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, 1998
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:
110,035,497 SHARES OUTSTANDING ON JULY 31, 1998
<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, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations
(Unaudited)--Three Months and Six Months Ended
June 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Six Months Ended June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 34
PART II. Other Information
Item 5. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 35
</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,
1998 1997
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 11,139 $ 27,278
Restricted cash (Note 2) - 115,956
Accounts receivable 490,760 619,581
Inventories 63,021 65,161
Income taxes 26,164 1,985
Gas imbalance receivables 13,091 16,644
Assets from trading activities 96,035 92,150
Other 37,425 42,052
---------- ----------
Total Current Assets 737,635 980,807
---------- ----------
Investments in Unconsolidated Affiliates and Other 661,758 553,618
---------- ----------
Plant, Property and Equipment 6,328,070 6,079,239
Less accumulated depreciation, depletion
and amortization 3,578,615 3,096,541
---------- ----------
2,749,455 2,982,698
---------- ----------
Deferred Charges and Other:
Assets from trading activities 28,980 9,638
Other 170,399 190,298
---------- ----------
199,379 199,936
---------- ----------
Total Assets $4,348,227 $4,717,059
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 9,829 $ 14,508
Unsecured notes 816,909 446,721
Accounts payable 481,409 615,322
Accrued income taxes 12,579 18,274
Accrued interest 41,089 37,242
Accrued long-term compensation (Note 2) - 73,799
Gas imbalance payables 10,277 14,320
Liabilities from trading activities 86,848 85,398
Other 41,879 75,299
---------- ----------
Total Current Liabilities 1,500,819 1,380,883
---------- ----------
Long-Term Debt 1,101,691 1,235,984
---------- ----------
Deferred Credits and Other:
Deferred income taxes 196,190 298,681
Liabilities from trading activities 23,333 5,014
Other 186,387 182,507
---------- ----------
405,910 486,202
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 168,872 167,786
Retained earnings 1,231,712 1,511,085
---------- ----------
1,400,584 1,678,871
Less treasury stock 60,777 64,881
---------- ----------
Total Stockholders' Equity 1,339,807 1,613,990
---------- ----------
Total Liabilities and Stockholders' Equity $4,348,227 $4,717,059
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $ 925,222 $856,130 $2,034,407 $1,979,795
---------- -------- ---------- ----------
Costs and Expenses:
Natural gas cost 551,734 548,293 1,315,217 1,323,391
Electric power cost 115,421 42,970 180,612 75,856
Operating and maintenance 42,021 44,878 82,501 83,817
Exploration cost 23,015 34,493 47,702 67,050
General and administrative 35,924 59,179 75,158 103,958
Depreciation, depletion
and amortization 85,142 77,986 172,690 160,565
Impairment of oil and gas properties 429,827 - 429,827 -
Restructuring costs 15,017 - 15,017 -
Taxes, other than income 13,830 11,108 27,435 16,902
---------- -------- ---------- ----------
1,311,931 818,907 2,346,159 1,831,539
---------- -------- ---------- ----------
Operating Income (Loss) (386,709) 37,223 (311,752) 148,256
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 17,527 9,445 27,180 19,567
Minority interest (1,089) 76 (1,631) (796)
Other income, net 1,252 1,337 1,964 7,504
---------- -------- ---------- ----------
17,690 10,858 27,513 26,275
---------- -------- ---------- ----------
Earnings (Loss) Before Interest
and Taxes (369,019) 48,081 (284,239) 174,531
---------- -------- ---------- ----------
Interest:
Interest income 1,063 1,013 3,263 2,195
Interest expense (34,792) (26,518) (66,922) (51,371)
Interest capitalized 1,448 1,824 2,872 3,867
---------- -------- ---------- ----------
(32,281) (23,681) (60,787) (45,309)
---------- -------- ---------- ----------
Income (Loss) Before Income Taxes (401,300) 24,400 (345,026) 129,222
Income Tax Expense (Benefit) (143,322) 7,549 (125,061) 42,504
---------- -------- ---------- ----------
Net Income (Loss) $ (257,978) $ 16,851 $ (219,965) $ 86,718
========== ======== ========== ==========
Basic Earnings (Loss) Per Share
of Common Stock $ (2.34) $ .15 $ (2.00) $ .79
========== ======== ========== ==========
Diluted Earnings (Loss) Per Share
of Common Stock $ (2.32) $ .15 $ (1.98) $ .77
========== ======== ========== ==========
Weighted Average Shares Outstanding 110,049 110,185 110,008 110,285
========== ======== ========== ==========
Weighted Average Shares Outstanding-
Assuming Dilution 111,057 111,883 111,060 111,915
========== ======== ========== ==========
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,
1998 1997
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income (loss) $(219,965) $ 86,718
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization,
including impairment 602,517 160,565
Exploration cost 47,702 67,050
Deferred income taxes (102,225) 44,078
Equity in earnings of unconsolidated
affiliates, less distributions (20,663) (15,056)
Gas supply realignment costs 563 4,967
Change in:
Accounts receivable 188,074 160,415
