SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K
Current Report
Pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of earliest event reported: October 22, 1998
SONAT INC.
(Exact name of registrant as specified in its charter)
Delaware 1-7179 63-0647939
(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
AmSouth-Sonat Tower
Birmingham, Alabama 35203
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
205-325-3800
<PAGE>
Item 5. Other events.
On October 22, 1998, Sonat Inc. announced its third quarter results,
which reflect the adoption of the full cost method of accounting for its
exploration and production business segment. A copy of the press release,
including third quarter results, is filed as an exhibit to this report.
Change to Full Cost Accounting
Sonat Exploration Company changed from successful efforts to full cost
accounting because its future capital spending will be focused significantly
more on exploration activity than in the past. Full cost accounting, which
amortizes rather than expenses dry-hole exploration and other related costs,
provides a more appropriate method of matching revenues and expenses.
Exploration activity has increased from 6 percent of 1995 capital spending, or
$27 million, to an estimated 33 percent of 1998 capital spending, or
approximately $175 million. A significant percentage of Sonat Exploration's 1999
capital program will be spent on exploratory drilling.
The adoption of the full cost method is expected to increase 1998 and 1999
normalized earnings from levels that would have been reported under successful
efforts accounting and, more important, will reduce earnings volatility from
quarter-to-quarter and year-to-year going forward. Sonat's earnings will now be
more comparable to its integrated pipeline company peers that have substantial
exploration and production operations, most of which use the full cost method.
The change to full cost accounting will not materially affect the company's cash
flow from operations.
Sonat has restated all prior financial statements as a result of the
conversion to full cost accounting. As a part of this process, all previous
charges related to the impairment of Sonat Exploration's assets, including those
taken in 1998, were reversed, which significantly raised the book value of those
properties as well as Sonat's stockholders' equity. The full cost method,
however, requires quarterly ceiling tests to ensure that the carrying value of
assets on the balance sheet is not overstated. Sonat Exploration has performed
ceiling tests for each of the three 1998 quarters and appropriate charges have
been taken. The third quarter test was based on NYMEX prices of $1.67 per
thousand cubic feet (Mcf) for natural gas and $14.98 per barrel for oil, and was
adjusted for hedges, basis differentials and other pricing factors. Future
quarterly full cost ceiling tests will be based on the then-current NYMEX prices
for both natural gas and oil after adjustments. The end result of the full cost
conversion is that both the book value of Sonat Exploration's properties and
Sonat's stockholders' equity are at higher levels than if it had continued with
the successful efforts method of accounting.
Financial Results
Under the full cost method of accounting, Sonat earned $37.4 million, or
$.34 per share, for the three months ended September 30, 1998, after eliminating
a $295.8 million, or $2.69 per share, ceiling test charge under full cost
accounting rules. Third quarter 1998 results compare with $52.3 million, or $.47
per share, for the same 1997 period. The decline in normalized earnings is
principally due to sharply lower oil and natural gas prices and lower
production.
<PAGE>
For the nine months ended September 30, 1998, the company earned $136.8
million, or $1.24 per share, after eliminating the previously mentioned third
quarter charge as well as ceiling test and restructuring charges totaling $386.8
million, or $3.51 per share, in the previous two 1998 quarters. This compares
with earnings of $176.2 million, or $1.58 per share, for the first nine months
of 1997.
The change to full cost accounting had the effect of increasing third
quarter 1998 and 1997 normalized earnings by $24.4 million, or $.22 per share,
and $23.7 million, or $.21 per share, respectively. Nine-month 1998 and 1997
normalized earnings were increased by $54.7 million, or $.49 per share, and
$60.9 million, or $.54 per share, respectively
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
The Index to Exhibits to this Report is incorporated herein by reference.
-2-
<PAGE>
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 hereunto duly authorized.
Sonat Inc.
By: /s/ William A. Smith
William A. Smith
Executive Vice President and
General Counsel
Dated: October 22, 1998
-3-
<PAGE>
SONAT INC.
