exploratory operations
(see Note 16).
The effect of the accounting change on net income (loss) is as follows:
<TABLE>
<CAPTION>
(In Thousands,
Except Per-Share Amounts)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Effect on:
Net income $(258,351) $130,584 $18,006
Earnings (loss) per share of
common stock (2.35) 1.19 .16
Earnings (loss) per share of
common stock -
assuming dilution (2.35) 1.17 .16
- ----------------------------------------------------------------------------
</TABLE>
The effect of the accounting change on earnings by quarter for 1998 and 1997
is as follows (per-share amounts are on a diluted basis):
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
------------------------------------------------
Amount Per Share Amount Per Share
1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $ (10,063) $ (.09) $17,672 $.16
Second (57,317) (.52) 19,454 .17
Third (250,164) (2.27) 57,732 .52
Fourth 59,193 .54 35,726 .32
- -------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
Notes to Consolidated Financial Statements
NOTE 3 Changes in Operations
Business Combination - On January 30, 1998, following a special shareholders'
meeting, the Company completed the merger with Zilkha Energy Company by
exchanging approximately 24.2 million common shares for all of the outstanding
shares of Zilkha Energy. Zilkha Energy was a privately owned exploration and
production company. Immediately thereafter Zilkha Energy's name was changed to
Sonat Exploration GOM Inc.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling-of-interests under APB No. 16. Accordingly, all prior period
consolidated financial statements and notes have been restated to include Sonat
Exploration GOM in the Company's consolidated financial statements for all
periods presented.
There were no transactions between Sonat and Sonat Exploration GOM
prior to the combination. Certain changes were made to the Sonat Exploration GOM
financial statements to conform to Sonat's basis of accounting presentation.
The following are the revenues and net income (loss) for the previously
separate companies and the combined amounts presented in these consolidated
financial statements.
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------
Month of Years Ended December 31,
January 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sonat Inc. $380,302 $4,175,218 $3,038,425
Sonat Exploration GOM 14,186 197,279 165,185
- -------------------------------------------------------------------------
Combined $394,488 $4,372,497 $3,203,610
=========================================================================
Net Income (Loss):
Sonat Inc. $ 13,459 $ 219,011 $ 213,409
Sonat Exploration GOM 3,492 (1,015) 42,431
- -------------------------------------------------------------------------
Combined $ 16,951 $ 217,996 $ 255,840
=========================================================================
</TABLE>
In connection with the merger, Sonat Exploration GOM recorded charges
of $50.4 million ($32.7 million after taxes) to operating expenses in 1997 for
direct and other merger-related costs pertaining to the merger transaction.
At December 31, 1997, Sonat Exploration GOM had accrued $73.8 million,
which represented compensation due to certain employees under deferred
compensation plans. The liability was estimated based on the fair market value
of Sonat Exploration GOM as of December 31, 1997. The Company's restricted cash
deposit at December 31, 1997, reflected on the Consolidated Balance Sheet was
used to settle this liability and certain other merger-related expenses. During
the years ended December 31, 1997 and 1996, $61.8 million and $12.0 million,
respectively, were expensed related to the deferred compensation plans.
All debt of Sonat Exploration GOM was paid off in connection with the
merger.
Sonat Exploration Restructuring - On April 23, 1998, the Company
announced a restructuring of Sonat Exploration. The restructuring included
significant property sales and certain cost-reduction activities associated
with a reduction in work force. Oil and natural gas properties having
approximately 430 billion cubic feet of natural gas equivalent reserves and
daily net production of approximately 170 million cubic feet of natural gas
equivalent were sold.
A pretax restructuring charge of $15.0 million for restructuring
expenses primarily associated with a reduction in work force was recognized in
the second quarter of 1998. All work force reductions have been completed.
NOTE 4 Financial Instruments
Derivative Commodity Instruments Held or Issued for Trading Purposes
The Company maintains active trading positions in natural gas and crude oil
commodity futures, swap and option contracts. The Company manages its trading
positions with strict policies and procedures and limits its risk to changes in
the value of its outstanding positions through the use of Value-at-Risk models
and the establishment of offsetting positions. The trading operation also enters
into natural gas commodity purchase and sale commitments. These activities
constitute its trading business and are essential to provide customers with
market products at competitive prices.
At December 31, 1998 and 1997, the Company's trading portfolio had
outstanding energy commodity futures, swaps and options. In the table below,
buys of swaps represent either 1) payment of fixed price and receipt of NYMEX or
index; or 2) payment of NYMEX or index and receipt of index. The absolute
notional volumes and terms are:
<TABLE>
<CAPTION>
1998
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 1,506 1,454 60 months
Crude Oil (Thousands of Barrels) 5,640 2,310 60 months
- ---------------------------------------------------------------------------
</TABLE>
The 60-month term deals begin in 2002 and end in 2006.
<TABLE>
<CAPTION>
1997
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 372 284 33 months
- ---------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
The 33-month term deals were ongoing at December 31, 1997, and end in
2000.
The amounts disclosed in the following table represent the
end-of-period fair value and the average fair value of the natural gas trading
portfolio.
<TABLE>
<CAPTION>
In Thousands)
-----------------------------------------------------
Fair Value
(Carrying Amount) Average Fair Value
as of for the Year Ended
-----------------------------------------------------
December 31, 1998 1997 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets $255,495 $101,788 $140,774 $52,899
Liabilities 236,192 90,412 126,236 49,848
- --------------------------------------------------------------------------
</TABLE>
Net trading gains for 1998 and 1997 are $13.1 million and $15.0
million, respectively.
Derivative Commodity Instruments Held or Issued for Purposes Other Than Trading
In certain cases derivative positions are taken specifically to mitigate market
price risk associated with significant physical transactions and are accounted
for using hedge accounting provided they meet hedge accounting criteria. Sonat
Exploration hedges a portion of its production by entering into intercompany
swaps with Sonat Marketing Company L.P. (Sonat Marketing). The exposure that
Sonat Marketing assumes from Sonat Exploration is then hedged by entering into
derivative instruments with third parties. Sonat Marketing and Sonat Power
Marketing also hedge third-party purchases and sales by entering into commodity
futures, swaps and options.
At December 31, 1998 and 1997, the Company had outstanding energy
commodity futures, swaps and options for purposes other than trading. In the
table below, buys of swaps represent either 1) payment of fixed price and
receipt of NYMEX or index; or 2) payment of NYMEX or index and receipt of index.
The absolute notional volumes and terms are:
<TABLE>
<CAPTION>
1998
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 17 103 24 months
Electricity (Thousands of MWh) 39 45 4 months
- ---------------------------------------------------------------------------
</TABLE>
The 24-month term deals were ongoing at December 31, 1998 and end in 2000.
<TABLE>
<CAPTION>
1997
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 38 214 58 months
Crude Oil (Thousands of Barrels) -- 480 12 months
- ---------------------------------------------------------------------------
</TABLE>
The 58-month term deals were ongoing at December 31, 1997 and end in 2002.
The information in the following table represents the fair value of
outstanding financial derivative positions held for purposes other than trading.
Not included are the related physical positions that these derivative positions
hedge.
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
Fair Value as of
December 31, 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Natural Gas:
Futures $ (439) $ (873)
Swaps (7,158) (27,458)
Options -- (516)
Electricity:
Futures 1 --
Options 12 --
- ---------------------------------------------------------------------------
</TABLE>
Deferred amounts on open futures positions will mature over 1999 and
2000.
Credit Risk from Derivative Activities
NYMEX traded futures are guaranteed by the NYMEX and have nominal credit risk.
On all other transactions described above, the Company is exposed to credit risk
in the event of nonperformance by the counterparties. The Company has
established policies and procedures to evaluate potential counterparties for
creditworthiness before entering into over-the-counter swap and option
agreements. The credit risk resulting from in-the-money swaps is monitored on a
regular basis against established collateralization limits and credit limits
established by the Company. Due to changes in market conditions, the market
value of swaps and options and the associated credit exposure with the
counterparties can change significantly. At December 31, 1998, the market value
of the Company's in-the-money swaps and options was $21.0 million, and two
counterparties posted additional collateral in the amount of $.5 million.
Reserves for credit risk are established as necessary.
Financial Risk
On January 22, 1996, the Company entered into a forward rate agreement to hedge
the interest rate risk of an anticipated future borrowing under an existing
shelf registration statement. In September 1996, due to revised expectations of
external financing requirements, 50 percent of the forward rate agreement was
liquidated resulting in a gain of $3.9 million. A gain of $2.4 million was
recognized upon final settlement of this agreement in 1997.
12
<PAGE> 14
Notes to Consolidated Financial Statements
Note 4 (continued)
Other Financial Instruments
The carrying amounts and fair values of the Company's financial instruments,
other than derivative instruments, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
December 31, 1998 Carrying Amounts Fair Value
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $ 7,104 $ 7,104
Notes Receivable 50,359 50,359
Investment in Debt and
Equity Securities 47,130 47,511
Gas Supply Realignment Costs 2,562 2,562
Unsecured Notes 720,361 720,361
Long-Term Debt 1,209,319 1,258,370
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
December 31, 1997 Carrying Amounts Fair Value
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $ 27,278 $ 27,278
Restricted Cash 115,956 115,956
Investment in Debt and
Equity Securities 52,231 53,101
Gas Supply Realignment Costs 3,630 3,630
Unsecured Notes 446,721 446,721
Long-Term Debt 1,250,492 1,294,854
- -------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for balance sheet financial instruments:
Cash and cash equivalents, restricted cash, notes receivable, gas
supply realignment (GSR) costs and unsecured notes - The carrying amount
reported in the Consolidated Balance Sheets approximates its fair value.
Investment in debt and equity securities - The fair values for
marketable debt and equity securities are based on quoted market prices.
Long-term debt - The fair values of the Company's long-term debt are
based on quoted market values or estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
All of the Company's financial instruments, other than certain
derivative instruments, are held for purposes other than trading.
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents, investments and accounts
receivable.
The Company's cash equivalents, restricted cash deposits and short-term
investments represent securities placed with various high investment grade
institutions. This investment practice limits the Company's exposure to
concentrations of credit risk.
Accounts receivable of the Exploration and Production segment are
primarily from joint-interest partners, oil and gas marketing companies and
pipeline companies. A majority of its revenues are from Sonat Marketing, which
is headquartered in the Southeast. Accounts receivable of the Natural Gas
Transmission segment relate to business conducted with gas distribution
companies, municipalities, gas districts, industrial customers and interstate
pipeline companies in the Southeast. Accounts receivable of the Energy Services
segment primarily relate to trading with other marketing companies, industrial
end users and local distribution companies, with primary concentration in the
Gulf Coast, Southeastern, Northeastern and Midwestern markets.
