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 September 30, 1996
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:
86,257,117 SHARES OUTSTANDING ON OCTOBER 31, 1996
<PAGE>
SONAT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)--September 30, 1996 and
December 31, 1995 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 26
PART II. Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 20,008 $ 37,289
Accounts receivable 338,602 349,441
Inventories 37,938 23,956
Gas imbalance receivables 16,047 16,556
Federal income taxes 16,324 12,979
Other 39,646 54,210
-------- --------
Total Current Assets 468,565 494,431
-------- --------
Investments in Unconsolidated Affiliates and Other 454,828 432,769
-------- --------
Plant, Property and Equipment 5,090,707 4,822,879
Less accumulated depreciation, depletion
and amortization 2,641,253 2,545,320
---------- ----------
2,449,454 2,277,559
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs 21,115 199,073
Other 94,355 107,609
-------- --------
115,470 306,682
-------- --------
$3,488,317 $3,511,441
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 53,524 $ 18,750
Unsecured notes and commercial paper 128,120 218,900
Accounts payable 338,426 297,660
Accrued state income taxes 8,689 10,579
Accrued interest 28,751 27,115
Gas imbalance payables 17,944 21,444
Other 52,140 45,677
-------- --------
Total Current Liabilities 627,594 640,125
-------- --------
Long-Term Debt 867,606 770,313
-------- --------
Deferred Credits and Other:
Deferred income taxes 285,911 213,122
Reserves for regulatory matters 14,358 181,798
Other 155,686 223,441
-------- --------
455,955 618,361
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other 122,533 127,039
Retained earnings 1,451,492 1,387,137
---------- ----------
1,574,025 1,514,176
Less treasury stock (36,863) (31,534)
-------- --------
Total Stockholders' Equity 1,537,162 1,482,642
---------- ----------
$3,488,317 $3,511,441
========== ==========
</TABLE>
See accompanying notes.
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $788,161 $509,429 $2,369,718 $1,410,807
-------- -------- ---------- ----------
Costs and Expenses:
Natural gas cost 513,673 289,053 1,452,140 741,795
Transition cost recovery 7,309 32,259 160,445 40,665
Operating and maintenance 70,948 41,645 167,122 119,811
General and administrative 34,089 34,517 108,202 101,017
Depreciation, depletion
and amortization 74,670 67,110 213,421 208,161
Taxes, other than income 12,312 9,641 35,756 31,294
------- -------- ------- ----------
713,001 474,225 2,137,086 1,242,743
-------- -------- ---------- ----------
Operating Income 75,160 35,204 232,632 168,064
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 8,832 11,037 25,285 35,920
Sale of subsidiary stock - 188,012 - 188,012
Minority interest (87) (95) (5,196) (95)
Other 4,697 232 6,586 (35,492)
------ ----- ------ ----------
13,442 199,186 26,675 188,345
------- -------- ------- ----------
Interest:
Interest income 988 1,929 3,311 5,617
Interest expense (21,888) (25,074) (70,023) (83,476)
Interest capitalized 1,240 1,534 3,918 4,973
------ -------- ------ ----------
(19,660) (21,611) (62,794) (72,886)
-------- -------- -------- ----------
Income before Income Taxes 68,942 212,779 196,513 283,523
Income Tax Expense 20,908 82,259 62,315 98,045
------- -------- ------- ----------
Net Income $ 48,034 $130,520 $ 134,198 $ 185,478
======== ======== ========= ==========
Earnings Per Share of Common Stock $ .56 $ 1.51 $ 1.56 $ 2.15
===== ======== ====== ==========
Weighted Average Shares Outstanding 86,228 86,273 86,188 86,332
Dividends Paid Per Share $ .27 $ .27 $ .81 $ .81
===== ======== ===== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 134,198 $ 185,478
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 213,421 208,161
Deferred income taxes 72,851 34,094
Equity in earnings of unconsolidated affiliates,
less distributions (18,324) (28,184)
Gain on sale of subsidiary stock and
disposal of assets, net (3,390) (147,807)
Reserves for regulatory matters (167,440) (6,330)
Gas supply realignment costs 182,325 (50,319)
Change in:
Accounts receivable 10,839 23,057
Inventories (13,982) 606
Accounts payable 40,766 (9,448)
Accrued interest and income taxes, net (4,806) 15,332
Other current assets and liabilities 19,301 (4,179)
Other (40,716) (59,346)
-------- -----------
Net cash provided by operating activities 425,043 161,115
-------- -----------
Cash Flows from Investing Activities:
Plant, property and equipment additions (399,522) (357,441)
Net proceeds from sale of subsidiary stock and
disposal of assets 10,270 593,213
Advances to unconsolidated affiliates
and other (13,883) (10,833)
-------- -----------
Net cash provided by (used in)
investing activities (403,135) 224,939
--------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 400,000 3,103,000
Payments of long-term debt (267,933) (3,295,495)
Changes in short-term borrowings (90,780) (100,000)
-------- -----------
Net changes in debt 41,287 (292,495)
Dividends paid (69,843) (69,930)
Other (10,633) 25,383
-------- -----------
Net cash used in financing activities (39,189) (337,042)
-------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (17,281) 49,012
Cash and Cash Equivalents at Beginning of Period 37,289 9,131
------- -----------
Cash and Cash Equivalents at End of Period $ 20,008 $ 58,143
======== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 49,497 $ 65,812
Income taxes, net 5,907 77,150
See accompanying notes.
</TABLE>
<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 1995 condensed consolidated financial statements
have been reclassified to conform with the 1996 presentation.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, became effective for years beginning after
December 15, 1995. SFAS No. 123 allows a choice between either the method
required by Accounting Principles Board (APB) Opinion No. 25 or a new fair-value
based method. Under either method new disclosures will be required. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 for its
stock-based compensation awards.
2. Derivative Financial Instruments
Commodity Price Risk
The Company uses futures contracts, options and oil and natural gas
price swap agreements to hedge its commodity price risk. Gains or losses
experienced on hedging transactions are offset by the related gains or losses
recognized on the sale of the commodity.
Futures - Natural gas futures contracts and options on natural gas
futures contracts are traded on the New York Mercantile Exchange (NYMEX).
Contracts are for fixed units of 10,000 MMBtu and are available for up to 36
months in the future. NYMEX requires both parties (buyers and sellers) to
futures contracts to deposit cash or other assets (the margin) with a broker at
the time the contract is initiated. Brokers mark open positions to market daily
and require additional assets to be maintained on deposit when significant
unrealized losses are experienced or allow deposits to be reduced when
unrealized gains are experienced. At September 30, 1996, Sonat Marketing Company
L.P. (Sonat Marketing), a 65 percent-owned subsidiary of Sonat, had $6.1 million
on deposit with brokers for margin calls, included in other current assets on
the Consolidated Balance Sheet.
Sonat Marketing uses futures contracts to reduce exposure to price risk
when gas is not bought and sold simultaneously. At September 30, 1996, Sonat
Marketing had a total of 130 net contracts open (4,959 long and 4,829 short
futures contracts) and a deferred loss of $.3 million, representing unrealized
losses on contracts that will mature throughout 1996, 1997 and 1998. Option
activity during the third quarter of 1996 was not material.
