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 March 31, 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:
86,169,168 SHARES OUTSTANDING ON APRIL 30, 1996
<PAGE>
SONAT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
<S> <C>
March 31, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Income--
Three Months Ended March 31, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1996 and 1995 3
Notes to Condensed Consolidated Financial
Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 24
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 5,717 $ 37,289
Accounts receivable 377,549 349,441
Inventories 30,632 23,956
Gas imbalance receivables 15,249 16,556
Federal income taxes 13,677 12,979
Other 43,811 54,210
---------- -------
Total Current Assets 486,635 494,431
-------- --------
Investments in Unconsolidated Affiliates and Other 442,270 432,769
-------- --------
Plant, Property and Equipment 4,934,701 4,822,879
Less accumulated depreciation, depletion
and amortization 2,593,642 2,545,320
---------- ----------
2,341,059 2,277,559
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs 208,757 199,073
Other 95,532 107,609
---------- --------
304,289 306,682
-------- --------
$3,574,253 $3,511,441
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 18,675 $ 18,750
Unsecured notes 241,040 218,900
Accounts payable 315,393 297,660
Accrued state income taxes 12,186 10,579
Accrued interest 27,602 27,115
Gas imbalance payables 20,675 21,444
Other 39,309 45,677
---------- -------
Total Current Liabilities 674,880 640,125
-------- --------
Long-Term Debt 764,443 770,313
---------- --------
Deferred Credits and Other:
Deferred income taxes 232,258 213,122
Reserves for regulatory matters 180,888 181,798
Other 222,351 223,441
---------- --------
635,497 618,361
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 125,209 127,039
Retained earnings 1,409,445 1,387,137
---------- ----------
1,534,654 1,514,176
Less treasury stock (35,221) (31,534)
-------- --------
Total Stockholders' Equity 1,499,433 1,482,642
---------- ----------
$3,574,253 $3,511,411
========== ==========
</TABLE>
See accompanying notes.
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands, Except
Per-Share Amounts)
<S> <C> <C>
Revenues $734,406 $425,034
-------- --------
Costs and Expenses:
Natural gas cost 500,340 190,728
Transition cost recovery (5,383) 20,886
Operating and maintenance 44,054 38,347
General and administrative 32,958 33,637
Depreciation, depletion and amortization 67,373 74,391
Taxes, other than income 11,833 11,925
------- --------
651,175 369,914
-------- --------
Operating Income 83,231 55,120
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 8,955 12,953
Minority interest (4,662) -
Other (104) 5,508
-------- --------
4,189 18,461
------ --------
Interest:
Interest income 1,623 848
Interest expense (24,219) (28,539)
Interest capitalized 1,359 1,758
------ --------
(21,237) (25,933)
-------- --------
Income before Income Taxes 66,183 47,648
Income Taxes 20,614 10,031
-------- --------
Net Income $ 45,569 $ 37,617
======== ========
Earnings Per Share of Common Stock $ .53 $ .44
===== ========
Weighted Average Shares Outstanding 86,128 86,352
======= ========
Dividends Paid Per Share $ .27 $ .27
===== ========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 45,569 $ 37,617
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 67,373 74,391
Deferred income taxes 18,990 21,063
Equity in earnings of unconsolidated
affiliates, less distributions (8,949) (12,197)
Gain on disposal of assets (671) (2,376)
Reserves for regulatory matters (910) (12,237)
Gas supply realignment costs (8,249) (35,770)
Change in:
Accounts receivable (28,108) 58,588
Inventories (6,676) 377
Accounts payable 17,733 (42,411)
Accrued interest and income taxes, net 1,443 (4,347)
Other current assets and liabilities 4,523 (10,804)
Other 2,006 (4,260)
----------- -----------
Net cash provided by operating activities 104,074 67,634
-------- -----------
Cash Flows from Investing Activities:
Plant, property and equipment additions (124,269) (214,805)
Net proceeds from disposal of assets 3,638 20,174
Advances to unconsolidated affiliates and other (2,370) (251)
------- -----------
Net cash used in investing activities (123,001) (194,882)
--------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt - 1,453,000
Payments of long-term debt (5,945) (1,346,070)
Changes in short-term borrowings 22,140 45,000
------- -----------
Net changes in debt 16,195 151,930
Dividends paid (23,261) (23,314)
Other (5,579) (2,369)
----------- -----------
Net cash provided by (used in)
financing activities (12,645) 126,247
-------- -----------
Net Decrease in Cash and Cash Equivalents (31,572) (1,001)
Cash and Cash Equivalents at Beginning of Period 37,289 9,131
------- -----------
Cash and Cash Equivalents at End of Period $ 5,717 $ 8,130
======= ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 15,136 $ 23,978
Income taxes (refunds received), net 872 (8,376)
</TABLE>
See accompanying notes.