CURRENT REPORT ON FORM 8-K
INDEX TO EXHIBITS
Exhibit
No. Exhibit
99* Press Release dated October 22, 1998
- -----------------
* Filed herewith
-4-
<PAGE>
EXHIBIT 99
Bruce L. Connery FOR RELEASE: October 22, 1998
205 325 3898
Thomas W. Barker, Jr.
205 325 3586
SONAT INC. ANNOUNCES THIRD QUARTER RESULTS; CHANGE TO FULL COST ACCOUNTING;
AND DECLARATION OF DIVIDEND
BIRMINGHAM, Ala. -- Ronald L. Kuehn, Jr., chairman, president and
chief executive officer of Sonat Inc. (NYSE: SNT), today announced the company's
third quarter results, which reflect the adoption of the full cost method of
accounting for its exploration and production business segment.
Change to Full Cost Accounting
Sonat Exploration Company changed from successful efforts to full cost
accounting because its future capital spending will be focused significantly
more on exploration activity than in the past. Full cost accounting, which
amortizes rather than expenses dry-hole exploration and other related costs,
provides a more appropriate method of matching revenues and expenses.
Exploration activity has increased from 6 percent of 1995 capital spending, or
$27 million, to an estimated 33 percent of 1998 capital spending, or
approximately $175 million. A significant percentage of Sonat Exploration's 1999
capital program will be spent on exploratory drilling.
The adoption of the full cost method is expected to increase 1998 and 1999
normalized earnings from levels that would have been reported under successful
efforts accounting and, more important, will reduce earnings volatility from
quarter-to-quarter and year-to-year going forward. Sonat's earnings will now be
more comparable to its integrated pipeline company peers that have substantial
exploration and production operations, most of which use the full cost method.
The change to full cost accounting will not materially affect the company's cash
flow from operations.
Sonat has restated all prior financial statements as a result of the
conversion to full cost accounting. As a part of this process, all previous
charges related to the impairment of Sonat Exploration's assets, including those
taken in 1998, were reversed, which significantly raised the book value of those
properties as well as Sonat's stockholders' equity. The full cost method,
however, requires quarterly ceiling tests to ensure that the carrying value of
assets on the balance sheet is not overstated. Sonat Exploration has performed
ceiling tests for each of the three 1998 quarters and appropriate charges have
been taken. The third quarter test was based on NYMEX prices of $1.67 per
thousand cubic feet (Mcf) for natural gas and $14.98 per barrel for oil, and was
adjusted for hedges, basis differentials and other pricing factors. Future
quarterly full cost ceiling tests will be based on the then-current NYMEX prices
for both natural gas and oil after adjustments. The end result of the full cost
conversion is that both the book value of Sonat Exploration's properties and
Sonat's stockholders' equity are at higher levels than if it had continued with
the successful efforts method of accounting.
<PAGE>
Financial Results
Under the full cost method of accounting, Sonat earned $37.4 million, or
$.34 per share, for the three months ended September 30, 1998, after eliminating
a $295.8 million, or $2.69 per share, ceiling test charge under full cost
accounting rules. Third quarter 1998 results compare with $52.3 million, or $.47
per share, for the same 1997 period. The decline in normalized earnings is
principally due to sharply lower oil and natural gas prices and lower
production.
For the nine months ended September 30, 1998, the company earned $136.8
million, or $1.24 per share, after eliminating the previously mentioned third
quarter charge as well as ceiling test and restructuring charges totaling $386.8
million, or $3.51 per share, in the previous two 1998 quarters. This compares
with earnings of $176.2 million, or $1.58 per share, for the first nine months
of 1997.
The change to full cost accounting had the effect of increasing third
quarter 1998 and 1997 normalized earnings by $24.4 million, or $.22 per share,
and $23.7 million, or $.21 per share, respectively. Nine-month 1998 and 1997
normalized earnings were increased by $54.7 million, or $.49 per share, and
$60.9 million, or $.54 per share, respectively.