2. Derivative Financial Instruments (Cont'd)
Sonat's wholly owned subsidiary Sonat Exploration Company, through Sonat
Marketing, may use futures contracts to lock in the price for a portion of its
expected future natural gas production when it believes that prices are at
acceptable levels. Sonat Exploration had lower revenues of $18.8 million
relating to losses on gas futures in the 1996 nine-month period.
Swaps - 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. Sonat Exploration
uses swap agreements to hedge exposure to changes in spot-market prices on the
amount of production covered in the agreement. Sonat Marketing uses swaps to
lock in a margin on its gas transactions.
Sonat Exploration has one oil price swap agreement for 1996, hedging
approximately 40 percent of the expected oil production for the remainder of
1996, which sets a fixed price of $18.00 per barrel. This swap is not in effect
during days when the market price falls below $16.39. Oil revenues in the
nine-month 1996 period were reduced by $8.0 million for the effect of oil swap
transactions. Sonat Exploration has two natural gas price swap agreements that
tend to offset each other. Sonat Exploration has incurred a loss of $2.2 million
on gas swap agreements for the current nine-month period.
Sonat Marketing had a total of 38 fixed-price swap agreements and 62
variable-price swap agreements at September 30, 1996, to exchange payments based
on a total notional volume of 85 TBtu of natural gas over periods ranging from
one month to seven years. Sonat Marketing also has a gas price collar agreement
which provides it a floor price of $1.80 on notional volumes of 37 TBtu and sets
a ceiling price of $2.56 on notional volumes of 30 TBtu. In the first nine
months of 1996, a loss of $2.2 million was recognized under these agreements.
The Company's credit exposure on swaps is limited to the value of swaps
that are in a favorable position to the Company. At September 30, 1996, the
market value of the Company's fixed-price favorable swaps was $.3 million. The
net position of all fixed-price swaps, both favorable and unfavorable, was $1.5
million unfavorable. The market value of the basis swaps is not material. The
market value of the gas price collar agreement is $1.7 million unfavorable.
Sonat Exploration has hedged a portion of its production of oil and gas
starting in January 1997 by entering into fixed price swaps with Sonat
Marketing. Oil production in the amount of 1,290,000 barrels is hedged
throughout 1997 with Sonat Exploration to receive fixed prices of $20.25 to
$21.75 per barrel. Gas production in the amount of 78,470,000 MMBtus is hedged
throughout 1997 and 1998 with Sonat Exploration to receive fixed prices of $2.00
to $2.04 per MMBtu.
<PAGE>
2. Derivative Financial Instruments (Cont'd)
Sonat Marketing Company has hedged its risk from entering into these swaps by
putting on futures positions and entering into offsetting swaps with third
parties with aggregate volumes equal to its swaps with Sonat Exploration.
Financial Risk
On January 22, 1996, Southern Natural Gas Company (Southern) entered
into a forward rate agreement to hedge the interest rate risk of an anticipated
future borrowing under an existing shelf registration statement. The base 10
year treasury rate for this future borrowing was hedged at approximately 5.78
percent on a notional amount of $97 million. 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. At September 30,
1996, the fair market value of the remaining $48.5 million notional amount of
this agreement was approximately $3 million.
3. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C> <C> <C>
Exploration and Production $ 102 $ 140 $ 290 $ 475
----- ------- ----- -------
Natural Gas Transmission:
Citrus Corp. 5,770 7,290 15,779 19,475
Amortization of Citrus basis
difference 345 345 1,037 1,037
Bear Creek Storage Company 2,433 2,385 7,462 7,307
Other (91) (67) (226) (145)
---- ------- ----- -------
8,457 9,953 24,052 27,674
------ ------- ------- -------
Energy Marketing - (2) - (10)
--- --- --- ----
Other:
Sonat Offshore Drilling - 606 - 6,735
Other affiliates 273 340 943 1,046
---- ------- ---- -------
273 946 943 7,781
---- ------- ---- -------
$8,832 $11,037 $25,285 $35,920
====== ======= ======= =======
</TABLE>
3. Unconsolidated Affiliates (Cont'd)
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp., the parent of Florida Gas Transmission Company (Florida Gas). A
subsidiary of 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $205,801 $186,104 $583,183 $505,959
Expenses (Income):
Natural gas cost 118,407 102,930 322,435 272,480
Operating expenses 30,733 34,432 97,087 97,893
Depreciation and amortization 11,668 11,651 35,127 31,248
Allowance for funds used
during construction (129) (12,144) (275) (32,441)
Interest and other 26,283 25,471 77,277 73,327
Income taxes 7,299 9,184 19,974 24,502
------ -------- ------- --------
Income Reported $ 11,540 $ 14,580 $ 31,558 $ 38,950
======== ======== ======== ========
</TABLE>
Florida Gas' Phase III expansion, which began in 1994, was completed
during February 1995. Income for the first nine months of 1995 reflects
significant allowance for funds used during construction attributable to the
Phase III expansion.
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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,924 $8,885 $27,117 $27,113
Expenses:
Operating expenses 1,262 1,206 3,797 3,732
Depreciation 1,354 1,350 4,061 4,049
Other expenses, net 1,441 1,560 4,335 4,718
------ ------ ------ -------
Income Reported $4,867 $4,769 $14,924 $14,614
====== ====== ======= =======
</TABLE>
4. Debt and Lines of Credit
Long-Term Debt - Sonat has a bank revolving credit agreement that
provides for periodic borrowings and repayments of up to $500 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 the first nine months of 1996, $400 million was borrowed and $250 million
was repaid under the revolving credit agreement, resulting in $150 million
outstanding at September 30, 1996, at a rate of 5.60 percent.
Unsecured Notes - Loans outstanding under all short-term credit
facilities are for a duration of less than three months.
Sonat and Southern have available short-term lines of credit of $200
million and $50 million, respectively, for a period of 364 days. Borrowings are
available through May 27, 1997, 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 September 30, 1996, no amounts
were outstanding under Sonat's agreement or Southern's agreement.
Sonat had $128.1 million in commercial paper outstanding at an average
rate of 5.57 percent at September 30, 1996.
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. At September 30, 1996, Southern's rates
are established by the Customer Settlement and a FERC order effective for
parties contesting the Customer Settlement and are not subject to refund (see
discussion below).
Customer Settlement - 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 gas supply realignment (GSR) costs.