<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. In accounting for stock-based compensation awards, 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. 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
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 March 31, 1996, Sonat Marketing had $2.0
million on deposit with brokers for margin calls.
Sonat Marketing uses futures contracts to reduce exposure to price risk
when gas is not bought and sold simultaneously. At March 31, 1996, Sonat
Marketing had a total of 302 net contracts open (1,430 long and 1,128 short
futures contracts) and a deferred gain of $.4 million, representing unrealized
gains on contracts that will mature throughout 1996 and 1997. Option activity
during the first quarter of 1996 was not material.
Sonat Exploration, 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. The majority of the
contracts have been sold no more than six months into the future. At March 31,
1996, Sonat Exploration had a deferred loss of $1.6 million relating to natural
gas futures contracts. During April 1996, Sonat Exploration closed all of its
then outstanding natural gas futures contracts resulting in an additional loss
of $1.8 million.
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. During the first quarter
of 1996 Sonat Exploration entered into a natural gas price swap agreement to
become effective April 1, 1996, which was closed in April with a loss of $1.0
million.
Sonat Marketing had a total of 19 fixed-price swap agreements and 29
variable-price swap agreements at March 31, 1996, to exchange payments based on
a total notional volume of 40 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 47 TBtu and sets
a ceiling price of $2.56 on notional volumes of 38 TBtu. In the first quarter of
1996, a loss of $1.5 million was recognized under this agreement.
The Company's credit exposure on swaps is limited to the value of swaps
that are in a favorable position to the Company. At March 31, 1996, the market
value of the Company's fixed-price favorable swaps was $1.1 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 $2.0 million unfavorable.
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 treasury rate for this future borrowing has been hedged at
approximately 5.78 percent on a notional amount of $97 million. At March 31,
1996, this agreement had a fair market value of $4.6 million.
<PAGE>
3. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C>
Exploration and Production $ 41 $ 186
---- -------
Natural Gas Transmission:
Citrus Corp. 5,644 6,382
Amortization of Citrus basis difference 346 346
Bear Creek Storage 2,618 2,532
Other (47) 23
---- -------
8,561 9,283
------ -------
Energy Marketing - (6)
--- ---
Other:
Sonat Offshore Drilling - 2,884
Other 353 606
---- -------
353 3,490
---- -------
$8,955 $12,953
====== =======
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp., the parent company of Florida Gas Transmission Company. A subsidiary of
Southern owns 50 percent of Bear Creek Storage Company, an underground gas
storage company.
<PAGE>
3. Unconsolidated Affiliates (Cont'd)
The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands)
<S> <C> <C>
Revenues $184,082 $125,164
Expenses (Income):
Natural gas cost 97,673 63,263
Operating expenses 30,888 28,917
Depreciation and amortization 11,721 8,096
Allowance for funds used during
construction (161) (20,211)
Interest and other 25,557 24,323
Income taxes 7,117 8,012
------ --------
Income Reported $ 11,287 $ 12,764
======== ========
</TABLE>
Florida Gas' Phase III expansion, which began in 1994, was completed
during February 1995, resulting in a significant increase in revenues and a
decrease in allowance for funds used during construction.
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
Ended March 31,
1996 1995
(In Thousands)
<S> <C> <C>
Revenues $9,241 $9,322
Expenses:
Operating expenses 1,166 1,275
Depreciation 1,353 1,350
Other expenses, net 1,486 1,633
------ ------
Income Reported $5,236 $5,064
====== ======
</TABLE>
4. Debt and Lines of Credit
Long-Term Debt - During the first quarter of 1996, there was no
activity under Sonat's long-term revolving credit agreement. $500 million was
available under this agreement at March 31, 1996, with borrowings available
through December 31, 1998.
