UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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:
85,750,945 SHARES OUTSTANDING ON JULY 31, 1997
<PAGE>
SONAT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<S> <C>
(Unaudited)--June 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Six Months Ended
June 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Six Months Ended June 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 18,366 $ 29,639
Accounts receivable 430,918 577,021
Inventories 51,979 30,500
Gas imbalance receivables 13,635 21,694
Other 52,162 34,436
---------- ----------
Total Current Assets 567,060 693,290
---------- ----------
Investments in Unconsolidated Affiliates and Other 484,556 465,121
---------- ----------
Plant, Property and Equipment 5,342,957 5,084,283
Less accumulated depreciation, depletion
and amortization 2,730,368 2,650,419
---------- ----------
2,612,589 2,433,864
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs 6,176 11,144
Other 166,677 171,240
---------- ----------
172,853 182,384
---------- ----------
Total Assets $3,837,058 $3,774,659
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 52,870 $ 53,707
Unsecured notes 280,731 158,030
Accounts payable 409,097 510,130
Accrued income taxes 11,902 26,726
Accrued interest 31,846 28,584
Gas imbalance payables 13,360 20,290
Other 53,820 51,370
---------- ----------
Total Current Liabilities 853,626 848,837
---------- ----------
Long-Term Debt 861,150 872,255
---------- ----------
Deferred Credits and Other:
Deferred income taxes 337,394 284,564
Reserves for regulatory matters 4,641 14,644
Other 171,368 169,995
---------- ----------
513,403 469,203
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 115,955 118,881
Retained earnings 1,551,769 1,495,186
---------- ----------
1,667,724 1,614,067
Less treasury stock 58,845 29,703
---------- ----------
Total Stockholders' Equity 1,608,879 1,584,364
---------- ----------
Total Liabilities and Stockholders' Equity $3,837,058 $3,774,659
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $815,304 $637,330 $1,887,447 $1,332,934
-------- -------- ---------- ----------
Costs and Expenses:
Natural gas cost 548,293 386,825 1,323,391 842,980
Electric power cost 42,970 9,101 75,856 13,897
Operating and maintenance 48,555 43,019 90,490 82,277
General and administrative 34,270 41,155 75,308 74,113
Depreciation, depletion
and amortization 64,639 71,378 133,122 138,751
Taxes, other than income 11,108 11,611 16,902 23,444
-------- -------- ---------- ----------
749,835 563,089 1,715,069 1,175,462
-------- -------- ---------- ----------
Operating Income 65,469 74,241 172,378 157,472
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 9,445 7,498 19,567 16,453
Minority interest 76 (447) (796) (5,109)
Other 787 1,993 4,613 1,889
-------- -------- ---------- ----------
10,308 9,044 23,384 13,233
-------- -------- ---------- ----------
Interest:
Interest income 707 700 1,573 2,323
Interest expense (23,375) (23,916) (45,146) (48,135)
Interest capitalized 907 1,319 2,032 2,678
-------- -------- ---------- ----------
(21,761) (21,897) (41,541) (43,134)
-------- -------- ---------- ----------
Income before Income Taxes 54,016 61,388 154,221 127,571
Income Tax Expense 17,793 20,793 51,152 41,407
-------- -------- ---------- ----------
Net Income $ 36,223 $ 40,595 $ 103,069 $ 86,164
======== ======== ========== ==========
Earnings Per Share of Common Stock $ .42 $ .47 $ 1.20 $ 1.00
======== ======== ========== ==========
Weighted Average Shares Outstanding 86,026 86,208 86,127 86,168
Dividends Paid Per Share $ .27 $ .27 $ .54 $ .54
======== ======== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1996
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 103,069 $ 86,164
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 133,122 138,781
Deferred income taxes 52,830 64,173
Equity in earnings of unconsolidated affiliates,
less distributions (15,056) (11,292)
Gain on disposal of assets (311) (3,274)
Reserves for regulatory matters (10,003) (167,339)
Gas supply realignment costs 4,968 174,947
Change in:
Accounts receivable 146,103 (16,332)
Inventories (21,479) (12,032)
Accounts payable (101,033) 45,496
Accrued interest and income taxes, net (19,331) (17,331)
Other current assets and liabilities (6,363) 16,155
Other 33,024 (27,945)
--------- ---------
Net cash provided by operating activities 299,540 270,171
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (333,504) (271,099)
Net proceeds from disposal of assets 338 4,603
Advances to unconsolidated affiliates
and other (8,696) (4,696)
--------- ---------
Net cash used in investing activities (341,862) (271,192)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 750,000 -
Payments of long-term debt (761,942) (7,139)
Changes in short-term borrowings 122,701 37,600
--------- ---------
Net changes in debt 110,759 30,461
Dividends paid (46,486) (46,562)
Treasury stock purchases and other (33,224) (6,406)
--------- ---------
Net cash provided by (used in)
financing activities 31,049 (22,507)
--------- ---------
Net Decrease in Cash and Cash Equivalents (11,273) (23,528)
Cash and Cash Equivalents at Beginning of Period 29,639 37,289
--------- ---------
Cash and Cash Equivalents at End of Period $ 18,366 $ 13,761
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 34,868 $ 33,924
Income taxes paid (refunds received), net 21,896 (6,092)
</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.
The 1996 periods have been restated to reflect the reclassification of
natural gas sales, natural gas cost and transition cost recovery to other
revenues in the Condensed Consolidated Statements of Income. Certain other
amounts in the 1996 condensed consolidated financial statements have been
reclassified to conform with the 1997 presentation.
2. Derivative Financial Instruments
Through May 1997, the Company used futures contracts, options and price
swap agreements solely to hedge its commodity price risk on crude oil and
natural gas. Gains or losses experienced on such hedging transactions are offset
by the related gains or losses recognized on the sale of the commodity. Sonat
Marketing Company L.P. (Sonat Marketing) performs all hedging activity for both
its own operations and for the operations of Sonat Exploration Company.