The Company performs ongoing credit evaluations of its customers'
financial condition and, in some circumstances, requires collateral from its
customers. Accounts receivable are stated net of valuation allowances of $9.3
million in 1998 and $8.2 million in 1997.
NOTE 5 Inventories
The table below shows the values of various categories of the Company's
inventories by segment.
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
December 31, 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Exploration and Production:
Materials and supplies $15,560 $16,954
Natural Gas Transmission:
Materials and supplies 20,190 21,529
Energy Services:
Materials and supplies 210 247
Gas stored underground 33,125 26,418
Other 8 13
- ----------------------------------------------------------------
$69,093 $65,161
================================================================
</TABLE>
NOTE 6 Unconsolidated Affiliates
At December 31, 1998, the Company's investments in unconsolidated affiliates
totaled $635.7 million, and the Company's share of underlying equity in net
assets of the investees was $691.3 million. The difference is primarily due to
the excess over cost of the Company's share of the underlying equity in net
assets of Citrus Corp., which is being amortized over the depreciable life of
Citrus' assets. Through December 31, 1998, the Company's cumulative equity in
earnings of these unconsolidated affiliates was $377.9 million and cumulative
dividends received from them totaled $182.8 million.
13
<PAGE> 15
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPANY'S SHARE OF REPORTED
EARNINGS (LOSSES)
Exploration and Production $ 455 $ 445 $ 408
- ------------------------------------------------------------------------------------
Natural Gas Transmission:
Citrus Corp. (including
$1,383,000 of amortization
of basis difference
each year) 24,371 28,676 22,902
Bear Creek Storage 9,531 10,679 10,184
Destin 9,968 1,276 --
Other 167 (106) (554)
- ------------------------------------------------------------------------------------
44,037 40,525 32,532
- ------------------------------------------------------------------------------------
Energy Services 2,885 817 9
- ------------------------------------------------------------------------------------
Other 1,400 1,234 1,262
- ------------------------------------------------------------------------------------
$48,777 $ 43,021 $ 34,211
====================================================================================
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus,
the parent company of Florida Gas Transmission Company. Southern owns a
one-third interest in Destin Pipeline Company, L.L.C. (Destin) and a subsidiary
of Southern owns 50 percent of Bear Creek Storage Company, an underground gas
storage company.
The following is summarized financial information for Citrus:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $591,005 $735,402 $769,860
Expenses:
Natural gas cost 269,818 416,953 429,367
Operating expenses 102,001 107,370 94,573
Depreciation and
amortization 51,771 60,470 83,563
Interest and other 92,715 78,563 92,079
Income taxes 28,726 17,460 27,240
- --------------------------------------------------------------------------------
Income Reported $ 45,974 $ 54,586 $ 43,038
================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 81,133 $ 79,390
Net transmission plant and property 2,342,641 2,346,123
Other 83,629 67,671
- --------------------------------------------------------------------------------
$2,507,403 $2,493,184
================================================================================
Liabilities and Equity:
Current $ 300,368 $ 132,134
Long-term debt and other liabilities 1,296,735 1,496,724
Stockholders' equity 910,300 864,326
- --------------------------------------------------------------------------------
$2,507,403 $2,493,184
================================================================================
</TABLE>
The following is summarized financial information for Bear Creek. No
provision for income taxes has been included since its income taxes are paid
directly by the joint venture participants.
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $35,744 $36,226 $36,258
Expenses:
Operating expenses 6,819 4,440 4,817
Depreciation 5,441 5,430 5,415
Other expenses, net 4,422 4,997 5,657
- -----------------------------------------------------------------------------
Income Reported $19,062 $21,359 $20,369
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 11,687 $ 6,503
Net plant and property 144,519 149,334
Other -- 296
- -------------------------------------------------------------
$156,206 $156,133
=============================================================
Liabilities and Equity:
Current $ 7,968 $ 8,298
Long-term debt and
other liabilities 43,140 48,799
Participants' equity 105,098 99,036
- -------------------------------------------------------------
$156,206 $156,133
=============================================================
</TABLE>
In 1995, Southern executed a Capital Contribution Agreement in
connection with the project financing for Bear Creek from The Prudential
Insurance Company of America. In the event that Bear Creek does not refinance
the remaining principal, this agreement provides that Southern and its partner
will contribute $21.0 million each to Bear Creek on October 31, 2000, to provide
funds to enable Bear Creek to make a principal payment due under the financing.
In April 1997, units of Shell Oil Company and BP Amoco Corporation
joined with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-foot-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Construction of the pipeline
began in December 1997. Destin was partially completed and placed in service in
September 1998 and was fully in service in March 1999. The FERC has approved two
extensions of Destin which extend its pipeline by
14
<PAGE> 16
Notes to Consolidated Financial Statements
Note 6 (continued)
43 miles. The following is summarized financial information for Destin.
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Revenues $ 11,978 $1,049
Expenses (Income):
Operating expenses 820 --
Depreciation and amortization 641 --
Interest and other (19,388) 2,778
- --------------------------------------------------------------------
Income Reported $ 29,905 $3,827
====================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 23,867 $ 54,885
Net transmission plant and property 417,102 81,864
Other 12,626 1,429
- ----------------------------------------------------------------------------
$453,595 $138,178
============================================================================
Liabilities and Equity:
Current $140,792 $ 4,315
Long-term debt and other liabilities 19,571 2,236
Stockholders' equity 293,232 131,627
- ----------------------------------------------------------------------------
$453,595 $138,178
============================================================================
</TABLE>
In November 1998 Destin issued bonds to the Mississippi Business
Finance Corporation (MBFC) in the amount of $135.0 million. The three members of
Destin each purchased $45.0 million of these bonds from the MBFC, which loaned
the proceeds from the sale of the bonds to Destin. Destin used the proceeds from
this loan to finance the construction of its pipeline project, which allowed it
to return invested capital to its three members.
NOTE 7 Plant, Property and Equipment and Depreciation
Plant, property and equipment, by business segment, is shown in the following
table:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production:
Costs subject to amortization $5,420,473 $5,022,140
Costs not subject to amortization 148,615 201,208
- ----------------------------------------------------------------------------
5,569,088 5,223,348
- ----------------------------------------------------------------------------
Natural Gas Transmission:
Mainline transmission property 1,642,291 1,295,247
Gas supply 506,965 660,700
Gas gathering 10,261 16,568
Underground storage facilities 61,494 60,684
Liquefied natural gas facilities 154,076 154,076
Other 297,138 269,498
- ----------------------------------------------------------------------------
2,672,225 2,456,773
- ----------------------------------------------------------------------------
Energy Services:
Intrastate pipeline 56,012 55,834
Other 32,168 22,334
- ----------------------------------------------------------------------------
88,180 78,168
- ----------------------------------------------------------------------------
Other 70,441 72,408
- ----------------------------------------------------------------------------
$8,399,934 $7,830,697
============================================================================
</TABLE>
Plant, property and equipment includes construction work in progress of
$142.6 million and $137.1 million at December 31, 1998 and 1997, respectively.
Plant, property and equipment also includes $142.1 million and $130.1 million of
gas stored underground at December 31, 1998 and 1997, respectively.
The accumulated depreciation, depletion and amortization amounts, by
business segment, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production $4,093,898 $2,700,122
- ----------------------------------------------------------------------------
Natural Gas Transmission:
Mainline transmission property 866,198 844,885
Gas supply 449,485 434,205
Gas gathering 6,206 11,072
Underground storage facilities 47,850 45,869
Liquefied natural gas facilities 123,802 118,981
Other 40,449 42,815
- ----------------------------------------------------------------------------
1,533,990 1,497,827
- ----------------------------------------------------------------------------
Energy Services:
Intrastate pipeline 29,727 26,819
Other 10,570 6,435
- ----------------------------------------------------------------------------
40,297 33,254
- ----------------------------------------------------------------------------
Other 35,582 33,714
- ----------------------------------------------------------------------------
$5,703,767 $4,264,917
============================================================================
</TABLE>
15
<PAGE> 17
The annual depreciation rates or useful productive lives, by business
segment, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission:
Mainline transmission property 2.0% 2.0% 2.0%
Gas supply 2.9% 2.9% 2.9%
Gas gathering 2.8% 2.8% 2.8%
Underground storage facilities 3.3% 3.3% 3.3%
Liquefied natural gas facilities 3.2% 3.2% 3.2%
Energy Services
Intrastate pipeline 20 yrs. 20 yrs. --
Other 5 yrs. 5 yrs. 5 yrs.
Other 5-38 yrs. 5-38 yrs. 5-38 yrs.
========================================================================================
</TABLE>
Under the full cost method, all productive and non-productive costs
incurred in connection with the acquisition, exploration and development of oil
and gas reserves are capitalized and amortized on the unit-of-production method
using proved reserves. Certain unevaluated properties are excluded from the
amortization base until a determination has been made as to the existence of
proved reserves. Also included in amortization on a unit-of-production basis are
the estimated future dismantlement and abandonment costs and estimated future
development costs for proved undeveloped reserves.
During the first quarter of 1998, the Company recognized the effect of
a change in salvage values, including reversal of excess depreciation expense,
relating to certain fixed assets, primarily aircraft and vehicles. The change,
which was to comply with FERC directives, reduced the loss for the year ended
December 31, 1998, by approximately $4.6 million.
NOTE 8 Debt and Lines of Credit
Long-Term Debt - Long-term debt consists of:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Sonat Inc.
Revolving Credit Agreement at
rates based on prime,
international or money-market
lending rates (an effective
rate of 6.14% at December 31,
1997) expiring on
June 30, 2001 $ -- $ 130,000
6.75% Notes due October 1, 2007 100,000 100,000
6 7/8% Notes due June 1, 2005 200,000 200,000
9 1/2% Notes due August 15, 1999 100,000 100,000
6 5/8% Notes due February 1, 2008 100,000 --
7% Notes due February 1, 2018 100,000 --
9% Notes due May 1, 2001 100,000 100,000
8.24% Senior Notes due through
December 31, 2000 4,100 6,200
Sonat Exploration GOM Inc.
Senior Revolving Credit Facility (an
effective rate of 7.22% at
December 31, 1997) expiring
on October 31, 1999 -- 145,000
10.6% Senior Subordinated Notes
due July 26, 2001 -- 50,000
Southern Natural Gas Company
6.125% Notes due September 15, 2008 100,000 --
6.70% Notes due October 1, 2007 100,000 100,000
7.85% Notes due January 15, 2002 100,000 100,000
8 5/8% Notes due May 1, 2002 100,000 100,000
8 7/8% Notes due February 15, 2001 100,000 100,000
Southern LNG Inc.