4. Debt and Lines of Credit (Cont'd)
Unsecured Notes - Loans outstanding under all short-term credit
facilities are for a duration of less than three months.
Sonat and Southern have 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 March 31, 1996, $11
million was outstanding under Sonat's agreement at a rate of 6.10 percent and no
amounts were outstanding under Southern's agreement.
Sonat had $230 million in commercial paper outstanding at an average
rate of 5.56 percent at March 31, 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.
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 Southern had
filed on March 15, 1995. The Customer Settlement, which is supported by
customers representing approximately 97 percent of the firm transportation
capacity on Southern's system, resolves, as to the parties supporting the
settlement, all of Southern's 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. Southern will 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
supported the Customer Settlement 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.
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 will make refunds to the contesting parties in May 1996 covering
various rate periods from January 1, 1991, through December 31, 1995. Southern
is adequately reserved for these refunds. The only issues remaining to be
litigated at the FERC by the contesting parties 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. One
contesting party has now appealed the April 11 Order and the Settlement Order to
the D.C. Circuit Court of Appeals, and other contesting parties may also appeal
those FERC orders. Although there can be no assurances, the Company believes
that the Settlement Order and the April 11 Order should be upheld on any
judicial appeal.
As of March 31, 1996, Southern had either paid or accrued $263 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. 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
March 31, 1996, Southern had incurred $85 million in price differential costs.
The amount of GSR costs that Southern 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 December 31, 1995,
to be approximately $366 million on a present-value basis. In accordance with
the cost-sharing mechanism adopted in the Customer Settlement, pursuant to which
Southern will absorb an agreed-upon portion of its total GSR costs, Southern is
now required to absorb 50 percent of all additional GSR costs incurred.
5. Commitments and Contingencies (Cont'd)
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 is pending before the FERC.
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. 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 could be implemented only on a prospective basis.
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 9, 1995, a petition was filed
against Sonat Exploration and its wholly owned subsidiary, Stateline Gas
Gathering Company, by nine royalty interest owners (Plaintiffs) in a lawsuit
styled A. L. Briggs, et al. v. Sonat Exploration Company, et al., in state court
in Panola County, Texas. The petition challenges the appropriateness of certain
post-production charges (e.g., gathering, transportation, and compression) that
had been deducted from Plaintiffs' proportionate share of the amount Sonat
Exploration has realized upon the sale of gas attributable to their royalty
interest and alleges numerous violations of law. Relief sought by Plaintiffs
includes actual damages, damages under the Deceptive Trade Practices Act,
exemplary damages, declaratory relief, an accounting, attorneys' fees, and
prejudgment interest. The petition also requests the court to certify a
nationwide class of plaintiffs. In an amended complaint Plaintiffs have also
asserted that certain marketing fees deducted by Sonat Marketing in calculating
the amount it paid Sonat Exploration for gas volumes purchased by Sonat
Marketing since approximately July 1, 1992, are not authorized by law or the
applicable leases, are not necessary, and have not been disclosed in accordance
with law; and that Sonat Exploration has breached its contractual duties to
royalty owners to obtain the highest sales price and to account to the royalty
owners for their share of the proceeds attributable to the sale of Sonat
Exploration's gas. Plaintiffs demanded that Sonat Exploration pay the proper
amounts allegedly due them according to their respective leases, overriding
royalty assignments, division orders, and operating agreements. Sonat
Exploration intends vigorously to defend the litigation and to resist
Plaintiffs' demands. Management is unable to predict the outcome of this
litigation or the demands made by Plaintiffs or to estimate the amount or range
of potential loss in the event of an unfavorable outcome.
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 December 31, 1994. 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. These proposed adjustments, if made, would
result in a charge to earnings by Florida Gas of approximately $44 million
after-tax. Management of Florida Gas has advised the Company that it believes
that its method of capitalizing AFUDC on Phase III was proper; however, the
final outcome of this matter cannot be determined.
