UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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:
85,749,451 SHARES OUTSTANDING ON OCTOBER 31, 1997
<PAGE>
SONAT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)--September 30, 1997 and
<S> <C>
December 31, 1996 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 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 - 24
PART II. Other Information
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>
September 30, December 31,
1997 1996
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 96,555 $ 29,639
Accounts receivable 515,494 577,021
Inventories 40,662 30,500
Gas imbalance receivables 14,263 21,694
Income taxes 31,042 2,163
Assets from price risk management activities 55,305 -
Other 37,889 32,273
---------- ----------
Total Current Assets 791,210 693,290
---------- ----------
Investments in Unconsolidated Affiliates and Other 514,756 465,121
---------- ----------
Plant, Property and Equipment 5,534,078 5,084,283
Less accumulated depreciation, depletion
and amortization 2,838,418 2,650,419
---------- ----------
2,695,660 2,433,864
---------- ----------
Deferred Charges and Other:
Gas supply realignment costs 5,156 11,144
Assets from price risk management activities 3,420 -
Other 174,902 171,240
---------- ----------
183,478 182,384
---------- ----------
Total Assets $4,185,104 $3,774,659
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 8,240 $ 53,707
Unsecured notes 235,197 158,030
Accounts payable 468,523 510,130
Accrued income taxes 11,359 26,726
Accrued interest 32,399 28,584
Gas imbalance payables 23,785 20,290
Liabilities from price risk management activities 53,159 -
Other 51,899 51,370
---------- ----------
Total Current Liabilities 884,561 848,837
---------- ----------
Long-Term Debt 1,160,597 872,255
---------- ----------
Deferred Credits and Other:
Deferred income taxes 352,240 284,564
Reserves for regulatory matters 4,739 14,644
Liabilities from price risk management activities 2,637 -
Other 180,824 169,995
---------- ----------
540,440 469,203
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 124,874 118,881
Retained earnings 1,541,590 1,495,186
---------- ----------
1,666,464 1,614,067
Less treasury stock 66,958 29,703
---------- ----------
Total Stockholders' Equity 1,599,506 1,584,364
---------- ----------
Total Liabilities and Stockholders' Equity $4,185,104 $3,774,659
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $1,023,531 $743,796 $2,910,978 $2,076,730
---------- -------- ---------- ----------
Costs and Expenses:
Natural gas cost 690,315 476,617 2,013,706 1,319,597
Electric power cost 98,993 24,936 174,849 38,833
Operating and maintenance 49,953 46,012 140,443 128,289
General and administrative 32,790 34,089 108,098 108,202
Depreciation, depletion
and amortization 111,635 74,670 244,757 213,421
Taxes, other than income 11,308 12,312 28,210 35,756
---------- -------- ---------- ----------
994,994 668,636 2,710,063 1,844,098
---------- -------- ---------- ----------
Operating Income 28,537 75,160 200,915 232,632
Other Income (Expense), Net:
Equity in earnings of
unconsolidated affiliates 8,876 8,832 28,443 25,285
Minority interest (448) (87) (1,244) (5,196)
Other 1,049 4,697 5,662 6,586
---------- -------- ---------- ----------
9,477 13,442 32,861 26,675
---------- -------- ---------- ----------
Interest:
Interest income 1,121 988 2,694 3,311
Interest expense (23,278) (21,888) (68,424) (70,023)
Interest capitalized 873 1,240 2,905 3,918
---------- -------- ---------- ----------
(21,284) (19,660) (62,825) (62,794)
---------- -------- ---------- ----------
Income before Income Taxes 16,730 68,942 170,951 196,513
Income Tax Expense 3,760 20,908 54,912 62,315
---------- -------- ---------- ----------
Net Income $ 12,970 $ 48,034 $ 116,039 $ 134,198
========== ======== ========== ==========
Earnings Per Share of Common Stock $ .15 $ .56 $ 1.35 $ 1.56
========== ======== ========== ==========
Weighted Average Shares Outstanding 85,767 86,228 86,006 86,188
Dividends Paid Per Share $ .27 $ .27 $ .81 $ .81
========== ======== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 116,039 $ 134,198
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 244,757 213,421
Deferred income taxes 67,793 72,851
Equity in earnings of unconsolidated affiliates,
less distributions (23,926) (18,324)
Gain on disposal of assets (230) (3,390)
Reserves for regulatory matters (9,905) (167,440)
Gas supply realignment costs 5,988 177,958
Change in:
Accounts receivable 61,527 10,605
Inventories (10,162) (13,982)
Accounts payable (41,607) 40,766
Accrued interest and income taxes, net (40,431) (4,806)
Other current assets and liabilities 3,707 22,131
Other 49,990 (38,945)
----------- ---------
Net cash provided by operating activities 423,540 425,043
----------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (537,197) (399,522)
Net proceeds from disposal of assets 3,825 10,270
Advances to unconsolidated affiliates
and other (31,972) (13,883)
----------- ---------
Net cash used in investing activities (565,344) (403,135)
----------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 1,500,000 400,000
Payments of long-term debt (1,257,125) (267,933)
Changes in short-term borrowings 77,167 (90,780)
----------- ---------
Net changes in debt 320,042 41,287
Dividends paid (69,635) (69,843)
Treasury stock purchases (51,316) (26,773)
Other 9,629 16,140
----------- ---------
Net cash provided by (used in)
financing activities 208,720 (39,189)
----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 66,916 (17,281)
Cash and Cash Equivalents at Beginning of Period 29,639 37,289
----------- ---------
Cash and Cash Equivalents at End of Period $ 96,555 $ 20,008
=========== =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 51,269 $ 49,381
Income taxes paid (refunds received), net 22,717 (5,907)
</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 unaudited 1996 Condensed Consolidated Financial Statements have
also been reclassified to conform with the 1997 presentation.