Promissory Note (an effective rate of
6.75% at December 31, 1998 and
1997) due through April 1, 1999 5,000 10,000
Capital Leases and Other 3,754 11,042
- -----------------------------------------------------------------------------------------
Total Outstanding 1,212,854 1,252,242
Less Long-Term Debt Due Within
One Year (109,835) (14,508)
Less Unamortized Debt Discount (3,535) (1,750)
- -----------------------------------------------------------------------------------------
$ 1,099,484 $ 1,235,984
=========================================================================================
</TABLE>
16
<PAGE> 18
Notes to Consolidated Financial Statements
Note 8 (continued)
Annual maturities of long-term debt at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Years (In Thousands)
- --------------------------------------------------------------------
<S> <C>
1999 $ 109,835
2000 2,805
2001 200,214
2002 200,000
2003 --
2004-2018 700,000
- --------------------------------------------------------------------
$1,212,854
====================================================================
</TABLE>
Sonat has a bank revolving credit agreement that provides for periodic
borrowings and repayments of up to $500.0 million through June 30, 2001.
Borrowings are supported by unsecured promissory notes that, at the option of
the Company, will bear interest at the banks' prevailing prime or international
lending rate, or such rates as the banks may competitively bid. During 1998,
$200.0 million was borrowed and $330.0 million was repaid under the revolving
credit agreement, resulting in no balance outstanding at December 31, 1998.
In January 1998, Sonat made two public offerings of Notes pursuant to a
shelf registration statement. In one offering, Sonat issued $100.0 million of 6
5/8 percent Notes due February 1, 2008, at 99.531 percent to yield 6.69 percent.
In the other offering, Sonat issued $100.0 million of 7 percent Notes due
February 1, 2018, at 99.787 percent to yield 7.02 percent. The net proceeds from
the offerings were used for general corporate purposes, including capital
expenditures, working capital and repayment of debt.
In September 1998, Southern Natural Gas made a public offering of
$100.0 million of its 6.125 percent Notes due September 15, 2008, at 99.531
percent to yield 6.189 percent. The net proceeds from the offering were used for
general corporate purposes, including capital expenditures.
Unsecured Notes - Loans under all short-term credit facilities are for
a duration of less than three months.
At December 31, 1998, Sonat had short-term lines of credit of $700.0
million available through January 25, 1999. Southern Natural Gas had short-term
lines of credit of $50.0 million available through May 31, 1999. Borrowings are
available for a period of not more than 364 days and are in the form of
unsecured promissory notes that bear interest at rates based on the banks'
prevailing prime, international or money-market lending rates. At December 31,
1998, Sonat had $24.3 million outstanding under its agreement at a rate of 5.87
percent. No amounts were outstanding under Southern Natural Gas' agreement.
In late January 1999, Sonat completed a new 364-day $400.0 million
revolving credit facility with 11 banks. In connection with this new credit
facility, the Company terminated existing lines of credit providing for up to
$700.0 million of borrowings.
Sonat had $696.1 million and $446.6 million, respectively, in
commercial paper outstanding at average rates of 5.96 percent and 6.31 percent
at December 31, 1998 and 1997, respectively.
NOTE 9 Income Taxes
An analysis of the Company's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 18,548 $ 12,435 $ 18,841
State 5,690 8,067 4,021
- ----------------------------------------------------------------------------------------
24,238 20,502 22,862
- ----------------------------------------------------------------------------------------
Deferred:
Federal (325,663) 82,777 94,911
State 3,677 2,472 5,391
- ----------------------------------------------------------------------------------------
(321,986) 85,249 100,302
- ----------------------------------------------------------------------------------------
Income Tax Expense (Benefit) $(297,748) $105,751 $123,164
========================================================================================
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $240,098 $ 585,314
Inventories 11,130 11,573
Other 17,078 10,468
- --------------------------------------------------------------------------
Total deferred tax liabilities 268,306 607,355
- --------------------------------------------------------------------------
Deferred Tax Assets:
GSR and other transition costs 8,531 10,210
Employee benefits 7,708 36,607
Net operating loss carryforwards 33,098 46,065
Tax credit carryforwards 22,859 14,713
Other accounting accruals 12,066 7,954
Other 20,080 17,361
- --------------------------------------------------------------------------
104,342 132,910
Less valuation allowance -- (11,505)
- --------------------------------------------------------------------------
Total deferred tax assets 104,342 121,405
- --------------------------------------------------------------------------
Net Deferred Tax Liabilities $163,964 $ 485,950
==========================================================================
</TABLE>
17
<PAGE> 19
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. During 1998, the Company removed its
valuation allowance related to net operating loss carryforwards because based on
the weight of available evidence, it is more likely than not that the remaining
deferred tax assets will be realized.
At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $94.6 million for income tax purposes which
expire between 2001 and 2017. The Company has tax credit carryforwards of
approximately $22.9 million which can be carried forward indefinitely.
Consolidated income tax expense (benefit) is different from the amount
computed by applying the U.S. federal income tax rate to income (loss) before
income tax. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense (Benefit)
at Statutory Federal Income
Tax Rates $(289,893) $ 113,311 $ 132,651
Increases (Decreases)
Resulting From:
State income taxes, net
of federal income
tax benefit 6,089 6,851 6,118
Non-conventional fuel
tax credits (6,844) (7,220) (9,465)
Refunds and adjustment
of accrued tax position (110) 47 880
Dividend exclusion (6,824) (8,029) (6,413)
Other (166) 791 (607)
- ------------------------------------------------------------------------------------------
Income Tax Expense
(Benefit) $(297,748) $ 105,751 $ 123,164
==========================================================================================
</TABLE>
NOTE 10 Commitments and Contingencies
Rate Matters - Periodically, Southern makes general rate filings with the FERC
to provide for the recovery of cost of service and a return on equity. The FERC
normally allows the filed rates to become effective, subject to refund, until it
rules on the approved level of rates. Southern provides reserves relating to
such amounts collected subject to refund, as appropriate, and makes refunds upon
establishment of the final rates. At December 31, 1998, Southern's rates are
established by a settlement that was approved by FERC orders issued in 1995 and
1996. All of its customers are parties to the settlement, and all revenue is
based on the final settlement rates and therefore is not being collected subject
to refund.
Other Matters - In September 1998, West Georgia Generating Company
L.P., formerly Cataula Generating Company, L.P. (West Georgia), acquired the
right to develop a 680-megawatt peaking plant in west central Georgia and an
associated contract to sell a significant portion of the plant's output to
Georgia Power Company. Although West Georgia originally planned to develop the
plant in Harris County, Georgia, as a result of the revocation by the Harris
County Board of Commissioners of the previously issued special-use permit, West
Georgia is in the process of finalizing alternate sites for the location of the
plant. If the project experiences additional delays in site finalization,
permitting or construction, it could result in an inability to have the plant
available in time to meet its obligation to make 205 megawatts of electric
capacity available to Georgia Power beginning June 1, 2000. In that event, West
Georgia would be required to source electric capacity from the market at prices
in excess of the prices received from Georgia Power. However, West Georgia
anticipates that it will be successful in relocating the plant to one of its
alternative sites and commencing construction in time to meet its contractual
commitments to Georgia Power.
18
<PAGE> 20
Notes to Consolidated Financial Statements
Note 10 (continued)
Sonat Marketing was formed in September 1995 and is jointly owned by
a subsidiary of the Company and a subsidiary of AGL Resources, Inc. Sonat's
wholly owned subsidiary, Sonat Marketing Company, contributed all of its assets
and liabilities except $32.0 million of accounts receivable in exchange for a 65
percent ownership interest in Sonat Marketing, and a subsidiary of AGL
Resources, contributed $32.0 million in cash to Sonat Marketing in exchange for
a 35 percent ownership interest. AGL Resources has certain rights to resell to
the Company its interest in Sonat Marketing, including a right until August 31,
2000, to receive the greater of fair market value or a formula price. The pretax
gain on the transaction of approximately $23 million, which is included in Other
Deferred Credits in the Consolidated Balance Sheets, has been deferred.
Leases - The Company has operating lease commitments expiring at
various dates, principally for office space and equipment. The Company has no
significant capital leases.
Rental expense for all operating leases is summarized below.
Rental Expense
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Non-Affiliated Operating Leases $19,904 $20,377 $18,444
Affiliated Operating Leases 3,950 3,544 3,680
- -----------------------------------------------------------------
$23,854 $23,921 $22,124
=================================================================
</TABLE>
At December 31, 1998, future minimum payments for non-cancelable
operating leases for the years 1999 through 2003 are $12 million or less per
year. Future minimum rentals to be received under subleases for the years 1999
and 2000 are less than $2 million per year.
NOTE 11 Capital Stock and Stock-Based Compensation Per-share prices of the
Company's common stock, based on the New York Stock Exchange listing of
composite transactions, and dividends paid per common share for the last two
years are summarized below.
Price Range and Dividends Paid Per Common Share
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------------------
Quarter 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price Range High-Low
First $45 5/8 - $38 7/8 $57 - $45 1/2
Second 44 13/16 - 36 59 1/8 - 50 5/8
Third 38 9/16 - 25 7/8 54 1/4 - 45 3/8
Fourth 31 3/8 - 26 5/16 51 5/16 - 42 1/4
=======================================================================
Dividend Rate (Note)
First $ .27 $ .27
Second .27 .27
Third .27 .27
Fourth .27 .27
- -----------------------------------------------------------------------
$ 1.08 $ 1.08
=======================================================================
Shareholders of
Record at Year-End 10,589 11,258
=======================================================================
</TABLE>
Note: The dividend rate is the actual rate paid per common share of Sonat
stock, exclusive of shares issued for the merger in January 1998 (see Note 3).
The Company had no restrictions on the payment of dividends at December
31, 1998.
The Company has a Preference Share Rights Plan (the Plan) designed to
protect the interest of stockholders in the event of a hostile attempt to take
over the Company and to make it more difficult for a person to gain control of
the Company in a manner or on terms not approved by the Board of Directors. The
Plan provides for the issuance of one right with respect to each outstanding
share of common stock. The rights issued under the Plan are redeemable at any
time by the Company before their expiration on February 3, 2006, unless certain
triggering events have occurred. The rights outstanding under the Plan are
exercisable for one one-hundredth of a share of Series A Participating
Preference Stock, par value $1.00, with each share having substantially the
rights and preferences of 100 shares of common stock. As of December 31, 1998,
1,000,000 shares of Series A Participating Preference Stock were reserved for
issuance under this Plan.