Inventories 2,140 (23,067)
Accounts payable (133,913) (101,397)
Accrued interest and income taxes, net (26,027) (19,017)
Accrued long-term compensation (73,799) 1,135
Other current assets and liabilities (11,235) (8,551)
Net change from trading activities (3,458) (127)
Net change in restricted cash 115,956 -
Other, net (4,820) 6,430
--------- ---------
Net cash provided by operating activities 360,847 364,143
--------- ---------
Cash Flows from Investing Activities:
Plant, property and equipment additions (451,360) (416,820)
Net proceeds from disposal of assets 14,479 3,954
Exploration cost, excluding lease write-offs (23,758) (50,512)
Investments in unconsolidated affiliates and other (88,645) (572)
--------- ---------
Net cash used in investing activities (549,284) (463,950)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 400,000 750,000
Payments of long-term debt (540,834) (700,455)
Changes in short-term borrowings 370,188 122,701
--------- ---------
Net changes in debt 229,354 172,246
Dividends paid (59,408) (46,489)
Treasury stock purchases (1,289) (40,849)
Other equity 3,641 7,628
--------- ---------
Net cash provided by financing activities 172,298 92,536
--------- ---------
Net Decrease in Cash and Cash Equivalents (16,139) (7,271)
Cash and Cash Equivalents at Beginning of Period 27,278 48,009
--------- ---------
Cash and Cash Equivalents at End of Period $ 11,139 $ 40,738
========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 58,270 $ 43,502
Income taxes paid, net 7,395 21,896
</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 1997 periods have been restated to reflect the Company's merger
with Zilkha Energy Company (see Note 2). Certain other amounts in the 1997
condensed consolidated financial statements and notes have been reclassified to
conform with the 1998 presentation.
During the first quarter of 1998, the Company recognized the effect of
a change in salvage values, including reversal of excess depreciation expense,
relating to certain fixed assets, primarily aircraft and vehicles. The change,
which was to comply with recent Federal Energy Regulatory Commission (FERC)
directives, increased net income for the six-month period ended June 30, 1998,
by $4.4 million. The effect of the change on the three-month period ended June
30, 1998, was not material.
2. Changes in Operations
Business Combination - On January 30, 1998, following a special
shareholders' meeting, the Company completed the merger with Zilkha Energy
Company by exchanging approximately 24.2 million common shares for all of the
outstanding shares of Zilkha Energy. Zilkha Energy was a privately owned
exploration and production company. Immediately thereafter Zilkha Energy's name
was changed to Sonat Exploration GOM Inc. It operates in the shallow waters of
the Gulf of Mexico where it has accumulated the industry's largest net leasehold
position in the shallow-water area.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board (APB) Opinion
No. 16. Accordingly, all prior period condensed consolidated financial
statements, notes and operational data have been restated to include Sonat
Exploration GOM as if it had always been a part of Sonat.
There were no transactions between Sonat and Sonat Exploration GOM
prior to the combination.
<PAGE>
2. Changes in Operations (Cont'd)
The following are the revenues and net income for the previously
separate companies and the combined amounts presented in these condensed
consolidated financial statements.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, 1997 Ended June 30, 1997
------------------- -------------------
(In Thousands)
Revenues
<S> <C> <C>
Sonat Inc. $815,864 $1,888,102
Sonat Exploration GOM 40,266 91,693
-------- ----------
Combined $856,130 $1,979,795
======== ==========
Net Income (Loss)
Sonat Inc. $ 36,223 $ 103,069
Sonat Exploration GOM (19,372) (16,351)
-------- ----------
Combined $ 16,851 $ 86,718
======== ==========
</TABLE>
At December 31, 1997, Sonat Exploration GOM had accrued $73.8 million,
which represented compensation due to certain employees under deferred
compensation plans. The liability was estimated based on the fair market value
of Sonat Exploration GOM as of December 31, 1997. The Company's restricted cash
deposit at December 31, 1997, reflected on the Condensed Consolidated Balance
Sheet was used to settle this liability and certain other merger related
expenses.
Sonat Exploration Company Restructuring - On April 23, 1998, the
Company announced a restructuring of Sonat Exploration Company. The
restructuring includes significant property sales and certain cost reduction
activities associated with a reduction in work force. Oil and natural gas
properties with a net book value of $638.4 million having approximately 500
billion cubic feet of natural gas equivalent reserves and daily net production
of approximately 190 million cubic feet of natural gas equivalent are being
sold. The Company expects the sales will be completed by the end of the third
quarter of 1998 with proceeds used to pay down debt. Based on an estimate of
sales proceeds and as the result of other impairments and charges, the Company
booked an after-tax charge of $289.1 million in the second quarter of 1998.