2. Derivative Financial Instruments
Through May 1997, the Company through Sonat Marketing Company L.P.
(Sonat Marketing) used futures contracts, options and price swap agreements
solely to hedge its commodity price risk on physical transactions in 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 performs all hedging activity for both its own operations and
for the operations of Sonat Exploration Company.
In June 1997, Sonat Marketing also began engaging in derivative
transactions that were not directly 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
September 30, 1997, the results of accounting for such derivatives under
mark-to-market accounting were not material. Sonat Marketing continues 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
<PAGE>
2. Derivative Financial Instruments (Cont'd)
significant future physical transactions that are specifically hedged with a
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 September 30, 1997, the Company had net
deposits of $27.1 million with brokers for margin calls, included in other
current assets on the Condensed Consolidated Balance Sheet, of which $25.1
million was for Sonat Marketing's operations and $2.0 million was for Sonat
Exploration's operations.
At September 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 1,484 $13,119
For Exploration's operations (664) (7,015)
------- -------
Total 820 $ 6,104
======= =======
Oil Futures:
For Marketing's operations - $ -
For Exploration's operations (225) (409)
------- -------
Total (225) $ (409)
======= =======
</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
<PAGE>
2. Derivative Financial Instruments (Cont'd)
putting on futures positions and entering into offsetting swaps with
third-parties with aggregate volumes equal to its swaps with Sonat Exploration.
At September 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> <C>
For Marketing's operations 246 $ (5,648) 1 month - 60 months
For Exploration's operations 159 (49,865) 1 month - 14 months
--- --------
405 $(55,513)
=== ========
</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 September 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 17.7 TBtu and sold calls of 14.1 TBtu with
a counterparty at zero cost. Sonat Marketing also has bought and sold options
for notional volumes of 8.2 TBtu. At September 30, 1997, the market value of all
these options was $4.1 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 September 30, 1997, the market value of the Company's
in-the-money swaps was $4.5 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C> <C> <C>
Exploration and Production $ 89 $ 102 $ 290 $ 290
------ ------ ------- -------
Natural Gas Transmission:
Citrus Corp. 5,241 5,770 17,343 15,779
Amortization of Citrus basis
difference 345 345 1,037 1,037
Bear Creek Storage Company 2,558 2,433 7,889 7,462
Other 158 (91) 224 (226)
------ ------ ------- -------
8,302 8,457 26,493 24,052
------ ------ ------- -------
Energy Marketing 186 - 669 -
------ ------ ------- -------
Other 299 273 991 943
------ ------ ------- -------
$8,876 $8,832 $28,443 $25,285
====== ====== ======= =======
</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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $213,594 $205,776 $574,062 $583,813
Expenses (Income):
Natural gas cost 136,385 118,384 324,968 323,067
Operating expenses 23,384 20,736 73,814 69,030
Depreciation and amortization 13,181 21,664 47,768 63,183
Interest and other 23,422 26,152 71,904 77,000
Income taxes 6,740 7,300 20,922 19,975
-------- -------- -------- --------
Income Reported $ 10,482 $ 11,540 $ 34,686 $ 31,558
======== ======== ======== ========
</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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,899 $8,924 $27,218 $27,117
Expenses:
Operating expenses 1,157 1,262 3,519 3,797
Depreciation 1,358 1,354 4,072 4,061
Other expenses, net 1,269 1,441 3,849 4,335
------ ------ ------- -------
Income Reported $5,115 $4,867 $15,778 $14,924
====== ====== ======= =======
</TABLE>
4. Debt and Lines of Credit
Long-Term Debt - Sonat has a bank revolving credit agreement that
provides for periodic borrowings and repayments of up to $500.0 million through
June 30, 2001. Borrowings are supported by unsecured promissory notes that, at
the option of the Company, will bear interest at the banks' prevailing prime or
international lending rate, or such rates as the banks may competitively bid. At
January 1, 1997, there was an outstanding balance of $155.0 million. During the
first nine months of 1997, $1.3 billion was borrowed and $1.205 billion was
repaid under the revolving credit agreement, resulting in $250.0 million
outstanding at September 30, 1997, at a rate of 5.76 percent.