Exploration and Production Results and Operations Sonat
Exploration's earnings before interest and taxes (EBIT) for the third
quarter of 1998 were $26 million, after eliminating the effect of the $455
million pre-tax ceiling test charge. This compares with EBIT of $50 million in
the same 1997 period. Total production declined from 81 billion cubic feet of
natural gas equivalent (Bcfe) to 66 Bcfe, primarily due to significant property
sales that have occurred as part of the previously announced corporate
restructuring. Excluding properties sold in the restructuring, production
declined from 59 Bcfe in the third quarter of 1997 to 56 Bcfe in the same 1998
period.
<PAGE>
Realized natural gas prices for the third quarter of 1998 were $1.85 per
Mcf as compared with $2.08 per Mcf last year. Realized oil prices were $12.34
per barrel compared with $18.72 per barrel last year.
So far this year, Sonat Exploration has been successful on four of the 13
exploratory wells that it has drilled in the Gulf of Mexico. The company has
recently completed the technical and permitting work necessary to drill a number
of important offshore prospects, including its Timbalier Trench and Viosca Knoll
blocks. With these prospects now ready to drill and because of the recent
decline in day rates for offshore drilling rigs and related services, the
company plans to increase substantially its offshore exploration activity with
13 wells planned for the fourth quarter of 1998 and first quarter of 1999.
Onshore exploration activity is also expected to increase sharply due to the
significant number of exploration prospects that the company has generated this
year.
In the August Federal Lease Sale 171, Sonat Exploration was the apparent
successful bidder on 30 offshore tracts at a total cost of $9.1 million.
Twenty-six of these leases are in deep water and are a part of the company's
efforts to build a deep-water exploration program.
Natural Gas Transmission Results and Operations
EBIT for the natural gas transmission segment was $53 million compared
with $49 million in the third quarter of 1997. The improvement is primarily due
to equity earnings from the allowance for funds used during the construction of
the Destin Pipeline and a Southern Natural Gas Company expansion that was
completed in late 1997. Southern Natural's market-area throughput rose from 133
Bcf to 140 Bcf because of increased electric-generation demand. Production-area
throughout declined from 109 to 85 Bcf due to disruptions from hurricanes and
tropical storms, and natural production declines taking place in certain Gulf of
Mexico fields.
<PAGE>
Expansion Update
During the third quarter, construction of the offshore portion on the
Destin Pipeline was completed, and it is currently transporting about 90 million
cubic feet (MMcf) of natural gas per day. As additional reserves are connected
during the fourth quarter, daily throughput is expected to exceed 200 MMcf per
day by year end.
Energy Services Results and Operations
Financial results for the energy services segment improved from 1997
levels, as third quarter EBIT rose to $4.2 million from $.7 million in the third
quarter of 1997. The increase is due to better power marketing results and the
contribution of the 50 percent-owned Mid-Georgia Cogen L.P. power plant, which
was heavily utilized in July and August.
Sonat Marketing Company's third quarter physical sales volumes were
slightly below 1997 levels. Notional sales volumes from natural gas derivative
transactions more than doubled, however, reflecting Sonat Marketing's expanding
its financial transactions on behalf of customers and increasing reliance on
financial transactions to manage basis positions.
While Sonat Power Marketing's third quarter 1998 volumes were slightly
below 1997 levels, margins were substantially better due to improved market
conditions. The company's financial results also benefited from marketing
arrangements, whereby the company captures a spread between natural gas and
electricity prices.
Dividend Approved
Kuehn also announced that a regular quarterly dividend of $.27 per share
was declared for Sonat's common stock. The dividend, payable on December 14,
1998, to stockholders of record on November 30, 1998, is the 239th consecutive
quarterly dividend paid on the company's common stock.