The restructuring charge is comprised primarily of two items; $279
million for impairment of properties and approximately $10 million for other
restructuring expenses primarily associated with a reduction in work force. The
Company reviewed all of its oil and natural gas reserves during the second
quarter of 1998. Based on that review, Sonat Exploration revised downward proved
reserves by a net 199 Bcfe from year-end 1997 proved reserves. The majority of
the work force reductions were completed by the end of the second quarter. The
remaining reductions under the plan are expected to be completed concurrent with
the remaining property sales expected to close by the end of the third quarter
as discussed above.
<PAGE>
2. Changes in Operations (Cont'd)
The asset impairments are associated primarily with the properties to
be disposed of in the Company's divestiture program. The impairment loss
associated with these assets to be disposed of, calculated as the difference
between the estimated fair value less costs to sell and the carrying amount, is
estimated at $160 million, net of gains on certain properties included in the
divestiture program. The asset impairments also include the impairment of
certain assets to be held and used, which were composed primarily of producing
properties, non-producing leaseholds and deferred data costs. The impairment
loss associated with these assets was estimated at $119 million. The Condensed
Consolidated Statement of Operations for both 1998 periods includes revenues of
$27.0 million associated with these properties for the period of planned
disposal. The Company has recorded a reserve of $12.4 million to eliminate from
total Company operating results the portion of the operating results
attributable to the sales package properties which occurred after the sales
package effective date.
3. Trading Activities and Derivative Financial Instruments
The Company uses derivative instruments (commodity futures contracts,
options and price swap agreements) to both hedge its commodity price risk on
natural gas, crude oil and electricity, and as a market maker (trading activity)
in natural gas.
Natural gas, crude oil and electricity 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. Crude
oil contracts are for fixed units of 1,000 barrels and are available for up to
34 months in the future. Electricity contracts are for 736 megawatt hours and
are available for up to 18 months in the future.
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.
Options can be exchange traded on the NYMEX or traded over the counter.
Exchange traded and over-the-counter options give the owner the right, but not
the obligation, to a futures contract, or to buy or sell an underlying commodity
at a given price, respectively.
<PAGE>
3. Trading Activities and Derivative Financial Instruments (Cont'd)
At June 30, 1998, the Company had outstanding energy commodity futures,
swaps and options. In the table below, buys of swaps represent either 1) payment
of fixed price and receipt of NYMEX or index; or 2) payment of NYMEX or index
and receipt of index. The notional volume and terms of these transactions are as
follows:
<TABLE>
<CAPTION>
Notional Volume Maximum
Commodity Buy Sell Term
- --------- --- ---- ----
<S> <C> <C> <C>
Natural Gas (Tbtu) 1,070.15 1,199.22 72 months
Electricity (Thousands of MWh) 87.2 70.4 2 months
Oil (Millions of Barrels) 4.4 - 72 months
</TABLE>
Derivative Commodity Instruments Held or Issued for Trading Purposes
The Company maintains active trading positions in energy commodity
futures, swap and option contracts and limits its risk to changes in the value
of its outstanding positions through the use of Value-at-Risk models,
establishment of offsetting positions, and limit and monitoring procedures. The
trading operation also enters into energy commodity purchase and sale
commitments. These activities constitute its trading business and are essential
to provide customers with market products at competitive prices. All of these
trading positions are reported at fair value and recorded under the heading of
Assets/Liabilities from Trading Activities (current and long-term) in the
Condensed Consolidated Balance Sheets. The change in fair value is recognized in
revenues as it occurs. Fair value is subject to change and reflects management's
best estimate of market prices considering various factors including 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.
The amounts disclosed in the following table represent the
end-of-period fair value and the average fair value of the trading portfolio.
<TABLE>
<CAPTION>
Fair Value Average Fair Value
(Carrying Amount) for the Six Months
as of 6/30/98 Ended 6/30/98
(In Thousands)
Energy Commodity Trading:
<S> <C> <C>
Assets $125,015 $93,246
Liabilities 101,181 80,099
=======================================================================================================
</TABLE>
Net trading gains for the three months and six months ended June 30, 1998,
are $8.9 million and $18.2 million, respectively.
<PAGE>
3. Trading Activities and Derivative Financial Instruments (Cont'd)
Derivative Commodity Instruments Held or Issued for Purposes Other Than Trading
Derivative positions taken specifically to mitigate market price risk
associated with significant physical transactions are accounted for using hedge
accounting provided they meet hedge accounting criteria. Under hedge accounting,
gains and losses from futures are deferred in the Condensed Consolidated Balance
Sheets in Deferred Credits and Other and recognized in earnings in conjunction
with the revenue recognition of the underlying physical transaction. Each net
payment/receipt due or owed under a swap agreement is recognized in earnings
during the period to which the payment/receipt relates, and there is no
recognition in the Condensed Consolidated Balance Sheets for changes in the
swap's fair value. Gains or losses resulting from settlement of swaps are
amortized over their original terms.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. In the event that correlation falls below allowable levels,
the gains or losses associated with the hedging instruments are immediately
recognized to the extent that correlation is lost.
