UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-7179
SONAT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0647939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-3800
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE:
86,268,500 SHARES OUTSTANDING ON JULY 31, 1995
<PAGE>
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<CAPTION>
SONAT INC. AND SUBSIDIARIES
INDEX
<C>
<S> Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 1995 and December 31, 1994 1
Condensed Consolidated Statements of Income--
Three Months and Six Months Ended
June 30, 1995 and 1994 2
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1995 and 1994 3
Notes to Condensed Consolidated Financial
Statements 4 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 31
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 6,052 $ 9,131
Accounts and note receivable 230,221 279,553
Inventories 27,662 26,722
Gas imbalance receivables 17,195 35,091
Other 43,032 36,344
Total Current Assets 324,162 386,841
Investments in Unconsolidated Affiliates and Other 541,761 704,308
Plant, Property and Equipment 4,793,590 4,741,296
Less accumulated depreciation, depletion
and amortization 2,500,147 2,497,691
2,293,443 2,243,605
Deferred Charges:
Gas supply realignment costs 231,332 160,850
Other 50,532 35,082
281,864 195,932
$3,441,230 $3,530,686
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 19,000 $ 19,250
Unsecured notes 70,000 200,000
Accounts payable 187,173 208,751
Accrued income taxes 14,319 22,029
Accrued interest 34,083 36,825
Gas imbalance payables 23,006 42,975
Other 33,850 40,371
Total Current Liabilities 381,431 570,201
Long-Term Debt 1,081,488 963,378
Deferred Credits and Other:
Deferred income taxes 218,541 187,957
Reserves for regulatory matters 173,856 183,343
Other 188,203 233,921
580,600 605,221
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 128,595 129,563
Retained earnings 1,295,656 1,287,339
1,424,251 1,416,902
Less treasury stock (26,540) (25,016)
Total Stockholders' Equity 1,397,711 1,391,886
$3,441,230 $3,530,686
</TABLE>
See accompanying notes.
1
<PAGE>
<TABLE>
<CAPTION>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $480,394 $422,759 $911,625 $911,704
Costs and Expenses:
Natural gas cost 262,014 180,714 452,742 394,289
Transition cost recovery
and gas purchase contract
settlement costs (12,480) 27,529 8,406 70,449
Operating and maintenance 43,869 46,801 88,413 94,649
General and administrative 32,863 38,836 66,500 69,861
Depreciation, depletion
and amortization 66,660 66,350 141,051 132,644
Taxes, other than income 9,728 10,024 21,653 20,608
402,654 370,254 778,765 782,500
Operating Income 77,740 52,505 132,860 129,204
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 11,930 11,560 24,883 16,382
Other (41,232) 2,426 (35,724) 6,877
(29,302) 13,986 (10,841) 23,259
Interest:
Interest income 2,840 1,192 3,688 3,113
Interest expense (29,863) (23,632) (58,402) (45,061)
Interest capitalized 1,681 1,956 3,439 3,571
(25,342) (20,484) (51,275) (38,377)
Income before Income Taxes 23,096 46,007 70,744 114,086
Income Taxes 5,755 11,466 15,786 29,935
Net Income $ 17,341 $ 34,541 $ 54,958 $ 84,151
Earnings Per Share of Common Stock $ .20 $ .40 $ .64 $ .97
Weighted Average Shares Outstanding 86,371 87,193 86,361 87,185
Dividends Paid Per Share $ .27 $ .27 $ .54 $ .54
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 54,958 $ 84,151
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 141,051 132,644
Deferred income taxes 30,784 (3,089)
Equity in earnings of unconsolidated affiliates,
less distributions (17,178) (8,809)
(Gain) loss on disposal of assets 41,772 (1,465)
Reserves for regulatory matters (9,487) 22,271
Gas supply realignment costs (70,482) 15,699
Natural gas purchase contract settlement costs - 18,360
Change in:
Accounts receivable 49,356 (8,591)
Inventories (940) 46
Accounts payable (21,578) (26,123)
Accrued interest and income taxes, net (20,965) (4,035)
Other current assets and liabilities (4,767) 7,670
Other (47,115) 33,282
Net cash provided by operating activities 125,409 262,011
Cash Flows from Investing Activities:
Plant, property and equipment additions (282,766) (204,409)
Net proceeds from disposal of assets 218,540 7,935
Advances to unconsolidated affiliates
and other (2,142) (171,471)
Net cash used in investing activities (66,368) (367,945)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 2,953,000 2,110,000
Payments of long-term debt (2,835,140) (2,053,160)
Changes in short-term borrowings (130,000) 94,294
Net changes in debt (12,140) 151,134
Dividends paid (46,641) (47,064)
Other (3,339) 666
Net cash provided by (used in)
financing activities (62,120) 104,736
Net Decrease in Cash and Cash Equivalents (3,079) (1,198)
Cash and Cash Equivalents at Beginning of Period 9,131 10,822
Cash and Cash Equivalents at End of Period $ 6,052 $ 9,624
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 50,174 $ 42,051
Income taxes (refunds received), net (1,685) 32,213
</TABLE>
See accompanying notes.
3
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Sonat
Inc. (Sonat) and its subsidiaries (the Company) have been prepared in accordance
with the instructions to Form 10-Q and include the information and footnotes
required by such instructions. In the opinion of management, all adjustments
including those of a normal recurring nature have been made that are necessary
for a fair presentation of the results for the interim periods presented herein.
Certain amounts in the 1994 condensed consolidated financial statements
have been reclassified to conform with the 1995 presentation.
2. Derivative Financial Instruments
At June 30, 1995, Sonat Exploration had four oil price swap agreements
covering approximately 75 percent of its remaining 1995 production to exchange
payments based on a total notional volume of 1.4 million barrels. The average
market price Sonat Exploration was paying was $18.40 per barrel and the average
fixed price Sonat Exploration was receiving was $18.52 per barrel at June 30,
1995. These instruments, which are hedges of Sonat Exploration's production of
oil reserves, are effected for the purpose of reducing exposure to changes in
spot- market prices on the same amount of production.
At June 30, 1995, Sonat Marketing had a total of 32 natural gas price
and basis swap agreements to exchange payments based on a total notional volume
of 35,403,000 MMBtu of natural gas over periods ranging from one month to seven
years. At June 30, 1995, the average price the Company was paying was $1.60 per
MMBtu and the average price the Company was receiving was $1.51 per MMBtu. These
instruments, which are hedges of Sonat Marketing's spot market natural gas
transactions, are effected for the purpose of locking in the margin on the
related transactions.
The Company's credit exposure on swaps is limited to the value of swaps
that are in a favorable position to the Company. At June 30, 1995, the market
value of the Company's fixed-price favorable swaps was $2,706,000. The net
position of all fixed-price swaps, both favorable and unfavorable, was
$2,674,000 favorable. The market value of the basis swaps is not material.
4
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
Company's Share of Reported Earnings (Losses)
<S> <C> <C> <C> <C>
Exploration and Production: $ 149 $ 204 $ 335 $ 311
Natural Gas Transmission and Marketing:
Citrus Corp. 5,803 7,367 12,185 7,684
Amortization of Citrus basis
difference 345 345 692 692
Bear Creek Storage 2,391 2,213 4,922 4,494
Other natural gas transmission
and marketing affiliates (103) (53) (86) (78)
8,436 9,872 17,713 12,792
Other:
Sonat Offshore Drilling 3,245 866 6,129 2,561
Other affiliates 100 618 706 718
3,345 1,484 6,835 3,279
$11,930 $11,560 $24,883 $16,382
</TABLE>
5
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Unconsolidated Affiliates (Cont'd)
Natural Gas Transmission and Marketing Affiliates - Sonat owns 50
percent of Citrus Corp. (Citrus), the parent of Florida Gas Transmission
Company. Southern Natural Gas Company (Southern) owns 50 percent of Bear Creek
Storage Company (Bear Creek), an underground gas storage company.
The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $194,691 $134,385 $319,855 $237,869
Expenses (Income):
Natural gas cost 106,287 86,404 169,550 152,297
Operating expenses 34,544 28,787 63,461 55,009
Depreciation and amortization 11,501 9,850 19,597 19,543
Allowance for funds used
during construction (86) (25,623) (20,297) (36,006)
Interest and other 23,533 11,050 47,856 21,965
Income taxes 7,306 9,183 15,318 9,694
Income Reported $ 11,606 $ 14,734 $ 24,370 $ 15,367
</TABLE>
Allowance for funds used during construction decreased significantly
when Florida Gas' Phase III expansion went into service on March 1, 1995.