<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
Business segment operating results for Sonat Inc. and its subsidiaries
(the Company) are presented in the table below. There were no unusual items that
affected operating income and net income comparisons in either period presented.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Operating Income (Loss):
<S> <C> <C>
Exploration and production $20.0 $ 1.6
Natural gas transmission 48.1 52.2
Energy marketing 12.4 2.1
Other 2.7 (0.8)
---- -----
Operating Income $83.2 $55.1
===== =====
</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. From 1988 through 1995, Sonat Exploration's reserve
growth strategy has been based on acquiring properties that have additional
exploitation drilling potential, developing those properties and conducting low
risk exploration activities. The Company is now placing more emphasis on
exploration due to the size of the acreage position it has established and its
increased use of technology, such as three-dimensional (3D) seismic surveys.
Sonat Exploration has been very successful in its exploratory drilling
efforts so far this year with discoveries on each of the five exploratory wells
it drilled. The most significant find is in Leon County, Texas, where a recently
completed Cotton Valley pinnacle reef discovery, the Fountain No. 1, tested at a
rate of 30.3 million cubic feet of natural gas per day. Recoverable natural gas
reserves from the Fountain No. 1 are estimated to be in the range of 70 to 80
billion cubic feet. Sonat Exploration has a 64 percent working interest in this
well. The Company has an interest in 191,000 prospective acres (including
161,000 acres relating to Sonat Exploration's joint venture with United Meridian
Corporation, Aspect Resources, and MB Exploration) in the Cotton Valley Pinnacle
Reef Trend and plans to drill an additional three exploratory wells there before
year end. In addition, Sonat Exploration completed an important dual-lateral
horizontal discovery in the Austin Chalk Trend of west Louisiana, the Sonat
Minerals 1 No. 1, that had an initial production rate of eight million cubic
feet of natural gas and 1,300 barrels of condensate per day. Sonat Exploration
has increased its 1996 development drilling budget for its Austin Chalk
operations to $65 million and will soon have seven drilling rigs operating in
this area, up from three drilling rigs in 1995.
In addition to its exploratory activity, Sonat Exploration maintained
an active development drilling program in the first quarter of 1996,
participating in the completion of 91 gross development wells. Proved reserves
at March 31, 1996, were 1.832 trillion cubic feet of natural gas equivalent, up
61 billion cubic feet of natural gas equivalent from year end. During the first
quarter of 1996, the Company completed six acquisitions at a net cost of $26
million that added 58 billion cubic feet of natural gas equivalent. The Company
also added 61 billion cubic feet of natural gas equivalent by drilling and
producing operations.
Natural gas production is sold by Sonat Exploration to Sonat Marketing
Company L.P. (Sonat Marketing), a 65 percent-owned affiliate of the Company
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 its production. (See discussion below, Market Risk Management and
Note 2 of the Notes to Condensed Consolidated Financial Statements.)
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Revenues:
<S> <C> <C>
Sales to others $ 15.8 $ 39.4
Intersegment sales 95.8 54.6
----- -----
Total Revenues 111.6 94.0
------ -----
Costs and Expenses:
Operating and maintenance 15.5 17.2
Exploration expense 3.5 1.5
General and administrative 11.9 10.5
Depreciation, depletion and
amortization 54.9 57.8
Taxes, other than income 5.8 5.4
---- -----
91.6 92.4
----- -----
Operating Income $ 20.0 $ 1.6
====== =====
Net Sales Volumes:
Gas (Bcf) 47 50
Oil and condensate (MBbls) 1,078 1,073
Natural gas liquids (MBbls) 386 438
- -------------------------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 1.92 $ 1.44
Oil and condensate ($/Bbl) 18.10 17.22
Natural gas liquids ($/Bbl) 9.45 8.72
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarter-to-Quarter Analysis
Operating income for the first quarter of 1996 was up $18.4 million
from $1.6 million for the same period in 1995, primarily due to a 33 percent
increase in average realized natural gas prices. Sonat Exploration hedged a
significant portion of its first quarter 1996 natural gas production, which
reduced its price realization by $.34 per thousand cubic feet. The effect of
these gas hedging transactions reduced revenues in the first quarter by $16
million. Realized oil prices rose to an average of $18.10 per barrel from $17.22
per barrel in 1995. Sonat Exploration's total production was 56 billion cubic
feet of natural gas equivalent, which was slightly lower than first quarter 1995
production as a result of producing property asset sales in the second quarter
of 1995. 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). Sonat Exploration has no hedges in place with respect to
future natural gas production.