Sonat Exploration's production is hedged by entering into intercompany
swaps with Sonat Marketing. The exposure that Sonat Marketing assumes from Sonat
Exploration is then hedged by entering into derivative instruments with outside
counterparties. Sonat Marketing and Sonat Power Marketing also hedge third-party
purchases and sales by entering into commodity futures, swaps and options. The
information in the following table represents the fair value of all outstanding
derivative positions as of June 30, 1998. Not included are the related physical
positions that these derivative positions hedge.
Fair Value
(In Thousands)
Natural Gas $(54,545)
Electricity (1,783)
Deferred amounts on open futures positions will mature over 1998 and
1999.
Credit Risk from Derivative Activities
NYMEX traded futures are guaranteed by the NYMEX and have nominal
credit risk. On all other transactions described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. The Company
has established policies and procedures to evaluate potential counterparties for
creditworthiness before entering into over-the-counter swap and option
agreements. The credit risk resulting from in-the-money swaps is monitored on a
regular basis against established collateralization limits. Due to changes in
market conditions, the market value of swaps and options and the associated
credit exposure with the counterparties can change significantly. At June 30,
1998, the market value of the Company's in-the-money swaps and options was $5.3
million, and all counterparties were within collateral limits. Reserves for
credit risk are established as necessary.
<PAGE>
4. 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,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C> <C> <C>
Exploration and Production $ 177 $ 84 $ 321 $ 201
------- ------ ------- -------
Natural Gas Transmission:
Citrus Corp. 10,482 5,807 14,993 12,102
Amortization of Citrus basis
difference 346 346 692 692
Bear Creek Storage 2,446 2,623 4,535 5,331
Destin Pipeline 3,074 106 5,134 119
Other 91 (28) 67 (53)
------- ------ ------- -------
16,439 8,854 25,421 18,191
------- ------ ------- -------
Energy Services 556 191 781 483
------- ------ ------- -------
Other 355 316 657 692
------- ------ ------- -------
$17,527 $9,445 $27,180 $19,567
======= ====== ======= =======
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp., the parent company of Florida Gas Transmission Company. Southern Natural
Gas Company (Southern) owns a one-third interest in Destin Pipeline Company,
L.L.C. and a subsidiary of Southern owns 50 percent of Bear Creek Storage
Company, an underground gas storage company.
<PAGE>
4. 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,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $161,981 $189,546 $295,562 $359,150
Expenses:
Natural gas cost 70,989 104,988 129,603 187,265
Operating expenses 20,900 27,980 44,887 50,430
Depreciation and amortization 13,009 14,382 25,731 34,587
Interest and other 23,070 24,247 46,490 48,482
Income taxes 13,049 6,335 18,865 14,182
-------- -------- -------- --------
Income Reported $ 20,964 $ 11,614 $ 29,986 $ 24,204
======== ======== ======== ========
</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,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,821 $8,973 $17,850 $18,319
Expenses:
Operating expenses 1,452 1,120 3,753 2,361
Depreciation 1,360 1,358 2,719 2,714
Other expenses, net 1,116 1,248 2,308 2,581
------ ------ ------- -------
Income Reported $4,893 $5,247 $ 9,070 $10,663
====== ====== ======= =======
</TABLE>
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern in the ownership of Destin Pipeline, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water development in the eastern Gulf of Mexico. Construction of the
pipeline began in December 1997, and it is expected to be partially completed
and in service in August 1998, and fully in service by January 1999. The FERC
has approved two extensions of Destin for a total filed cost of an additional
$56 million. The total cost of Destin is now estimated to be $416 million.
Destin's earnings in 1997 and 1998 primarily relate to the allowance for funds
used during construction capitalized on its expenditures to date.
<PAGE>
5. Debt and Lines of Credit
Long-Term Debt and Lines of Credit - 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 December 31, 1997, there was an outstanding balance of
$130.0 million. During the first six months of 1998, $70.0 million was borrowed
and $200.0 million was repaid under the revolving credit agreement, resulting in
no amounts outstanding at June 30, 1998.
In late January 1998, Sonat made two public offerings of Notes pursuant
to a shelf registration statement. In one offering, Sonat issued $100 million of
6 5/8 percent Notes due February 1, 2008, at 99.531 percent to yield 6.69
percent. In the other offering, Sonat issued $100 million of 7 percent Notes due
February 1, 2018, at 99.787 percent to yield 7.02 percent. The net proceeds from
the offerings were used for general corporate purposes, including capital
expenditures, working capital and repayment of debt.
Unsecured Notes - Loans under all short-term credit facilities are for
a duration of less than three months.
In late January 1998, Sonat completed a new 364-day $700 million
revolving credit facility with 20 banks. In connection with this new facility
the Company terminated existing lines of credit providing for up to $200 million
of borrowings. At June 30, 1998, Sonat had short-term lines of credit of $700.0
million available through January 25, 1999. Southern had short-term lines of
credit of $50.0 million available through May 31, 1999. 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, 1998, Sonat had
$12.7 million outstanding under its agreement at a rate of 6.56 percent. No
amounts were outstanding under Southern's agreement.