The following is summarized income statement 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>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,906 $8,843 $18,228 $17,873
Expenses:
Operating expenses 1,251 1,287 2,526 2,565
Depreciation 1,349 1,350 2,699 2,700
Other expenses, net 1,525 1,780 3,158 3,619
Income Reported $4,781 $4,426 $ 9,845 $ 8,989
</TABLE>
6
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Unconsolidated Affiliates (Cont'd)
Other Affiliate - In June 1993, the Company reduced its ownership of
Sonat Offshore, which provides offshore drilling services, from 100 percent to
approximately 40 percent. At June 30, 1995, the Company held 11.3 million shares
of Sonat Offshore common stock. The Company's investment in Sonat Offshore is
accounted for on the equity method.
On July 20, 1995, the Company made a capital contribution of its
remaining shares of Sonat Offshore Drilling common stock to Sonat Exploration
Company, the Company's wholly owned subsidiary. On July 26, 1995, Sonat
Exploration sold in an underwritten public offering these shares of Sonat
Offshore Drilling common stock. The net proceeds after underwriters' discounts
and commissions were $326 million. The Company expects to realize approximately
$210 million of net cash proceeds from the sale after income taxes and expenses
are paid and will report a third quarter after-tax gain of approximately $110
million, or $1.27 per share.
The following is summarized income statement information for Sonat
Offshore:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $85,510 $58,922 $156,236 $125,029
Expenses (Income):
Operating expenses 67,360 48,648 121,100 102,363
Depreciation 6,237 6,283 12,515 12,101
Other (income) expenses, net (942) 522 (1,575) 453
Income taxes 4,665 1,299 8,730 3,695
Income Reported $ 8,190 $ 2,170 $ 15,466 $ 6,417
</TABLE>
4. Long-Term Debt and Lines of Credit
Long-Term Debt - During the first six months of 1995, Sonat borrowed
$2.7 billion and repaid $2.8 billion under its revolving credit agreement, which
is classified as long-term, resulting in $300 million outstanding at a rate of
6.21 percent at June 30, 1995.
On June 12, 1995, Sonat issued $200 million of 6 7/8 Percent Notes due
June 1, 2005. The proceeds from the sale of the Notes were used to repay
floating rate debt.
Lines of Credit and Credit Agreement - At June 30, 1995, no amounts
were outstanding under Sonat's 364-day revolving credit agreement and $70
million in commercial paper was outstanding at a rate of 6.27 percent. Loans
outstanding under all short-term credit facilities are for a duration of less
than three months.
7
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Long-Term Debt and Lines of Credit (Cont'd)
Short-Term Credit Facilities - On May 29, 1995, Sonat and Southern
renewed their short-term lines of credit with several banks to provide for
borrowings of $200 million and $50 million, respectively. Borrowings are
available through May 28, 1996, in the form of unsecured promissory notes and
bear interest at rates based on the banks' prevailing prime, international or
money market lending rates. At June 30, 1995, no amounts were outstanding under
either agreement.
5. Commitments and Contingencies
Rate Matters - Periodically, Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (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 and its subsidiaries provide reserves relating
to such amounts collected subject to refund, as appropriate, and make refunds
upon establishment of the final rates.
On September 1, 1989, Southern implemented new rates, subject to
refund, reflecting a general rate decrease of $6 million. In January 1991
Southern implemented new rates, subject to refund, that restructured its rates
consistent with a FERC policy statement on rate design and increased its sales
and transportation rates by approximately $65 million annually. These two
proceedings have been consolidated for hearing. On October 7, 1993, the
presiding administrative law judge certified to the FERC a contested offer of
settlement pertaining to the consolidated rate cases that (1) resolved all
outstanding issues in the rate decrease proceeding, (2) resolved the cost of
service, throughput, billing determinants, and transportation discount issues in
the rate increase proceeding, and (3) provided a method to resolve all other
issues in the latter proceeding, including the appropriate rate design. Under
the settlement, the FERC will decide cost classification, cost allocation, and
rate design issues based on written submissions of the parties and the existing
record in the proceeding. By orders issued on December 16, 1993, and May 5,
1994, the FERC approved the settlement. One party has sought judicial review of
the FERC orders. Southern cannot predict the outcome of this appeal.
On September 1, 1992, Southern implemented another general rate change.
The rates reflected the continuing shift in the mix of throughput volumes away
from sales and toward transportation and a $5 million reduction in annual
revenues. On April 30, 1993, Southern submitted a proposed settlement in the
proceeding that would resolve the throughput and certain cost of service issues.
The cost allocation and rate design issues were consolidated with similar issues
in Southern's rate proceeding filed May 1, 1993, which is described below, and
will be resolved in that proceeding. This settlement was approved by the FERC
orders issued on December 16, 1993, and May 5, 1994. One party has sought
judicial review of these FERC orders as well. Southern also cannot predict the
outcome of this appeal.
On May 1, 1993, Southern implemented a general rate change, subject to
refund, that increased its sales and transportation rates by approximately
8
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
$57 million annually. The filing is designed to recover increased operating
costs and to reflect the impact of competition. On January 9, 1995, Southern
filed with the presiding administrative law judge a trial stipulation that
resolved certain cost of service issues with the FERC staff in this proceeding.
This trial stipulation was not opposed by any party to the proceeding. A hearing
regarding all other outstanding issues concluded in February 1995. Southern
cannot predict the outcome of this hearing.
Southern filed with the FERC on March 15, 1995, a proposed settlement
(the Customer Settlement) that would resolve all of Southern's pending rate
(described above) and gas supply realignment (GSR) cost recovery (described
below) proceedings. The FERC staff and customers representing more than 95
percent of the firm transportation capacity on Southern's pipeline system are in
support of the Customer Settlement. Pursuant to the Customer Settlement, which
must be approved by the FERC, all issues in Southern's current and prior rate
cases would be settled as to the supporting parties. Southern would credit in
the aggregate the full amount of Southern's rate reserves as of February 28,
1995 (approximately $155 million), less certain amounts withheld for potential
rate refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. Southern implemented reduced settlement rates for parties that
support the Customer Settlement on an interim basis effective March 1, 1995,
subject to reinstatement, pending FERC consideration and approval of the
Customer Settlement. The Customer Settlement provides that, except in certain
limited circumstances, Southern will not file a general rate case to be
effective prior to March 1, 1998. Southern's GSR costs are discussed below (see
Order No. 636).
In the fourth quarter of 1994, the Company recognized a $29 million
charge associated with the Customer Settlement, which includes anticipated
amounts for GSR costs that Southern would not recover from its customers, and a
$28 million provision relating to regulatory assets that may not be recovered as
a result of the Customer Settlement, including amounts for a corporate
restructuring undertaken in 1994.
The Customer Settlement has been contested by certain of Southern's
firm customers representing approximately five percent of Southern's firm
contract demand and by certain interruptible customers. If approved by the FERC,
the Customer Settlement will become effective only as to supporting parties and
any contesting parties the FERC determines will be bound by it. Southern's rates
and GSR costs applicable to the contesting parties not bound by the Customer
Settlement will be determined by the outcome of Southern's pending rate and GSR
proceedings, where Southern believes it is likely that those contesting
customers will continue to challenge both the eligibility and prudence of
Southern's GSR costs. It is also possible that the Customer Settlement might not
be approved by the FERC or, if approved, might be modified in a way unacceptable
to Southern or its customers.
Several of the shippers on the pipeline system of Sea Robin Pipeline
Company, a subsidiary of Southern, filed with the FERC in February 1995 a
complaint against Sea Robin under Section 5 of the Natural Gas Act claiming that
Sea Robin's rates were unjust and unreasonable. Any reduction in Sea Robin's
rates as a result of
9
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
this complaint could be implemented only on a prospective basis. In its answer,
Sea Robin asked the FERC to dismiss the complaint or to find that its rates
continue to be just and reasonable based on the data it presented. Sea Robin is
unable to predict the outcome of this proceeding.
Gas Purchase Contracts - Southern currently is incurring no take-or-pay
liabilities under its gas purchase contracts. Southern regularly evaluates its
position relative to gas purchase contract matters, including the likelihood of
loss from asserted or unasserted take-or-pay claims or above-market prices. When
a loss is probable and the amount can be reasonably estimated, it is accrued.