19
<PAGE> 21
Earnings Per Share - The following table presents the computation of
basic and diluted earnings (loss) per share of common stock:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $(530,517) $217,996 $255,840
===========================================================================
Denominator:
Denominator for Basic
Earnings (Loss) Per Share:
Weighted average number
of shares of common
stock outstanding 110,020 110,099 110,370
Effect of Dilutive Securities:
Common stock equivalents
applicable to outstanding
stock options (Note) -- 1,570 1,352
- ---------------------------------------------------------------------------
Denominator for Earnings
(Loss) Per Share -
Assuming Dilution:
Adjusted weighted
average shares using
treasury stock method
for assumed conversions 110,020 111,669 111,722
===========================================================================
Earnings (Loss) Per Share
of Common Stock $ (4.82) $ 1.98 $ 2.32
===========================================================================
Earnings (Loss) Per Share
of Common Stock -
Assuming Dilution $ (4.82) $ 1.95 $ 2.29
===========================================================================
</TABLE>
Note: The addition of 1,002,000 potential common shares for the 1998 period
would be antidilutive in the computation of diluted earnings per share and are
therefore not included.
Executive Award Plan - The Company has an Executive Award Plan that
provides awards to certain key employees in the form of stock options,
restricted stock and stock appreciation rights (SARs) in tandem with any or all
stock options. In years prior to 1991, tax offset payments were generally
provided in conjunction with these awards. SARs permit the holder of an
exercisable option to surrender that option for an amount equal to the excess of
the market price of the common stock on the date of exercise over the option
price (appreciation). The appreciation is payable in cash, common stock or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. Commencing in November 1995, the Company has
issued, in tandem with its regular stock options, SARs that are exercisable only
in the event of a change in control (limited SARs). In November 1995, the
Company also issued limited SARs to certain key employees with respect to all of
their then outstanding options. No other SARs have been issued since 1990. At
December 31, 1998, 89,000 SARs relating to the earlier periods were outstanding.
All options granted since December 1992 have 10-year terms and vest and become
fully exercisable at the end of five years of continued employment. Options
issued after 1992 also contain an acceleration provision dependent upon a
specified increase in the Company's stock price. Options granted prior to
December 1992 vested over three years and had no accelerated vesting provisions.
The Company issued 18,400 shares of restricted stock with a $35.48 per share
market value to employees during 1998, 80,100 shares with a $43 13/16 per share
market value during 1997 and 97,000 shares with a $52.00 per share market value
during 1996. At December 31, 1998, 229,798 of the 550,200 cumulative restricted
shares issued have vested. A new plan was authorized during 1995 which made an
additional four million shares available for issuance.
The Company has elected to follow APB No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting for its employee
stock options. Under APB No. 25, compensation expense is recognized for the
difference between the option price and market value on the measurement date for
variable stock option awards and restricted stock grants. No compensation
expense is recognized for options the Company issued after 1990 because the
exercise price of the stock options equals the market price of the underlying
stock on the date of grant.
Stock-based compensation increased pretax income by $5.8 million in
1998 and $2.0 million in 1997 and decreased it by $13.2 million in 1996.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been
determined as if the Company had
20
<PAGE> 22
Notes to Consolidated Financial Statements
Note 11 (continued)
accounted for its employee stock options under the fair value method of the
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: interest rates (zero-coupon
U.S. government issues with a remaining life of six years) of 4.95 percent, 5.93
percent and 6.10 percent; dividend yields of 3.54 percent, 2.47 percent and 2.35
percent; volatility factors of the expected market price of the Company's common
stock of .292, .266 and .255; and a weighted-average expected life of the
options of six years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
--------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss):
As reported $ (530,517) $ 217,996 $ 255,840
Pro forma (533,027) 216,773 253,173
Earnings (Loss) Per Share:
As reported $ (4.82) $ 1.98 $ 2.32
Pro forma (4.84) 1.97 2.29
Earnings (Loss) Per Share -
Assuming Dilution:
As reported $ (4.82) $ 1.95 $ 2.29
Pro forma (4.84) 1.94 2.27
============================================================================
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period, which is
five years for the awards. However, since all of the 1995 stock option grants
vested under an accelerated vesting clause in 1996, the entire remaining cost
for that award is reflected in 1996. Because the Company's stock options vest
generally over five years and additional awards are typically made each year,
the above pro forma disclosures are not likely to be representative of the
effects on pro forma net income or loss for future years.
A summary of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,416,219 $32.74
Granted 1,323,100 30.48
Exercised (190,424) 19.80
Forfeited (68,480) 45.79
- ---------------------------------------------------------------------------
Outstanding - End of Year 5,480,415 32.48
===========================================================================
Exercisable - End of Year 3,444,075 30.25
===========================================================================
Shares Authorized for Future Grants 1,561,000
===========================================================================
Fair Value of Options Granted During the Year $ 7.53
===========================================================================
<CAPTION>
1997
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,178,226 $30.16
Granted 712,400 43.81
Exercised (453,907) 25.69
Forfeited (20,500) 46.90
- ---------------------------------------------------------------------------
Outstanding - End of Year 4,416,219 32.74
===========================================================================
Exercisable - End of Year 3,217,419 27.38
===========================================================================
Shares Authorized for Future Grants 2,884,700
===========================================================================
Fair Value of Options Granted During the Year $ 12.50
===========================================================================
<CAPTION>
1996
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,578,600 $25.24
Granted 633,700 52.00
Exercised (1,013,954) 21.58
Forfeited (20,120) 31.81
- ---------------------------------------------------------------------------
Outstanding - End of Year 4,178,226 30.16
===========================================================================
Exercisable - End of Year 3,544,526 26.26
===========================================================================
Shares Authorized for Future Grants 3,597,100
===========================================================================
Fair Value of Options Granted During the Year $ 14.87
===========================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------
Weighted-Avg.
Number Remaining
Range of Exercise Outstanding Contractual Weighted-Avg.
Prices 12/31/98 Life Exercise Price
- -------------------------------------------------------------------
<S> <C> <C> <C>
$ 13.625 - $17.4375 365,050 2.9 $16.31
$ 21.125 - $ 29.125 2,345,130 7.1 26.42
$ 30.00 - $ 32.25 1,266,815 5.8 30.99
$43.8125 - $ 52.00 1,503,420 8.6 47.14
- -------------------------------------------------------------------
5,480,415
<CAPTION>
Options Exercisable
---------------------------
Number
Range of Exercise Exercisable Weighted-Avg.
Prices 12/31/98 Exercise Price
- ---------------------------------------------------
<S> <S> <C>
$ 13.625 - $17.4375 365,050 $16.31
$ 21.125 - $ 29.125 1,262,630 25.54
$ 30.00 - $ 32.25 1,266,815 30.99
$43.8125 - $ 52.00 549,580 48.64
- ---------------------------------------------------
3,444,075
===================================================
</TABLE>
21
<PAGE> 23
Directors' Restricted Stock Plan - The Company has a Restricted Stock
Plan for non-employee members of the Board of Directors. Full rights vest over a
maximum of five years. The Company issued 24,000 shares under this plan in 1998.
The Company did not issue any shares under this plan during 1997 and 1996. At
December 31, 1998, 35,860 of the 61,460 cumulative shares granted have vested.
Treasury Stock - Shares held in treasury are being reissued in
connection with employee stock options and restricted stock programs.
Serial Preference Stock - At December 31, 1998 and 1997, there were
10,000,000 shares of $1.00 par value Serial Preference Stock authorized, with
none issued.
NOTE 12 Retirement Plans and Other
Postemployment Benefits
Retirement Plans - The Company has a trusteed, non-contributory, tax qualified
defined benefit retirement plan (the Retirement Plan) covering substantially all
employees of the Company. A supplemental benefit plan (the Supplemental Plan)
that provides retirement benefits in excess of those allowed under the Company's
tax qualified retirement plan is also in effect for the Company.
Amounts are being placed in a trust established to provide benefits
under the Supplemental Plan. However, this trust is not subject to any funding
requirements. At December 31, 1998, this trust had assets with a fair market
value of $47.5 million available to pay benefits. These assets are not
considered plan assets under SFAS No. 87, Employers' Accounting for Pensions.
The following tables set forth the benefit obligation and assets of the
plans and the changes in the benefit obligation and plan assets:
<TABLE>
<CAPTION>
(In Thousands)
------------------------
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1, $ 372,687 $ 386,825
Service cost 10,892 7,848
Interest cost 28,209 26,858
Amendments (341) --
Actuarial loss (gain) 31,351 (25,959)
Effect of curtailment (5,518) (3,096)
Effect of special termination benefits 4,121 3,252
Benefits paid (24,020) (23,041)
- --------------------------------------------------------------------
Benefit obligation at December 31, $ 417,381 $ 372,687
====================================================================
Change in Plan Assets:
Fair value at January 1, $ 550,982 $ 459,033
Return on plan assets 76,312 111,983
Contributions 3,395 3,007
Benefits paid (24,020) (23,041)
- --------------------------------------------------------------------
Fair value at December 31, $ 606,669 $ 550,982
====================================================================
</TABLE>
The following table sets forth the funded status of the plans and the
amount of the net pension asset or liability recognized in the Company's
Consolidated Balance Sheets:
<TABLE>
<CAPTION>
(In Thousands)
------------------------
December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Funded Status $ 189,288 $ 178,295
Unrecognized Net Assets at Transition (7,612) (9,292)
Unrecognized Net Gain (166,188) (172,566)
Unrecognized Prior Service Cost 5,516 7,088
Net Unamortized Deferred Charge from
Early Retirement Termination Benefits 453 598
- --------------------------------------------------------------------
Net Pension Asset Recognized in the
Consolidated Balance Sheets $ 21,457 $ 4,123
====================================================================
Total Recognized Amounts in the
Consolidated Balance Sheets Consist of:
Prepaid benefit cost $ 53,642 $ 33,170
Accrued benefit liability (33,893) (29,887)
Intangible asset 1,255 242
Net unamortized deferred charge from
early retirement termination benefits 453 598
- --------------------------------------------------------------------
$ 21,457 $ 4,123
====================================================================
</TABLE>
22
<PAGE> 24
Notes to Consolidated Financial Statements
Note 12 (continued)
The projected benefit obligation and accumulated benefit obligation for
the pension plan with accumulated benefit obligations in excess of plan assets
were $51.1 million and $33.9 million, respectively, as of December 31, 1998, and
$40.4 million and $29.9 million, respectively, as of December 31, 1997.