Sonat had $804.2 million in commercial paper outstanding at an average
rate of 5.81 percent at June 30, 1998.
6. Rate Matters and Contingencies
Periodically, Southern and its subsidiaries make general rate filings
with the 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, 1998, Southern's rates are established by a settlement that was
approved by FERC orders issued in 1995 and 1996. All of its customers are
parties to the settlement, and all revenue is based on the final settlement
rates and therefore not collected subject to refund.
<PAGE>
7. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income (loss) or stockholders' equity. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities to be
included in other comprehensive income. Comprehensive income, net of related
tax, is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $(257,978) $16,851 $(219,965) $86,718
Unrealized Gains (Loss)
on Securities (438) 550 826 1,953
--------- ------- --------- -------
Comprehensive Income $(258,416) $17,401 $(219,139) $88,671
========= ======= ========= =======
</TABLE>
Common Stock and Other Capital in the Condensed Consolidated Balance
Sheets includes $4.0 million at June 30, 1998, and $3.2 million at December 31,
1997, related to other comprehensive income, which is comprised of unrealized
gains on securities.
8. Segment Information
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company had previously modified its definition of segments to
conform to the approach required by SFAS No. 131.
<PAGE>
8. Segment Information (Cont'd)
The Company's consolidated financial statements reflect operations in
three segments: Exploration and Production, Natural Gas Transmission and Energy
Services.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 42,229 $82,806 $800,164 $ 23 $ 925,222
Intersegment Revenues 106,041 12,694 - 9,935 128,670
Earnings (Loss) Before
Interest and Taxes (435,178) 63,147 1,644 1,368 (369,019)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 76,443 $83,257 $696,425 $ 5 $ 856,130
Intersegment Revenues 75,548 20,125 - 12,467 108,140
Earnings (Loss) Before
Interest and Taxes (10,152) 55,052 (170) 3,351 48,081
</TABLE>
<PAGE>
8. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 122,067 $175,094 $1,737,219 $ 27 $2,034,407
Intersegment Revenues 188,106 25,907 - 22,307 236,320
Earnings (Loss) Before
Interest and Taxes (422,141) 132,062 2,480 3,360 (284,239)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 167,716 $155,864 $1,656,204 $ 11 $1,979,795
Intersegment Revenues 189,904 46,684 - 21,357 257,945
Earnings Before
Interest and Taxes 52,750 115,156 754 5,871 174,531
</TABLE>
<PAGE>
8. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Total Earnings (Loss) Before
Interest and Taxes for
<S> <C> <C> <C> <C>
Reportable Segments $(369,019) $ 48,081 $(284,239) $174,531
Interest Income 1,063 1,013 3,263 2,195
Interest Expense (34,792) (26,518) (66,922) (51,371)
Interest Capitalized 1,448 1,824 2,872 3,867
--------- -------- --------- --------
Income (Loss) Before Income
Taxes $(401,300) $ 24,400 $(345,026) $129,222
========= ======== ========= ========
</TABLE>
Assets for the Company's three segments are as follows:
June 30, 1998
(In Thousands)
Assets by Segment
Exploration and Production $ 1,927,432
Natural Gas Transmission 1,804,020
Energy Services 704,795
<PAGE>
9. Earnings Per Share
The calculation of diluted earnings per share differs from that of
basic earnings per share due to the denominator for the diluted calculation
including common stock equivalents applicable to outstanding stock options.
The following table presents the computation of basic and diluted
earnings (loss) per share of common stock:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, Except
Per-Share Amounts)
Numerator:
<S> <C> <C> <C> <C>
Net income (Loss) $(257,978) $ 16,851 $(219,965) $ 86,718
========= ======== ========= ========
Denominator:
Denominator for Basic Earnings Per Share:
Weighted average number of
shares of common stock
outstanding 110,049 110,185 110,008 110,285
Effect of Dilutive Securities:
Common stock equivalents
applicable to outstanding
stock options 1,008 1,698 1,052 1,630
--------- -------- --------- --------
Denominator for Diluted Earnings Per Share:
Adjusted weighted average
shares using treasury
stock method for assumed
conversions 111,057 111,883 111,060 111,915
========= ======== ========= ========
Basic Earnings (Loss) Per Share
of Common Stock $ (2.34) $ .15 $ (2.00) $ .79
========= ======== ========= ========
Diluted Earnings (Loss) Per Share
of Common Stock $ (2.32) $ .15 $ (1.98) $ .77
========= ======== ========= ========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
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 a major restructuring program recorded in the second quarter of 1998 that
affects earnings before interest and taxes (EBIT) and net income comparisons.