Order No. 636 - In 1992 the FERC issued its Order No. 636 (the Order).
The Order required significant changes in interstate natural gas pipeline
services. Interstate pipeline companies, including Southern, are incurring
certain costs (transition costs) as a result of the Order, the principal one
being costs related to amendment or termination of, or purchasing gas at
above-market prices under, existing gas purchase contracts, which are referred
to as GSR costs. The Order provided for the recovery of 100 percent of the GSR
costs and other transition costs to the extent the pipeline can prove that they
are eligible, that is, incurred as a result of customers' service choices in the
implementation of the Order, and were incurred prudently. The prudence review
will extend both to the prudence of the underlying gas purchase contracts, based
on the circumstances that existed at the time the contracts were executed, and
to the prudence of the amendments or terminations of the contracts. Numerous
parties have appealed the Order to the Circuit Courts of Appeal.
On September 3, 1993, the FERC generally approved a compliance plan for
Southern and directed Southern to implement its restructured services pursuant
to the Order on November 1, 1993 (the September 3 order). Pursuant to Southern's
compliance plan, GSR costs that are eligible for recovery include payments to
reform or terminate gas purchase contracts. Where Southern can show that it can
minimize transition costs by continuing to purchase gas under the contract
(i.e., it is more economic to continue to perform), eligible GSR costs would
also include the difference between the contract price and the higher of (a) the
sales price for gas purchased under the contract or (b) a price established by
an objective index of spot-market prices. Recovery of these "price differential"
costs is permitted for an initial period of two years ending October 31, 1995.
Southern filed with the FERC on July 31, 1995, for a two-year extension of this
period. The Customer Settlement, which provides that price differential costs
can be recovered for an indefinite period, would, if approved, supersede this
filing as to the supporting parties.
Southern's compliance plan contains two mechanisms pursuant to which
Southern is permitted to recover 100 percent of its GSR costs. The first
mechanism is a monthly fixed charge designed to recover 90 percent of the GSR
costs from Southern's firm transportation customers. The second mechanism is a
volumetric charge designed to collect the remaining 10 percent of such costs
from Southern's interruptible transportation customers. These funding mechanisms
will continue until the GSR costs are fully recovered or funded. The FERC also
indicated that
10
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
Southern could file to recover any GSR costs not recovered through the
volumetric charge after a period of two years. In addition, Southern's
compliance plan provides for the recovery of other transition costs as they are
incurred and any remaining transition costs may be recovered through a regular
rate filing.
Southern's customers have generally opposed the recovery of Southern's
GSR costs based on both eligibility and prudence grounds. The September 3 order
rejected the argument of certain customers that a 1988 take-or-pay recovery
settlement bars Southern from recovering GSR costs under gas purchase contracts
executed before March 31, 1989, which comprise most of Southern's GSR costs.
Those customers subsequently filed motions urging the FERC to reverse its ruling
on that issue. On December 16, 1993, the FERC affirmed its September 3 ruling
with respect to the 1988 take-or-pay recovery settlement (the December 16
order). The FERC's finding that the 1988 settlement is not a bar in general to
the recovery as GSR costs of payments made to amend or to terminate these
contracts does not prevent an eligibility challenge to specific payments,
however, on the theory that they are actually take-or-pay costs that would have
been unavoidable regardless of the Order. The December 16 order generally
approved Southern's restructuring tariff submitted pursuant to the September 3
order. Various parties have sought judicial review of the September 3 and
December 16 orders.
As of June 30, 1995, Southern had either paid or accrued $192 million
in GSR costs (including interest) either to reduce significantly the price
payable under or to terminate a number of gas supply contracts providing for
payment of above-market prices. On February 17, 1995, Southern reached an
agreement to resolve its remaining high-cost supply contracts with Exxon
Corporation (Exxon) by paying an additional $45 million in GSR costs and
foregoing a claim against $19 million in price differential costs that have been
paid to Exxon under an interim agreement entered into between the parties
pending resolution of litigation contesting Southern's termination on March 1,
1994, of a gas purchase contract with Exxon. This agreement is conditioned upon
the Customer Settlement becoming effective. These Exxon amounts are included in
the amount for June 30, 1995, above. In addition to the above amounts, Southern
also has an agreement under which another high-cost contract price is reduced in
exchange for monthly payments having a present value of approximately $43
million. Southern has received permission from the FERC to purchase an annuity
in order to monetize this obligation.
In addition to its GSR costs relating to termination or amendment of
its remaining gas purchase contracts, Southern has incurred and expects to
continue to incur certain price differential GSR costs resulting from Southern's
continued purchase of gas under its remaining supply contracts that provide for
prices in excess of current market prices. As of June 30, 1995, Southern had
incurred $98 million in price differential costs.
Beginning in December 1993, Southern has made a number of filings with
the FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative law judge regarding whether such costs were prudently incurred
and are eligible for
11
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
recovery under the Order. Southern's customers are opposing its recovery of its
GSR costs in these proceedings based on both eligibility and prudency grounds.
These proceedings, which have all been consolidated, are in the early stages of
discovery and Southern cannot predict their outcome at this time.
As described above, Southern's Customer Settlement would settle as to
supporting parties all of the proceedings pursuant to which Southern is seeking
recovery of its GSR costs as well as all of its other outstanding rate
proceedings. If the Customer Settlement is ultimately approved by the FERC, all
challenges to the recovery of Southern's GSR costs would be resolved as to those
customers supporting the Customer Settlement, including all issues related to
eligibility and prudency. Additionally, Southern would absorb an agreed-upon
portion of its total GSR costs, which was reflected in the provision for the
Customer Settlement noted above.
In its Customer Settlement discussions, Southern has advised its
customers that the amount of GSR costs that it actually incurs will depend on a
number of variables, including future natural gas and fuel oil prices, future
deliverability under Southern's existing gas purchase contracts, and Southern's
ability to renegotiate certain of these contracts. While the level of GSR costs
is impossible to predict with certainty because of these numerous variables,
based on current spot-market prices, a range of estimates of future oil and gas
prices, contract renegotiations that have occurred, and price differential costs
actually incurred, the amount of GSR costs was estimated at June 30, 1995, to be
approximately $341 million on a present-value basis. This amount includes the
$64 million cost that will be incurred under the settlement of existing
contracts with Exxon, which will become effective if the Customer Settlement
becomes effective. These amounts do not include an additional $90 million in
projected GSR costs that may be incurred if the settlement with Exxon does not
become effective and Exxon prevails in its lawsuit regarding Southern's March 1,
1994, termination of a contract relating to Exxon's reserves in its Mississippi
Canyon blocks (described below).
Until the Customer Settlement is approved, Southern plans to make
additional rate filings quarterly to recover its price differential costs and
any other GSR costs. Additionally, Southern will continue to make monthly
filings designed to adjust the billing determinants and associated surcharges
for its firm transportation customers to reflect changes in the level of
systemwide contract demands and effective carrying charges that occur from time
to time.
If the Customer Settlement is not approved, Southern cannot predict the
ultimate outcome of its Order No. 636 restructuring proceedings, its rate
filings to recover its GSR costs, or its other outstanding rate proceedings.
Administrative Law Judge Ruling Concerning Recoverability of Investment
in Offshore Gas Supply Facilities; Settlement with Exxon Corporation - In an
initial decision issued on May 2, 1994, which Southern appealed, an
administrative law judge ruled, in a rate case Southern had filed before the
FERC, that Southern could not include in its rates the approximately $45 million
cost of certain pipeline facilities placed in service by Southern in 1992 to
connect to its interstate
12
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
pipeline system extensive new gas reserves developed by Exxon in the Mississippi
Canyon and Ewing Bank Area Blocks, offshore Louisiana (the Mississippi Canyon
Facilities). The judge ruled that Southern's recovery of these costs was
precluded by the 1988 settlement with Southern's customers that limits the
amount of take-or-pay payments Southern may recover in its rates. The judge
found that the cost of the facilities constitutes non-cash consideration to
Exxon for a 1989 take-or-pay settlement and is therefore subject to the dollar
"cap" on these payments contained in the 1988 settlement. Southern has
previously recovered the maximum amount permitted by the 1988 settlement in its
rates. Southern has appealed the administrative law judge's decision to the FERC
but cannot predict the outcome of this appeal.