In an order issued on September 29, 1995, (the Settlement Order), the
FERC approved a comprehensive settlement (the Customer Settlement) that
<PAGE>
5. Commitments and Contingencies (Cont'd)
Southern had filed on March 15, 1995. The Customer Settlement, which is
effective as to all Southern's customers, except one customer representing
approximately 2 percent of the firm transportation capacity on Southern's
system, resolved all of Southern's previously pending rate proceedings and
proceedings to recover GSR and other transition costs associated with the
implementation of Order No. 636. The four major rate cases resolved by the
Customer Settlement cover consecutive periods beginning September 1, 1989. In
May 1996, the Settlement became final and Southern credited in the aggregate the
full amount of Southern's rate reserves as of February 28, 1995, plus interest,
less certain amounts withheld for potential refunds to contesting parties, to
reduce the GSR costs borne by Southern's customers. The total credit recorded in
May 1996 amounted to $164 million. Southern implemented reduced settlement rates
effective March 1, 1995. 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. The Settlement also provides for Southern to
recover $363 million of GSR costs incurred or reserved as of September 30, 1996,
and 50 percent of future GSR costs that Southern may incur thereafter, which
future costs the Company believes will not be material to its financial position
or results of operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (April 11 Order). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the one remaining contesting party concern the recoverability of
certain GSR and other transition costs under Order No. 636, which would not be
material even if such issues were determined adversely to Southern. The
contesting party, and one other entity that may potentially compete with
Southern in providing storage services, have each appealed the April 11 Order
and the Settlement Order to the D.C. Circuit Court of Appeals. Although there
can be no assurances, the Company believes that the Settlement Order and the
April 11 Order should be upheld on appeal.
Sea Robin - In January 1995, Sea Robin Pipeline Company, a subsidiary of
Southern, filed with the FERC a petition for a declaratory ruling that the Sea
Robin pipeline system is engaged in the gathering of natural gas and is,
therefore, exempt from FERC regulation under the Natural Gas Act. In June 1995,
the FERC denied Sea Robin's petition on the basis that the primary function of
the Sea Robin system is the interstate transportation of gas. Sea Robin's
request for rehearing of that ruling was denied by the FERC on June 26, 1996.
Sea Robin filed on August 15, 1996, for judicial review of the orders denying
its petition.
5. Commitments and Contingencies (Cont'd)
Following the filing of Sea Robin's petition for a gathering exemption,
several of the shippers on the Sea Robin system 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 are unjust and unreasonable. 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. On July 31, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act. Sea Robin is unable to predict the
outcome of this proceeding, but any reduction in Sea Robin's rates as a result
of this complaint can be implemented only on a prospective basis and any such
change is not expected to be material to the Company's financial position or
results of operations.
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.
Briggs v. Sonat Exploration - On October 18, 1996, the Court certified
two settlement classes and entered a final order approving the terms of a
settlement agreement, which had been previously negotiated between the
Plaintiffs and Sonat Exploration under which Sonat Exploration agreed to pay
approximately $8.5 million (including $1.6 million of interest) into a
settlement fund for the benefit of the class members. Under the settlement
agreement, all claims raised in the litigation have been dismissed, and with
respect to the respective class members, other than those that elect to opt out
of the settlement, the following claims have been released (i) all claims that
the members of the first settlement class have relating to any adjustments,
deductions or charges made by Sonat Exploration, Sonat Marketing or certain
affiliated gathering entities against the production revenue share of the class
members for periods prior to the effective date of the settlement, (ii) for all
periods prior to the effective date of the settlement all claims that the
members of the second settlement class may have relating to any proceeds
received by Sonat Exploration under two term gas sales contracts to which Sonat
Exploration was a party and (iii) for all periods prior to January 1, 1996, all
claims that members of the second settlement class have relating to any proceeds
received by Sonat Exploration allocated to such members' share of production,
the sale of natural gas by Sonat Exploration to Sonat Marketing, including such
sales at index prices and the marketing fees charged Sonat Exploration by Sonat
Marketing and the margins realized by Sonat Marketing upon the sale by it of gas
purchased from Sonat Exploration. The approximately 2,800 members of the first
settlement class include the persons who own interests in onshore wells that
were provided gathering services by three affiliated gathering systems operated
by Sonat Exploration. The approximately 40,500 members of the second settlement
class include the persons that own
<PAGE>
5. Commitments and Contingencies (Cont'd)
interests in onshore wells in Texas, Louisiana, Arkansas, Oklahoma, and New
Mexico whose natural gas has been sold by Sonat Exploration and whose share of
revenue was reduced by marketing fees charged by Sonat Marketing, except certain
royalty interest owners in wells in Oklahoma who are presently members of a
class certified in an action pending in an Oklahoma state court. Pursuant to the
settlement agreement, Sonat Exploration did not admit any liability. The court
also awarded attorneys' fees and costs of $3.15 million. The judgment will
become final, if no post-judgment motions are filed or appeals taken, sixty days
from October 18. Payment under the judgment will be made as soon thereafter as
practical.
FERC Audit of Florida Gas - The FERC's Division of Audits completed a
compliance review of Florida Gas' books and records for the period January 1,
1991, through February 28, 1995. Among other things, the FERC auditors
questioned certain aspects of Florida Gas' procedures for accounting for the
costs of financing Florida Gas' Phase III expansion facilities and have proposed
adjustments to the capitalization by Florida Gas of AFUDC during construction of
its Phase III expansion facilities. Pursuant to an agreement in principle among
Florida Gas, FERC staff and customer intervenors, Florida Gas filed a settlement
agreement on July 30, 1996, which was approved by FERC order issued September
27, 1996. The settlement provides for a reduction of $18.75 million in its
Account No. 101, Gas Plant in Service. The settlement is without prejudice to
Florida Gas seeking Commission approval to recover the $18.75 million, required
to be removed from its plant account, in the rate case filed by Florida Gas on
August 30, 1996, in Docket No. RP96-366-000.
<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 are in the table
below. The table also shows the effect of four unusual items recorded in 1995
that affect operating income and net income comparisons. 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
were recorded in the second quarter of 1995. The sale of the remaining
investment in Sonat Offshore common stock was recorded in the third quarter of
1995.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Operating Income (Loss):
Exploration and production $38.2 $ (2.8) $ 97.2 $ 37.2
Natural gas transmission 36.2 36.1 120.7 126.1
Energy marketing (0.7) 1.0 11.6 5.1
Other 1.4 0.9 3.1 (0.3)
----- ---- ---- ------
Operating Income 75.1 35.2 232.6 168.1
Less Unusual Items:
Exploration and Production
Termination of gas
sales contracts - - - 37.5
--- --- --- ------
Operating Income Excluding
Unusual Items $75.1 $ 35.2 $232.6 $130.6
===== ====== ====== ======
Net Income As Reported $48.0 $130.5 $134.2 $185.5
Less Unusual Items:
Exploration and Production
Termination of gas
sales contracts - - - 24.4
Property sales - - - (20.0)
Sale of Offshore stock - 110.1 - 110.1
Other
Sale of Baker Hughes Stock - - - (8.2)
--- --- --- ------
Net Income Excluding
Unusual Items $48.0 $ 20.4 $134.2 $ 79.2
===== ====== ====== ======
Earnings Per Share of Common Stock $ .56 $ 1.51 $ 1.56 $ 2.15
===== ====== ====== ======
Earnings Per Share of Common
Stock Excluding Unusual
Items $ .56 $ .24 $ 1.56 $ .92
===== ===== ====== =====
</TABLE>
<PAGE>
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. From 1988 through 1995, Sonat Exploration's reserve
growth strategy was based on acquiring properties that have additional
exploitation drilling potential, developing those properties and conducting low
risk exploration activities. In 1996 the Company has made a strategic shift to
increase exploratory activity due to the size of the acreage position it has
established and its increased use of technology, such as three-dimensional (3D)
seismic surveys.