Costs and expenses were essentially flat as compared to the first
quarter of 1995. Operating and maintenance expense decreased 10 percent due to a
reduced level of workovers and the sale of properties during the second quarter
of 1995. Exploration expenses increased $2 million compared to the first quarter
of 1995 due to a significantly more aggressive exploratory program.
Depreciation, depletion and amortization expense was lower by 5 percent due to
reduced production volumes.
NATURAL GAS TRANSMISSION
The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company (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 Federal Energy Regulatory
Commission (FERC) seeking approval to extend its pipeline system to provide firm
gas transportation service to customers in North Alabama. The proposed
76-million-cubic-feet-per-day expansion is supported by long-term firm
transportation agreements with five customers, 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 proposed expansion, which
requires FERC approval, is scheduled to be in service by November 1997. The
company that currently provides transportation service to the city of Huntsville
has filed suit against Southern and Huntsville seeking to have Southern's
service agreement with Huntsville set aside as violative of Alabama's
competitive bid laws and the Alabama Constitution. This company has also opposed
the system expansion application at the FERC. Southern cannot predict the
outcome of this litigation or the FERC proceeding.
In early 1995, Southern initiated an open season to obtain customer
commitments to expand its system in order to meet growing demand in its market
area. In the open season, Southern sought requests for additional firm
transportation services and for a new liquefied natural gas (LNG) service.
Southern received requests for additional firm transportation services from 10
customers in Georgia and Tennessee totaling approximately 45 million cubic feet
per day. Southern plans to file an application with the FERC for this $36
million project in May. If FERC approval is received, the in-service date for
the firm transportation service is expected to be November 1997. Requests for
LNG service are still being evaluated. If sufficient commitments are obtained
and the necessary regulatory approvals are received, the in-service date for the
LNG service is expected to be in 1998. The LNG service would be provided at an
existing LNG storage terminal near Savannah, Georgia, that is owned by Southern
Energy Company, a wholly owned subsidiary of Southern. The LNG facility was
constructed in 1978 but was taken out of service in 1980.
<PAGE>
NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Operating Income (Loss):
Southern Natural Gas Company and
<S> <C> <C>
subsidiaries $ 48.2 $ 52.6
Other (0.1) (0.4)
----- -----
Total Operating Income $48.1 $52.2
===== =====
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
(In Millions)
Revenues:
Gas sales $ 60.2 $ 46.7
Market transportation and storage 84.4 93.5
Supply transportation 11.2 12.7
Other 1.5 26.3
---- ------
Total Revenues 157.3 179.2
------ ------
Costs and Expenses:
Natural gas cost 57.6 45.2
Transition cost recovery (5.4) 20.9
Operating and maintenance 19.9 19.3
General and administrative 19.5 20.8
Depreciation and amortization 12.4 14.8
Taxes, other than income 5.1 5.6
---- ------
109.1 126.6
------ ------
Operating Income $ 48.2 $ 52.6
====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.6 $ 2.5
===== ======
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 2
Market transportation 208 178
--- ---
Total Market Throughput 210 180
Supply transportation 85 87
--- ---
Total Volumes 295 267
=== ===
Transition gas sales 17 26
=== ===
</TABLE>
<PAGE>
CITRUS CORP.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Equity in Earnings of
<S> <C> <C>
Citrus Corp. $6.0 $6.8
==== ====
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 91 93
Supply transportation 8 8
-- ---
Total Volumes 99 101
=== ===
</TABLE>
Quarter-to-Quarter Analysis
Operating income for the 1996 first quarter decreased $4 million
compared with the 1995 period due to lower operating results at Southern.