The Customer Settlement provides that, as to customers supporting the
settlement, the costs of the Mississippi Canyon Facilities will be recovered by
Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not
preclude Southern's recovery of such costs. On February 17, 1995, Southern
reached a settlement with Exxon pursuant to which, in return for an additional
cash payment by Southern of $45 million, plus allowing Exxon to retain $19
million in price differential costs already paid to Exxon, all existing gas
purchase contracts would be terminated, two new gas purchase contracts would be
entered into having three-year terms and providing for market-based index
prices, and a lawsuit regarding Southern's termination of the gas purchase
contract covering gas reserves connected by the Mississippi Canyon Facilities
(Mississippi Canyon Contract) would be dismissed. The settlement with Exxon is
contingent on FERC approval of the Customer Settlement.
If this settlement with Exxon does not become effective, total GSR
costs under the Mississippi Canyon Contract through the scheduled renegotiation
of its pricing provisions in 1997 were estimated at June 30, 1995, to be
approximately $129 million on a present-value basis, although such estimate is
subject to significant uncertainty since the assumptions inherent in the
estimate (including underlying reserves, future deliverability, and a range of
estimated future gas market prices) are not known today with certainty and there
is a wide range of possible outcomes for each assumption. In addition, Southern
gave notice to Exxon that effective March 1, 1994, it terminated the Mississippi
Canyon Contract pursuant to certain provisions of the contract. Such
termination, if effective, would reduce GSR costs associated with such contract
to $14 million. Exxon filed suit against Southern seeking a declaratory judgment
that Southern does not have the right to terminate the contract or alternatively
for damages of an unspecified amount arising out of the alleged repudiation or
breach of the contract by Southern. The court entered a summary judgment order
upholding Southern's termination of this contract, which Exxon appealed to the
Fifth Circuit Court of Appeals. Southern's customers are challenging the
recovery of GSR costs attributable to such contract on eligibility and prudence
grounds and on the basis that such costs also constitute non-cash consideration
for the 1989 take-or-pay settlement with Exxon and thus are not recoverable due
to the 1988 take-or-pay cost cap. If the settlement with Exxon does not become
effective, Southern cannot predict the outcome of pending or future proceedings
for the recovery of GSR costs related to the gas supplies connected by the
Mississippi Canyon Facilities or its
13
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies (Cont'd)
pending litigation with Exxon regarding Southern's notice of termination of the
Mississippi Canyon Contract.
FERC Audit of Florida Gas - The FERC's Division of Audits has nearly
completed a compliance review of Florida Gas' books and records for the period
January 1, 1991, through December 31, 1993. Among other things, the FERC
auditors have tentatively proposed adjustments to the capitalization by Florida
Gas of AFUDC during construction of its Phase III expansion facilities that, if
made, would result in a charge to earnings of approximately $40 million after
tax. Florida Gas intends to request that resolution of this issue be deferred
until its next regular rate case, which will be filed in late 1996. Management
of Florida Gas has advised the Company that it believes that its method of
capitalizing AFUDC on Phase III was proper and does not believe that the outcome
of this matter will have a material adverse effect on Florida Gas' results of
operations.
6. Changes in Operations
The Company has reached an agreement in principle with Atlanta Gas
Light Company (Atlanta) whereby Atlanta and Sonat (or a subsidiary of Sonat)
will jointly own and operate the business currently conducted by Sonat's wholly
owned subsidiary, Sonat Marketing Company. The Company will contribute all of
the assets and liabilities of Sonat Marketing, except $32 million of accounts
receivable, to a new entity and Atlanta will contribute $32 million in cash. The
transaction is subject to execution of mutually acceptable definitive documents.
Atlanta, which will own 35 percent of the new entity, will have certain rights
to resell to the Company its interest in the new entity, including a right for
five years to sell under a formula price, which will result in the deferral of
the pre-tax gain of approximately $23 million on the transaction.
In June 1995 the Company sold back to Baker Hughes Incorporated for
$167 million the four million shares of Baker Hughes convertible preferred stock
that Sonat received as partial consideration for its sale of Teleco Oilfield
Services Inc. to Baker Hughes in 1992. The sale resulted in an $8 million loss
after taxes, or $.09 per share.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SONAT INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Income
Operating results for the Company's business segments follow:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Operating Income:
<S> <C> <C> <C> <C>
Exploration and production $38 $22 $ 40 $ 44
Natural gas transmission
and marketing 40 29 94 81
Other - 2 (1) 4
Operating Income $78 $53 $133 $129
</TABLE>
15
<PAGE>
Unusual Items
The Company's Statements of Income for both 1995 periods reflect the
impact of three unusual items recorded in the second quarter of 1995. These
items are the sale of properties and terminations of long-term gas sales
contracts by Sonat Exploration and the sale of the Company's investment in Baker
Hughes Incorporated Preferred Stock.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Operating Income
<S> <C> <C> <C> <C>
As Reported $78 $53 $133 $129
Less Unusual Items:
Exploration and Production
Termination of gas
sales contracts 37 - 37 -
Operating Income Excluding
Unusual Items $41 $53 $ 96 $129
Net Income As Reported $17 $35 $ 55 $ 84
Less Unusual Items:
Exploration and Production
Termination of gas
sales contracts 24 - 24 -
Property sales (20) - (20) -
Other:
Sale of Baker Hughes Stock (8) - (8) -
Net Income Excluding
Unusual Items $21 $35 $ 59 $ 84
</TABLE>
EXPLORATION AND PRODUCTION
The Company is engaged in the exploration for and the acquisition,
development, and production of oil and natural gas in the United States through
Sonat Exploration Company. Sonat Exploration's strategy is to acquire oil and
gas properties with significant development potential. Since implementing this
strategy in 1988, proved reserves have grown to approximately 1.8 trillion cubic
feet of natural gas equivalent at June 30, 1995, more than a seven-fold
increase.
Sonat Exploration intends to continue aggressively to acquire domestic
oil and gas properties with significant development potential. During 1995,
Sonat Exploration has acquired oil and gas interests and properties for a total
of $163 million, which increased proved reserves by approximately 267 billion
cubic feet of natural gas equivalent. Through these acquisitions, Sonat
Exploration extended its operations in north Louisiana and the Texas Panhandle
area.
16
<PAGE>
Developmental drilling programs continue to be very successful. In the
first six months of 1995, Sonat Exploration completed 103 development wells.
These drilling programs added proved reserves of approximately 83 billion cubic
feet of natural gas equivalent.
In order to focus its exploration and production efforts and to
minimize administrative and other costs, Sonat Exploration has committed to
dispose of certain non-strategic oil and gas interests for approximately $105
million in the states of Arkansas, Colorado, Louisiana, and Texas and offshore
Louisiana. Of these commitments, through June 30, 1995, $54 million were closed,
which included net proved reserves of approximately 97 Bcf of natural gas
equivalent. Sonat Exploration expects that it will continue to dispose of
non-strategic oil and gas interests in the future.
The decline in natural gas prices that began in 1994 has continued into
1995. Natural gas prices have remained depressed throughout the second quarter
and into the third quarter. As a consequence, Sonat Exploration's earnings and
cash flow in the first six months of 1995 have been adversely impacted. This
decline in natural gas prices will continue to depress Sonat Explorations's
earnings and cash flow in the third quarter.
Total capital expenditures for Sonat Exploration are expected to
approximate $410 million in 1995, which would be up slightly from 1994. Capital
spending planned for 1995 includes approximately $240 million for producing
property acquisitions.
In early August 1995, Sonat Exploration and Taurus Exploration Inc., a
wholly owned subsidiary of Energen Corporation, entered into an agreement
pursuant to which Taurus will join Sonat Exploration in its regular oil and gas
reserve acquisition program through December 31, 1998. Taurus has committed to
spend up to $30 million as its proportionate share of acquisitions that may be
made during the remainder of 1995 and expects to invest $25 million to $50
million annually in subsequent years. Development drilling on the acquired
properties will involve additional investment by Taurus. Sonat Exploration will
operate all properties acquired.
Natural gas production is marketed primarily in the spot-market by
Sonat Marketing Company, a subsidiary of the Company operating in the Natural
Gas Transmission and Marketing Segment. Sonat Exploration, through Sonat
Marketing, uses derivative financial instruments to manage the risks associated
with price volatility for its production. (See Commodity Price Risk Management
and Note 2 of the Notes to Condensed Consolidated Financial Statements.)