During the first nine months of 1996, Sonat Exploration successfully
completed several exploratory wells. Early in the second quarter of 1996, the
Company had a significant find in Leon County, Texas, where it completed its
first Cotton Valley pinnacle reef discovery, the Fountain No. 1. Sonat
Exploration has a 64 percent working interest in this well. In the third
quarter, Sonat Exploration announced completion of its second discovery in the
Cotton Valley Pinnacle Reef Trend, the Scurlock No. 1 well. Sonat Exploration
has a 67 percent working interest in this well. In October, Sonat Exploration
announced that its Blanton No. 1 exploratory well in the Bear Grass area of
Freestone County, Texas, encountered 520 feet of Cotton Valley Pinnacle Reef
development with very active gas shows throughout the entire section. Based on
geological and geophysical analysis of this result and the drilling
characteristics of the well, Sonat Exploration believes the Blanton No. 1 will
be its third and most significant exploratory success thus far in the Bear Grass
area. Sonat Exploration has a 100 percent working interest in this well.
In the Austin Chalk Trend of west Louisiana, Sonat Exploration completed
an important dual-lateral horizontal discovery, the Sonat Minerals 1 No. 1, that
had an initial production rate of eight million cubic feet (MMcf) of natural gas
and 1,300 barrels of condensate per day. Sonat Exploration also completed two
significant wells in High Island Block 39 in the Gulf of Mexico, one exploratory
and one development, with a combined initial production rate of 85 MMcf per day
of natural gas and 720 barrels of condensate.
In addition to its exploratory activity, Sonat Exploration maintained an
active development drilling program in the first nine months of 1996,
participating in the completion of 246 gross development wells. Also, during the
same period, the Company completed several acquisitions at a net cost of $46
million that added 105 billion cubic feet of natural gas equivalent (Bcfe).
Property sales of $34 million during the first nine months of 1996 decreased
proved reserves by 50 Bcfe. Proved reserves at September 30, 1996, were 1.896
trillion cubic feet of natural gas equivalent, up 126 Bcfe from year-end 1995.
Natural gas production is sold by Sonat Exploration to Sonat Marketing,
the Company's affiliate operating in the Energy Marketing segment, and is
marketed primarily in the spot market by Sonat Marketing. Sonat Exploration,
through Sonat Marketing, uses derivative financial instruments to manage the
risks associated with price volatility for both its natural gas production and
its oil production, which it sells in the spot market. (See discussion below,
Market Risk Management and Note 2 of the Notes to Condensed Consolidated
Financial Statements.)
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Revenues:
Sales to others $ 43.3 $ 31.2 $100.4 $139.8
Intersegment sales 97.6 53.4 291.2 162.8
----- ------ ------ ------
Total Revenues 140.9 84.6 391.6 302.6
------ ------ ------ ------
Costs and Expenses:
Operating and maintenance 14.3 15.6 45.1 49.1
Exploration expense 7.0 2.5 15.6 6.0
General and administrative 13.1 12.3 39.1 33.7
Depreciation, depletion and
amortization 61.5 52.9 175.6 162.9
Taxes, other than income 6.8 4.1 19.0 13.7
---- ------ ----- ------
102.7 87.4 294.4 265.4
------ ------ ------ ------
Operating Income (Loss) $ 38.2 $ (2.8) $ 97.2 $ 37.2
====== ====== ====== ======
Net Sales Volumes:
Gas (Bcf) 54 45 152 139
Oil and condensate (MBbls) 1,366 983 3,748 2,944
Natural gas liquids (MBbls) 643 302 1,579 1,158
- ------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 2.09 $ 1.41 $ 2.07 $ 1.46
Oil and condensate ($/Bbl) 19.09 17.78 18.99 17.48
Natural gas liquids ($/Bbl) 11.10 9.28 10.77 8.82
- ------------------------------------------------------------------------------------------------
</TABLE>
Quarter-to-Quarter Analysis
Operating income for the third quarter of 1996 was up $41.0 million
compared with the same 1995 period. Natural gas production increased 9 billion
cubic feet (Bcf) to 54 Bcf and average realized natural gas prices for the third
quarter of 1996 were $2.09 per thousand cubic feet (Mcf) compared with $1.41 per
Mcf in 1995. The increase in natural gas production reflects successful
exploration and development programs throughout the Company's areas of
operations. Oil and condensate production increased 39 percent to 1.4 million
barrels for the third quarter of 1996, primarily due to growing production in
the eastern Austin Chalk Trend where in 1996 the Company increased its drilling
program from three to seven rigs. Average realized oil prices rose to $19.09 per
barrel for the third quarter of 1996 from $17.78 per barrel in 1995. Operating
income for the third quarter of 1996 was reduced by $5.5 million for costs
associated with the settlement of the Briggs, et. al. v. Sonat Exploration
litigation. See Item 1 of Part II of this report.
Exploration expense increased $4.5 million due to increased exploration
activity in 1996. Although amortization rates declined from $1.00 to $.93 per
Mcf of natural gas equivalent, depreciation, depletion and amortization expense
for the current period increased by 16 percent compared with the same 1995
period due to higher production levels in 1996. Other tax expense increased by
$2.7 million primarily due to higher severance taxes resulting from higher
revenues.
Year-to-Date Analysis
Operating income for the first nine months of 1996 was up $97.5 million
compared with the same period of 1995, after excluding the recognition of $37.5
million of operating revenue from the termination of two long-term gas sales
contracts in the 1995 period. The increase was due to both higher prices and
increased production. Average realized natural gas prices increased to $2.07 per
Mcf in 1996 from $1.46 per Mcf in 1995, a 42 percent increase. Gas revenues in
the 1996 period were reduced by $21.0 million for the effect of gas hedging
transactions. Realized oil prices rose to an average of $18.99 per barrel in
1996 from $17.48 per barrel in 1995. Oil revenues in the 1996 period were
reduced by $8.0 million for the effect of oil hedging transactions. Sonat
Exploration has hedged approximately 40 percent of expected oil production for
the remainder of 1996 at an $18 per barrel West Texas Intermediate index price
(see Note 2 of the Notes to Condensed Consolidated Financial Statements). Oil
and condensate production increased by 27 percent. Operating income of the first
nine months of 1996 was reduced by $12.0 million for litigation accruals
associated with the Briggs, et. al. v. Sonat Exploration litigation.
Costs and expenses were higher in the first nine months of 1996 compared
with the same 1995 period due to several factors. Exploration expense increased
$9.6 million due to more exploration activity in 1996. General and
administrative expenses increased $5.4 million due to higher employee related
costs, including stock-based employee compensation expense, and less overhead
costs charged to producing properties due to property sales. Depreciation,
depletion and amortization expense increased $12.7 million due to higher
production levels partially offset by lower amortization rates. Other tax
expense increased $5.3 million due to higher severance taxes related to higher
revenues. Operating and maintenance expenses were $4.0 million lower for the
first nine months of 1996 compared with 1995, primarily due to reduced levels of
workovers in 1996, which partially offset the higher expenses mentioned above.
NATURAL GAS TRANSMISSION
The Company is engaged in the natural gas transmission business through
Southern and its subsidiaries, and Citrus Corp. (a 50 percent-owned company).