Southern Natural Gas - Operating income for the first quarter declined
primarily because incremental revenues from the sale of firm transportation
capacity were collected in the first quarter of 1995 prior to revised rates
going into effect on March 1, 1995. The 1995 first quarter 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 as compared with the
1995 first quarter reflecting higher gas prices on transition gas sales from
supply remaining under contract. Market transportation revenues declined due to
the lower rates implemented March 1, 1995. Other revenue and transition cost
recovery declined due to the decrease in take-or-pay cost recovery. Market
transportation revenues and transition cost recovery were also reduced by a $16
million GSR cost refund. The refund did not affect operating income.
Depreciation and amortization decreased in 1996 due to lower rates implemented
in 1995.
Citrus - Equity in earnings of Citrus declined $.8 million to $6.0
million. 1996 results reflect revenues and operating costs relating to the
operations of the Phase III expansion project while 1995 results include AFUDC
related to Phase III. The Phase III expansion project was placed in service on
March 1, 1995.
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 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 76 percent and 72 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 19 percent in 1996, 23 percent in 1997, 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.
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 $102
1997 137
1998 38
1999 35
2000 31
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 the parties supporting the
settlement, all of Southern's pending rate proceedings and proceedings to
recover GSR and other transition costs associated with the implementation of
Order No. 636. Southern implemented reduced settlement rates for parties that
supported the Customer Settlement effective March 1, 1995. (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 Inc., conducts marketing business in the natural
gas and electric industries.
Sonat Marketing has experienced rapid growth as reflected by average
daily sales volumes of 2.3 billion cubic feet during the first quarter of 1996.
For the current period, total sales volumes increased 47 percent as compared
with the first quarter of 1995, growing from 142 billion cubic feet to 209
billion cubic feet. 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 prices of Sonat
Exploration's future production and 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, formed in 1995, 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, are engaged in discussions
regarding the acquisition by AGL Resources Inc. of a 35 percent interest in
Sonat Power Marketing.
ENERGY MARKETING
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
<S> <C> <C>
Revenues $596.8 $228.9
====== ======
Operating Income $ 12.4 $ 2.1
====== ======
Sonat Marketing Gas Sales Volumes (100%)
(Billion Cubic Feet) 209 142
=== ===
Sonat Power Marketing Sales Volumes
(Thousands of Megawatt Hours) 169 -
=== ==
</TABLE>
Quarter-to-Quarter Analysis
First quarter 1996 financial results for the energy marketing segment
were up substantially over 1995 levels, as operating income increased to $12.4
million from $2.1 million due primarily to much higher trading margins and to a
lesser extent to higher volumes. Unusually cold weather in certain of Sonat
Marketing's markets created intense demand for natural gas during peak periods
in the first quarter resulting in a volatile price environment which created
exceptional trading opportunities for Sonat Marketing Company. Thus, first
quarter margins are not likely to be indicative of margins expected to be
realized for the remainder of the year.
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Other Income, Net:
<S> <C> <C>
Equity in Earnings of Unconsolidated Affiliates $ 9.0 $ 13.0
Minority Interest (4.7) -
Other (0.1) 5.5
----- ----
$ 4.2 $ 18.5
===== ======
</TABLE>
The decrease in equity in earnings primarily reflects the absence of
earnings from Sonat Offshore Drilling Inc. in 1996. Minority interest is AGL
Resources Inc.'s 35 percent share of Sonat Marketing's earnings. In the 1995
period, Other includes $3 million of dividends on the Baker Hughes stock and
gains on the sale of oil and gas properties at Sonat Exploration.
<TABLE>
<S> <C> <C>
Interest Income (Expense), Net $(21.2) $(25.9)
</TABLE>
Interest expense on debt decreased as compared with the first quarter
of 1995 due to much lower average debt levels, slightly offset by higher
interest rates. Debt levels were lower due to proceeds from the Sonat Offshore
stock sale and the Baker Hughes stock sale in 1995 being used to repay debt,
which were offset in part by higher average reserve levels and higher interest
rates established by the FERC.