17
<PAGE>
Exploration and Production Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Sales to others $ 69 $ 37 $109 $ 68
Intersegment sales 55 71 109 146
Total Revenues 124 108 218 214
Costs and Expenses:
Operating and maintenance 17 17 34 31
Exploration expense 2 1 3 5
General and administrative 11 14 21 25
Depreciation, depletion and
amortization 52 49 110 98
Taxes, other than income 4 5 10 11
86 86 178 170
Operating Income $ 38 $ 22 $ 40 $ 44
Net Sales Volumes:
Gas (Bcf) 44 44 94 87
Oil and condensate (MBbls) 888 1,064 1,961 2,017
Natural gas liquids (MBbls) 418 309 856 537
Average Sales Prices:
Gas ($/Mcf) $ 1.52 $ 1.97 $ 1.48 $ 2.03
Oil and condensate ($/Bbl) 17.54 16.77 17.33 15.01
Natural gas liquids ($/Bbl) 8.59 8.86 8.66 8.95
</TABLE>
Quarter-to-Quarter Analysis
Sonat Exploration's operating income was $38 million in the second
quarter of 1995, $16 million more than the same period in 1994. This increase
was due to the termination of two long-term gas sales contracts, which resulted
in the recognition of $37 million of additional operating revenue for the
quarter. This additional revenue more than offset the effect of a decline in
natural gas prices from $1.97 per thousand cubic feet for the second quarter of
1994 to $1.52 per thousand cubic feet for the same period in 1995. Oil and
condensate prices, however, showed some improvement over the second quarter of
1994, increasing five percent to an average price of $17.54 per barrel.
Production volumes for oil and condensate were down 17 percent in 1995 while
natural gas volumes remained flat, as did operating expenses. Production in 1995
was below expected levels due to pipeline mechanical problems in the Gulf of
Mexico, which caused some properties to be shut-in or curtailed, and to the
disposal of properties. Production from these properties would have otherwise
contributed six billion cubic feet of natural gas equivalent during the second
quarter of 1995. General and administrative expenses were down 21 percent from
the second quarter of 1994 due primarily to savings in pension cost, savings
from company restructuring, and an overall effort
18
<PAGE>
to lower expenses. A higher proportion of Austin Chalk (predominately oil,
condensate and natural gas liquids) production is contributing to an increase in
amortization rates.
Year-to-Date Analysis
Operating income for the 1995 year-to-date period was $40 million
compared to $44 million for the first six months of 1994. Natural gas prices
experienced a 27 percent decline from the 1994 level of $2.03 resulting in the
reduction in operating income. The effect of lower natural gas prices was
partially offset by additional revenue of $37 million recognized as a result of
two gas sales contract terminations. An increase in oil and condensate prices of
15 percent also served to offset the impact of lower gas prices. Production
volumes for natural gas increased by seven percent for the first half of 1995 as
compared to the same period of 1994 while oil and condensate volumes were fairly
stable. Increases in operating expenses and higher amortization resulting from
increased production and a higher proportion of oil, condensate and liquids
production were partially offset by the effects of a successful effort to reduce
administrative costs (see above).
NATURAL GAS TRANSMISSION AND MARKETING
The Company participates in the natural gas transmission and marketing
business through Southern Natural Gas Company, Citrus Corp. (a 50 percent-owned
company), and Sonat Marketing (see Note 6 of the Notes to Condensed Consolidated
Financial Statements).
Southern continues to pursue growth opportunities to expand the level
of services in its traditional market area and to connect new gas supplies. On
April 26, 1995, Southern received authorization from the Federal Energy
Regulatory Commission (FERC) to construct a 21-mile pipeline extension to a
delivery point near Chattanooga, Tennessee, that will deliver natural gas to a
group of new customers who have signed 10-year contracts for firm transportation
volumes totaling approximately 11 million cubic feet per day. Southern also
sought approval in a filing with the FERC made on May 19, 1995, to expand its
north main pipeline system to provide approximately 26 million cubic feet per
day of additional firm transportation. This increase in capacity is supported by
10-year firm transportation agreements with 15 customers in Alabama, Georgia,
and Tennessee. If FERC approval is received, the in-service date is expected to
be November 1996.
Southern has also initiated an open season to obtain customer
commitments to expand its system in order to meet the growing demand for natural
gas in the Southeast. In the open season, Southern is seeking requests for
additional firm transportation services and for a new liquefied natural gas
(LNG) service. The facilities to provide the firm transportation service will be
determined based on the service levels requested. The LNG service would be
provided at the existing LNG storage terminal near Savannah, Georgia, that is
owned by Southern Energy Company, a subsidiary of Southern. If sufficient
commitments are obtained and the necessary regulatory approvals are received,
the in-service date for both services is expected to be November 1997. The open
season will continue through October 31, 1995.
19
<PAGE>
In addition, on May 15, 1995, Southern requested FERC approval for a
production area expansion project. Southern proposes to install 9,400 horsepower
of additional compression at its Toca, Louisiana compressor station south of New
Orleans and to install certain receipt and delivery point facilities in order to
increase its capacity to transport gas supplies on the east leg of its offshore
Louisiana supply system through Toca by 140 million cubic feet per day. Southern
requested that the FERC issue an initial determination on the proposed project,
which would become final upon Southern's filing of 10-year firm transportation
agreements for 100 percent of the increased capacity within 120 days from the
initial determination. Southern presently is in discussion with potential
customers regarding such commitments, although there is no assurance that such
commitments will be obtained.
Southern also has some operations that are not regulated. Southern's
parent, Sonat Inc., transferred to Southern its investments in three small
unregulated companies effective January 1, 1995.
In addition, Sea Robin Pipeline Company, a wholly owned subsidiary of
Southern, filed a petition with the FERC requesting it be declared an
unregulated gas gathering system. The FERC denied Sea Robin's petition in an
order issued on June 16, 1995. Sea Robin filed for rehearing of this denial on
July 17, 1995, but cannot predict the outcome of this proceeding. (See Note 5 of
the Notes to Condensed Consolidated Financial Statements.)
Sonat Energy Services Company, a subsidiary of Sonat and parent of
Sonat Marketing, recently announced that it has formed a new subsidiary, Sonat
Power Marketing Inc., to market electric power. Sonat Power Marketing has filed
with the FERC for permission to purchase and resell electricity at market-based
rates. It will offer services in electricity similar to those offered by its
sister company, Sonat Marketing, in natural gas.
Sonat Marketing markets almost all of the natural gas production of
Sonat Exploration that is not sold under pre-existing term dedications, and has
responsibility for the execution of Sonat Exploration's risk management program.
With the Sonat Exploration volumes and expanded relationships with other
suppliers and buyers , Sonat Marketing has been able to expand its presence in
Gulf Coast, Midwest, and Northeast markets. As a result of these efforts, Sonat
Marketing's daily natural gas sales volumes have recently reached 2.3 billion
cubic feet per day.
Sonat Marketing uses natural gas futures contracts and options on gas
futures and oil and gas price swap agreements to hedge the effects of
spot-market price volatility on operating results. An additional benefit of this
hedging is that Sonat Marketing is able to offer fixed price contracts to its
suppliers and customers. (See Commodity Price Risk Management and Note 2 of the
Notes to Condensed Consolidated Financial Statements.)
Florida Gas, a subsidiary of Citrus, completed an expansion project
that went into service on March 1, 1995, known as Phase III, that increased its
system capacity by 530 million cubic feet per day to its present capacity of 1.5
billion cubic feet per day. As part of Phase III, Florida Gas contracted for 100
million cubic feet per day of new firm transportation to be delivered from
Southern's
20
<PAGE>
system. Also in connection with this expansion, Florida Gas acquired an interest
in an existing pipeline in the Mobile Bay area that has been expanded to provide
over 300 million cubic feet per day to Florida Gas and is connected to Florida
Gas' pipeline system.
It has been announced that plans by other companies to build a
competitive pipeline into peninsular Florida, which would have been known as the
Sunshine Pipeline, had been abandoned at present. Florida Gas is currently
reviewing the prospects for further expansions of its pipeline system into the
Florida market.