Southern continues to pursue opportunities to expand its pipeline system
in its traditional market area and to connect new gas supplies. Southern filed
an application on January 24, 1996, with the FERC seeking approval to expand its
pipeline system to provide firm gas transportation service to three existing
customers and to two new customers in North Alabama. The proposed
76-million-cubic-feet-per-day expansion is supported by long-term firm
transportation agreements, including the cities of Huntsville and Decatur, which
have executed 20-year service agreements for 40 million cubic feet per day and
25 million cubic feet per day, respectively. The $53 million project includes
118 miles of new pipeline and additional compression on Southern's existing
system. The earliest in-service date for the proposed expansion, which requires
FERC approval, would be November 1997. The company that currently provides
transportation service to the cities of Huntsville and Decatur has challenged
this project in Alabama state court and with the FERC.
In May 1996, Southern filed an application with the FERC to expand its
pipeline system in Zone 3 of its market area. This $36 million expansion will
enable Southern to provide additional firm transportation services totaling 46
million cubic feet per day to 11 customers in Georgia and Tennessee. If FERC
approval is received, the in-service date for this firm transportation service
is expected to be November 1997.
In 1996, Southern formed Destin Pipeline Company Inc., a wholly owned
subsidiary. Destin filed an application with the FERC seeking authorization to
construct, own, and operate a large-diameter interstate pipeline system to
transport approximately one billion cubic feet of gas per day from the deepwater
and corridor areas being developed in the eastern Gulf of Mexico for delivery to
pipeline interconnections in central Mississippi. The estimated capital cost of
the facilities is $294 million. Destin Pipeline has requested preliminary
regulatory approval for the project by January 1997 so that commercial
agreements can be entered into in early 1997. Engineering would be completed
during 1997, and construction would begin in 1998. The projected in-service date
is scheduled for January 1999. In addition to FERC authorization, Southern is
seeking, but does not yet have, contractual commitments to support the project.
<PAGE>
NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Operating Income (Loss):
Southern Natural Gas Company
and subsidiaries $ 36.2 $ 36.7 $120.9 $127.5
Other - (0.6) (0.2) (1.4)
--- ------ ----- ------
Total Operating Income $ 36.2 $ 36.1 $120.7 $126.1
====== ====== ====== ======
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Revenues:
Gas sales $ 39.8 $ 44.9 $154.4 $138.9
Market transportation and
storage 76.9 75.4 237.4 243.9
Supply transportation 12.5 12.7 35.8 38.6
Other 13.0 41.5 180.8 63.2
----- ------ ------ ------
Total Revenues 142.2 174.5 608.4 484.6
------ ------ ------ ------
Costs and Expenses:
Natural gas cost 39.2 44.7 151.2 137.1
Transition cost recovery 7.3 32.3 160.4 40.7
Operating and maintenance 24.6 23.2 66.9 63.5
General and administrative 18.9 20.5 58.9 61.1
Depreciation and amortization 11.3 12.3 36.1 39.8
Taxes, other than income 4.7 4.8 14.0 14.9
---- ------ ----- ------
106.0 137.8 487.5 357.1
------ ------ ------ ------
Operating Income $ 36.2 $ 36.7 $120.9 $127.5
====== ====== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.3 $ 2.3 $ 7.2 $ 7.1
===== ====== ===== ======
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 1 6 5
Market transportation 133 143 483 448
--- --- --- ---
Total Market Throughput 135 144 489 453
Supply transportation 77 101 242 288
--- --- --- ---
Total Volumes 212 245 731 741
=== === === ===
Transition gas sales 16 21 51 70
=== === === ===
</TABLE>
<PAGE>
CITRUS CORP.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Equity in Earnings of
Citrus Corp. $6.1 $7.6 $16.8 $20.5
==== ==== ===== =====
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 126 129 331 348
Supply transportation 6 6 22 20
-- --- --- ---
Total Volumes 132 135 353 368
=== === === ===
</TABLE>
Quarter-to-Quarter Analysis
Southern Natural Gas Company and Subsidiaries - Operating results for
the third quarter of 1996 were relatively flat compared with the prior year. Gas
sales revenues and natural gas cost decreased compared with the 1995 third
quarter due to declining transition gas sales from supply remaining under
contract partially offset by higher prices. Both other revenue and transition
cost recovery in the 1995 period include a $17.7 million adjustment related to
the Customer Settlement. The adjustment did not impact operating income. General
and administrative expenses decreased due to lower employee benefit expenses,
including stock-based compensation. Depreciation and amortization in the 1996
period includes a favorable $0.9 million adjustment related to a change in the
estimated life of leasehold improvements.
Citrus - Equity in earnings of Citrus declined from $7.6 million to $6.1
million in 1996. The 1995 period benefited from an adjustment to allowance for
funds used during construction (AFUDC) related to the Florida Gas Transmission
Company Phase III expansion project (Phase III). The effect of this adjustment
was partly offset by the effect of out-of-period expense adjustments in 1995 and
1996.
Year-to-Date Analysis
Southern Natural Gas Company and Subsidiaries - Operating results for
the nine-month period decreased $6.6 million primarily because incremental
revenues from the sale of firm transportation capacity were collected in the
1995 period prior to revised rates going into effect on March 1, 1995. The 1995
period also included positive adjustments 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.
Gas sales revenues and natural gas cost increased compared with the 1995
period reflecting higher gas prices on transition gas sales from supply
remaining under contract. Supply transportation revenues decreased due to lower
supply-area transportation volumes. Both other revenue and transition cost
recovery in the 1996 period include $163.9 million recorded as a result of
Southern's Customer Settlement becoming final. Depreciation and amortization
decreased in the 1996 period due to lower rates implemented March 1, 1995, and
the adjustments discussed in the preceding paragraph.
Citrus - Equity in earnings of Citrus were $3.7 million lower than in
1995. 1996 results reflect revenues and operating costs relating to the
operations of the Phase III expansion project while 1995 results include AFUDC,
including the AFUDC adjustment discussed previously, related to Phase III which
was placed in service on March 1, 1995. Also contributing to the decline were
lower margins due to lower interruptible transportation volumes. These were
partly offset by the effect of out-of-period expense adjustments in 1995 and
1996.
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 has terminated or renegotiated to market
pricing substantially all of its gas supply contracts through which it had
historically obtained its long-term gas supply. Some of the remaining 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 the cost of
gas under some of these contracts is in excess of current spot-market prices,
Southern currently is incurring no take-or-pay liabilities under any of these
contracts. Two market-priced contracts entered into with Exxon Corporation in
1995 as part of a settlement of certain other gas purchase contracts account for
92 percent and 85 percent in 1996 and 1997, respectively, of the purchase
commitments described below. Of such purchase commitments, the percent that is
priced in excess of current spot-market prices is 1 percent in 1996, 2 percent
in 1997, 8 percent in 1998, and substantially all of the volumes for years
thereafter. (See Note 5 of the Notes to Condensed Consolidated Financial
Statements for a discussion of price differential GSR costs.) 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 that have been extended through November 30, 1997. The remainder of
Southern's gas supply will continue to be sold on a month-to-month basis.