<TABLE>
<S> <C> <C>
Income Taxes $ 20.6 $ 10.0
</TABLE>
The increase in income taxes resulted from an increase in pre-tax
income and to a higher effective tax rate. The higher effective tax rate
reflects a lower percentage of earnings (dividends and earnings from Sonat
Offshore) receiving tax preferential rates and lower non-conventional fuel tax
credits in the current period.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<S> <C> <C>
Operating Activities $104.1 $ 67.6
</TABLE>
Cash flow from operations increased $36.5 million as compared with the
first quarter of 1995 primarily due to improved operating results at both Sonat
Exploration and Sonat Marketing which were discussed earlier.
Several other factors resulted in significant changes in the Statement
of Cash Flows. A $45.0 million payment to Exxon in 1995 was the principal
expenditure responsible for the $27.5 million change in net payments for gas
supply realignment costs. The change in regulatory reserves primarily reflects
the reduction in 1995 of amounts reserved for the volumetric take-or-pay
surcharge collected from December 18, 1993 through April 30, 1994, pursuant to
the FERC's acceptance in February 1995 of Southern's refund report. The growth
in both accounts receivable and accounts payable is primarily attributable to
the expanding business of Sonat Marketing. The change in inventory relates to
Southern's purchase of materials in 1996 for the North System expansion. The
increase in other current assets and liabilities is primarily due to lower
margin requirements on futures broker accounts at Sonat Marketing.
<TABLE>
<S> <C> <C>
Investing Activities $(123.0) $(194.9)
</TABLE>
Net cash used in investing activities was $71.9 million less in 1996 as
compared with the 1995 period. The decrease was attributable to capital
expenditures of $124.3 in 1996 versus $214.8 in 1995, which was offset in part
by $3.6 million proceeds received in 1996 from the sale of Sonat Exploration oil
and gas properties versus $20.0 million in 1995.
<TABLE>
<S> <C> <C>
Financing Activities $ (12.6) $ 126.2
</TABLE>
Financing activities required $12.6 million of net cash in 1996
compared to providing $126.2 million in 1995. In the 1995 period the Company was
borrowing under its floating rate facilities to supplement cash flow from
operations to be used in financing property additions.
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Millions)
Capital Expenditures
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<S> <C> <C>
Exploration and Production $ 107.0 $ 206.3
Natural Gas Transmission 15.5 6.2
Energy Marketing 0.4 0.4
Other 1.4 1.9
---- ----
Total $ 124.3 $ 214.8
======= =======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $2.5 million and $59.4 million in the first quarter 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 March 31, 1996, the Company had lines of credit and a revolving
credit agreement with a total capacity of $750 million. Of this, $509 million
was available. The amount available under the lines of credit has been reduced
by the amount of commercial paper outstanding of $230 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 $300 million is unissued. 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 issue the $100 million
remaining under its shelf registration in either late 1996 or early 1997 to fund
planned expansion of its pipeline system.
The Company has a stock repurchase program through April 30, 1997,
which authorizes the purchase of three million shares of the Company's common
stock. Through March 31, 1996, the Company has purchased 1,872,460 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.
Sonat Exploration, through Sonat Marketing, uses futures contracts,
options, and oil and natural gas price swap agreements to hedge its commodity
price risk. Sonat Exploration's hedging objective is to lock in the price of a
portion of its expected oil and gas production when it believes that prices are
at an acceptable level.
Sonat Marketing uses derivative instruments to reduce the risk of price
changes and location differences when it buys or sells natural gas. For example,
Sonat Marketing may purchase certain natural gas volumes before a customer has
been identified, then sell an equivalent volume in natural gas futures contracts
or options on futures contracts to match the cash transaction.
The Company also has exposure to financial market risks. In
anticipation of a future borrowing under its shelf registration, Southern
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. These policies prohibit
speculative 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. 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.)
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
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 4. Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting of Stockholders in Birmingham,
Alabama, on April 25, 1996. The stockholders voted (1) to elect five Directors
as members of the Board of Directors of the Company, to serve until the 1999
Annual Meeting of Stockholders and until their respective successors have been
duly elected and qualified, and (2) on a proposal to elect Ernst & Young LLP as
the Company's Auditor ("Proposal No. 1").