21
<PAGE>
<TABLE>
<CAPTION>
NATURAL GAS TRANSMISSION AND MARKETING
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
Operating Income (Loss):
<S> <C> <C> <C> <C>
Southern Natural Gas Company $ 38 $ 27 $ 91 $ 76
Sonat Marketing Company 2 2 4 6
Other - - (1) (1)
Total Operating Income $ 40 $ 29 $ 94 $ 81
SOUTHERN NATURAL GAS COMPANY
Revenues:
Gas sales $ 47 $ 57 $ 94 $144
Market transportation and
storage 75 76 168 164
Supply transportation 13 10 26 20
Other - 42 32 102
Total Revenues 135 185 320 430
Costs and Expenses:
Natural gas cost 47 57 92 139
Transition cost recovery and
gas purchase contract
settlement costs (12) 28 8 71
Operating and maintenance 25 32 50 64
General and administrative 20 21 41 39
Depreciation and amortization 13 16 28 32
Taxes, other than income 4 4 10 9
97 158 229 354
Operating Income $ 38 $ 27 $ 91 $ 76
Equity in Earnings of
Unconsolidated Affiliates $ 2 $ 2 $ 5 $ 4
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 - 4 -
Market transportation 127 113 305 269
Total Market Throughput 129 113 309 269
Supply transportation 100 83 187 161
Total Volumes 229 196 496 430
Transition gas sales 23 24 49 56
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
SONAT MARKETING COMPANY
<S> <C> <C> <C> <C>
Gas Sales Revenues $298 $219 $527 $448
Operating Income $ 2 $ 2 $ 4 $ 6
(Billion Cubic Feet)
Gas Sales Volumes 176 109 318 209
CITRUS CORP.
(In Millions)
Equity in Earnings of
Citrus Corp. $ 6 $ 8 $ 13 $ 8
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 126 77 219 143
Supply transportation 6 4 14 9
Total Volumes 132 81 233 152
</TABLE>
Quarter-to-Quarter Analysis
Operating Income for the Natural Gas Transmission and Marketing segment
increased 38 percent in the second quarter of 1995 compared with the second
quarter of 1994 due to improved operating results at Southern discussed below.
Southern Natural Gas - Operating results for the second quarter of 1995
were up primarily due to the sale of previously unsubscribed firm transportation
capacity and lower operating expenses.
Gas sales revenue and gas cost at Southern decreased 18 percent
compared with the second quarter of 1994, reflecting lower gas prices (see
Natural Gas Sales and Supply below). Market transportation and storage revenues
decreased slightly in the 1995 period due to lower rates, partially offset by
the sale of firm transportation capacity. Supply transportation increased 20
percent due to increased volumes under existing contracts at Sea Robin Pipeline
Company and a new transportation contract at Southern. Other Revenue and
Transition Cost Recovery and Gas Purchase Contract Settlement Costs have been
reduced by an adjustment of approximately $25 million to reflect the terms of
the Customer Settlement. The adjustment did not impact operating income. Lower
recovery rates for GSR cost billings during the 1995 period also reduced Other
Revenue and Transition Cost Recovery and Gas Purchase Contract Settlement Costs
from 1994 levels.
Operating and Maintenance Expense decreased in the 1995 period
reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring, which
23
<PAGE>
reduced Southern's staffing level. Depreciation and Amortization decreased in
the 1995 period due to lower depreciation rates as a result of the Customer
Settlement.
Sonat Marketing - Sales volumes increased significantly due to
expanding activities on non-affiliated pipelines. Operating income was level
with the 1994 second quarter as the effect of higher sales volumes was offset by
lower unit margins, reflecting the competitiveness of the business.
Citrus - Equity in earnings of Citrus declined from $8 million to $6
million. 1995 results reflect the first full quarter of operations of the Phase
III expansion. 1994 results include three months of earnings from the allowance
for funds used during construction of the Phase III expansion. Throughput on the
Florida Gas Pipeline system was up sharply, reflecting the Phase III expansion
going in service on March 1, 1995.
Year-to-Date Analysis
Operating income for the Natural Gas Transmission and Marketing segment
increased 16 percent in the six-month period ended June 30, 1995, compared with
last year due to improved operating results at Southern discussed below.
Southern Natural Gas - Operating results for the six-month period were
up primarily due to the sale of previously unsubscribed firm transportation
capacity and lower operating expenses. The 1995 period also reflected the
positive effect on revenue of a $6 million adjustment to reflect actual
interruptible transportation revenue and cost recovery in the first year of
post-Order No. 636 operations and the reduction of a take-or-pay liability. The
1994 period included a favorable $6 million reduction in fuel gas liability.
Gas sales revenue and gas cost at Southern decreased significantly
compared with the 1994 period as transition gas sales made from supply remaining
under contract declined, reflecting lower sales volumes and prices (see Natural
Gas Sales and Supply below). Market transportation and storage revenues
increased two percent in the 1995 period due to the sale of firm transportation
capacity, partially offset by lower rates. Supply transportation increased 30
percent due to increased volumes under existing contracts at Sea Robin Pipeline
Company and a new transportation contract at Southern. Other revenue and
Transition Cost Recovery and Gas Purchase Contract Settlement Costs have been
reduced by an adjustment of approximately $25 million to reflect the terms of
the Customer Settlement. The adjustment did not impact operating income.
Declining billings and lower recovery rates for GSR cost during the 1995 period
also reduced Other Revenue and Transition Cost Recovery and Gas Purchase
Contract Settlement Costs from 1994 levels.
Operating and Maintenance Expense decreased in the 1995 period,
reflecting lower fuel costs and the impact of the 1994 fourth quarter
restructuring, which reduced Southern's staffing levels. Depreciation and
Amortization decreased in the 1995 period due to lower depreciation rates as a
result of the Customer Settlement.
24
<PAGE>
Sonat Marketing - Sales volumes increased significantly due to
expanding activities on non-affiliated pipelines. Operating income decreased
compared with the 1994 period as the effect of higher sales volumes was offset
by lower unit margins, reflecting the competitiveness of the business, and
higher operating expenses.
Citrus - Equity in earnings of Citrus were higher than in 1994 due
principally to higher margins on a gas supply contract with one of its major
customers that was restructured during the second quarter of 1994 and lower
depreciation from an increase in the useful life of the pre-Phase III pipeline
system, partially offset by lower earnings on the Phase III expansion project.
1995 results reflect the first four months of operation of the Phase III
expansion. 1994 results include six months of allowance for funds used during
construction of the Phase III expansion.
Transportation Contracts
If the Customer Settlement (described in Note 5 of the Notes to
Condensed Consolidated Financial Statements) becomes effective, Southern's
largest customer, Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas
Company (collectively "Atlanta") will amend their firm transportation contracts
for an aggregate of 682 million cubic feet per day, 582 million cubic feet of
which currently expires on November 1, 1995, and 100 million cubic feet of which
currently expires on June 30, 1997, to extend their primary terms for a period
of three years beginning March 1, 1995. An additional 118 million cubic feet per
day would remain under its current term to April 30, 2007. Also, if the Customer
Settlement becomes effective, South Carolina Pipeline Corporation (SCPL) will
amend its firm transportation contract for 28 million cubic feet per day, which
currently expires on July 31, 1997, to extend its primary term for a period of
three years beginning March 1, 1995. Such extension will be in addition to the
remaining 160 million cubic feet per day of SCPL's firm transportation services
that remain in effect under terms extending from 1997 through 2003. Alabama Gas
Corporation, Southern's second largest customer, had earlier executed firm
transportation contracts for 393 million cubic feet per day under terms
extending through October 31, 2008. Southern's other customers have contracted
for firm transportation services for terms ranging from one to ten or more
years. As a result, substantially all of the firm transportation capacity
currently available in Southern's largest market area is fully subscribed.
Natural Gas Sales and Supply
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated, or are assigned.
As a result of Order No. 636, Southern is attempting to terminate its remaining
supply contracts through which it had traditionally obtained its long-term gas
supply. Some of these contracts contain clauses requiring Southern either to
purchase minimum volumes of gas under the contract or to pay for it (take-or-pay
clauses). Although Southern currently is incurring no take-or-pay liabilities
under these contracts, the annual weighted average cost of gas under these
contracts is in excess of current spot-market prices. Pending the termination of
these remaining supply contracts, Southern has sold a portion of its remaining
gas supply to a number of its firm transportation customers under contracts of
varying
25
<PAGE>
duration. Several of these customers have extended their contracts through
October 31, 1995. These and other customers, including Atlanta, have advised
Southern that if the Customer Settlement becomes effective, they will extend the
sales agreements with them through November 30, 1997. The remainder of
Southern's gas supply will continue to be sold on a month-to-month basis.