The assumed rates used to measure the projected benefit obligations and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 7.5% 7.0%
Long-Term Rate of Return 10.5% 9.5% 9.5%
Increase in Future Compensation Levels
(Composite Rate):
Retirement and Supplemental Plans 5.0% 5.0% 5.0%
==================================================================
</TABLE>
The Company's net periodic pension income consists of the following
components:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 10,892 $ 7,848 $ 8,818
Interest Cost 28,209 26,858 26,550
Expected Return (48,586) (40,107) (37,795)
Amortization of Prior
Service Cost 816 868 868
Amortization of Net Asset
at Transition (1,679) (1,679) (1,679)
Amortization of Net Gain (3,054) (2,379) 76
Curtailment Gain (4,803) (2,959) --
Special Termination
Benefits Loss 4,121 3,252 --
- --------------------------------------------------------------------
Net Periodic Pension Income $(14,084) $ (8,298) $ (3,162)
====================================================================
</TABLE>
Other Postemployment Benefits - The Company has plans that provide for
postretirement health care and life insurance benefits to substantially all of
its employees when they retire. The Company accrues the cost of postretirement
health care and life insurance benefits within the employees' active service
periods. The Company has elected to amortize the transition obligation over a
20-year period.
The following tables set forth the benefit obligation and assets of the
Company's postretirement health care and life insurance plans and the changes in
the benefit obligation and plan assets:
<TABLE>
<CAPTION>
(In Thousands)
----------------------
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1, $ 82,956 $ 95,027
Service cost 2,005 2,137
Interest cost 5,870 6,575
Plan participants' contributions 987 904
Actuarial loss (gain) 1,695 (14,833)
Effect of curtailment (1,389) 233
Effect of special termination benefits 1,824 100
Benefits paid (6,836) (7,187)
- ------------------------------------------------------------------
Benefit obligation at December 31, $ 87,112 $ 82,956
==================================================================
Change in Plan Assets:
Fair value at January 1, $ 38,923 $ 32,595
Return on plan assets 6,276 4,109
Employer's contribution 9,614 8,502
Plan participants' contributions 987 904
Benefits paid (6,836) (7,187)
- ------------------------------------------------------------------
Fair value at December 31, $ 48,964 $ 38,923
==================================================================
</TABLE>
The following table sets forth the funded status and amount of the net
pension asset or liability at December 31, 1998 and 1997, for the Company's
postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
(In Thousands)
----------------------
December 31, 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Funded Status $(38,148) $(44,033)
Unrecognized Net Obligation at Transition 43,151 51,994
Unrecognized Net Gain (32,918) (31,649)
Net Unamortized Deferred Charge From
Early Retirement Termination Benefit 1,442 1,980
- ------------------------------------------------------------------
Accrued Postretirement Benefit Liability $(26,473) $(21,708)
==================================================================
Total Recognized Amounts in the
Consolidated Balance Sheets Consist of:
Prepaid benefit cost $ -- $ 204
Accrued benefit liability (27,915) (23,892)
Net unamortized deferred charge from
early retirement termination benefit 1,442 1,980
- ------------------------------------------------------------------
$(26,473) $(21,708)
==================================================================
</TABLE>
23
<PAGE> 25
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 7.5% 7.0%
Long-Term Rate of Return:
Medical assets (after tax) 6.5% 5.5% 5.5%
Life insurance assets 10.5% 7.5% 7.5%
========================================================
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 4.5 percent in 1999 and for all future years.
The Company's net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 2,005 $ 2,137 $ 2,161
Interest Cost 5,870 6,575 6,387
Expected Return on Plan Assets (2,772) (2,069) (1,617)
Amortization of Net Obligation
at Transition 3,469 3,597 3,597
Amortization of Net Gain (1,722) (820) (367)
Curtailment Loss 4,180 1,866 --
Special Termination Benefits Loss 1,824 100 --
- ---------------------------------------------------------------------------
$ 12,854 $ 11,386 $ 10,161
===========================================================================
</TABLE>
A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
- -------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components $1,156 $ (939)
Effect on postretirement benefit obligation 8,964 (7,684)
=========================================================================
</TABLE>
NOTE 13 Business Segment Analysis
The Company's consolidated financial statements reflect operations in three
segments: Exploration and Production, Natural Gas Transmission and Energy
Services.
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas through its Exploration and
Production segment. The oil and gas properties of the Exploration and Production
segment are located principally onshore in the Southern coastal states, in
various states in the Southwest, and in federal waters offshore Louisiana and
Texas. It derives a significant portion of its revenues from sales to Sonat
Marketing (included in the Energy Services segment).
The principal business of the Natural Gas Transmission segment is the
transmission and storage of natural gas in interstate commerce. Its transmission
systems are located in the Southeastern United States. Transportation service is
provided for its distribution customers primarily for residential and commercial
end use; industrial customers; electric generation companies; gas producers;
other gas pipelines; and gas marketing and trading companies. It provides
transportation service in both its gas supply and market areas. The principal
industries served directly by the natural gas transmission segment's pipeline
system and indirectly through its distribution customers' systems include the
electric generation, fertilizer, chemical, pulp and paper, textile, primary
metals, stone, clay and glass industries.
The Energy Services segment is engaged primarily in natural gas and
electric power marketing for industrial and commercial users, gas distribution
companies and gas producers throughout the Gulf Coast, Southeastern, Midwestern
and Northeastern United States and development of power systems and power
plants.
The Company's results of operations, revenues from major customers,
capital expenditures and assets by business segment are shown in the following
tables. Intersegment sales are primarily gas sales by the Exploration and
Production segment and transportation revenue by the Natural Gas Transmission
segment and are priced at market rates. The Company has no foreign operations.
24
<PAGE> 26
Notes to Consolidated Financial Statements
Note 13 (continued)
Business Segment Analysis
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1998 Production Transmission Services Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $ 173,874 $ 357,678 $ 3,191,320 $ 3,722,872
Intersegment Revenues 361,380 36,538 1,048 398,966
Interest Income 80 3,494 3,023 6,597
Interest Expense 78,071 40,114 4,255 122,440
Interest Capitalized 2,371 2,506 246 5,123
Depreciation, Depletion and Amortization 291,586 46,281 7,032 344,899
Unusual Items 1,050,195 -- -- 1,050,195
Equity in Earnings of Unconsolidated Affiliates 455 44,037 2,885 47,377
Earnings (Loss) Before Interest and Taxes (936,230) 233,268 (6,820) (709,782)
Investment in Unconsolidated Affiliates 6,090 549,520 69,212 624,822
Segment Assets 1,635,597 1,961,994 762,547 4,360,138
Capital Expenditures 581,059 222,165 9,971 813,195
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1997 Production Transmission Services Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $ 345,520 $ 359,163 $3,725,186 $4,429,869
Intersegment Revenues 409,555 34,129 -- 443,684
Interest Income 1,261 2,233 2,670 6,164
Interest Expense 64,540 30,612 1,874 97,026
Interest Capitalized 5,599 1,849 -- 7,448
Depreciation, Depletion and Amortization 341,278 47,769 5,557 394,604
Unusual Items 50,374 -- -- 50,374
Equity in Earnings of Unconsolidated Affiliates 445 40,525 817 41,787
Earnings Before Interest and Taxes 180,972 225,905 7,063 413,940
Investment in Unconsolidated Affiliates 5,679 467,453 9,192 482,324
Segment Assets 2,764,381 1,757,851 744,626 5,266,858
Capital Expenditures 862,609 144,269 10,978 1,017,856
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1996 Production Transmission Services Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $319,730 $ 362,194 $2,589,468 $3,271,392
Intersegment Revenues 410,520 36,634 3,234 450,388
Interest Income 1,092 5,077 5,008 11,177
Interest Expense 57,059 38,060 984 96,103
Interest Capitalized 6,658 984 -- 7,642
Depreciation, Depletion and Amortization 332,129 48,292 1,729 382,150
Equity in Earnings of Unconsolidated Affiliates 408 32,532 9 32,949
Earnings Before Interest and Taxes 252,845 204,782 5,841 463,468
Capital Expenditures 620,100 130,418 4,736 755,254
============================================================================================================
</TABLE>
25
<PAGE> 27
The following table reconciles the total of the Company's reportable
segments' revenues to the Company's consolidated revenues:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues for
Reportable Segments $ 4,121,838 $ 4,873,553 $ 3,721,780
Other Revenues 17 15 (524)
Elimination of
Intersegment Revenues (398,966) (443,684) (450,388)
Other Reclassifications (13,071) (57,387) (67,258)
- --------------------------------------------------------------------------
Total Consolidated
Revenues $ 3,709,818 $ 4,372,497 $ 3,203,610
==========================================================================
</TABLE>
The following table reconciles the total of the Company's reportable
segments' earnings before interest and taxes (EBIT) to the Company's
consolidated EBIT:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Total EBIT for
Reportable Segments $(709,782) $413,940 $463,468
Other EBIT 7,772 6,999 4,423
- -------------------------------------------------------------------
Total Consolidated EBIT $(702,010) $420,939 $467,891
===================================================================
</TABLE>
The following table reconciles the total of the Company's reportable
segments' assets to the Company's consolidated assets:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Total Assets for Reportable Segments $ 4,360,138 $ 5,266,858
Other Assets 2,874,572 2,885,865
Elimination of Intercompany
Receivables and Payables (2,850,311) (2,867,051)
Other Eliminations (23,305) (33,558)
- ---------------------------------------------------------------------
Total Consolidated Assets $ 4,361,094 $ 5,252,114
=====================================================================
</TABLE>
Revenues from Major Customers
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Enron and affiliates:
Exploration and production $ 63,265 $181,206 $167,843
Natural gas transmission 3 180 156
Energy services 157,950 264,399 202,130
- ------------------------------------------------------------------
$221,218 $445,785 $370,129
==================================================================
Atlanta Gas Light:
Natural gas transmission $134,045 $130,425 $134,062
Energy services 17,303 51,069 54,191
- ------------------------------------------------------------------
$151,348 $181,494 $188,253
==================================================================
Alabama Gas Corporation:
Natural gas transmission $ 47,956 $ 48,300 $ 38,662
Energy services 105,134 87,994 86,062
- ------------------------------------------------------------------
$153,090 $136,294 $124,724
==================================================================
</TABLE>
All of the major customers or their affiliates participate with the
Company in certain joint venture operations.
NOTE 14 Oil and Gas Operations (Unaudited)
At December 31, 1998, the Company had interests in oil and gas properties that
are located primarily in Texas, Louisiana, Oklahoma, Arkansas, Alabama, and
offshore Louisiana and Texas in the Gulf of Mexico. The Company does not own or
lease any oil and gas properties outside the United States.