<PAGE>
4. Debt and Lines of Credit (Cont'd)
In September 1997, Sonat and Southern issued a total of $200.0 million
under their shelf registration statements. Sonat issued $100.0 million of 6.75
percent Notes due October 1, 2007, at 99.748 percent to yield 6.785 percent.
Southern issued $100.0 million of 6.70 percent Notes also due October 1, 2007,
at 99.891 percent to yield 6.715 percent. The net proceeds were subsequently
used to repay amounts borrowed under Sonat's commercial paper program and under
its revolving credit agreement.
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 September 30,
1997, there were no amounts outstanding for Sonat or Southern.
Sonat had $234.7 million in commercial paper outstanding at an average
rate of 5.77 percent at September 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 September 30, 1997, Southern's rates
are established by a settlement that was approved by a FERC order issued in
1995. All of its customers are parties to the settlement, except one
representing approximately 2 percent of Southern's firm transportation volumes.
The contesting party has appealed the FERC's approval of the settlement and
orders in the proceedings to the United States Circuit Court of Appeals. (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 petition. By order dated October 23, 1997, the United States Court of
Appeals for the Fifth Circuit vacated and remanded the FERC's decision to deny
Sea
<PAGE>
5. Commitments and Contingencies (Cont'd)
Robin's petition and found that the FERC did not give enough attention to the
physical and operational characteristics of Sea Robin in applying the primary
function test. The petition will return to the FERC for further consideration.
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. 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. 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. On
October 29, 1997, the FERC issued an order on rehearing of the initial order in
the proceedings and found that Sea Robin's proposed settlement rates are just
and reasonable. The rates will become effective for consenting parties on
January 1, 1997, and for contesting parties on May 1, 1997.
6. Impairment of Assets
Sonat Exploration Company's 1997 production has been lower than
expected with most of the shortfall coming from certain Gulf of Mexico
properties. Last year, Sonat Exploration completed two significant wells in High
Island Block 39 that together initially produced 89 million cubic feet of
natural gas equivalent per day, but have recently ceased production. In
addition, other wells drilled in this area during 1997 have not yielded material
reserves. As a result, it was determined in the third quarter that the remaining
reserves for these properties would not recover the associated book value, and
accordingly, the properties were written down by $39.0 million. The impairment,
which is included in depreciation, depletion and amortization in the Condensed
Consolidated Statement of Income, reduced net income by $25.4 million, or $.30
per share. Fair value used in determining the impairment adjustment was based on
an estimate of future net cash flows discounted at a market rate of interest.
<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. The table also shows the effect
of an unusual item recorded in the third quarter of 1997 that affects operating
income and net income comparisons. The table is presented because management
believes this information enhances the analysis of results of operations.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Millions, Except Per-Share Amounts)
Operating Income (Loss):
<S> <C> <C> <C> <C>
Exploration and production $(12.6) $38.2 $ 61.7 $ 97.2
Natural gas transmission 39.7 36.2 131.7 120.7
Energy marketing 0.9 (0.7) 2.0 11.6
Other 0.5 1.4 5.5 3.1
------ ----- ------ ------
Operating Income 28.5 75.1 200.9 232.6
Adjustment for Unusual Item:
Exploration and Production
Impairment of oil and
gas properties 39.0 - 39.0 -
------ ----- ------ ------
Operating Income Excluding
Unusual Item $ 67.5 $75.1 $239.9 $232.6
====== ===== ====== ======
Net Income As Reported $ 13.0 $48.0 $116.0 $134.2
Adjustment for Unusual Item:
Exploration and Production
Impairment of oil and
gas properties 25.4 - 25.4 -
------ ----- ------ ------
Net Income Excluding
Unusual Item $ 38.4 $48.0 $141.4 $134.2
====== ===== ====== ======
Earnings Per Share of Common Stock $ .15 $ .56 $ 1.35 $ 1.56
====== ===== ====== ======
Earnings Per Share of Common Stock
Excluding Unusual Item $ .45 $ .56 $ 1.65 $ 1.56
====== ===== ====== ======
</TABLE>
<PAGE>
EXPLORATION AND PRODUCTION
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas in the United States through
Sonat Exploration Company. In 1996, Sonat Exploration broadened its growth
strategy by increasing its focus on exploration and 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 is continuing an aggressive exploration program that is
highlighted by its activity in the Cotton Valley Pinnacle Reef trend in east
Texas, where it operates six of the 17 rigs drilling in the trend. Sonat
Exploration recently began producing the Laura Lee No. 1, Blazek No. 5 and
Fountain No. 2 wells at a combined gross initial production rate of 74 million
cubic feet per day (MMcf/D). The Morris Lazy K No. 1 well is being completed and
well results will be available during the fourth quarter. Two additional wells
are expected to be completed during the fourth quarter.