Sonat Marketing used derivatives (futures, swaps, and options) solely to
hedge physical transactions. In June 1997, Sonat Marketing also began engaging
in derivative transactions that are not linked to physical transactions to meet
the needs of its customers. These derivative transaction types together with any
physical transactions that are not linked to either a derivative or another
physical transaction are included in a risk pool. All of the Company's
derivative transactions, including those in the risk pool, are subject to
policies that limit the aggregate value at risk and mark-to-market positions to
amounts approved by the Company's Risk Oversight Committee. The transactions in
this risk pool have been accounted for using mark-to-market accounting. Under
such method, all positions, both derivative and physical, are recorded at fair
value. Changes in the market value of these positions, net of reserves, are
recognized as unrealized gains or losses in operating income in the period of
change offset by other assets and liabilities related to risk management
activity on the balance sheet. The market prices used to value the transactions
reflect management's estimates of market value, taking into account closing
exchange and over-the-counter quotations, time value and volatility factors
underlying the commitments. These market prices are adjusted to reflect the
potential impact of liquidating Sonat Marketing's position in an orderly manner
over a reasonable period of time under present market conditions. As of June 30,
1997, the results of accounting for such derivatives under mark-to-market
accounting were not material. Sonat Marketing will continue to use hedge
accounting on futures, swaps, and option transactions that were entered into
prior to June 1997 because such transactions qualified and continue to qualify
for hedge accounting. In addition, certain significant future physical
transactions that are specifically hedged with a
<PAGE>
2. Derivative Financial Instruments (Cont'd)
derivative and that meet the criteria of a hedged transaction in accordance with
Statement of Financial Accounting Standards (SFAS) No. 80, Accounting for
Futures Contracts, will also continue to be accounted for in accordance with the
hedge accounting provisions of this standard.
Futures - Natural gas and oil futures contracts are traded on the New
York Mercantile Exchange (NYMEX). Natural gas contracts are for fixed units of
10,000 MMBtu and are available for up to 36 months in the future. Oil futures
are for fixed units of 1,000 barrels and are available for up to 34 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 June 30, 1997, the Company had net deposits
of $23.2 million with brokers for margin calls, included in other current assets
on the Condensed Consolidated Balance Sheet, of which $19.9 million was for
Sonat Marketing's operations and $3.3 million was for Sonat Exploration's
operations.
At June 30, 1997, the Company had the following open futures positions:
<TABLE>
<CAPTION>
Deferred Gain or
Open Contracts (Loss)
Long (Short) (In Thousands)
Natural Gas Futures:
<S> <C> <C>
For Marketing's operations 1,798 $ (588)
For Exploration's operations (1,317) (2,682)
------- -------
Total 481 $(3,270)
======= =======
Oil Futures:
For Marketing's operations - $ -
For Exploration's operations (450) (166)
------- -------
Total (450) $ (166)
======= =======
</TABLE>
The above contracts will mature during 1997 and 1998.
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 has hedged various portions of its 1997 through 2000
production of oil and gas by entering into fixed-price swaps with Sonat
Marketing. Marketing has then 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.
<PAGE>
2. Derivative Financial Instruments (Cont'd)
At June 30, 1997, the Company had the following open swap positions:
<TABLE>
<CAPTION>
Fair Remaining Term of
Volume Value Individual Contracts
(Bcf) (In Thousands)
Natural Gas Swaps:
<S> <C> <C> <C>
For Marketing's operations 83 $ (496) 1 month - 64 months
For Exploration's operations 140 (20,393) 4 months - 18 months
--- --------
223 $(20,889)
=== ========
</TABLE>
Options - Options can be exchange traded on the NYMEX or traded over the
counter. Exchange traded options give the owner the right but not the obligation
to a futures contract. Over-the-counter options give the owner the right but not
the obligation to buy or sell an underlying commodity at a given price. At June
30, 1997, Sonat Marketing had only over-the-counter options.
In order to meet the requirements of certain gas purchase agreements,
Sonat Marketing has purchased puts of 23.5 TBtu and sold calls of 18.8 TBtu with
a counterparty at zero cost. Sonat Marketing also has sold puts for notional
volumes of 5.9 TBtu. At June 30, 1997, the market value of these options was
$7.1 million unfavorable.
Credit Risk - Due to changes in market conditions the value of swaps and
options can change in relation to their value to the Company. Sonat Marketing
has established policies and procedures to evaluate potential counterparties for
creditworthiness before entering into over-the-counter swap and option
agreements. At June 30, 1997, the market value of the Company's in-the-money
swaps was $1.3 million. The credit risk resulting from in-the-money swaps is
monitored on a regular basis. Reserves for credit risk are established as
necessary.
<PAGE>
3. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C> <C> <C>
Exploration and Production $ 84 $ 146 $ 201 $ 188
------ ------ ------- -------
Natural Gas Transmission:
Citrus Corp. 5,807 4,365 12,102 10,009
Amortization of Citrus basis
difference 346 346 692 692
Bear Creek Storage Company 2,623 2,411 5,331 5,029
Other 78 (88) 66 (135)
------ ------ ------- -------
8,854 7,034 18,191 15,595
------ ------ ------- -------
Energy Marketing 191 - 483 -
------ ------ ------- -------
Other 316 318 692 670
------ ------ ------- -------
$9,445 $7,498 $19,567 $16,453
====== ====== ======= =======
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp., the parent of Florida Gas Transmission Company. A subsidiary of Southern
Natural Gas Company 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 Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $189,546 $193,300 $360,468 $378,037
Expenses:
Natural gas cost 104,988 106,355 188,583 204,683
Operating expenses 27,980 25,898 50,430 48,294
Depreciation and amortization 14,382 21,306 34,587 41,519
Interest and other 24,247 25,452 48,482 50,848
Income taxes 6,335 5,558 14,182 12,675
-------- -------- -------- --------
Income Reported $ 11,614 $ 8,731 $ 24,204 $ 20,018
======== ======== ======== ========
</TABLE>
The following is summarized income statement information for Bear Creek.