The vote for the nominees for Director was as follows:
<TABLE>
<CAPTION>
- ----------------------------- ---------------- -------------------------- --------------
Name of Nominee Voted For Authority Withheld Abstained
- ----------------------------- ---------------- -------------------------- --------------
<S> <C> <C> <C>
William O. Bourke 67,458,445 6,870,151 0
- ----------------------------- ---------------- -------------------------- --------------
- ----------------------------- ---------------- -------------------------- --------------
Robert C. Goizueta 67,460,166 6,868,430 0
- ----------------------------- ---------------- -------------------------- --------------
- ----------------------------- ---------------- -------------------------- --------------
Ronald L. Kuehn, Jr. 67,463,260 6,865,336 0
- ----------------------------- ---------------- -------------------------- --------------
- ----------------------------- ---------------- -------------------------- --------------
Robert J. Lanigan 67,461,064 6,867,532 0
- ----------------------------- ---------------- -------------------------- --------------
- ----------------------------- ---------------- -------------------------- --------------
Charles Marshall 67,460,658 6,867,938 0
- ----------------------------- ---------------- -------------------------- --------------
</TABLE>
The vote on Proposal No. 1 was as follows:
- ---------------------- ---------------- ------------- --------------
Voted Voted
For Against Abstained
- ---------------------- ---------------- ------------- --------------
- ---------------------- ---------------- ------------- --------------
Proposal No. 1 73,998,031 173,646 156,919
- ---------------------- ---------------- ------------- --------------
There were no broker non-votes with respect to either matter voted upon at the
meeting. The five nominees for Director were duly elected as members of the
Board of Directors, and Proposal No. 1 was approved by the stockholders.
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
(a) Exhibits1
Exhibit
Number Exhibits
11* Computation of Earnings per Share
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedules for the period ended March 31, 1996
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter
ended March 31, 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: May 13, 1996 By: /s/ James A. Rubright
------------------------- -----------------------
James A. Rubright
Senior Vice President and
General Counsel
Date: May 13, 1996 By: /s/ Thomas W. Barker, Jr.
------------------------- ---------------------------
Thomas W. Barker, Jr.
Vice President-Finance and
Treasurer
EXHIBIT 12
<PAGE>
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 66,183 $45,187 $282,497 $154,871 $364,198 $133,728 $ 98,374
Fixed charges (see computation below) 39,746 44,054 165,154 127,909 129,160 156,428 175,980
Less allowance for interest capitalized (1,359) (1,758) (6,540) (6,692) (4,101) (8,422) (7,951)
------- ------- ------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $104,570 $87,483 $441,111 $276,088 $489,257 $281,734 $266,403
======== ======= ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 37,854 $42,061 $157,653 $120,295 $122,204 $149,165 $168,510
Rentals(b) 1,892 1,993 7,501 7,614 6,956 7,263 7,470
------ ------- ------ -------- -------- -------- --------
$ 39,746 $44,054 $165,154 $127,909 $129,160 $156,428 $175,980
======== ======= ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.6 2.0 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,717
<SECURITIES> 0
<RECEIVABLES> 377,549
<ALLOWANCES> 0
<INVENTORY> 30,632
<CURRENT-ASSETS> 486,635
<PP&E> 4,934,701
<DEPRECIATION> 2,593,642
<TOTAL-ASSETS> 3,574,253
<CURRENT-LIABILITIES> 674,880
<BONDS> 764,443
0
0
<COMMON> 87,244
<OTHER-SE> 1,412,189
<TOTAL-LIABILITY-AND-EQUITY> 3,574,253
<SALES> 625,816
<TOTAL-REVENUES> 734,406
<CGS> 500,340
<TOTAL-COSTS> 539,011
<OTHER-EXPENSES> 67,373
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,860
<INCOME-PRETAX> 66,183
<INCOME-TAX> 20,614
<INCOME-CONTINUING> 45,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,569
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands Except
Per-Share Amounts)
Primary Earnings Per Share(1)
<S> <C> <C>
Net Income $45,569 $37,617
======= =======
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,128 86,352
Common Stock Equivalents Applicable
to Outstanding Stock Options 1,097 747
------ -------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,225 87,099
======= =======
Primary Earnings Per Share $ .52 $ .43
===== =======
</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 for both periods
do not agree with primary earnings per share shown on the Condensed
Consolidated Statements of Income in Part I.