The Austin Chalk trend of east Texas and west Louisiana is also a very
active drilling area for the Company. During the third quarter, nine wells were
completed in this trend, of which all are commercial. The primary concentration
for the Company is in the Hurricane Branch area of the trend.
Overall, during the first nine months of 1997, Sonat Exploration
participated in the completion of 348 gross development wells, of which 322 were
successful, and 11 exploratory wells, five of which were successful. At
September 30, 1997, total proved reserves were 2.1 trillion cubic feet of
natural gas equivalent.
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Millions)
Revenues:
<S> <C> <C> <C> <C>
Sales to others $ 40.5 $ 43.3 $116.5 $100.4
Intersegment sales 89.9 97.6 279.8 291.2
------ ------ ------ ------
Total Revenues 130.4 140.9 396.3 391.6
------ ------ ------ ------
Costs and Expenses:
Operating and maintenance 18.2 15.9 51.3 46.4
Exploration expense 10.3 7.0 24.1 15.6
General and administrative 12.0 13.1 38.0 39.1
Depreciation, depletion and
amortization 97.2 61.5 202.9 175.6
Taxes and other 5.3 5.2 18.3 17.7
------ ------ ------ ------
143.0 102.7 334.6 294.4
------ ------ ------ ------
Operating Income (Loss) as Reported (12.6) 38.2 61.7 97.2
Impairment of Oil and Gas Properties 39.0 - 39.0 -
------ ------ ------ ------
Operating Income Excluding
Unusual Item $ 26.4 $ 38.2 $100.7 $ 97.2
====== ====== ====== ======
Net Sales Volumes:
Gas (Bcf) 51 54 148 152
Oil and condensate (MBbls) 1,144 1,366 3,108 3,748
Natural gas liquids (MBbls) 489 643 1,254 1,579
- ---------------------------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 2.01 $ 2.09 $ 2.13 $ 2.07
Oil and condensate ($/Bbl) 19.39 19.09 20.48 18.99
Natural gas liquids ($/Bbl) 10.93 11.10 11.93 10.77
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Third Quarter 1997 to Third Quarter 1996 Analysis
Operating income decreased $11.8 million, after excluding the
recognition of a $39.0 million charge for the impairment of certain oil and gas
properties in September 1997 (see Note 6 of the Notes to Condensed Consolidated
Financial Statements). The decrease in operating income is attributable
primarily to lower natural gas and oil production and lower natural gas prices.
These unfavorable items were partially offset by $5.5 million of costs
associated with the settlement of the Briggs et. al. v. Sonat Exploration
litigation incurred in the third quarter of 1996. Natural gas production
declined to 51 billion cubic feet (Bcf) from 54 Bcf in the third quarter of
1996, a decrease of 6 percent, and oil and condensate production declined 16
percent. The drop in production primarily reflects declines in certain Gulf of
Mexico properties (see impairment discussion). Average realized natural gas
prices for the third quarter of 1997 were $2.01 per thousand cubic feet (Mcf)
compared with $2.09 per Mcf in the third quarter of 1996, a 4 percent decrease.
Excluding depreciation, depletion and amortization expense, costs and
expenses were slightly higher in the 1997 period. Exploration expense increased
$3.3 million as a result of increased exploration activity. Operating and
maintenance expense increased $2.3 million as a result of a higher level of
drilling activity. General and administrative expenses were lower due to a
decrease in employee related expenses. Excluding the $39.0 million impairment
provision in 1997, depreciation, depletion and amortization expense decreased by
$3.3 million due to lower production volumes.