<PAGE>
Southern's purchase commitments under its remaining gas supply contracts
for the remainder of 1996 and years 1997 through 2000 are estimated as follows:
Estimated
Purchase
Commitments
(In Millions)
1996 $ 72
1997 137
1998 22
1999 22
2000 19
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.
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
The Customer Settlement resolves, as to all of Southern's customers
except one contesting party that represents approximately 2 percent of
Southern's firm transportation volumes, all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636. See Note 5 of the Notes to
Condensed Consolidated Financial Statements for a discussion of the Customer
Settlement and other rate matters.
ENERGY MARKETING
Sonat Energy Services, through its subsidiaries, Sonat Marketing Company
L.P. and Sonat Power Marketing L.P., conducts marketing business in the natural
gas and electric industries.
Sonat Marketing has experienced rapid growth as reflected by average
daily sales volumes of 2.9 billion cubic feet during the third quarter of 1996.
For the current three-month period, total sales volumes grew from 201 billion
cubic feet in 1995 to 262 billion cubic feet in 1996. Sonat Marketing purchases
and resells substantially all of Sonat Exploration Company's natural gas
production.
Sonat Marketing uses natural gas futures contracts, options, and gas
price swap agreements to hedge the effects of spot-market price volatility on
its operating results. These instruments are used to lock in margins on Sonat
Marketing's gas transactions. Sonat Marketing also uses futures derivatives to
enable it to offer fixed-price contracts to its suppliers and customers. (See
Market Risk Management and Note 2 of the Notes to Condensed Consolidated
Financial Statements.)
Sonat Power Marketing has executed power purchase, sales and
transmission agreements with numerous U.S. utilities. It is focusing on
expanding its wholesale business. Sonat and AGL Resources Inc., which has a 35
percent ownership interest in Sonat Marketing, completed an agreement in the
second quarter of 1996 whereby AGL Resources Inc. also acquired a 35 percent
interest in Sonat Power Marketing. The transaction resulted in a $.5 million
pretax gain, which is included in other income for the nine-month period.
ENERGY MARKETING OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Revenues $636.1 $318.3 $1,759.2 $846.7
====== ====== ======== ======
Operating Income (Loss) $ (0.7) $ 1.0 $ 11.6 $ 5.1
====== ====== ====== ======
Sonat Marketing Gas Sales
Volumes (100%)
(Billion Cubic Feet) 262 201 685 519
==== === ==== ===
Sonat Power Marketing Sales
Volumes (100%)
(Thousands of Megawatt Hours) 1,035 - 1,684 -
===== == ===== ==
</TABLE>
Quarter-to-Quarter Analysis
Although revenues doubled due to both higher volumes and higher gas
prices, operating results for the energy marketing segment decreased $1.7
million in the third quarter of 1996 compared with the 1995 period. Sonat
Marketing's natural gas sales volumes increased 61 billion cubic feet, but unit
trading margins were lower due to intense competition. Energy marketing results
were also reduced by start-up losses associated with the development of its
electric power marketing operations.
Year-to-Date Analysis
Revenues increased for the nine-month period for the same reasons
mentioned above. Operating results for the energy marketing segment for the nine
months ended September 30, 1996, were up substantially over 1995 levels
primarily due to much higher unit trading margins in the spring as a result of
unusually cold weather in certain of Sonat Marketing's markets. This created
intense demand for natural gas during peak periods resulting in a volatile price
environment which created exceptional trading opportunities for Sonat Marketing.
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates $ 8.9 $ 11.0 $25.3 $ 36.0
Minority interest (0.1) (0.1) (5.2) (0.1)
Sale of subsidiary stock - 188.0 - 188.0
Other 4.7 0.3 6.6 (35.5)
---- ---- ---- ------
$13.5 $199.2 $26.7 $188.4
===== ====== ===== ======
</TABLE>
The decrease in equity in earnings of unconsolidated affiliates in both
periods reflects the absence of earnings from the Company's investment in Sonat
Offshore Drilling Inc., which was sold in July 1995, and a decrease in equity in
earnings of Citrus (discussed earlier in the Natural Gas Transmission section).
Minority interest is AGL Resources Inc.'s 35 percent share of Sonat Marketing
and Sonat Power Marketing's earnings. The 1995 periods include the gain from the
Company's sale of its remaining interest in Sonat Offshore stock. Other
increased for the three-month period due to the recognition of a $3.9 million
gain on partial termination of an interest rate swap in September 1996. Other
for the nine-month period of 1996 also includes a $2.4 million gain on the sale
of oil and gas properties and the $.5 million gain on the sale of a 35 percent
interest in Sonat Power Marketing discussed earlier. The comparable 1995 period
includes a $28.9 million loss on the sale of oil and gas properties, a $13.0
million loss on the sale of the Company's investment in Baker-Hughes
Incorporated convertible preferred stock, and $6.0 million of dividends on the
Baker Hughes stock.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Interest Expense, Net $19.7 $ 21.6 $62.8 $ 72.9
</TABLE>
Net interest expense decreased compared with the three and nine-month
periods of 1995. Interest expense for the three-month period decreased primarily
due to lower average revenue reserve balances. Interest expense for the
nine-month period decreased primarily due to lower average outside debt levels
and revenue reserves balances.
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Income Taxes $20.9 $ 82.3 $62.3 $ 98.0
</TABLE>
Income taxes decreased for the three and nine-month periods due to
income taxes associated with the unusual items (discussed earlier) in the 1995
period. Absent these unusual items, the effective tax rate was higher for the
three and nine-month periods reflecting a lower percentage of earnings receiving
tax preferential rates and lower non-conventional fuel tax credits.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Millions)
<S> <C> <C>
Operating Activities $ 425.0 $ 161.1
</TABLE>
Cash flow from operations increased $263.9 million compared with the
1995 period primarily due to improved operating results at both Sonat
Exploration and Sonat Marketing which were discussed earlier. At Southern, cash
flow from operations improved, primarily due to lower GSR payments in 1996. The
1995 period also included a large third quarter tax payment related to the sale
of the remaining shares of Sonat Offshore common stock.
Other than the GSR payments discussed above, both the change in gas
supply realignment costs and the change in reserves for regulatory matters were
attributable to recognition of the Customer Settlement in the second quarter of
1996 (see earlier discussion). The change in deferred income taxes reflects the
deductibility of certain oil and gas drilling costs in the current period and
the disposal of the Company's investment in Baker-Hughes Incorporated
convertible preferred stock in the 1995 period. The change in accounts payable
is primarily attributable to higher gas prices and to the expanding business of
Sonat Exploration and Sonat Marketing. The change in accrued interest and income
taxes primarily reflects accrued taxes related to the Sonat Offshore stock
disposition in the 1995 period. The change in inventories relates to gas
inventory purchases at Sonat Marketing. The increase in other current assets and
liabilities is primarily due to lower margin requirements on futures broker
accounts at Sonat Marketing in the 1996 period. Other includes $32.9 million of
accrual reversals related to the Customer Settlement in the current period. In
addition, the 1995 period includes $37.5 million from the termination of
long-term gas sales contracts, as well as $14.4 million in transition costs
deferred at Southern.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Millions)
<S> <C> <C>
Investing Activities $(403.1) $ 224.9
</TABLE>
Investing activities required $403.1 million of net cash in 1996
compared to providing $224.9 million in 1995, which included sources of cash
from unusual items. In 1995, the Company received $326.0 million from the sale
of its remaining interest in Sonat Offshore stock, $167.0 million from the sale
of four million shares of Baker Hughes convertible preferred stock, and $98.9
million in proceeds from the sale of Sonat Exploration oil and gas properties.