No provision for income taxes has been included since its income taxes are paid
directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,973 $8,952 $18,319 $18,193
Expenses:
Operating expenses 1,120 1,370 2,361 2,535
Depreciation 1,358 1,353 2,714 2,707
Other expenses, net 1,248 1,408 2,581 2,894
------ ------ ------- -------
Income Reported $5,247 $4,821 $10,663 $10,057
====== ====== ======= =======
</TABLE>
<PAGE>
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. At
January 1, 1997, there was an outstanding balance of $155 million. During the
first six months of 1997, $750 million was borrowed and $755 million was repaid
under the revolving credit agreement, resulting in $150 million outstanding at
June 30, 1997, at a rate of 5.80 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 $200.0
million and $50.0 million, respectively, through May 26, 1998. Borrowings are
available for a period of not more than 364 days and are in the form of
unsecured promissory notes that bear interest at rates based on the banks'
prevailing prime, international or money-market lending rates. At June 30, 1997,
Sonat had $10 million outstanding at a rate of 6.66 percent and no amount was
outstanding under Southern's agreement.
Sonat had $270.7 million in commercial paper outstanding at an average
rate of 5.89 percent at June 30, 1997.
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 June 30, 1997, Southern's rates are
established by a settlement with all of its customers (except one representing
approximately 2 percent of Southern's firm transportation volumes) that was
approved by a FERC order issued in 1995 and are not subject to refund. (See Rate
Matters in Item 2 of this report.)
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
<PAGE>
5. Commitments and Contingencies (Cont'd)
petition and had oral argument in its pending appeal before the Eleventh Circuit
on July 10, 1997.
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 August 2, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed
settlement of the complaint proceeding pursuant to which it would voluntarily
reduce its transportation rates by $.0042 per decatherm (Dth), calculated on a
100 percent load factor basis, effective January 1, 1997. The settlement was
supported by the staff of the FERC and one of two groups of active intervenors,
but was opposed by the complainant shippers, the other group of active
intervenors. By order dated April 22, 1997, the FERC approved the settlement
with modifications, making a merits determination as to the just and reasonable
rates to become effective for contesting and non-contesting parties as of May 1,
1997. Under the FERC Order, Sea Robin's transportation rates were reduced an
additional $.006 per Dth, calculated on a 100 percent load factor basis, below
the proposed settlement rate level. Sea Robin sought rehearing of the settlement
order on May 22, 1997, arguing that the FERC improperly modified the settlement
terms as to non-contesting parties, and that it failed to properly consider Sea
Robin's filed case in making its merits determinations as to contesting parties.
<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.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Millions)
Operating Income (Loss):
<S> <C> <C> <C> <C>
Exploration and production $17.6 $39.0 $ 74.3 $ 59.0
Natural gas transmission 45.2 36.4 92.0 84.5
Energy marketing (0.4) (0.1) 1.1 12.3
Other 3.1 (1.0) 5.0 1.7
----- ----- ------ ------
Operating Income $65.5 $74.3 $172.4 $157.5
===== ===== ====== ======
</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. In 1996, Sonat Exploration broadened its growth
strategy by increasing its focus on exploration and aggressive development
drilling as opposed to primarily property acquisitions and exploitation
drilling. Most of Sonat Exploration's natural gas production is sold to Sonat
Marketing Company L.P. (Sonat Marketing), the Company's affiliate operating in
the Energy Marketing segment.
Sonat Exploration's most important exploratory program is in the Cotton
Valley Pinnacle Reef trend in the East Texas salt basin, a high-potential
onshore exploratory play that is one of the most active in the lower 48 states.
In the first quarter of 1997, Sonat Exploration completed drilling and testing
its fourth Cotton Valley Pinnacle Reef trend discovery in the Bear Grass area of
Leon County, Texas. Sonat Exploration has a 50 percent working interest in the
well. Two reef wells have been completed since the end of the first quarter, one
of which was successful. Sonat Exploration is currently drilling five other
wells in the Cotton Valley Pinnacle Reef trend and anticipates completing all of
them in the third quarter of 1997. In July 1997 Sonat Exploration announced that
its Ryon No. 1 Cotton Valley Pinnacle Reef well in the Tri-Cities area of
Henderson County, Texas, failed to encounter a reef. The Ryon No. 1 was the
first exploratory test in the northern part of the Cotton Valley Pinnacle Reef
trend. Sonat Exploration has numerous other reef-like seismic anomalies to test
in this area and in its other acreage in the trend and the results of the Ryon
No. 1 do not change Sonat Exploration's plans for its exploration program or its
view concerning the production potential for reef drilling in the trend.
Additional drilling in this northern area is scheduled for the fourth quarter of
1997. Sonat Exploration has drilled seven wells in this trend so far and
completed five producing wells for a success rate of 71 percent.
The Austin Chalk trend of east Texas and west Louisiana was again a very
active drilling area, with 15 wells drilled in the Austin Chalk trend in the
first six months of 1997, of which 13 were successful. Sonat Exploration had
excellent completion results from its first company-operated well in the
Hurricane Branch area of Vernon Parish, Louisiana, the Scobee No. 1 well, during
the first quarter of 1997. The Scobee No. 1 exhibited the highest initial
hydrocarbon production rate of any Sonat operated well in the entire Eastern
Austin Chalk area, flowing 3,840 barrels of oil and 9.5 million cubic feet (Mcf)
of natural gas per day. Sonat Exploration has a 60 percent working interest in
this well. To date Sonat Exploration has completed four wells in the Hurricane
Branch area that have a combined total gross production of 18 Mcf of natural gas
and 6,620 barrels of oil per day. The Company has increased its drilling program
in the Hurricane Branch area to six rigs.