Nine Months 1997 to Nine Months 1996 Analysis
Operating income increased $3.5 million after excluding the $39.0
million provision for the impairment of oil and gas properties in the third
quarter of 1997 which was discussed earlier. The increase was primarily due to
higher natural gas and oil and condensate prices. Additionally, 1996 results
include $12.0 million of costs associated with the settlement of the Briggs et.
al. v. Sonat Exploration litigation. Average realized natural gas prices
increased to $2.13 per Mcf compared with $2.07 per Mcf in 1996, a 3 percent
increase. Realized oil prices increased 8 percent to an average of $20.48 per
barrel in 1997 from $18.99 per barrel in 1996. Lower oil and condensate
production, which decreased 17 percent to 3.1 million barrels for the first nine
months of 1997, and lower natural gas production partly offset the higher prices
realized for oil and natural gas.
Excluding depreciation, depletion and amortization expense, costs and
expenses were higher for the first nine months of 1997 when compared with the
first nine months of 1996. Exploration expense increased $8.5 million as a
result of increased exploration activity. Operating and maintenance expense
increased $4.9 million due to a higher level of drilling activity. After
excluding the impairment provision, depreciation, depletion and amortization
expense decreased $11.7 million as a result of a lower amortization rate as well
as lower production volumes.
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
$19.7 million and $21.0 million and oil revenues were reduced by $.5 million and
$8.0 million in the 1997 and 1996 nine-month periods, respectively, relating to
hedging activities.
<PAGE>
A portion of Sonat Exploration's future production is hedged. Gas
production for the remainder of 1997 through 2000 in the aggregate amount of
175.5 TBtus is hedged at a weighted average price of $2.05 per MMBtu. Of this
amount, 18.8 TBtu at a weighted average price of $2.11 relates to remaining 1997
production. Oil production of approximately 275 thousand barrels is hedged for
the remainder of 1997 at a weighted average price of $20.27 per barrel.
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).
In connection with Southern's Destin Pipeline project, the FERC issued
its Draft Environmental Impact Statement in July 1997. The pipeline, which is
still subject to final FERC approval, is expected to be partially completed and
in service in mid-1998.
In April 1997 the FERC issued an order that permitted Southern to begin
construction on a project with an estimated capital cost of $36 million that
would add 46 million cubic feet per day of firm capacity for customers in
Georgia and Tennessee. Construction began in late June, and this project was
placed in service on November 1, 1997. Southern is also moving forward on
expansions to eastern Tennessee and northern Alabama that have a total filed
capital cost of $105 million. The North Alabama expansion, which received FERC
approval in May 1997, is now anticipated to go in service in the fall of 1999,
subject to FERC approval of an application to change the route of the pipeline
as it crosses the Tennessee River. 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.
In October 1997 AGL Resources Inc. and Southern entered into a letter
of intent to jointly construct, own and operate a new liquefied natural gas
peaking facility, Etowah LNG, in Polk County, Ga. Under the agreement, which is
subject to the execution of definitive documents, AGL Resources and Southern
each will own 50 percent of Etowah LNG, which will be regulated by the FERC. The
proposed plant will connect directly into AGL Resources' principal natural gas
distribution subsidiary, Atlanta Gas Light Company, and Southern's pipeline.
Etowah LNG will provide natural gas storage and peaking services to Atlanta Gas
Light and other Southeastern customers. The new facility will cost approximately
$90 million, with 3 billion cubic feet of natural gas storage capacity and 450
million cubic feet per day of vaporization capacity. Affiliates of AGL Resources
will manage the construction of the facility and operate it. Southern will
provide administrative services. The companies plan to hold an open season for
Etowah LNG subscriptions for peaking services in December 1997 and January 1998
and expect to file a certificate application with FERC in March 1998. Subject to
receiving timely FERC approval, construction will begin in early 1999 in order
to provide peaking services during the 2001-02 winter heating season.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Millions)
Revenues (1):
Market transportation and
<S> <C> <C> <C> <C>
storage $74.9 $76.9 $232.7 $237.4
Supply transportation 12.8 12.5 35.7 35.8
Other 5.4 6.3 27.3 23.6
----- ----- ------ ------
Total Revenues 93.1 95.7 295.7 296.8
----- ----- ------ ------
Costs and Expenses (1):
Operating and maintenance 20.4 24.6 60.2 66.9
General and administrative 15.8 18.9 52.9 58.9
Depreciation and amortization 12.0 11.3 35.6 36.1
Taxes, other than income 5.0 4.7 15.0 14.0
----- ----- ------ ------
53.2 59.5 163.7 175.9
----- ----- ------ ------
Operating Income $39.9 $36.2 $132.0 $120.9
===== ===== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.7 $ 2.3 $ 8.1 $ 7.2
===== ===== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation (2) 133 135 439 489
Supply transportation 109 77 289 242
---- ---- ---- ----
Total Volumes 242 212 728 731
==== ==== ==== ====
CITRUS CORP.