Sonat Inc., headquartered in Birmingham, is a diversified energy company
engaged in exploration and production of oil and natural gas, interstate
transmission of natural gas, and energy services.
<PAGE>
Cautionary Statement Concerning Forward-Looking Statements
This press release includes certain forward-looking statements, which 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 management's
forward-looking statements. Such statements are made in reliance on the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Changes in business conditions in the oil and gas industry and at Sonat
Exploration Company could change its current plans for increasing its onshore
and offshore exploration programs. Such changes would include material changes
in oil and gas prices and drilling rig rates. Finally, there can be no assurance
that the Destin Pipeline will be able to timely connect new fields or that the
production from those fields will allow it to meet its planned throughput
objectives.
Additional factors that may affect the company can be found under the caption
"Cautionary Statement Concerning Forward-Looking Statements" in the company's
1997 Annual Report on Form 10-K, and its Quarterly Reports on Form 10-Q for the
first and second quarters of 1998. These reports, which are filed with the
Securities and Exchange Commission, are hereby referenced in their entirety for
further information about the company, its operations and its financial
statements.
# # #
98-31
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
3 Months 9 Months
---------------------- ----------------------
Periods Ended September 30, 1998 1997 (2) 1998 1997 (2)
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $ 874,497 $1,073,715 $2,908,772 $3,053,169
Costs and Expenses 1,263,819 982,208 3,713,508 2,756,289
---------- ---------- ---------- ----------
Operating Income (Loss) (389,322) 91,507 (804,736) 296,880
Other Income 20,521 9,487 48,034 35,762
---------- ---------- ---------- ----------
Earnings (Loss) Before Interest
and Taxes (368,801) 100,994 (756,702) 332,642
Interest Expense, Net (32,312) (23,505) (93,099) (68,814)
---------- ---------- ---------- ----------
Income (Loss) before Income Taxes (401,113) 77,489 (849,801) 263,828
Income Tax Expense (Benefit) (142,697) 25,141 (304,039) 87,636
---------- ---------- ---------- ----------
Net Income (Loss) (1) $ (258,416) $ 52,348 $ (545,762) $ 176,192
========== ========== ========== ==========
Earnings (Loss) Per Share of
Common Stock $ (2.35) $ .48 $ (4.96) $ 1.60
========== ========== ========== ==========
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ (2.35) $ .47 $ (4.96) $ 1.58
========== ========== ========== ==========
Weighted Average Shares
Outstanding 110,034 109,926 110,017 110,164
========== ========== ========== ==========
Weighted Average Shares
Outstanding-Assuming Dilution 110,034 111,397 110,017 111,716
========== ========== ========== ==========
Cash Dividends Paid Per Common Share $ .27 $ .27 $ .81 $ .81
========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Net income for the three-month period of 1998 includes a charge of
$295.8 million, or $2.69 per share, for ceiling test write-downs
related to the Company's oil and gas operations. Net income for the
nine-month period of 1998 includes charges of $682.6 million, or $6.20
per share, for ceiling test write-downs and restructuring charges
related to the Company's oil and gas operations.
(2) The 1997 information has been restated for a change to the full cost
method of accounting for the Company's oil and gas operations and to
reflect the Company's merger with Zilkha Energy Company on January 30,
1998, which was accounted for as a pooling of interests.
Under the successful efforts method of accounting the Company would
have reported net income as follows (including Zilkha):
<TABLE>
<CAPTION>
3 Months 9 Months
------------------- --------------------
Periods Ended September 30, 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Net Income (Loss) $(8,252) $(5,384) $(228,218) $81,333
======= ======= ========= =======
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ (.07) $ (.05) $ (2.07) $ .73
======= ======= ========= =======
</TABLE>
Net income under the successful efforts method for both 1997 periods
included a charge of $34.0 million, or $.31 per share, related to the
impairment of certain oil and gas properties.