Overall, during the first six months of 1997, Sonat Exploration
participated in the completion of 210 gross development wells, of which 198 were
successful, and seven exploratory wells, four of which were successful.
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Sales to others $ 36.1 $ 41.3 $ 76.0 $ 57.1
Intersegment sales 75.6 97.8 189.9 193.6
------ ------ ------ ------
Total Revenues 111.7 139.1 265.9 250.7
------ ------ ------ ------
Costs and Expenses:
Operating and maintenance 17.0 15.1 33.1 30.5
Exploration expense 7.8 5.1 13.8 8.6
General and administrative 12.1 14.1 26.0 26.0
Depreciation, depletion and
amortization 51.3 59.2 105.7 114.1
Taxes, other than income 5.3 6.4 11.7 12.2
Other expenses .6 .2 1.3 .3
------ ------ ------ ------
94.1 100.1 191.6 191.7
------ ------ ------ ------
Operating Income $ 17.6 $ 39.0 $ 74.3 $ 59.0
====== ====== ====== ======
Net Sales Volumes:
Gas (Bcf) 47 51 97 98
Oil and condensate (MBbls) 922 1,304 1,964 2,382
Natural gas liquids (MBbls) 403 550 765 936
- ------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 1.89 $ 2.19 $ 2.20 $ 2.06
Oil and condensate ($/Bbl) 19.65 19.61 21.12 18.93
Natural gas liquids ($/Bbl) 8.47 11.31 12.57 10.54
- ------------------------------------------------------------------------------------------------
</TABLE>
Second Quarter 1997 to Second Quarter 1996 Analysis
Operating income decreased $21.4 million primarily due to lower natural
gas prices. Average realized natural gas prices for the second quarter of 1997
were $1.89 per Mcf compared with $2.19 per Mcf in the second quarter of 1996, a
14 percent decrease. Natural gas production declined to 47 billion cubic feet
(Bcf) from 51 Bcf in the second quarter of 1996, a decrease of 8 percent, and
oil and condensate production declined 29 percent to 922,000 barrels from 1.3
million barrels in the second quarter of 1996. The drop in production primarily
reflects declines in the Gulf Coast and Austin Chalk regions.
Costs and expenses were slightly lower in the second quarter of 1997
primarily due to a $7.9 million decrease in depreciation, depletion and
amortization expense, resulting from lower production volumes and a lower
amortization rate. Additionally, general and administrative expenses decreased
$2.0 million primarily as a result of lower stock-based compensation expense.
Exploration expense increased $2.7 million as a result of increased exploration
activity. Operating and maintenance expense increased $1.9 million due to a
higher level of drilling activity.
<PAGE>
Six Months 1997 to Six Months 1996 Analysis
Operating income increased primarily as a result of higher natural gas
prices. Although natural gas prices weakened during the second quarter of 1997,
average realized natural gas prices increased to $2.20 per Mcf for the first six
months of 1997 compared with $2.06 for the first six months of 1996, a 7 percent
increase. Realized oil prices increased 12 percent to an average of $21.12 per
barrel in 1997 from $18.93 per barrel in 1996. Lower oil and condensate
production, which decreased 18 percent to approximately 2 million barrels for
the first six months of 1997, slightly offset the higher gas and oil prices.
Costs and expenses for the first six months of 1997 were flat when
compared with the first six months of 1996. Lower depreciation, depletion and
amortization expense was offset by higher exploration expense and higher
operating and maintenance expense. Depreciation, depletion and amortization
expense decreased $8.4 million as a result of a lower amortization rate as well
as lower production volumes. Exploration expense increased $5.2 million as a
result of increased exploration activity. Operating and maintenance expense
increased $2.6 million primarily as a result of a higher level of drilling
activity.
Hedging Activities
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 Market and Financial Risk Management and Note 2 of the Notes to
Condensed Consolidated Financial Statements.) Gains or losses experienced on
Sonat Exploration's hedging transactions are offset by the changes in revenue
recognized on the sale of the commodity. Natural gas revenues were reduced by
$14.4 million and $19.5 million and oil revenues were reduced by $.7 million and
$4.6 million in the 1997 and 1996 six-month periods, respectively, relating to
hedging activities.
A portion of Sonat Exploration's future production is hedged. Gas
production for the last six months of 1997 through 2000 in the aggregate amount
of 187.8 TBtus is hedged at a weighted average price of $2.03 per MMBtu. Of this
amount, 32.3 TBtu at a weighted average price of $2.03 relates to remaining 1997
production, which represents approximately 24 percent of expected production.
Oil production of approximately 650 thousand barrels, or 15 percent of expected
production, is hedged for the remainder of 1997 at a weighted average price of
$20.28 per barrel.
<PAGE>
NATURAL GAS TRANSMISSION
The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company and its subsidiaries (Southern), and Citrus Corp.
(a 50 percent-owned company).
Southern is aggressively seeking to expand its pipeline system in its
traditional market area and to connect new gas supplies.
In March 1997 an amended application and tariff for the Destin Pipeline
was filed with the Federal Energy Regulatory Commission (FERC) to reflect the
fact that units of Shell Oil Company and Amoco Corporation have joined in the
ownership of this 1 Bcf per day, $300 million pipeline designed to transport
natural gas from the growing eastern Gulf of Mexico production area. Southern
has a one-third interest in this pipeline. Shell and Amoco have made substantial
firm transportation commitments to this pipeline, and discussions are underway
with other prospective shippers. In June 1997 the FERC issued a Preliminary
Determination, subject to completion of its environmental review, that approved
the construction and operation of the Destin Pipeline. In July 1997 the FERC
issued its Draft Environmental Impact Statement. The pipeline, which is still
subject to final FERC approval, is expected to be completed in mid-1998.