(In Millions)
Allocated Expenses Included
in Operating Income $ .2 $ - $ .3 $ .2
==== ==== ===== =====
Equity in Earnings of
Citrus Corp. $5.6 $6.1 $18.4 $16.8
==== ==== ===== =====
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 124 126 347 331
Supply transportation 5 6 18 22
---- ---- ----- ----
Total Volumes 129 132 365 353
==== ==== ===== ====
</TABLE>
Notes:
(1) The 1996 periods have been restated to reflect the reclassification of
natural gas sales, natural gas cost and transition cost recovery to
other revenues.
(2) Volumes for Southern for 1996 include 9 billion cubic feet of gas for
the three-month period and 28 billion cubic feet of gas for the
nine-month period associated with a small intrastate pipeline that was
transferred to Sonat on January 1, 1997, and are therefore not included
in Southern's 1997 volumes.
<PAGE>
Third Quarter 1997 to Third Quarter 1996 Analysis
Southern Natural Gas Company and Subsidiaries - Operating income for
Southern was $39.9 million compared with $36.2 million in the comparable 1996
period. The improvement was primarily due to the impact of recent expansions,
lower operating expenses and improved results at Sea Robin Pipeline Company.
Market transportation revenues decreased due primarily to a reduction
in interruptible volumes and the transfer of Southern's ownership of a small
intrastate pipeline to Sonat, which was immaterial to operating results, and a
favorable imbalance resolution in the 1996 period, partially offset by increased
revenue from expansions. Supply revenues increased due to higher volumes.
Operating and maintenance expense decreased primarily due to cost reduction
initiatives. General and administrative expenses decreased primarily due to
lower employee benefit expenses. Sea Robin's improved results were due to
increased throughput and lower operating and maintenance expense.
Citrus - Equity in earnings of Citrus declined $.5 million to $5.6
million. The decline was primarily due to lower trading margins at Citrus
Trading, partly offset by higher rates at Florida Gas in conjunction with its
rate filing effective in March 1997.
Nine Months 1997 to Nine Months 1996 Analysis
Southern Natural Gas Company and Subsidiaries - Operating income for
Southern was $132.0 million for the nine months ended September 30, 1997,
compared with $120.9 million for the nine months ended September 30, 1996. The
improvement was due to the impact of recent expansions, lower operating expenses
and improved results at Sea Robin Pipeline Company.
Market transportation revenues decreased due to lower volumes resulting
primarily from warmer weather and the transfer of Southern's ownership of a
small intrastate pipeline to Sonat, which was immaterial to operating results,
partially offset by increased revenue from expansions. Supply transportation
revenues were flat as increased volumes offset the effect of lower rates at Sea
Robin. Operating and maintenance expense decreased primarily due to cost
reduction initiatives. General and administrative expenses decreased primarily
due to lower stock-based compensation and employee benefit expenses. Sea Robin's
improved results were primarily due to lower operating and maintenance expense.
Citrus - Equity in earnings of Citrus increased $1.6 million to $18.4
million. The increase was attributable to higher rates at Florida Gas mentioned
above, higher interruptible transportation volumes and lower financing costs,
partly offset by lower trading margins at Citrus Trading.
<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 expire on
November 30, 1997, following which Southern's remaining gas supply will either
be used by Southern or 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. Southern is a party to two market-priced contracts with Exxon
Corporation entered into in 1995 as part of a settlement of certain other gas
purchase contracts. These contracts, which terminate in November 1997, account
for 80 percent of Southern's estimated purchase commitments in the fourth
quarter of 1997, which total $40 million. Annual purchase commitments total less
than $25 million for each subsequent year. 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 natural gas business has continued to grow rapidly.
Sonat Marketing's average daily sales volumes increased 29 percent from the
third quarter of 1996. This growth was achieved in large part by the Company's
continuing focus on its strategy of working closely with its customers and
delivering outstanding customer service.
<PAGE>
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 directly 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 3.3
million megawatt hours in the third quarter of 1997 from 1.0 million megawatt
hours in the third quarter of 1996.