Southern's purchase commitments under its remaining gas supply
contracts for the remainder of 1995 and the years 1996 through 1999 are
estimated as follows:
<TABLE>
<CAPTION>
Estimated
Purchase
Commitments
(In Millions)
<C> <C>
1995 $19
1996 39
1997 40
1998 40
1999 36
</TABLE>
These estimates are subject to significant uncertainty due both to the
number of assumptions inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the three major factors that
determine purchase commitments (underlying reserves, future deliverability, and
future price) is known today with certainty. These estimates also exclude
estimated purchase commitments under certain contracts with Exxon Corporation
(Exxon) that will be terminated if the Customer Settlement becomes effective. If
the Customer Settlement does not become effective and Southern were therefore
required to perform these contracts, and further assuming that Exxon were to
prevail in its lawsuit contesting the Company's termination of the Mississippi
Canyon Contract, which litigation is described in Note 5 of the Notes to
Condensed Consolidated Financial Statements, these estimates would increase by
$85 million in 1995, $182 million in 1996, $91 million in 1997, $29 million in
1998, and $21 million in 1999. Of these amounts, $56 million in 1995, $126
million in 1996, and $49 million in 1997 is attributable to the Mississippi
Canyon Contract. In addition, as part of its settlement with Exxon, which as
noted is contingent on the effectiveness of the Customer Settlement, Southern
and Exxon have agreed to terminate all their existing gas purchase contracts and
to enter into two new gas purchase contracts having three-year terms and
providing for market-based index prices (which would not constitute gas supply
realignment (GSR) costs). Therefore, if the Customer Settlement becomes
effective, these estimates could increase by $63 million in 1995, $114 million
in 1996, and $117 million in 1997 to include these two new contracts with Exxon.
See Note 5 of the Notes to Condensed Consolidated Financial Statements
for a discussion regarding Southern's rate proceedings to recover its GSR costs.
Rate Matters
Several general rate changes have been implemented by Southern and
remain subject to refund. If the Customer Settlement is approved by the FERC and
becomes effective, all outstanding rate and Order No. 636 transition cost
recovery
26
<PAGE>
proceedings would be resolved. The settlement would result in reducing
Southern's filed rates to more competitive levels, would reduce somewhat
reported revenues, and would reduce depreciation expense to approximately $40
million in 1995. Although the FERC staff and customers representing more than 95
percent of Southern's firm capacity are in support of the Customer Settlement,
there is no assurance that the settlement will be approved by the FERC. Southern
implemented reduced settlement rates for parties that support the Customer
Settlement on an interim basis effective March 1, 1995, subject to
reinstatement, pending FERC consideration and approval of the Customer
Settlement. (See Note 5 of the Notes to Condensed Consolidated Financial
Statements for a discussion of the Customer Settlement and other rate matters.)
Citrus Corp.
The operating results of the Florida Gas Phase III expansion project,
combined with Florida Gas' Order No. 636 restructuring and resultant conversion
to a SFV rate methodology and Citrus' successful renegotiation in 1994 of an
unfavorable contract with one of its major customers, should result in stable
revenues, earnings, and cash flow at Citrus. The results are expected to be at
somewhat lower levels than in 1994 due to the completion of the Phase III
expansion project and the resulting end of AFUDC recognition on the project.
Florida Gas has terminated its gas purchase contracts with a weighted
average cost in excess of current spot-market prices for aggregate costs that
are less than the $160 million maximum amount that it is entitled to recover
from its customers pursuant to its 1993 restructuring settlement under Order No.
636.
Citrus obtains its own financing independent of its parent companies.
Debt financing by Citrus with outside parties generally is nonrecourse to its
parent companies.
27
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Millions)
<S>
Other Income - Equity in
Earnings of Unconsolidated
Affiliates
Natural gas transmission
<C> <C> <C> <C>
and marketing $ 9 $ 10 $ 18 $ 13
Other 3 2 7 3
$ 12 $ 12 $ 25 $ 16
</TABLE>
Equity in Earnings of Unconsolidated Affiliates for the three-month
period was level with that of last year. For the six-month period, Equity in
Earnings of Unconsolidated Affiliates increased in 1995 primarily due to an
increase in equity of Citrus (discussed earlier in the Natural Gas Transmission
and Marketing section). Equity in earnings of Sonat Offshore, included in Other,
increased from 1994 due to improved operating results in the U.S. Gulf of
Mexico, the North Sea, and for the Polar Pioneer, partially offset by lower
operating income in Mexico.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Income (Loss) - Other $(41) $ 2 $(36) $ 7
</TABLE>
The decrease in Other Income (Expense) for the three-month period is
due to a $31 million loss on the sale of oil and gas properties, and a $13
million loss on the sale of the Company's investment in Baker Hughes
Incorporated convertible preferred stock.
The decrease in Other Income (Expense) for the six-month period is due
to the transactions mentioned above.
<TABLE>
<CAPTION>
Interest
<S> <C> <C> <C> <C>
Interest income $ 3 $ 2 $ 4 $ 3
Interest expense (30) (24) (58) (45)
Interest capitalized 2 2 3 4
$(25) $(20) $(51) $(38)
</TABLE>
Interest expense increased for the three-month period due to increased
debt levels, coupled with higher rates on floating rate debt. Also contributing
to the increase in expense was increased interest on federal income taxes and
higher revenue reserve balances. Slightly offsetting these expense increases was
an increase in interest income due to higher GSR interest income.
Interest expense increased for the six-month period primarily due to
higher debt balances. Higher rates, revenue reserve balances, and increased
accruals for federal income taxes also contributed to the increase.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income Taxes $ 6 $ 11 $ 16 $ 30
</TABLE>
Income Taxes decreased for the three-month period due to lower pre-tax
income.
28
<PAGE>
The decrease in Income Taxes for the six-month period resulted from a
decrease in pre-tax income and a lower effective tax rate. The lower effective
tax rate reflects a higher portion of earnings receiving tax preferential rates
in the current period.
FINANCIAL CONDITION
CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1995 1994
(In Millions)
<S> <C> <C>
Operating Activities $125 $ 262
</TABLE>
Net cash provided by operating activities in 1995 was $137 million
lower than in 1994. Increased outflows at Southern primarily related to gas
supply realignment costs as well as lower cash from operations in 1995 at Sonat
Exploration contributed to the decrease. Lower gas prices in 1995 and a gas
prepayment received in 1994 resulted in the decrease in cash flow from
operations at Sonat Exploration.
The increase in deferred income taxes and the decrease in accrued
income taxes is primarily due to the refund of GSR cost previously recovered
from customers and the amount of GSR cost deductible for taxes. The increase in
the loss on disposal of assets is due to $29 million loss on disposal of oil and
gas properties at Sonat Exploration, and a $13 million loss on the sale of the
Baker Hughes convertible preferred stock. The decrease in regulatory reserves is
due to a $21 million refund made to customers for the overcollection of
volumetric take-or-pay costs, and to lower rates billed to customers effective
March 1, 1995, under the Customer Settlement. The $18 million decrease in
natural gas purchase contract settlement costs reflects the completion of
recoveries of take-or-pay costs in 1994. The $86 million change in gas supply
realignment costs includes the $45 million payment for the Exxon settlement
described earlier.
An improvement in the timing of collection of receivables at Sonat
Marketing as well as the election of some of Southern's customers to offset
amounts they would have received under the provisions of the take-or-pay refund
against amounts they owed Southern for Order No. 636 cost contributed to the
favorable change in accounts receivable. The change in Other is attributable to
transition costs deferred at Southern in 1995 versus revenue credits in 1994,
and to terminations of long-term gas sales contracts referred to earlier.
<TABLE>
<S> <C> <C>
Investing Activities $(66) $(368)
</TABLE>
Net cash used in investing activities decreased $302 million from 1994.
The decrease was mainly attributable to the receipt of $167 million in proceeds
from the sale of four million shares of Baker Hughes convertible preferred stock
and to $51 million in proceeds from the sale of Sonat Exploration properties.
Also contributing to the decrease was net advances made to Citrus in 1994 of
29
<PAGE>
$168 million. Partially offsetting these decreases was an increase in capital
expenditures of $79 million. (See Capital Expenditures below.)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1995 1994
(In Millions)
<S> <C> <C>
Financing Activities $(62) $105
</TABLE>
Net cash from financing activities decreased $167 million primarily due
to repayments of Sonat's floating rate facilities. Proceeds from the sale of the
Baker Hughes stock were used in the repayments.