In April 1997 the FERC issued an order that permits Southern to begin
construction on a $36 million project that will add 46 million cubic feet per
day of firm capacity for customers in Georgia and Tennessee. Construction began
in late June, and this project is expected to be in service in late 1997.
Southern is also moving forward on expansions to eastern Tennessee and northern
Alabama that have a total estimated capital cost of $107 million. The North
Alabama expansion, which received FERC approval in May 1997, is now anticipated
to go in service in the fourth quarter of 1998. The East Tennessee expansion is
anticipated to go in service in November 1998, subject to FERC approval of an
application that Southern filed in May 1997.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Millions)
Revenues (Note):
Market transportation and
<S> <C> <C> <C> <C>
storage $ 74.6 $ 76.1 $157.8 $160.5
Supply transportation 12.4 12.1 22.9 23.3
Other 16.5 7.8 21.9 17.3
------ ------ ------ ------
Total Revenues 103.5 96.0 202.6 201.1
------ ------ ------ ------
Costs and Expenses (Note):
Operating and maintenance 22.2 22.4 39.8 42.3
General and administrative 19.1 20.5 37.1 40.0
Depreciation and amortization 11.9 12.4 23.6 24.8
Taxes, other than income 4.8 4.2 10.0 9.3
------ ------ ------ ------
58.0 59.5 110.5 116.4
------ ------ ------ ------
Operating Income $ 45.5 $ 36.5 $ 92.1 $ 84.7
====== ====== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.7 $ 2.3 $ 5.4 $ 4.9
====== ====== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 136 144 306 354
Supply transportation 100 80 180 165
---- ---- ----- -----
Total Volumes 236 224 486 519
==== ==== ===== =====
Transition gas sales 17 18 35 35
==== ==== ===== =====
CITRUS CORP.
(In Millions)
Allocated Expenses Included in
Operating Income $0.3 $0.1 $ 0.1 $ 0.2
==== ==== ===== =====
Equity in Earnings of
Citrus Corp. $6.2 $4.7 $12.8 $10.7
==== ==== ===== =====
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 125 116 223 205
Supply transportation 5 6 13 16
---- ---- ----- -----
Total Volumes 130 122 236 221
==== ==== ===== =====
</TABLE>
Note: The 1996 periods have been restated to reflect the reclassification of
natural gas sales, natural gas cost and transition cost recovery to
other revenues.
<PAGE>
Second Quarter 1997 to Second Quarter 1996 Analysis
Southern Natural Gas Company and Subsidiaries - Operating income for
Southern was $45.5 million compared with $36.5 million in the second quarter of
1996. The improvement is primarily due to the impact of recent expansions,
improved results at Sea Robin Pipeline Company, a wholly owned subsidiary of
Southern, and lower expenses. In addition, operating income includes the
adjustment of a reserve due to a favorable ruling on a royalty issue. The
reserve adjustment, net of other out-of-period items including depreciation and
property tax adjustments and interest related to GSR collection in 1996,
increased operating income by $2.4 million.
Market transportation revenues decreased due primarily to a reduction in
interruptible volumes, partially offset by increased revenue from expansions.
Supply transportation revenues increased due to an expansion in firm service at
Southern and increased volumes at Sea Robin. Excluding the out-of-period items
mentioned above, operating and maintenance expense decreased due to cost cutting
measures. General and administrative expenses decreased primarily due to lower
stock-based compensation expense.
Citrus - Equity in earnings of Citrus increased $1.5 million to $6.2
million primarily as a result of higher rates at Florida Gas in conjunction with
its rate filing effective in March 1997 and higher interruptible transportation
revenue.
Six Months 1997 to Six Months 1996 Analysis
Southern Natural Gas Company and Subsidiaries - Operating income for
Southern was $92.1 million compared with $84.7 million for the six months ended
June 30, 1996. The improvement was primarily due to the same factors discussed
above.
Market transportation revenues decreased due to lower volumes resulting
primarily from warmer weather, partially offset by increased revenue from
expansions. Supply transportation revenues decreased somewhat due to lower
transportation rates at Sea Robin, partially offset by higher revenue from
recent expansions at Southern. Operating and maintenance expense decreased in
the 1997 period due to cost cutting measures. General and administrative
expenses decreased primarily due to lower stock-based compensation and employee
benefit expenses.
Citrus - Equity in earnings of Citrus increased $2.1 million to $12.8
million primarily as a result of the higher rates at Florida Gas and higher
interruptible transportation revenue mentioned above.
<PAGE>
Natural Gas Sales and Supply
As a result of FERC Order No. 636, Southern terminated or renegotiated
to market pricing substantially all of its gas supply contracts through which it
had historically obtained its long-term gas supply. Pending the termination of
the remaining supply contracts, Southern is selling a portion of its gas supply
to a number of its firm transportation customers under contracts that have been
extended through November 30, 1997. The remainder is sold on a month-to-month
basis. Gas sales revenue and natural gas cost are included in other revenue.
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 85 percent of Southern's remaining estimated purchase commitments in 1997,
which total $68 million. Annual purchase commitments total less than $20 million
for subsequent years. Based on Southern's current expectations with respect to
natural gas prices in the years following 1997, only a small amount of gas
volumes are expected to be at prices above market.
Rate Matters
A settlement approved by the FERC in 1995 resolved all of Southern's
previously pending rate proceedings and proceedings to recover GSR and other
transition costs associated with the implementation of FERC Order No. 636,
except for one contesting party that represents approximately 2 percent of
Southern's firm transportation volumes. That party has appealed the FERC's
approval of the settlement and orders in the proceedings to the United States
Circuit Court of Appeals. As a contesting party under the settlement, that party
has also challenged at FERC the collection by Southern of approximately $6.3
million in GSR costs allocable to it under Order No. 636. The settlement
provides that, except in certain limited circumstances, Southern will not file a
general rate case to be effective prior to March 1, 1998, but requires Southern
to file a new rate case no later than September 1, 1999.