Capitalized costs relating to oil and gas producing activities and
related accumulated depreciation, depletion and amortization were as follows:
Capitalized Costs
<TABLE>
<CAPTION>
(In Thousands)
-------------------------
December 31, 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Oil and Gas Properties:
Costs subject to amortization $5,420,473 $5,022,140
Costs not subject to amortization 148,615 201,208
- ---------------------------------------------------------------
5,569,088 5,223,348
Less Accumulated Depreciation,
Depletion and Amortization 4,093,898 2,700,122
- ---------------------------------------------------------------
$1,475,190 $2,523,226
===============================================================
</TABLE>
26
<PAGE> 28
Notes to Consolidated Financial Statements
Note 14 (continued)
Costs incurred in oil and gas producing activities, whether capitalized
or expensed, were as follows:
Costs Incurred
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Property Acquisition Costs:
Proved properties $ 1,592 $ 5,811 $ 61,441
Unproved properties 48,292 77,935 72,705
Exploration Costs 155,879 287,884 177,199
Development Costs 371,500 488,724 295,821
- -----------------------------------------------------------------------
Total Costs $577,263 $860,354 $607,166
=======================================================================
</TABLE>
An analysis of the capitalized costs by year of expenditure of oil and
gas properties that are not being amortized as of December 31, 1998, pending
determination of proved reserves follows:
Capitalized Costs Not Being Amortized
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------------------
Cumulative Costs Excluded for Cumulative
Balance Years Ended Dec.31, Balance
---------------------------------------------------------------
DEC. 31, 1998 1998 1997 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Acquisition $ 93,931 $39,559 $24,220 $18,386 $11,766
Exploration 54,684 41,573 12,644 467 --
- ----------------------------------------------------------------------------
$148,615 $81,132 $36,864 $18,853 $11,766
============================================================================
</TABLE>
Projects presently excluded from amortization are in various stages of
evaluation. The majority of these costs are expected to be included in the
amortization calculation in the years 1999 through 2003. Total amortization
expense, including ceiling test charges, per unit of production was $4.81,
$1.41, and $1.03 per thousand cubic feet equivalent in 1998, 1997 and 1996,
respectively.
Net quantities of proved developed and undeveloped reserves of natural
gas and crude oil, including condensate and natural gas liquids, and changes in
such quantities were as follows:
Reserve Data
<TABLE>
<CAPTION>
Liquids Gas Liquids Gas Liquids Gas
(MBbls) (Bcf) (MBbls) (Bcf) (MBbls) (Bcf)
--------------------------------------------------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved (Developed and Undeveloped) Reserves, Net:
Beginning of year 72,882 2,160.6 65,984 2,006.4 55,304 1,711.7
Revisions of previous estimates (12,816) (349.4) 4,506 156.6 4,134 58.0
Extensions, discoveries and other additions 1,688 118.5 10,540 287.1 21,307 457.2
Purchases of reserves in place -- 5.9 850 20.6 2,158 151.3
Sales of reserves in place (23,710) (287.6) (433) (43.7) (7,941) (103.5)
Production (8,327) (225.7) (8,565) (266.4) (8,978) (268.3)
- --------------------------------------------------------------------------------------------------------------------------------
End of Year 29,717 1,422.3 72,882 2,160.6 65,984 2,006.4
================================================================================================================================
Proved Developed Reserves:
Beginning of year 45,225 1,557.5 33,327 1,395.8 30,455 1,184.1
End of year 24,743 1,122.6 45,225 1,557.5 33,327 1,395.8
================================================================================================================================
</TABLE>
MBbls-Thousands of barrels
Bcf-Billion cubic feet
27
<PAGE> 29
The significant changes to reserves, other than acquisitions,
dispositions or production, are due to reservoir performance in existing fields
and drilling of additional wells in existing fields. There were no major
discoveries or other events, favorable or adverse, that may be considered to
have caused a significant change in the estimated proved reserves since December
31, 1998.
Results of operations from producing activities by fiscal year were as
follows:
Results of Operations
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Sales $ 179,258 $ 347,219 $ 331,757
Affiliated sales 361,380 409,555 410,520
- -----------------------------------------------------------------------
Total 540,638 756,774 742,277
Production Costs (91,470) (116,112) (96,235)
Depreciation, Depletion
and Amortization (1,326,765) (341,278) (332,129)
- -----------------------------------------------------------------------
(877,597) 299,384 313,913
Income Tax (Expense)
Benefit 313,497 (97,603) (100,488)
- ------------------------ ----------------------------------------------
Results of Operations from
Producing Activities
(Excluding Corporate
Overhead and Interest
Costs) $ (564,100) $ 201,781 $ 213,425
=======================================================================
</TABLE>
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves follows:
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------
December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Future Cash Inflows $ 3,124,205 $ 6,059,477 $ 8,551,630
Future Production and
Development Costs (1,027,931) (1,889,348) (1,881,447)
Future Income Tax
Expenses (317,572) (912,059) (1,776,403)
- -----------------------------------------------------------------------
Future Net Cash Flows 1,778,702 3,258,070 4,893,780
- -----------------------------------------------------------------------
10% Annual Discount
for Estimated Timing
of Cash Flows (616,435) (1,058,622) (1,499,656)
- -----------------------------------------------------------------------
Standardized Measure
of Discounted Future
Net Cash Flows $ 1,162,267 $ 2,199,448 $ 3,394,124
=======================================================================
</TABLE>
For the calculations in the preceding table, estimated future cash
inflows from estimated future production of proved reserves were computed using
realized oil and gas prices for the month of December of each respective year.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Sales and Transfers of
Oil and Gas
Produced, Net of
Production Costs $ (449,168) $ (640,662) $ (646,042)
Net Changes in Prices
and Production Costs (389,252) (1,858,640) 1,583,674
Extensions, Discoveries
and Improved
Recovery, Less
Related Costs 71,557 328,665 1,156,729
Changes in Estimated
Future Development
Costs 36,269 (83,805) 28,320
Development Costs
Incurred During the
Period 182,447 228,798 60,259
Revisions of Previous
Quantity Estimates (413,484) 175,081 164,214
Accretion of Discount 268,797 449,400 185,091
Net Change in Income
Taxes 379,228 611,352 (891,355)
Purchases of Reserves
in Place 4,441 23,628 318,084
Sales of Reserves
in Place (468,770) (47,170) (256,706)
Changes in Production
Rates (Timing) and
Other (259,246) (381,323) 49,465
- ----------------------------------------------------------------------
$(1,037,181) $(1,194,676) $1,751,733
======================================================================
</TABLE>
28
<PAGE> 30
Notes to Consolidated Financial Statements
NOTE 15 Quarterly Results (Unaudited)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998(1)(2)
Revenues $1,109,143 $ 925,132 $ 874,497 $ 801,046
Operating Income (Loss) 59,474 (474,888) (389,322) 41,372
Earnings (Loss) Before Interest and Taxes 69,298 (457,199) (368,801) 54,692
Net Income (Loss) 27,950 (315,296) (258,416) 15,245
=========================================================================================================================
Earnings (Loss) Per Share of Common Stock $ .25 $ (2.87) $ (2.35) $ .14
=========================================================================================================================
Earnings (Loss) Per Share of Common Stock - Assuming Dilution $ .25 $ (2.87) $ (2.35) $ .14
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997(2)(3)
Revenues $1,123,529 $ 855,925 $1,073,715 $1,319,328
Operating Income 138,220 67,153 91,507 75,137
Earnings Before Interest and Taxes 153,637 78,011 100,994 88,297
Net Income 87,538 36,306 52,348 41,804
=========================================================================================================================
Earnings Per Share of Common Stock $ .79 $ .33 $ .48 $ .38
=========================================================================================================================
Earnings Per Share of Common Stock - Assuming Dilution $ .78 $ .32 $ .47 $ .38
=========================================================================================================================
</TABLE>
(1) See Note 2 for information on quarterly ceiling test charges recorded
in 1998.
(2) In September 1998, the Company changed its accounting method for its
oil and gas operations (see Note 2).
(3) Net income for the fourth quarter of 1997 includes a charge of $32.7
million, or $.29 per share (diluted), related to merger expenses (see
Note 3)
NOTE 16 Subsequent Event (Unaudited)
The Company recognized a $1,035.2 Million non-cash write-down of its oil and
natural gas properties as a result of its change to the full cost method of
accounting during the third quarter of 1998.
Due to the substantial recent volatility in oil and gas prices and their
effect on the carrying value of the Company's proved oil and gas reserves, there
can be no assurance that future write-downs will not be required as a result of
factors that may negatively affect the present value of proved oil and natural
gas reserves and the carrying value of oil and natural gas properties, including
volatile oil and natural gas prices, downward revisions in estimated proved oil
and natural gas reserve quantities and unsuccessful drilling activities.
Based on current market prices and current estimates, the Company
anticipates a first quarter ceiling test write-down of approximately $200
million. This estimate is based upon a number of assumptions that are subject to
change dependent on future events, however, including changes in oil and gas
prices and the impact of reserve changes during the quarter.
29
<PAGE> 31
Selected Consolidated Financial Data (Unaudited)
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,709.8 $ 4,372.5 $ 3,203.6 $ 1,902.4 $ 1,481.9
Costs and Expenses 4,473.2 4,000.5 2,771.5 1,626.7 1,281.3
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (763.4) 372.0 432.1 275.7 200.6
Other Income, Net 61.4 48.9 35.8 226.1 55.9
- -------------------------------------------------------------------------------------------------------------------------------
EBIT (702.0) 420.9 467.9 501.8 256.5
Interest Expense, Net (126.2) (97.2) (88.9) (97.1) (77.3)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (828.2) 323.7 379.0 404.7 179.2
Income Tax Expense (Loss) (297.7) 105.7 123.2 136.2 23.5
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (530.5) $ 218.0 $ 255.8 $ 268.5 $ 155.7
===============================================================================================================================
Earnings (Loss) Per Share $ (4.82) $ 1.98 $ 2.32 $ 2.43 $ 1.40
Earnings (Loss) Per Share - Assuming Dilution $ (4.82) $ 1.95 $ 2.29 $ 2.41 $ 1.39
Weighted Average Shares Outstanding (thousands) 110,020 110,099 110,370 110,428 111,278
Weighted Average Shares Outstanding -
Assuming Dilution (thousands) 110,020 111,669 111,722 111,261 112,228
Dividend Rate $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.08
===============================================================================================================================
Assets $ 4,361.1 $ 5,252.1 $ 4,362.8 $ 4,013.3 $ 3,885.1
Debt Maturing within One Year 830.2 461.2 215.7 241.7 225.3
Long-Term Debt 1,099.5 1,236.0 979.7 804.6 993.4
Stockholders' Equity 1,329.3 1,961.8 1,876.0 1,716.1 1,548.9
- -------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 3,259.0 $ 3,659.0 $ 3,071.4 $ 2,762.4 $ 2,767.6
===============================================================================================================================
</TABLE>
Note: The 1994-1997 periods have been restated to reflect the change to the full
cost method of accounting for the Company's oil and gas operations (see Note 2).