The table is presented because management believes this information enhances the
analysis of results of operations.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Earnings (Loss) Before Interest and Taxes:
<S> <C> <C> <C> <C>
Exploration and production $(435.1) $(10.1) $(422.1) $ 52.8
Natural gas transmission 63.1 55.1 132.0 115.2
Energy services 1.7 (.2) 2.5 .7
Other 1.3 3.2 3.4 5.8
------- ------ ------- ------
(369.0) 48.0 (284.2) 174.5
Adjustment for Restructuring Program:
Exploration and Production
Impairment of oil and gas
properties (429.8) - (429.8) -
Restructuring costs (15.0) - (15.0) -
------- ------ ------- ----
Earnings Before Interest and Taxes
Excluding Unusual Item $ 75.8 $ 48.0 $ 160.6 $174.5
======= ====== ======= ======
Net Income (Loss) As Reported $(258.0) $ 16.9 $(220.0) $ 86.7
Adjustment for Restructuring Program:
Exploration and Production
Impairment of oil and gas
properties (279.4) - (279.4) -
Restructuring costs (9.7) - (9.7) -
------- ------ ------- ------
Net Income Excluding Unusual Item $ 31.1 $ 16.9 $ 69.1 $ 86.7
======= ====== ======= ======
Earnings (Loss) Per Share of
Common Stock $ (2.34) $ .15 $ (2.00) $ .79
======= ====== ======= ======
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ (2.32) $ .15 $ (1.98) $ .77
======= ====== ======= ======
Earnings Per Share of Common Stock
Excluding Unusual Item $ .28 $ .15 $ .63 $ .79
======= ====== ======= ======
Earnings Per Share of Common Stock
Excluding Unusual Item-
Assuming Dilution $ .28 $ .15 $ .62 $ .77
======= ====== ======= ======
</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. 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 Services segment.
On January 30, 1998, the Company completed its merger with Zilkha Energy
Company for $1.3 billion (see Note 2 of the Notes to Condensed Consolidated
Financial Statements).
Following the merger with Zilkha Energy, the Company undertook a
comprehensive review of its exploration and production business to improve its
overall financial performance. As a consequence, a major restructuring program
was announced in April 1998. Steps originally announced included the sale of oil
and gas properties, consolidation of business units and a substantial work force
reduction.
Oil and gas properties to be sold have proved reserves of approximately
500 billion cubic feet of natural gas equivalent (Bcfe) and daily net production
of approximately 190 million cubic feet (MMcf) of natural gas equivalent. The
divestiture includes all of the Company's Austin Chalk, Arkoma Basin and
substantially all onshore Gulf Coast properties as well as various properties
from other business units. No significant properties from the Zilkha Energy
merger or in the Cotton Valley Pinnacle Reef Trend are included in the
divestiture program. The property sales are expected to be completed during the
third quarter of 1998.
Sonat Exploration has consolidated its business units from seven to
three. This action, together with related staff reductions, when complete, will
reduce its workforce by approximately 220 people, or approximately one-fourth of
the Sonat Exploration workforce, including those employed by Sonat Exploration
GOM Inc., the former Zilkha Energy. The majority of the work force reductions
were completed by the end of the second quarter. The remaining reductions under
the plan are expected to be completed concurrent with the remaining property
sales expected to close by the end of the third quarter as discussed above.
In addition to these previously announced steps, the Company reviewed
all of its oil and natural gas reserves during the second quarter of 1998. Based
on that review, Sonat Exploration has revised downward proved reserves by a net
199 Bcfe from year-end 1997 proved reserves and has impaired additional
properties. A substantial portion of the additional impaired properties is in
the Cotton Valley Pinnacle Reef trend following an unsuccessful exploratory well
in the Opelika region of the play in June 1998 and poor well performance of
recently completed wells in the Bear Grass area of the trend. The effect of the
further impairments is substantially offset by the better than expected results
now anticipated from the property sales effort.
Therefore, the after-tax restructuring charge, estimated previously as
being up to $275 million, is $289.1 million, which was recorded in the second
quarter of 1998. As a result of the restructuring and giving effect to the sale
of oil and gas properties, Sonat Exploration's proved reserves as of June 30,
1998, are approximately 1.7 trillion cubic feet of natural gas equivalent.
Management believes the steps being taken will significantly improve
Sonat Exploration's financial performance. Going forward, Sonat expects its
total unit costs, other than interest, to be $1.59 per thousand cubic feet (Mcf)
of natural gas equivalent, down sharply from $1.89 in first quarter of 1998.
Sonat Exploration's total 1998 production, not including volumes from the
properties being sold after the effective sales dates, is now expected to be 258
Bcfe.