ENERGY MARKETING
Sonat Energy Services, through its subsidiaries, Sonat Marketing and
Sonat Power Marketing L.P. (Sonat Power Marketing), conducts marketing business
in the natural gas and electric industries, respectively. Sonat Marketing
purchases and resells substantially all of Sonat Exploration Company's natural
gas production.
Sonat Marketing's business has continued to grow rapidly. Sonat
Marketing's average daily sales volumes increased 42 percent from the second
quarter of 1996. This growth was achieved in large part by the Company's focus
on its strategy of working closely with its customers and delivering outstanding
customer service.
Sonat Marketing uses natural gas and oil futures contracts, options, and
gas and oil price swap agreements to hedge the effects of 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
to enable it to hedge fixed-price contracts to both its suppliers and its
customers. Additionally, in June 1997, Sonat Marketing also began engaging in
derivative transactions that are not linked to physical transactions to meet the
needs of its customers. (See Market and Financial Risk Management and Note 2 of
the Notes to Condensed Consolidated Financial Statements.)
Sonat Power Marketing has executed electric power purchase, sales and
transmission agreements with numerous companies. Sonat Power Marketing has
remained focused on expanding its wholesale electric business, which is
evidenced by the significant growth in sales volumes. Sales volumes grew to 1.9
million megawatt hours in the second quarter of 1997 from 0.4 million megawatt
hours in the second quarter of 1996.
<PAGE>
ENERGY MARKETING
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Millions)
<S> <C> <C> <C> <C>
Revenues $695.8 $526.3 $1,655.5 $1,123.1
====== ====== ======== ========
Operating Income (Loss) $ (0.4) $ (0.1) $ 1.1 $ 12.3
====== ====== ======== ========
Sonat Marketing Gas Sales
Volumes (100%)
(Billion Cubic Feet) 299 214 603 423
===== === ===== ===
Sonat Power Marketing Sales
Volumes (100%)
(Thousands of Megawatt Hours) 1,921 439 3,318 649
===== === ===== ===
</TABLE>
Second Quarter 1997 to Second Quarter 1996 Analysis
Although revenues increased 32 percent, Sonat Energy Services' operating
loss increased $0.3 million in the second quarter of 1997 compared to the same
period in 1996. Sales volumes increased sharply, but unit trading margins were
lower due to intense competition. Energy marketing results were also adversely
affected by higher operating costs due to business growth.
Six Months 1997 to Six Months 1996 Analysis
Revenues increased for the six-month period due to higher volumes.
Operating income for the energy marketing segment for the six months ended June
30, 1997, declined $11.2 million compared to the same period in 1996. Although
sales volumes increased, unit trading margins were lower. Additionally, in the
six months ended June 30, 1996, increased price volatility and tight natural gas
supplies in certain markets created excellent trading opportunities for Sonat
Marketing. Similar conditions and opportunities did not occur in the six months
ended June 30, 1997. Energy marketing results were also adversely affected by
higher operating costs due to business growth.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Millions)
Other Income (Loss), Net:
Equity in earnings of
<S> <C> <C> <C> <C>
unconsolidated affiliates $ 9.5 $ 7.4 $19.6 $16.4
Minority interest 0.1 (0.4) (0.8) (5.1)
Other 0.7 2.0 4.6 1.9
----- ----- ----- -----
$10.3 $ 9.0 $23.4 $13.2
===== ===== ===== =====
</TABLE>
The increase in equity in earnings of unconsolidated affiliates in both
1997 periods primarily reflects improved results at Citrus (discussed earlier in
the Natural Gas Transmission section). Minority interest is AGL Resource's 35
percent share of earnings in Sonat Marketing and Sonat Power Marketing
(operating results were discussed earlier in the Energy Marketing section).
Other in both of the 1996 periods includes gains on the sale of assets, while
the 1997 periods include marginally higher levels of equity interest capitalized
at Southern Natural. In addition, the six-month period of 1997 includes a $2.4
million net gain on the termination of the remainder of an interest rate swap.
<TABLE>
<S> <C> <C> <C> <C>
Interest Expense, Net $21.7 $21.9 $41.5 $43.1
</TABLE>
Net interest expense decreased in both the three-month and six-month
periods of 1997 due to much lower average regulatory reserve balances. Partly
offsetting was an increase in interest expense resulting from higher average
debt levels in both periods. Additionally, in the six-month period, interest
income decreased due to lower GSR related interest income. Interest capitalized
decreased in both periods due to lower interest capitalized at Sonat
Exploration.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense $17.8 $20.8 $51.2 $41.4
</TABLE>
The change in income tax expense in both periods reflects the change in
pretax income and the pattern of earnings.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1996
(In Millions)
<S> <C> <C>
Operating Activities $ 299.5 $270.2
</TABLE>
Cash flow from operations increased $29.3 million compared with the 1996
period primarily due to improved operating results at Sonat Exploration
(discussed earlier in operating section) and higher cash flow at Southern.
At Southern, the 1996 period included $35 million in cash refunds to
customers. Other than those refunds, the change in gas supply realignment costs
was attributable to the recording of the Customer Settlement in the second
quarter of 1996. In addition, the change in reserves for regulatory matters,
deferred income taxes, accrued income taxes and other was also due to the
settlement accounting. The changes in deferred income taxes and accrued interest
and income taxes resulting from the settlement accounting are partially offset
by the impact of higher intangible drilling costs at Sonat Exploration in the
current period. The change in accounts receivable and accounts payable is
primarily attributable to improved operating results and to the expanding
business of Energy Marketing, which had high receivables and payables balances
in December 1996 due to higher natural gas prices. The change in other current
assets and liabilities is primarily due to the level of broker deposits in the
1996 period at Energy Marketing.