30
<PAGE> 32
(b) Pro forma financial information.
Presented below are unaudited pro forma condensed combined financial
statements reflecting the all common stock merger using the pooling of interests
method of accounting and unaudited pro forma condensed combined financial
statements reflecting the alternative merger using the purchase method of
accounting. This information is included to give you a better understanding of
what the combined results of operations and financial position of El Paso Energy
and Sonat may have looked like had the merger occurred on an earlier date.
The pro forma information reflecting the all common stock merger
assumes (1) each share of Sonat common stock will be converted into one share of
El Paso Energy common stock and (2) El Paso Energy will issue a total of
approximately 110 million shares in the merger.
The pro forma information reflecting the alternative merger assumes (1)
each share of Sonat common stock will be converted into (x) .170 of a share of
El Paso Energy common stock and (y) .299 of a depositary share determined
assuming an implied price per share of El Paso Energy common stock of $36, (2)
El Paso Energy will issue in the alternative merger a total of 18.7 million
shares of common stock and 32.9 million depositary shares, which depositary
shares would entitle the holders thereof to receive up to $3.29 billion of value
if El Paso Energy were liquidated, (3) each share of El Paso Energy common stock
issued will have a value of $36 on completion of the alternative merger, and (4)
the annual dividend rate on the senior voting preferred stock will be 8.75%. The
actual dividend rate will be a rate that our and Sonat's financial advisors
believe will cause the depositary shares, when fully distributed after
completion of the alternative merger, to trade initially at approximately $100
per share, considering the pro forma capitalization and credit profile of the
combined company after the completion of the alternative merger. These unaudited
pro forma condensed combined financial statements should be read in conjunction
with the historical financial statements and related notes of El Paso Energy and
Sonat included in their respective Annual Reports on Form 10-K for the year
ended December 31, 1998. The historical financial information presented for
Sonat includes certain reclassifications to conform to El Paso Energy's
presentation. These reclassifications have no impact on net income or total
stockholders' equity.
Accounting policy differences and intercompany balances between
El Paso Energy and Sonat have been determined to be immaterial and, accordingly,
the pro forma condensed combined financial statements have not been adjusted for
those differences.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved had
the all common stock merger of El Paso Energy and Sonat under either structure
been consummated as of the beginning of the periods presented, nor are they
necessarily indicative of the future operating results or financial position of
El Paso Energy. The unaudited pro forma condensed combined financial statements
do not give effect to any operating efficiencies or cost savings that may result
from the integration of El Paso Energy's and Sonat's operations.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
The following unaudited pro forma condensed combined financial
statements give effect to the all common stock merger using the pooling of
interests method of accounting. Under this accounting method, El Paso Energy's
and Sonat's balance sheets and income statements are treated as if they had
always been combined for accounting and financial reporting purposes.
The unaudited pro forma condensed combined balance sheet as of December
31, 1998 assumes the merger had been completed on December 31, 1998. The
unaudited pro forma condensed combined income statements for the three years
ended December 31, 1998 assume the merger had been completed on January 1, 1996,
the beginning of the earliest period presented.
31
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
AS OF DECEMBER 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets............................... $ 1,209 $ 801 $ -- $ 2,010
Property, plant and equipment, net................. 7,341 2,696 -- 10,037
Other.............................................. 1,519 864 -- 2,383
------- ------ ----- -------
Total assets............................. $10,069 $4,361 $ -- $14,430
======= ====== ===== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities.......................... $ 2,162 $1,577 $ 135(a) $ 3,823
(51)(c)
------- ------ ----- -------
Long-term debt, less current maturities............ 2,552 1,099 -- 3,651
------- ------ ----- -------
Deferred income taxes.............................. 1,564 164 (22)(c) 1,706
------- ------ ----- -------
Other.............................................. 993 183 -- 1,176
------- ------ ----- -------
Company-obligated mandatorily redeemable
convertible preferred securities of El Paso
Energy Capital Trust I........................... 325 -- -- 325
------- ------ ----- -------
Minority interest.................................. 365 9 -- 374
------- ------ ----- -------
Stockholders' equity
Common stock..................................... 373 111 219(b) 703
Additional paid-in capital....................... 1,436 77 (279)(b) 1,234
Retained earnings................................ 460 1,210 (192)(a) 1,551
73(c)
Other............................................ (161) (69) 60(b) (113)
57(a)
------- ------ ----- -------
Total stockholders' equity............... 2,108 1,329 (62) 3,375
------- ------ ----- -------
Total liabilities and stockholders'
equity................................. $10,069 $4,361 $ -- $14,430
======= ====== ===== =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Balance
Sheet.
32
<PAGE> 34
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
(a) Reflects estimated costs of $192 million associated with the merger of El
Paso Energy and Sonat. These costs consist of (1) $142 million of costs for
compensation related programs under which certain benefits of El Paso
Energy and Sonat personnel accelerate and vest as a result of the change in
control associated with the all common stock merger and (2) $50 million of
transaction costs, which include legal, accounting, and financial advisory
services.
(b) Reflects the exchange of one share of El Paso Energy common stock for each
share of outstanding Sonat common stock, as provided in the merger
agreement and the cancellation of $60 million of Sonat treasury stock.
(c) Reflects the income tax consequences of the $192 million of costs
associated with the merger assuming an effective income tax rate of 38%.
33
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,782 $3,710 $-- $9,492
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 4,212 2,745 -- 6,957
Operation and maintenance........................ 707 281 -- 988
Depreciation, depletion and amortization......... 269 349 -- 618
Ceiling test charges............................. -- 1,035 -- 1,035
Other............................................ 88 63 -- 151
------ ------ --- ------
5,276 4,473 -- 9,749
------ ------ --- ------
Operating income (loss)............................ 506 (763) -- (257)
Interest and debt expense.......................... 267 137 -- 404
Other income, net.................................. (138) (67) -- (205)
------ ------ --- ------
Income (loss) before income taxes and minority
interest......................................... 377 (833) -- (456)
Income tax expense (benefit)....................... 127 (299) -- (172)
------ ------ --- ------
Income (loss) before minority interest............. 250 (534) -- (284)
Minority interest.................................. 25 (3) -- 22
------ ------ --- ------
Net income (loss).................................. $ 225 $ (531) $-- $ (306)
====== ====== === ======
Basic earnings (loss) per common share............. $ 1.94 $(1.35)
====== ======
Diluted earnings (loss) per common share........... $ 1.85 $(1.35)(a)
====== ======
Basic average common shares outstanding............ 116 110(b) 226
====== === ======
Diluted average common shares outstanding.......... 126 111(b) 237
====== === ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined
Statements of Income.
34
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING THE COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,638 $4,372 $-- $10,010
------ ------ --- -------
Operating expenses
Cost of gas and other products................... 4,125 3,174 -- 7,299
Operation and maintenance........................ 664 385 -- 1,049
Depreciation, depletion and amortization......... 236 398 -- 634
Other............................................ 92 43 -- 135
------ ------ --- -------
5,117 4,000 -- 9,117
------ ------ --- -------
Operating income................................... 521 372 -- 893
Interest and debt expense.......................... 238 110 -- 348
Other income, net.................................. (57) (66) -- (123)
------ ------ --- -------
Income before income taxes and minority interest... 340 328 -- 668
Income tax expense................................. 129 107 -- 236
------ ------ --- -------
Income before minority interest.................... 211 221 -- 432
Minority interest.................................. 25 3 -- 28
------ ------ --- -------
Net income......................................... $ 186 $ 218 $-- $ 404
====== ====== === =======
Basic earnings per common share.................... $ 1.64 $ 1.80
====== =======
Diluted earnings per common share.................. $ 1.59 $ 1.76
====== =======
Basic average common shares outstanding............ 114 110(b) 224
====== === =======
Diluted average common shares outstanding.......... 117 112(b) 229
====== === =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined
Statements of Income.
35
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $3,012 $3,204 $-- $6,216
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 2,277 2,039 -- 4,316
Operation and maintenance........................ 322 301 -- 623
Depreciation, depletion and amortization......... 101 384 -- 485
Employee separation and asset impairment
charge........................................ 99 -- -- 99
Other............................................ 43 48 -- 91
------ ------ --- ------
2,842 2,772 -- 5,614
------ ------ --- ------
Operating income................................... 170 432 -- 602
Interest and debt expense.......................... 110 101 -- 211
Other income, net.................................. (5) (53) -- (58)
------ ------ --- ------
Income before income taxes and minority interest... 65 384 -- 449
Income tax expense................................. 25 125 -- 150
------ ------ --- ------
Income before minority interest.................... 40 259 -- 299
Minority interest.................................. 2 3 -- 5
------ ------ --- ------
Net income......................................... $ 38 $ 256 $-- $ 294
====== ====== === ======
Basic earnings per common share.................... $ 0.53 $ 1.62
====== ======
Diluted earnings per common share.................. $ 0.52 $ 1.59
====== ======
Basic average common shares outstanding............ 72 110(b) 182
====== === ======
Diluted average common shares outstanding.......... 73 112(b) 185
====== === ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statements
of Income
36
<PAGE> 38
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
(a) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per
common share. If we had included those securities, we would have shown
less of a loss per common share.
(b) The basic and diluted average common share adjustments reflect the exchange
of one share of El Paso Energy common stock for each share of Sonat common
stock contemplated by the merger agreement.
37
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
The following unaudited pro forma condensed combined financial statements
give effect to the merger under the alternative merger structure using the
purchase method of accounting.
In accordance with the purchase method of accounting, we have reflected
Sonat's assets and liabilities on the following pro forma financial statements,
and have allocated to those assets and liabilities the total value of the shares
that would be issued in the alternative merger structure, based on our estimate
of what the fair value of those assets and liabilities will be when the merger
is completed. Our estimates of the fair value and allocations are preliminary
and may be revised after the completion of independent appraisals, which have
not yet been performed. To the extent the total value of the shares issued in
the merger exceeds the fair value of Sonat's identified assets and liabilities,
we will record the excess as "goodwill" for accounting purposes.
The unaudited pro forma condensed combined balance sheet as of December 31,
1998 assumes the merger had been completed on December 31, 1998. The unaudited
pro forma condensed combined statement of income for the year ended December 31,
1998 assumes the merger had been completed on January 1, 1998.