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Revenues $ 148.3 $152.0 $ 310.2 $357.6
------- ------ ------- ------
Costs and Expenses:
Operating and maintenance 19.2 20.8 38.6 40.1
Exploration cost 23.0 34.6 47.7 67.1
General and administrative 16.6 36.4 34.8 54.0
Depreciation, depletion and
amortization 69.3 64.8 148.7 133.1
Impairment of oil and gas
properties 429.8 - 429.8 -
Restructuring costs 15.0 - 15.0 -
Taxes and other 10.8 6.0 18.1 13.1
------- ------ ------- ------
583.7 162.6 732.7 307.4
------- ------ ------- ------
Operating Income (Loss) (435.4) (10.6) (422.5) 50.2
Other Income .3 .5 .4 2.6
------- ------ ------- ------
Earnings (Loss) Before Interest
and Taxes As Reported (435.1) (10.1) (422.1) 52.8
Restructuring and Impairment of
Oil and Gas Properties (444.8) - (444.8) -
------- ------ ------- ------
Earnings (Loss) Before Interest and
Taxes Excluding Unusual Item $ 9.7 $(10.1) $ 22.7 $ 52.8
======= ====== ======= ======
Net Sales Volumes:
Gas (Bcf) 60 62 123 129
Oil and condensate (MBbls) 1,784 1,312 3,734 2,706
Natural gas liquids (MBbls) 591 414 1,175 796
- ---------------------------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 2.00 $ 1.97 $ 2.01 $ 2.26
Oil and condensate ($/Bbl) 13.00 19.30 13.92 20.65
Natural gas liquids ($/Bbl) 8.81 8.39 9.27 12.41
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Second Quarter 1998 to Second Quarter 1997 Analysis
EBIT increased $19.8 million after excluding the recognition of charges
of $448.8 million for restructuring and impairment costs in the second quarter
of 1998 (see Note 2 of the Notes to Condensed Consolidated Financial
Statements), primarily due to lower costs and expenses, partly offset by lower
revenues.
Realized oil and condensate prices decreased 33 percent to an average
of $13.00 per barrel from $19.30 per barrel in the second quarter of 1997.
Natural gas production decreased slightly to 60 Bcf from 62 Bcf in the second
quarter of 1997. Oil and condensate production increased 36 percent and average
realized natural gas prices increased slightly to $2.00 per Mcf to partially
offset these unfavorable factors.
Costs and expenses were $23.7 million lower after excluding the charge
for restructuring and impairment costs discussed earlier. General and
administrative expense decreased 54 percent primarily due to executive
compensation expense at Sonat Exploration GOM (formerly Zilkha Energy) in the
1997 period. Exploration cost decreased 34 percent as a result of lower dry hole
costs and lower seismic expenses. Depreciation, depletion and amortization
expense includes a reserve relating to the operation of properties to be sold
(see Note 2 of the Notes to Condensed Consolidated Financial Statements).
Excluding this reserve, depreciation, depletion and amortization expense
decreased by seven percent due to a lower amortization rate ($.77 for the 1998
period compared to $.89 for the 1997 period).
Other income was slightly lower for the three-month 1998 period
compared with the three-month 1997 period due to gains on the disposal of
marketable securities held by Sonat Exploration GOM in the 1997 period.
Six Months 1998 to Six Months 1997 Analysis
EBIT decreased $30.1 million after excluding the $444.8 million charge
for restructuring and impairment costs, discussed earlier, primarily due to
lower revenues resulting from lower natural gas and oil and condensate prices
and lower natural gas production. Average realized natural gas prices decreased
11 percent to $2.01 per Mcf for the six-month 1998 period from $2.26 per Mcf for
the six-month 1997 period. Realized oil and condensate prices decreased 33
percent to an average of $13.92 per barrel from $20.65 per barrel in the 1997
six-month period. Natural gas production declined five percent. Oil and
condensate production increased 38 percent, slightly offsetting these
unfavorable factors.
Costs and expenses were $19.5 million lower after excluding the charge
for restructuring and impairment costs. General and administrative expense
decreased 36 percent primarily as a result of executive compensation expense for
Sonat Exploration GOM which was included in the 1997 period. Exploration cost
decreased 29 percent due to lower seismic expense and dry hole costs. These
favorable factors were partially offset by higher depreciation expense primarily
due to the aforementioned reserve.
Other income was lower for the six-month 1998 period compared with the
six-month 1997 period due to gains on the disposal of marketable securities in
the 1997 period.
<PAGE>
Hedging Activities
Sonat Exploration, through Sonat Marketing, uses derivative financial
instruments to manage the risks associated with price volatility for its
production, which it sells in the spot market. (See Market Risk and Note 3 of
the Notes to Condensed Consolidated Financial Statements.) Gains or losses
experienced on Sonat Exploration's hedging transactions offset the changes in
revenue recognized on the sale of the commodity. Natural gas revenues were
reduced by $3.1 million and $1.9 million in the three-month and six-month
periods ended June 30, 1998, and were reduced by $1.7 million and $18.9 million
in the three-month and six-month periods ended June 30, 1997, respectively, as a
result of hedging activities. There were no oil hedging activities reflected in
the 1998 period. Hedging activities increased oil revenues by $.2 million in the
three-month period ended June 30, 1997, and reduced oil revenues by $.7 million
in the six-month period ended June 30, 1997.