Capital expenditures (see discussion below) were higher in the 1996 period
compared to the 1995 period primarily due to Southern's system expansion.
<TABLE>
<CAPTION>
<S> <C> <C>
Financing Activities $ (39.2) $(337.0)
</TABLE>
Net cash used in financing activities was $297.8 million less in the
1996 period compared to the 1995 period. Proceeds from the unusual transactions
discussed above were used in part to repay borrowings under Sonat's floating
rate facilities in the 1995 period.
Capital Expenditures
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Exploration and Production $298.1 $314.8
Natural Gas Transmission 94.9 36.8
Energy Marketing 3.3 1.9
Other 3.2 3.9
---- ------
Total $399.5 $357.4
====== ======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $8.9 million and $100.4 million in the first nine months of 1996
and 1995, respectively. The 1995 period included spending at Florida Gas on the
Phase III expansion project placed in service on March 1, 1995.
Capital Resources
At September 30, 1996, the Company had lines of credit and a revolving
credit agreement with a total capacity of $750 million. Of this, $472 million
was available. The amount available under the lines of credit and the revolving
credit agreement has been reduced by the amount of commercial paper outstanding
of $128 million to reflect the Company's policy that bank and commercial paper
borrowings in the aggregate will not exceed the maximum amount available under
its lines of credit and revolving credit agreement.
Sonat has a shelf registration with the Securities and Exchange
Commission (SEC) that provides for issuance of up to $500 million in debt
securities of which $200 million has been issued. Southern also has a shelf
registration with the SEC for up to $200 million in debt securities, of which
$100 million has been issued.
The Company has a stock repurchase program in effect through April 30,
1997, which authorizes the purchase of approximately three million shares of the
Company's common stock. Through September 30, 1996, the Company has purchased
2,274,860 shares and will continue to purchase shares from time-to-time on the
open market or in privately negotiated transactions. Shares purchased under the
authorization are being reissued in connection with employee stock options and
restricted stock programs.
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.
MARKET AND FINANCIAL RISK MANAGEMENT
The Company's primary market risk exposure is the volatility of
spot-market natural gas and oil prices, which affects operating results of Sonat
Exploration and Sonat Marketing. The Company's use of derivatives to reduce this
volatility is described in Note 2 of the Notes to Condensed Consolidated
Financial Statements.
The Company also has exposure to financial market risks. In anticipation
of a future borrowing, Southern has entered into a forward rate agreement to
hedge its interest rate risk (see Note 2 of the Notes to Condensed Consolidated
Financial Statements).
The Company's use of these derivative instruments is implemented under a
set of policies approved by the Board of Directors. Speculative transactions are
prohibited. These policies presently prohibit transactions not matched by
physical commodity positions in the case of Sonat Exploration or corresponding
trading positions in the case of Sonat Marketing and determine approval levels
for each transaction. For commodity price hedges, these policies set limits
regarding volumes relative to budgeted production or sales levels. Individually
material forward rate agreement and swap counterparties are approved by the
Board, and volume limits for swaps are set for any single counterparty. Reports
detailing each transaction are reviewed by 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.)
FORWARD LOOKING STATEMENTS
Disclosures provided in this Quarterly Report contain forward looking
statements regarding the Company's future plans, objectives, and expected
performance. These statements are based on assumptions that the Company believes
are reasonable, but are subject to a wide range of risks, and there is no
assurance that actual results may not differ materially. Important factors that
could cause actual results to differ include changes in oil and gas prices and
underlying demand, which would affect profitability and might cause the Company
to alter its plans, the timing and results of oil and gas drilling and
acquisition programs, which determine production levels and reserves, the
success of the Company's exploratory drilling activities, the results of the
Company's hedging activities, and the success of management's cost reduction
activities. Realization of the Company's objectives and expected performance can
also be adversely affected by the actions of customers and competitors, changes
in governmental regulation of the Company's businesses, and changes in general
economic conditions and the state of domestic capital markets.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company reported in Item 5 of Part II of the Company's Report of
Form 10-Q for the quarter ended June 30,1996, that it is one of many defendants
in an action styled Jack J. Grynberg, et al. v Alaska Pipeline Company, et al.
A. L. Briggs, et al. v. Sonat Exploration Company, et al., which is
described in Item 3 of Part I of the Company's Report on Form 10-K for the year
ended December 31, 1995, has been settled, pending expiration of the appeals
period for the judgment certifying the settlement classes and approving the
terms of the settlement agreement. See Note 5 of the Notes to Condensed
Consolidated Financial Statements in Part I of this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
10* Amendatory Agreement dated August 23, 1996, to Service
Agreement No. 902470 dated September 1, 1994, as amended
March 1, 1995; No. 904460 dated November 1, 1994, as amended June
1, 1995; and Nos. 904461 and S20150 dated November 1, 1994, as
amended March 1, 1995, between Southern Natural Gas Company and
Atlanta Gas Light Company
11* Computation of Earnings per Share
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedules for the period ended September 30, 1996
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter ended
September 30, 1996.
----------------- (1) The Company will furnish to requesting security
holders the exhibits on this list upon the payment of a fee of $.10 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: November 7, 1996 By: /s/ James A. Rubright
------------------------- -----------------------
James A. Rubright
Senior Vice President and
General Counsel
(Principal Accounting Officer)
Date: November 7, 1996 By: /s/ Thomas W. Barker, Jr.
------------------------- --------------------------
Thomas W. Barker, Jr.
Vice President-Finance and
Treasurer
(Principal Financial Officer)
Amendatory Agreement
This Amendment is entered into this 23 day of August, 1996, between
SOUTHERN NATURAL GAS COMPANY ("Company") and ATLANTA GAS LIGHT COMPANY
("Shipper").
RECITALS:
1. Company and Shipper are parties to a firm transportation agreement
dated September 1, 1994 (#902470) for 100,000 Mcf per day, as amended March 1,
1995 (the "September FT Agreement"), a firm transportation agreement dated
November 1, 1994 (#904460), as amended March 1, 1995 and June 1, 1995, for
255,812 Mcf per day (the "November FT Agreement"), a no-notice firm
transportation agreement dated November 1, 1994 (#904461) as amended March 1,
1995 for 406,222 Mcf per day (the "FT-NN Agreement"), and a contract storage
service agreement dated November 1, 1994 as amended March 1, 1995 (#S20150) for
20,117,674 Mcf (the "CSS Agreement");
2. Shipper has notified Company that it desires to extend the term of
the September FT Agreement, the November FT Agreement, the FT-NN Agreement, and
the CSS Agreement as provided below.
AGREEMENTS:
In consideration for the premises and the mutual promises and covenants
contained herein, the parties agree as follows:
1. Section 4.1 of the September FT Agreement shall be deleted in its
entirety and the following Section 4.1 substituted therefor:
4.1 Subject to the provisions hereof, this Agreement
shall become effective as of the date first
hereinabove written and shall be in full force and
effect for a primary term through February 28, 1999,
and shall continue and remain in force and effect for
successive terms of one year each thereafter if the
parties mutually agree in writing to each such yearly
extension at least 60 days prior to the end of the
primary term or any subsequent yearly extension.