38
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
AS OF DECEMBER 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets................................ $ 1,209 $ 801 $ -- $ 2,010
Property, plant and equipment, net.................. 7,341 2,696 4,368(a) 13,963
(442)(b)
Other............................................... 1,519 864 -- 2,383
------- ------ ------- -------
Total assets.............................. $10,069 $4,361 $ 3,926 $18,356
======= ====== ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities........................... $ 2,162 $1,577 $ 72(c) $ 3,784
(27)(e)
------- ------ ------- -------
Long-term debt, less current maturities............. 2,552 1,099 49(a) 3,700
------- ------ ------- -------
Deferred income taxes............................... 1,564 164 1,473(e) 3,201
------- ------ ------- -------
Other............................................... 993 183 -- 1,176
------- ------ ------- -------
Company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital
Trust I........................................... 325 -- -- 325
------- ------ ------- -------
Mandatorily redeemable preferred stock.............. -- -- 3,288(f) 3,288
------- ------ ------- -------
Minority interest................................... 365 9 -- 374
------- ------ ------- -------
Stockholders' equity
Common stock...................................... 373 111 (111)(d) 429
56(f)
Additional paid-in capital........................ 1,436 77 (77)(d) 2,054
618(f)
Retained earnings................................. 460 1,210 (1,210)(d) 186
(442)(b)
168(e)
Other............................................. (161) (69) 69(d) (161)
------- ------ ------- -------
Total stockholders' equity................ 2,108 1,329 (929) 2,508
------- ------ ------- -------
Total liabilities and stockholders'
equity.................................. $10,069 $4,361 $ 3,926 $18,356
======= ====== ======= =======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma
Condensed Combined Balance Sheet.
39
<PAGE> 41
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
(a) Reflects the preliminary allocation of the total value of the shares issued
to Sonat stockholders under the alternative merger structure to Sonat's
assets and liabilities.
(b) Reflects the writedown of the purchase price allocated to proven reserves
as a result of applying the full cost ceiling limitations. This writedown
has not been considered in the pro forma condensed combined statement of
income because it reflects a nonrecurring charge which would result
directly from the merger and which would be included in the income
statement during the period in which the merger is completed.
(c) Reflects estimated costs of $72 million associated with the merger of El
Paso Energy and Sonat under the alternative merger structure. These costs
consist of (1) $22 million of compensation related costs associated with
certain benefits of Sonat personnel which accelerate and vest as a result
of the change in control associated with the merger and (2) $50 million of
transaction costs, which include legal, accounting and financial advisory
services.
(d) Reflects the elimination of the historical equity of Sonat.
(e) Reflects the income tax consequences of the pro forma adjustments assuming
an effective income tax rate of 38%.
(f) Reflects the issuance of approximately 18.7 million shares of El Paso
Energy common stock assuming each share of El Paso Energy common stock
issued will have a value of $36 on completion of the alternative merger and
the issuance of 32.9 million depositary shares (determined assuming an
implied price per share of El Paso common stock of $36) representing newly
issued senior voting preferred stock having an aggregate liquidation
preference of $3.29 billion and an annual dividend rate of 8.75%. The
actual dividend rate will be set at a rate that our financial advisors
believe will cause the depositary shares, when fully distributed after
completion of the alternative merger, to trade initially at approximately
$100 per share, considering the pro forma capitalization and credit profile
of the combined company after completion of the alternative merger.
40
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO
ENERGY SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,782 $3,710 $ -- $9,492
------ ------ ----- ------
Operating expenses
Cost of gas and other products................... 4,212 2,745 -- 6,957
Operation and maintenance........................ 707 281 -- 988
Depreciation, depletion and amortization......... 269 349 88(a) 706
Ceiling test charges............................. -- 1,035 -- 1,035
Other............................................ 88 63 -- 151
------ ------ ----- ------
5,276 4,473 88 9,837
------ ------ ----- ------
Operating income (loss)............................ 506 (763) (88) (345)
Interest and debt expense.......................... 267 137 -- 404
Other income, net.................................. (138) (67) -- (205)
------ ------ ----- ------
Income (loss) before income taxes and minority
interest......................................... 377 (833) (88) (544)
Income tax expense (benefit)....................... 127 (299) (33)(b) (205)
------ ------ ----- ------
Income (loss) before minority interest............. 250 (534) (55) (339)
Minority interest.................................. 25 (3) -- 22
------ ------ ----- ------
Net income (loss) before preferred stock dividend
requirement...................................... 225 (531) (55) (361)
Preferred stock dividend requirement............... -- -- 288(c) 288
------ ------ ----- ------
Net income (loss) available to common
stockholders..................................... $ 225 $ (531) $(343) $ (649)(e)
====== ====== ===== ======
Basic earnings (loss) per common share............. $ 1.94 $(4.81)(e)
====== ======
Diluted earnings (loss) per common share........... $ 1.85 $(4.81)(d)(e)
====== ======
Basic average common shares outstanding............ 116 19(d) 135
====== ===== ======
Diluted average common shares outstanding.......... 126 24(d) 150
====== ===== ======
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined
Statement of Income.
41
<PAGE> 43
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
(a) Reflects depreciation expense related to the portion of the total value of
the shares issued to Sonat stockholders allocated to property, plant and
equipment based on an estimated life of 40 years, which approximates the
regulatory lives of Sonat's pipelines.
(b) Reflects the income tax consequences of the pro forma adjustment assuming
an effective income tax rate of 38%.
(c) Reflects an annual dividend rate of 8.75% for senior voting preferred stock
which would be issued by El Paso Energy pursuant to the alternative merger
structure. The actual dividend rate will be set at a rate that our
financial advisors believe will cause the depositary shares, when fully
distributed after completion of the alternative merger, to trade initially
at approximately $100 per share, considering the pro forma capitalization
and credit profile of the combined company after completion of the
alternative merger. Each percentage point change in the assumed annual
dividend rate would impact the senior voting preferred stock dividend by
approximately $33 million.
(d) The basic and diluted common shares adjustments reflect the issuance of (1)
18.7 million and 24 million shares, respectively, of El Paso Energy common
stock, with each share having a value of $36 on completion of the
alternative merger and (2) the issuance of 32.9 million shares of senior
voting preferred stock having an aggregate liquidation preference of $3.29
billion and an annual dividend rate of 8.75%. As required by the accounting
rules, we have excluded additional dilutive securities such as options in
determining diluted earnings (loss) per common share. If we had included
those securities, we would have shown less of a loss per common share.
(e) In calculating net income (loss) available to common stockholders, basic
earnings (loss) per common share, and diluted earnings (loss) per common
share, we assumed an implied price per share of El Paso Energy common stock
of $36 for purposes of determining the fraction of a depositary share to be
exchanged for each share of Sonat common stock. Each one dollar increase
(or decrease) to this assumed implied price per share would increase (or
decrease) net loss available to common stockholders, basic loss per common
share and diluted loss per common share by $11 million, $.08 per share and
$.08 per share, respectively.
42
<PAGE> 44
(c) Exhibits.
12.1 -- Ratio of earnings to combined fixed charges and preferred stock
dividends.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of KPMG LLP, Independent Auditors
43
<PAGE> 45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EL PASO ENERGY CORPORATION
By: /s/ JEFFREY I. BEASON
----------------------------------
Jeffrey I. Beason
Vice President and Controller
(Chief Accounting Officer)
Date: April 30, 1999
44
<PAGE> 46
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
12.1 -- Ratio of earnings to combined fixed charges and preferred stock
dividends.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of KPMG LLP, Independent Auditors
<PAGE> 1
EXHIBIT 12.1
EL PASO ENERGY CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
PRO FORMA
ASSUMING THE
ALTERNATIVE
MERGER
STRUCTURE HISTORICAL
------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Income (loss) from continuing operations...... $(361) $ 225 $ 186 $ 38 $ 85 $ 90
Income tax expense (benefit).................. (205) 127 129 25 48 58
Minority interest............................. 22 25 25 2 0 0
----- ----- ----- ----- ----- -----
Income (loss) from continuing operations
before income taxes and minority
interest................................... (544) 377 340 65 133 148
Interest and debt expense..................... 404 262 218 100 85 76
Interest component of rentals................. 17 9 7 5 3 3
Distributions in excess of earnings on equity
investments (undistributed earnings on
equity investments)........................ (66) (28) -- -- -- --
----- ----- ----- ----- ----- -----
Total earnings (losses) available for
fixed charges....................... $(189) $ 620 $ 565 $ 170 $ 221 $ 227
===== ===== ===== ===== ===== =====
Fixed charges
Interest and debt expense..................... $ 404 $ 262 $ 218 $ 100 $ 85 $ 76
Interest components of rentals................ 17 9 7 5 3 3
----- ----- ----- ----- ----- -----
Fixed charges excluding preferred stock
dividend requirement....................... 421 271 225 105 88 79
Preferred stock dividend requirements......... 502 37 25 2 -- --
----- ----- ----- ----- ----- -----
Total fixed charges................... $ 923 $ 308 $ 250 $ 107 $ 88 $ 79
===== ===== ===== ===== ===== =====
Ratio of Earnings to Fixed Charges(1)........... --(2) 2.01 2.26 1.59 2.51 2.87
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The ratio of earnings to combined fixed charges and preferred and
preference stock dividend requirements for the periods presented is the
same as the ratio of earnings to fixed charges since El Paso Energy has no
outstanding preferred stock or preference stock and, therefore, no dividend
requirements.
(2) Earnings were inadequate to cover fixed charges by $1,112 million.
For purposes of calculating these ratios: (i) "fixed charges" represent
interest cost (exclusive of interest on rate refunds), amortization of debt
costs, the estimated portion of rental expense representing the interest factor,
and pretax preferred stock dividend requirements; and (ii) "earnings" represent
the aggregate of income from continuing operations before income taxes, interest
expense (exclusive of interest on rate refunds), amortization of debt costs, the
portion of rental expense representing the interest factor, and the actual
amount of any preferred stock dividend requirements, adjusted to reflect actual
distributions from equity investments.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 19, 1999, with respect to the
consolidated financial statements of Sonat Inc. for the year ended December 31,
1998 included in Amendment No. 1 to the El Paso Energy Corporation Current
Report on Form 8-K/A dated April 30, 1999 filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Birmingham, Alabama
April 28, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sonat Exploration GOM Inc.
(formerly Zilkha Energy Company):
We consent to the incorporation by reference in the Form 8-K of El Paso Energy
Corporation anticipated to be filed on April 30, 1999, of our report dated
December 8, 1997, with respect to the Statements of Operations and Cash Flows
of Zilkha Energy Company for the year ended December 31, 1996, which report
appears in the Form 8-K of Sonat Inc. dated April 23, 1998 and is incorporated
by reference in the Form 10-K of Sonat Inc. for the year ended December 31,
1998.
Our report, dated December 8, 1997, refers to a change in accounting for oil
and gas properties from the full cost method to the successful efforts method.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
April 26, 1999