<TABLE>
<S> <C> <C>
Investing Activities $(341.9) $(271.2)
</TABLE>
Net cash used in investing activities was $70.7 million higher in 1997
compared to 1996. The increase was primarily attributable to capital
expenditures, which were higher due to increased drilling at Sonat Exploration.
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<S> <C> <C>
Exploration and Production $ 267.4 $ 214.7
Natural Gas Transmission 59.0 51.9
Energy Marketing 5.2 1.9
Other 1.9 2.6
------- -------
Total $ 333.5 $ 271.1
======= =======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $8.5 million and $4.9 million in the first six months of 1997 and
1996, respectively.
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1996
(In Millions)
<S> <C> <C>
Financing Activities $31.1 $ (22.5)
</TABLE>
Financing activities provided $31.1 million in 1997 compared to
requiring $22.5 million in 1996. The change was primarily attributable to
increased borrowings, which helped finance higher capital expenditures, and the
Company's stock repurchase program in the current period.
CAPITAL RESOURCES
At June 30, 1997, the Company had lines of credit and a revolving credit
agreement with a total capacity of $750 million. Of this, $319.3 million was
available. The Company has a 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. As a result, at that date the Company
would not have deemed available under the lines of credit and the revolving
credit agreement an amount equal to the $270.7 million of commercial paper then
outstanding, plus the $160 million then outstanding in bank loans.
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 the end of
1997. As of June 30, 1997, the Company had remaining authority to purchase
approximately 210,000 shares of the Company's common stock. Shares purchased are
intended for reissuance in connection with employee stock options and restricted
stock programs.
The Company believes that cash flow from operations and borrowings under
its existing credit facilities and shelf registrations will 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 the operating results of
Sonat Exploration and Sonat Marketing. The Company's use of derivatives to
reduce the effect of this volatility is described in 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
using financial derivatives are prohibited. In the case of Sonat Exploration,
these policies prohibit transactions not matched by physical commodity
positions. For commodity price hedges, these policies set limits regarding
volumes relative to budgeted production or sales levels. Sonat Marketing uses
futures contracts, options, and price swap agreements to hedge physical
positions. In June 1997, Sonat Marketing also began engaging in derivative
trading, subject to a policy that limits the net positions to specific value at
risk limits. Material forward rate agreements and swap counterparties are
approved by the Board, and volume limits for swaps are set for any single
counterparty. Reports detailing each transaction, mark-to-market and value at
risk positions, are reviewed by management. In addition, all derivative
activities are internally reviewed by a Risk Oversight Committee to ensure
compliance with all policies. (See Note 2 of the Notes to Condensed Consolidated
Financial Statements.)
<PAGE>
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains certain forward-looking statements
regarding the Company's future plans, objectives, and expected performance that
are based on assumptions the Company believes are reasonable, but a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Important factors that could cause actual
results to differ include changes in oil and gas prices and the timing and
success of the Company's exploratory and development drilling programs
(including its drilling programs in the Cotton Valley Pinnacle Reef trend and
the Austin Chalk trend). There can be no assurance that the actual level of
production from existing wells and the wells to be drilled in such programs will
equal expected volumes.
The Company's expectations for success in the Cotton Valley Pinnacle
Reef trend is based in part on seismic surveys. Much of the available data is
based on 2-D seismic surveys. While 2-D seismic data is helpful in identifying
geological anomalies which may become reef prospects, there is no basis to
predict how many anomalies identified by 2-D seismic data will be confirmed as
reef prospects by 3-D seismic surveys. The Company plans to drill only reef
prospects based on 3-D seismic surveys. Furthermore, 3-D seismic data cannot
confirm that economically productive hydrocarbons will be present in the reefs,
and current limitations on such technology are such that there is no assurance
that the Company will be able to locate and penetrate the reef formations.
In addition, there can be no assurance that the Company's pipeline
projects will receive timely regulatory approvals and be constructed and placed
into service on schedule.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits1
Exhibit
Number Exhibits
11* Computation of Earnings per Share
12* Computation of Ratio of Earnings to Fixed Charges
27.1* Financial Data Schedules for the period ended June 30, 1997
27.2* Restated Financial Data Schedules for the periods ended
March 31, 1997; March 31, 1996; June 30, 1996; September 30,
1996; and December 31, 1996
27.3* Restated Financial Data Schedules for the periods ended
March 31, 1995; June 30, 1995; September 30, 1995; December
31, 1995; and December 31, 1994
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter ended
June 30, 1997.
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: August 11, 1997 By: /s/ James E. Moylan, Jr.
------------------------ --------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 11, 1997 By: /s/ Thomas W. Barker, Jr.
------------------------- ---------------------------
Thomas W. Barker, Jr.