<PAGE>
2. The First Revised Exhibit E to the September FT Agreement shall be
deleted in its entirety and the Second Revised Exhibit E attached hereto shall
be substituted therefor.
3. Section 4.1 of the November FT Agreement shall be deleted in its
entirety and the following Section 4.1 substituted therefor:
4.1 Subject to the provisions hereof, this Agreement
shall become effective as of the date first
hereinabove written and shall be in full force and
effect for a primary term through the following
dates: (a) April 30, 2007, for 110,905 Mcf per day of
Transportation Demand and June 30, 2007, for 1,000
Mcf per day of Transportation Demand and shall
continue and remain in force and effect for
successive terms of one year each after the end of
each primary term for the specified volume, unless
and until canceled with respect to the associated
volume by either party giving 180 days written notice
to the other party prior to the end of the specified
primary term or any yearly extension thereof; (b)
February 29, 2000, for 21,139 Mcf per day of
Transportation Demand and shall continue and remain
in force and effect for successive terms of one year
each thereafter if the parties mutually agree in
writing to each such yearly extension at least 60
days prior to the end of the primary term or
subsequent yearly extention; and (c) February 28,
1999, for 122,768 Mcf per day of Transportation
Demand and shall continue and remain in force and
effect for successive terms of one year each
thereafter if the parties mutually agree in writing
to each such yearly extension at least 60 days prior
to the end of the primary term or subsequent yearly
extension.
4. Section 4.1 of the FT-NN Agreement shall be deleted in its entirety and
the following Section 4.1 substituted therefor:
4.1 Subject to the provisions hereof, this Agreement
shall become effective as of the date first
hereinabove written and shall be in full force and
effect for a primary term through the following
dates: (a) February 29, 2000, for 24,133 Mcf per day
of Transportation Demand and shall continue and
remain in force and effect for successive terms of
one year each thereafter if the parties mutually
agree in writing to each such yearly extension at
least 60 days prior to the end of the primary term or
subsequent yearly extension; and (b) February 28,
1999, for 382,089 Mcf per day of Transportation
Demand and shall continue and remain in force and
effect for successive terms of one year each
thereafter if the parties mutually agree in writing
to each such yearly extension at least 60 days prior
to the end of the primary term or subsequent yearly
extension.
5. Section 4.1 of the CSS Agreement shall be deleted in its entirety and
the following Section 4.1 substituted therefor:
4.1 Subject to the provisions hereof, this Agreement
shall become effective as of the date first
hereinabove written and shall be in full force and
effect for a primary term through the following
dates: (a) February 29, 2000, for 1,195,179 Mcf per
day of Maximum Storage Quantity and shall continue
and remain in force and effect for successive terms
of one year each thereafter if the parties mutually
agree in writing to each such yearly extension at
least 60 days prior to the end of the primary term or
subsequent yearly extension; and (b) February 28,
1999, for 18,922,495 Mcf per day of Maximum Storage
Quantity and shall continue and remain in force and
effect for successive terms of one year each
thereafter if the parties mutually agree in writing
to each such yearly extension at least 60 days prior
to the end of the primary term or subsequent yearly
extension.
6. Except as provided herein, the September FT Agreement, the November
FT Agreement, the FT-NN Agreement, and the CSS Agreement shall remain in full
force and effect as written.
7. This Amendment is subject to all applicable, valid laws, orders,
rules, and regulations of any governmental entity having jurisdiction over the
parties or the subject matter hereof.
WHEREFORE, the parties have executed this Amendment through their duly
authorized representatives to be effective as of the date first written above.
ATTEST: SOUTHERN NATURAL GAS COMPANY
By: James J. Cleary By: James E. Moylan, Jr.
Title: Vice President Title: President
ATTEST: ATLANTA GAS LIGHT COMPANY
By:__________________________ By: Thomas H. Benson
Title:_______________________ Title: Executive Vice President and Chief
Operating Officer
<PAGE>
Service Agreement No. 902470
SECOND REVISED
EXHIBIT E
DISCOUNT INFORMATION
Discounted Rates:
(1) The Reservation Charge under this Agreement shall be $10.50/Mcf;
(2) The applicable GSR Cost Surcharge and GSR Volumetric Surcharge shall be
capped at 50% each;
(3) All other surcharges shall be assessed at full rate under this
Agreement.
Discounted Rate Effective from 3/1/95 to 2/28/99
/s/ Thomas H. Benson /s/ James E. Moylan, Jr.
ATLANTA GAS LIGHT COMPANY SOUTHERN NATURAL GAS COMPANY
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Primary Earnings Per Share(1)
Net Income $ 48,034 $130,520 $134,198 $185,478
======== ======== ======== ========
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,228 86,273 86,188 86,332
Common Stock Equivalents Applicable
to Outstanding Stock Options 1,529 929 1,297 843
------ -------- ------ --------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,757 87,202 87,485 87,175
======= ======== ======= ========
Primary Earnings Per Share $ .55 $ 1.50 $ 1.53 $ 2.13
===== ======== ====== ========
</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 do not agree with
primary earnings per share shown on the Condensed Consolidated Statements
of Income in Part I.
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
Income (loss) before income taxes $196,512 $278,139 $282,497 $154,871 $364,198 $133,728 $ 98,374
Fixed charges (see computation below) 115,551 129,526 165,154 127,909 129,160 156,428 175,980
Less allowance for interest
capitalized (3,918) (4,973) (6,540) (6,692) (4,101) (8,422) (7,951)
------- -------- ------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $308,145 $402,692 $441,111 $276,088 $489,257 $281,734 $266,403
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $110,339 $124,602 $157,653 $120,295 $122,204 $149,165 $168,510
Rentals(b) 5,212 4,924 7,501 7,614 6,956 7,263 7,470
------ -------- ------ -------- -------- -------- --------
$115,551 $129,526 $165,154 $127,909 $129,160 $156,428 $175,980
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.7 3.1 2.7 2.2 3.8 1.8 1.5
=== ======== ==== ======== ======== ======== ========
</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> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,008
<SECURITIES> 0
<RECEIVABLES> 338,602
<ALLOWANCES> 0
<INVENTORY> 37,938
<CURRENT-ASSETS> 468,565
<PP&E> 5,090,707
<DEPRECIATION> 2,641,253
<TOTAL-ASSETS> 3,488,317
<CURRENT-LIABILITIES> 627,594
<BONDS> 867,606
0
0
<COMMON> 87,244
<OTHER-SE> 1,449,918
<TOTAL-LIABILITY-AND-EQUITY> 3,488,317
<SALES> 1,836,875
<TOTAL-REVENUES> 2,369,718
<CGS> 1,452,140
<TOTAL-COSTS> 1,779,707
<OTHER-EXPENSES> 213,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,105
<INCOME-PRETAX> 196,513
<INCOME-TAX> 62,315
<INCOME-CONTINUING> 134,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134,198
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
</TABLE>