ENERGY MARKETING OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Revenues $912.7 $636.1 $2,568.2 $1,759.2
====== ====== ======== ========
Operating Income (Loss) $ .9 $ (0.7) $ 2.0 $ 11.6
====== ====== ======== ========
(Billion Cubic Feet)
Sonat Marketing Gas Sales
Volumes (100%) 339 262 942 685
====== ====== ======== ========
(Thousands of Megawatt Hours)
Sonat Power Marketing Sales
Volumes (100%) 3,344 1,035 6,662 1,684
====== ====== ======== ========
</TABLE>
Third Quarter 1997 to Third Quarter 1996 Analysis
Revenues and operating income increased by $276.6 million and $1.6
million, respectively. The increase in revenues is due to higher sales volumes.
Operating costs for the energy marketing segment have increased due to business
growth.
Nine Months 1997 to Nine Months 1996 Analysis
Revenues increased for the nine-month period due to higher volumes.
Operating income for the energy marketing segment for the nine months ended
September 30, 1997, declined $9.6 million compared to the same period in 1996.
Although sales volumes increased, unit trading margins were lower. Additionally,
in the nine months ended September 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 nine months ended September 30, 1997. Operating costs for the
energy marketing segment increased due to business growth.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Millions)
Other Income (Expense), Net:
Equity in earnings of
<S> <C> <C> <C> <C>
unconsolidated affiliates $ 8.8 $ 8.9 $28.4 $25.3
Minority interest (0.4) (0.1) (1.2) (5.2)
Other 1.1 4.7 5.7 6.6
----- ----- ----- -----
$ 9.5 $13.5 $32.9 $26.7
===== ===== ===== =====
</TABLE>
Equity in earnings of unconsolidated affiliates was flat in the
three-month period. The increase in the nine-month period 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 a $3.9 million net gain on the partial termination of an interest rate
swap, while the nine-month period of 1997 includes a $2.4 million net gain on
the termination of the remainder of the interest rate swap. In addition, the
nine-month period of 1997 reflects higher levels of equity capitalized at
Southern in its construction programs in the early part of the year, while the
same period of 1996 includes gains on the sale of oil and gas properties.
<TABLE>
<S> <C> <C> <C> <C>
Interest Expense, Net $21.3 $19.7 $62.8 $62.8
</TABLE>
Net interest expense increased in the three-month period of 1997
compared to the three-month period of 1996 due to higher average debt levels.
Net interest expense was flat for the nine-month period of 1997 compared to the
nine-month period of 1996 because the impact of higher average debt levels was
offset by lower average reserve balances. Interest capitalized decreased in both
periods primarily due to lower interest capitalized at Sonat Exploration. The
current nine-month period reflects lower GSR related interest income at Southern
due to the 1996 Customer Settlement.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense $ 3.7 $20.9 $54.9 $62.3
</TABLE>
Income tax expense decreased in both periods due to lower levels of
income before income taxes. The effective tax rate was lower in the three-month
period because tax preference items had a greater impact at the lower level of
income before income taxes.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
(In Millions)
<S> <C> <C>
Operating Activities $ 423.5 $ 425.0
</TABLE>
Cash flow from operations was essentially flat compared to the 1996
period. An increase in cash flows at Sonat Exploration and Southern, driven
primarily by improved operating results for the nine-month period, was offset by
the unfavorable impact of energy prices on working capital for Energy
Marketing's operations.
The 1996 period included $34.0 million of cash refunds paid to
customers at Southern. 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. The change in reserves for regulatory matters and
other is primarily due to the Customer Settlement accounting. Deferred income
taxes and accrued income taxes reflect the impact of higher intangible drilling
costs at Sonat Exploration in the current period and the Customer Settlement.
The unusual entry to record an asset impairment at Sonat Exploration in the
current period had the effect of increasing depreciation, depletion, and
amortization by $39.0 million and decreasing deferred income taxes by $13.7
million. The change in accounts receivable and accounts payable is primarily
attributable to high receivable and payable balances in December 1996 due to
higher natural gas prices. The change in other current assets and liabilities is
primarily due to the change in the level of broker deposits at Energy Marketing.
<TABLE>
<S> <C> <C>
Investing Activities $(565.3) $(403.1)
</TABLE>
Net cash used in investing activities was $162.2 million higher in 1997
compared to 1996. The increase was primarily attributable to capital
expenditures, which were higher due to increased developmental drilling at Sonat
Exploration. The increase in advances to unconsolidated affiliates primarily
reflects Southern's investments of $17.2 million in the Destin Pipeline joint
venture.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
(In Millions)
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<S> <C> <C>
Exploration and Production $425.7 $298.1
Natural Gas Transmission 100.5 94.9
Energy Marketing 8.3 3.3
Other 2.7 3.2
------ ------
Total $537.2 $399.5
====== ======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $16.7 million and $8.9 million in the first nine months of 1997
and 1996, respectively.