Net income under the successful efforts method for the 1998 three-month
and nine-month periods included a charge for restructuring and
impairment costs related to the Company's oil and gas operations of
$21.2 million, or $.19 per share, and $310.4 million, or $2.82 per
share, respectively.
<PAGE>
SONAT INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
(Unaudited)
<TABLE>
<CAPTION>
3 Months 9 Months
---------------------- ----------------------
Periods Ended September 30, 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
BUSINESS SEGMENTS
Revenues:
<S> <C> <C> <C> <C>
Exploration and production $ 121,161 $ 180,255 $ 431,202 $ 537,534
Natural gas transmission 93,349 93,153 294,350 295,701
Energy services 762,024 912,910 2,499,243 2,569,114
Other 11,791 7,842 34,125 25,585
Intersegment revenue (113,828) (120,445) (350,148) (374,765)
--------- ---------- ---------- ----------
$ 874,497 $1,073,715 $2,908,772 $3,053,169
========= ========== ========== ==========
Operating Income (Loss):
Exploration and production $(430,366) $ 50,347 $ (956,593) $ 157,653
Natural gas transmission 38,166 39,695 143,060 131,735
Energy services 1,492 960 4,816 2,015
Other, net of corporate
expenses 1,386 505 3,981 5,477
--------- ---------- ---------- ----------
$(389,322) $ 91,507 $ (804,736) $ 296,880
========= ========== ========== ==========
Earnings (Loss) Before Interest
and Taxes:
Exploration and production $(428,537) $ 50,413 $ (954,340) $ 160,279
Natural gas transmission 52,857 48,983 184,919 164,139
Energy services 4,206 710 6,686 1,464
Other 2,673 888 6,033 6,760
--------- ---------- ---------- ----------
$(368,801) $ 100,994 $ (756,702) $ 332,642
========= ========== ========== ==========
INTEREST EXPENSE, NET:
Interest income $ 938 $ 1,467 $ 4,201 $ 3,662
Interest expense (34,470) (26,763) (101,392) (78,134)
Interest capitalized 1,220 1,791 4,092 5,658
--------- ---------- ---------- ----------
$ (32,312) $ (23,505) $ (93,099) $ (68,814)
========= ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
Assets $4,108,495 $5,252,114
Total Debt 1,847,696 1,697,213
Stockholders' Equity 1,342,639 1,961,776
Debt to Capitalization 58% 46%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SONAT INC. AND SUBSIDIARIES
OPERATIONAL DATA
(Unaudited)
Exploration and Production Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net Sales Volumes:
<S> <C> <C> <C> <C>
Gas (Bcf) 54 68 177 196
Oil and condensate (MBbls) 1,622 1,747 5,356 4,453
Natural gas liquids (MBbls) 378 496 1,553 1,293
- ---------------------------------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 1.85 $ 2.08 $ 1.96 $ 2.20
Oil and condensate ($/Bbl) 12.34 18.72 13.44 19.89
Natural gas liquids ($/Bbl) 8.33 10.94 9.04 11.84
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Natural Gas Transmission
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Billion Cubic Feet)
Southern Volumes:
<S> <C> <C> <C> <C>
Market transportation 140 133 462 439
Supply transportation 85 109 283 289
------ ------ ------ ------
Total Volumes 225 242 745 728
====== ====== ====== ======
Florida Gas Volumes (100%) 130 129 350 364
====== ====== ====== ======
</TABLE>
Energy Services
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Physical Volumes:
Sonat Marketing Sales Volumes (100%)
<S> <C> <C> <C> <C>
(Billion Cubic Feet) 285 339 929 942
====== ====== ====== ======
Sonat Power Marketing Sales
Volumes (100%)
(Thousands of Megawatt Hours) 3,051 3,344 8,950 6,662
====== ====== ====== ======
Financial Settlements (Notional):
(Bcf/d) 11.8 4.5 8.7 3.6
====== ====== ====== ======
</TABLE>