Capital Expenditures
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<S> <C> <C>
Exploration and Production $262 $180
Natural Gas Transmission and Marketing 18 22
Other 3 2
Total $283 $204
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $78 million and $244 million in the first six months of 1995 and
1994, respectively.
Liquidity and Capital Resources
At June 30, 1995, the Company had lines of credit and a revolving
credit agreement with a total capacity of $1.05 billion. Of this, $680 million
was unborrowed and available. The amount available under the lines of credit has
been reduced by the amount of commercial paper outstanding of $70 million to
reflect the Company's policy that credit line and commercial paper borrowings in
the aggregate will not exceed the maximum amount available under its lines of
credit and revolving credit agreement. In 1993 Sonat filed a shelf registration
with the Securities and Exchange Commission (SEC) for up to $500 million in debt
securities. On June 12, 1995, Sonat issued $200 million of 6 7/8 Percent Notes
under this shelf registration, leaving $300 million unissued. The proceeds from
the sale of the Notes were used to repay floating rate debt. On June 15, 1995,
Sonat monetized its investment of four million shares of Baker Hughes
Incorporated convertible preferred stock for $167 million. Proceeds from the
sale of this stock were used to repay floating rate debt. On July 26, 1995, the
Company received net proceeds of $326 million after underwriters discounts and
commissions for its remaining investment in Sonat Offshore Drilling (see Note 3
of the Notes to Condensed Consolidated Financial Statements). Proceeds from this
transaction were used to repay floating rate debt. The Company's net cash flow
from this transaction will be approximately $210 million. Southern also has a
shelf registration with the SEC for up to $200 million in debt securities, of
which $100 million has been issued. Southern expects to continue to use cash
from operations and borrowings on the
30
<PAGE>
public or private markets or loans from affiliates to finance its capital and
other corporate expenditures.
In 1994 the Board of Directors of the Company authorized the repurchase
of up to two million shares of the Company's common stock. Purchases are being
made from time-to-time on the open market or in privately negotiated
transactions. Shares purchased under the authorization are expected to be
reissued in connection with employee stock option and restricted stock programs.
At June 30, 1995, 1,175,100 shares of common stock had been purchased under the
program.
Cash flow from operations and borrowings in the public or private
markets provide the Company with the means to fund operations and currently
planned investment and capital expenditures.
Capitalization Information
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
Debt to Capitalization 46% 46%
Book Value Per Share $16.19 $16.11
</TABLE>
COMMODITY PRICE RISK MANAGEMENT
Sonat Exploration and Sonat Marketing use natural gas futures contracts
and options on gas futures and oil and gas price swap agreements to hedge the
effects of spot-market price volatility on operating results.
The Company's use of these instruments is implemented under a set of
policies approved by the Board of Directors. These policies prohibit
speculation, determine approval levels for each transaction, and set limits
regarding volume relative to budgeted production or sales levels. All swap
counterparties are approved by the Board, and volume limits are set for any
single counterparty. Reports detailing each transaction are distributed to
management. In addition, all hedge activities are internally reviewed to ensure
compliance with all policies. (See Note 2 of the Notes to Condensed Consolidated
Financial Statements.)
31
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits1
Exhibit
Number Exhibits
10* Amendment effective April 27,
1995 to the Executive Award
Plan of Sonat Inc. (as amended
and restated as of April 27,
1995)
11* Computation of Earnings per
Share
12* Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule for the
period ended June 30, 1995,
filed electronically with this
Report
* Filed with this Report
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 6, 1995, reporting certain
information, under Item 5, with respect to the press release announcing the
Company's disposition of certain assets and securities.
The Company filed a report on Form 8-K on June 12, 1995, reporting certain
information, under Item 5, with respect to the issuance and sale by the Company
of $200,000,000 aggregate principal amount of its 6-7/8% Notes due June 1, 2005,
registered under Registration Statement on Form S-3 (No. 33-62166).
-------- 1 The Company will furnish to requesting security holders the
exhibits on this list upon the payment of a fee of 10 cents per page up to a
maximum of $5.00 per exhibit. Requests must be in writing and should be
addressed to Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563,
Birmingham, Alabama 35202- 2563.
<PAGE>
SONAT INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
Date: August 11, 1995 By: /s/ James A. Rubright
James A. Rubright
Senior Vice President and
General Counsel
Date: August 11, 1995 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Vice President-Finance and
Treasurer
EX-10
AMENDMENT TO THE
SONAT INC.
EXECUTIVE AWARD PLAN
APRIL 27, 1995
Sonat Inc. hereby amends the Executive Award Plan (the "Plan") as follows,
effective as of April 27, 1995: 1. Section 4.3 of the Plan is amended to read in
its entirety as follows:
4.3 Amendments
(a) The Board of Directors may amend the Plan from
time to time. No such amendment shall require approval by the
stockholders unless stockholder approval is required by
applicable law or stock exchange requirements.
(b) The Committee shall have the authority to amend
any grant to include any provision which, at the time of such
amendment, is authorized under the terms of the Plan;
provided, however, that (1) no outstanding award may be
revoked or altered in a manner unfavorable to the holder
without the written consent of the holder, and (2) no
outstanding Option may be altered in a manner that reduces the
option price (except as provided in Section 4.2).
2. Section 4.4 of the Plan is amended to read in its entirety as follows:
4.4 Cancellation of Awards
Any award granted under the Plan may be cancelled at
any time with the consent of the holder and a new award may be
granted to such holder in lieu thereof, which award may, in
the discretion of the Committee, be on more favorable terms
and conditions than the cancelled award; provided, however,
that any Option that is granted in lieu of a cancelled Option
shall have an option price at least equal to the option price
of the cancelled Option.
<PAGE>
Page 2
IN WITNESS WHEREOF, this document has been executed as of
April 27, 1995.
SONAT INC.
BY: Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief
Executive Officer
EAP/4-27-95.AMD
<TABLE>
<CAPTION>
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(In Thousands Except Per-Share Amounts)
Primary Earnings Per Share(1)
<S> <C> <C> <C> <C>
Net Income $17,341 $34,541 $54,958 $84,151
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,371 87,193 86,361 87,185
Common Stock Equivalents Applicable
to Outstanding Stock Options 981 868 832 908
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,352 88,061 87,193 88,093
Primary Earnings Per Share $ .20 $ .39 $ .63 $ .96
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by Footnote 2 to Paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%. For this
reason, the primary earnings per share amounts shown may not agree with
primary earnings per share shown on the Condensed Consolidated Statements
of Income in Part I.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
Six Months Ended June 30, Years Ended December 31,
1995 1994 1994 1993 1992 1991 1990
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 65,965 $115,296 $154,871 $364,198 $133,728 $ 98,374 $127,811
Fixed charges (see computation below) 87,731 62,516 125,916 128,468 156,428 175,980 165,021
Less allowance for interest capitalized (3,438) (3,571) (6,692) (4,101) (8,422) (7,951) (6,184)
Total Earnings Available for Fixed Charges $150,258 $174,241 $274,095 $488,565 $281,734 $266,403 $286,648
Fixed Charges:
Interest expense before deducting
interest capitalized $ 85,652 $ 59,128 $120,295 $122,204 $149,165 $168,510 $158,550
Rentals(b) 2,079 3,388 5,621 6,264 7,263 7,470 6,471
$ 87,731 $ 62,516 $125,916 $128,468 $156,428 $175,980 $165,021
Ratio of Earnings to Fixed Charges 1.7 2.8 2.2 3.8 1.8 1.5 1.7
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 6,052
<SECURITIES> 0
<RECEIVABLES> 230,221
<ALLOWANCES> 0
<INVENTORY> 27,662
<CURRENT-ASSETS> 324,162
<PP&E> 4,793,590
<DEPRECIATION> 2,500,147
<TOTAL-ASSETS> 3,441,230
<CURRENT-LIABILITIES> 381,431
<BONDS> 1,081,488
<COMMON> 87,252
0
0
<OTHER-SE> 1,310,459
<TOTAL-LIABILITY-AND-EQUITY> 3,441,230
<SALES> 586,429
<TOTAL-REVENUES> 991,625
<CGS> 452,742
<TOTAL-COSTS> 549,561
<OTHER-EXPENSES> 141,051
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,963
<INCOME-PRETAX> 70,744
<INCOME-TAX> 15,786
<INCOME-CONTINUING> 54,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,958
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