<TABLE>
<S> <C> <C>
Financing Activities $208.7 $ (39.2)
</TABLE>
Financing activities provided $208.7 million in 1997 compared to
requiring $39.2 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. In September 1997,
Sonat and Southern each issued $100.0 million under their shelf registration
statements. The proceeds were used to repay amounts borrowed under Sonat's
commercial paper program and under its revolving credit agreement.
CAPITAL RESOURCES
At September 30, 1997, the Company had lines of credit and a revolving
credit agreement with a total capacity of $750.0 million. Of this, $265.3
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 $234.7 million of commercial
paper then outstanding, plus the $250.0 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 $500.0 million in debt
securities of which $300.0 million has been issued.
The Company has essentially completed purchasing stock under its stock
repurchase program for 1997. 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.
<PAGE>
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.)
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* Financial Data Schedules for the period ended September 30, 1997
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on September 29, 1997, reporting
certain information under Item 5, with respect to the issuance and sale by the
Company of $100,000,000 aggregate principal amount of its 6.75% Notes due
October 1, 2007, and furnishing certain related exhibits under Item 6.
1 The Company will furnish to requesting security holders the exhibits on
this list upon the payment of a fee of $.10 per page up to a maximum of $5.00
per exhibit. Requests must be in writing and should be addressed to Beverley T.
Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham, Alabama 35202-2563.
<PAGE>
SONAT INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
Date: November 10, 1997 By: /s/ James E. Moylan, Jr.
-------------------------- --------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 10, 1997 By: /s/ Thomas W. Barker, Jr.
-------------------------- ---------------------------
Thomas W. Barker, Jr.
Vice President-Finance
Exhibit 11
<TABLE>
<CAPTION>
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands Except Per-Share Amounts)
Primary Earnings Per Share(1)
<S> <C> <C> <C> <C>
Net Income $12,970 $48,034 $116,039 $134,198
======= ======= ======== ========
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 85,767 86,228 86,006 86,188
Common Stock Equivalents Applicable
to Outstanding Stock Options 1,472 1,529 1,551 1,297
------- ------- -------- --------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,239 87,757 87,557 87,485
======= ======= ======== ========
Primary Earnings Per Share $ .15 $ .55 $ 1.33 $ 1.53
======= ======= ======== ========
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by Footnote 2 to Paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%. For this
reason, the primary earnings per share amounts shown do not agree with
earnings per share amounts shown on the Condensed Consolidated Statements
of Income in Part I.
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Years Ended December 31,
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 $170,951 $196,513 $294,304 $282,497 $154,871 $364,198 $133,728
Fixed charges (see computation below) 112,881 115,551 152,830 165,154 127,909 129,160 156,428
Less allowance for interest
capitalized (2,905) (3,918) (5,094) (6,540) (6,692) (4,101) (8,422)
-------- -------- -------- -------- -------- -------- --------
Total Earnings Available for
Fixed Charges $280,927 $308,146 $442,040 $441,111 $276,088 $489,257 $281,734
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $107,048 $110,339 $145,406 $157,653 $120,295 $122,204 $149,165
Rentals(b) 5,833 5,212 7,424 7,501 7,614 6,956 7,263
-------- -------- -------- -------- -------- -------- --------
$112,881 $115,551 $152,830 $165,154 $127,909 $129,160 $156,428
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.5 2.7 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 96,555
<SECURITIES> 0
<RECEIVABLES> 515,494
<ALLOWANCES> 0
<INVENTORY> 40,662
<CURRENT-ASSETS> 791,210
<PP&E> 5,534,078
<DEPRECIATION> 2,838,418
<TOTAL-ASSETS> 4,185,104
<CURRENT-LIABILITIES> 884,561
<BONDS> 1,160,597
0
0
<COMMON> 87,230
<OTHER-SE> 1,512,276
<TOTAL-LIABILITY-AND-EQUITY> 4,185,104
<SALES> 2,557,057
<TOTAL-REVENUES> 2,910,978
<CGS> 2,188,555
<TOTAL-COSTS> 2,328,998
<OTHER-EXPENSES> 244,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,519
<INCOME-PRETAX> 170,951
<INCOME-TAX> 54,912
<INCOME-CONTINUING> 116,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,039
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