Vice President-Finance
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(In Thousands Except Per-Share Amounts)
Primary Earnings Per Share(1)
<S> <C> <C> <C> <C>
Net Income $36,223 $40,595 $103,069 $86,164
======= ======= ======== =======
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,026 86,208 86,127 86,168
Common Stock Equivalents Applicable
to Outstanding Stock Options 1,699 1,492 1,630 1,247
------- ------- -------- -------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,725 87,700 87,757 87,415
======= ======= ======== =======
Primary Earnings Per Share $ .41 $ .46 $ 1.17 $ .99
======= ======= ======== =======
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by Footnote 2 to Paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%. For this
reason, the primary earnings per share amounts shown may not agree with
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>
Six Months Ended June 30, Years Ended December 31,
1997 1996 1996 1995 1994 1993 1992
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $154,221 $127,571 $294,304 $282,497 $154,871 $364,198 $133,728
Fixed charges (see computation below) 74,654 78,993 152,830 165,154 127,909 129,160 156,428
Less allowance for interest
capitalized (2,032) (2,678) (5,094) (6,540) (6,692) (4,101) (8,422)
-------- -------- -------- ------- -------- -------- --------
Total Earnings Available for Fixed
Charges $226,843 $203,886 $442,040 $441,111 $276,088 $489,257 $281,734
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 70,837 $ 75,254 $145,406 $157,653 $120,295 $122,204 $149,165
Rentals(b) 3,817 3,739 7,424 7,501 7,614 6,956 7,263
-------- -------- -------- ------- -------- -------- --------
$ 74,654 $ 78,993 $152,830 $165,154 $127,909 $129,160 $156,428
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 3.0 2.6 2.9 2.7 2.2 3.8 1.8
======== ======== ======== ======== ======== ======== ========
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,366
<SECURITIES> 0
<RECEIVABLES> 430,918
<ALLOWANCES> 0
<INVENTORY> 51,979
<CURRENT-ASSETS> 567,060
<PP&E> 5,342,957
<DEPRECIATION> 2,730,368
<TOTAL-ASSETS> 3,837,058
<CURRENT-LIABILITIES> 853,626
<BONDS> 861,150
0
0
<COMMON> 87,230
<OTHER-SE> 1,521,648
<TOTAL-LIABILITY-AND-EQUITY> 3,837,058
<SALES> 1,647,773
<TOTAL-REVENUES> 1,887,447
<CGS> 1,399,247
<TOTAL-COSTS> 1,489,737
<OTHER-EXPENSES> 133,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,114
<INCOME-PRETAX> 154,221
<INCOME-TAX> 51,152
<INCOME-CONTINUING> 103,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,069
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 9-MOS
YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996 JUN-30-1996 SEP-30-1996
DEC-31-1996
<CASH> 21,856 5,717 13,761 20,008
29,639
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 382,010 377,549 365,639 338,602
577,021
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 29,669 30,632 35,988 37,938
30,500
<CURRENT-ASSETS> 474,921 486,635 496,939 468,565
693,290
<PP&E> 5,200,306 4,934,701 5,048,611 5,090,707
5,084,283
<DEPRECIATION> 2,671,139 2,593,642 2,650,301 2,641,253
2,650,419
<TOTAL-ASSETS> 3,648,520 3,574,253 3,456,440 3,488,317
3,774,659
<CURRENT-LIABILITIES> 701,338 674,880 718,489 627,594
848,837
<BONDS> 861,382 764,443 763,324 867,606
872,255
0 0 0 0
0
0 0 0 0
0
<COMMON> 87,230 87,244 87,244 87,244
87,233
<OTHER-SE> 1,519,619 1,412,189 1,429,382 1,449,918
1,497,131
<TOTAL-LIABILITY-AND-EQUITY> 3,648,520 3,574,253 3,456,440 3,488,317
3,774,659
<SALES> 955,960 583,189 1,100,778 1,732,511
2,556,822
<TOTAL-REVENUES> 1,072,143 695,604 1,332,934 2,076,730
3,039,014
<CGS> 807,984 460,951 856,877 1,358,430
2,038,846
<TOTAL-COSTS> 849,919 500,209 939,154 1,486,719
2,211,608
<OTHER-EXPENSES> 68,483 67,373 138,751 213,421
288,192
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 20,646 22,860 45,457 66,105
86,946
<INCOME-PRETAX> 100,205 66,183 127,571 196,513
294,304
<INCOME-TAX> 33,359 20,614 41,407 62,315
93,115
<INCOME-CONTINUING> 66,846 45,569 86,164 134,198
201,189
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 66,846 45,569 86,164 134,198
201,189
<EPS-PRIMARY> .78 .53 1.00 1.56
2.33
<EPS-DILUTED> .78 .53 1.00 1.56
2.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995
DEC-31-1994
<PERIOD-END> MAR-31-1995 JUN-30-1995 SEP-30-1995 DEC-31-1995
DEC-31-1994
<CASH> 8,130 6,052 58,143 37,289
9,131
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 220,990 230,221 256,521 327,697
279,553
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 26,345 27,662 26,116 23,956
26,722
<CURRENT-ASSETS> 313,875 324,162 404,075 494,431
386,841
<PP&E> 4,875,268 4,793,590 4,720,041 4,822,879
4,741,296
<DEPRECIATION> 2,514,760 2,500,147 2,478,258 2,545,320
2,497,691
<TOTAL-ASSETS> 3,628,581 3,441,230 3,336,900 3,511,441
3,530,686
<CURRENT-LIABILITIES> 544,488 381,431 462,061 640,125
570,201
<BONDS> 1,070,433 1,081,488 771,258 770,313
963,378
0 0 0 0
0
0 0 0 0
0
<COMMON> 87,252 87,252 87,252 87,244
87,252
<OTHER-SE> 1,316,654 1,310,459 1,414,315 1,395,398
1,304,634
<TOTAL-LIABILITY-AND-EQUITY> 3,628,581 3,441,230 3,336,900 3,511,441
3,530,686
<SALES> 228,354 526,796 842,970 1,236,953
934,588
<TOTAL-REVENUES> 363,070 807,776 1,240,358 1,754,341
1,407,269
<CGS> 149,650 367,546 612,011 913,324
582,486
<TOTAL-COSTS> 187,997 445,712 731,822 1,085,209
805,387
<OTHER-EXPENSES> 74,391 141,051 208,161 298,714
257,759
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 26,781 54,963 78,503 96,257
80,290
<INCOME-PRETAX> 47,648 70,744 283,523 287,881
157,219
<INCOME-TAX> 10,031 15,786 98,045 94,993
15,812
<INCOME-CONTINUING> 37,617 54,958 185,478 192,888
141,407
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 37,617 54,958 185,478 192,888
141,407
<EPS-PRIMARY> .44 .64 2.15 2.24
1.62
<EPS-DILUTED> .44 .64 2.15 2.24
1.62
</TABLE>