A portion of Sonat Exploration's future gas production is hedged
through the year 2001. Sonat Exploration's hedged gas production is as follows:
Weighted
Average
Volumes Price
(Bcf) (per Mcf)
Remainder of 1998 28.1 $2.33
1999 62.5 $2.13
2000 42.3 $2.16
2001 4.4 $2.30
- ----------------------------------------------------------------------------
137.3 $2.18
============================================================================
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 and Citrus are actively pursuing
opportunities to expand their pipeline systems in their traditional market areas
and to connect new gas supplies.
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern in the ownership of Destin Pipeline Company, L.L.C., a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Southern has a one-third
interest in this pipeline. Shell and Amoco have made substantial firm
transportation commitments to this pipeline. Eight other shippers have also
dedicated their production from certain leases in the eastern Gulf of Mexico to
Destin for transportation and discussions are under way with other prospective
shippers. Construction of the pipeline began in December 1997, and it is
expected to be partially completed and in service in August 1998, and fully in
service by January 1999. In June 1998, the Federal Energy Regulatory Commission
(FERC) approved Destin's application to extend its pipeline system approximately
14 miles to transport additional gas reserves committed to Destin's system. This
extension, which will cost approximately $19 million, is expected to be in
service in late 1998. In July 1998 the FERC also approved another Destin
application to extend its pipeline by approximately 31 miles at a cost of
approximately $37 million to transport additional gas reserves committed to its
system. This extension is expected to be in service in early 1999. The total
cost of Destin is now estimated to be $416 million.
<PAGE>
Southern is moving forward on three expansions to northern Alabama,
eastern Tennessee, and central Alabama that have a total filed capital cost of
$126 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 that Southern filed in February 1998 to change the
route of the pipeline as it crosses the Wheeler National Wildlife Refuge. The
122-mile expansion will provide 76 million-cubic-feet-per-day capacity to the
participating customers. A second expansion to serve customers primarily in
eastern Tennessee received FERC approval in April 1998 and is anticipated to go
in service in November 1998. Southern has firm transportation commitments
totaling 65 million cubic feet of natural gas per day from customers in eastern
Tennessee, Georgia and Alabama related to this expansion. The expansion in
central Alabama received FERC approval in March 1998 and is also expected to go
in service in the fourth quarter of 1998. This expansion will provide 34 million
cubic feet per day of firm transportation to Alabama Power Company and two other
customers.
In December 1997, an affiliate of AGL Resources, Inc. and Southern
formed a new entity, Etowah LNG Company, L.L.C. (Etowah LNG), to jointly
construct, own and operate a new liquefied natural gas peaking facility in Polk
County, Georgia. Peaking services provide supplemental gas supplies on days when
demand is highest, typically during the winter. Under the agreement, 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 the city of Austell, Georgia. The
new facility will cost approximately $90 million with 300 million cubic feet per
day of deliverability capacity. Affiliates of AGL Resources will manage the
construction of the facility and operate it. Southern will provide
administrative services. Etowah LNG filed a certificate application with the
FERC in April 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 Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $77.9 $ 74.6 $161.4 $157.8
Supply transportation 12.1 12.4 23.7 22.9
Other 5.5 16.5 15.9 21.9
----- ------ ------ ------
Total Revenues 95.5 103.5 201.0 202.6
----- ------ ------ ------
Costs and Expenses:
Operating and maintenance 19.0 22.2 38.6 39.8
General and administrative 12.2 19.1 27.7 37.1
Depreciation and amortization 13.1 11.9 18.6 23.6
Taxes, other than income 5.4 4.8 10.7 10.0
----- ------ ------ ------
49.7 58.0 95.6 110.5
----- ------ ------ ------
Operating Income 45.8 45.5 105.4 92.1
----- ------ ------ ------
Other Income:
Equity in Earnings of
Unconsolidated Affiliates 5.6 2.7 9.7 5.4
Other 1.1 .9 1.8 4.9
----- ------ ------ ------
6.7 3.6 11.5 10.3
----- ------ ------ ------
Earnings Before Interest and Taxes $52.5 $ 49.1 $116.9 $102.4
===== ====== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 137 136 322 306
Supply transportation 103 100 198 180
----- ------ ------ ------
Total Volumes 240 236 520 486
===== ====== ====== ======
Transition gas sales 3 17 6 35
===== ====== ====== ======
</TABLE>
<PAGE>
CITRUS CORP.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Equity in Earnings of
<S> <C> <C> <C> <C>
Citrus Corp. $ 10.8 $ 6.2 $ 15.7 $ 12.8
====== ====== ====== ======
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 109 124 204 222
Supply transportation 9 6 16 13
------ ------ ------ ------
Total Volumes 118 130 220 235
====== ====== ====== ======
</TABLE>
Second Quarter 1998 to Second Quarter 1997 Analysis
Southern Natural Gas Company and Subsidiaries - EBIT for Southern was
$52.5 million compared with $49.1 million in the second quarter of 1997. The
increase was primarily due to lower expenses of Southern and higher equity in
earnings of the Destin Pipeline. Partially offsetting was the effect of a $10
million reserve adjustment in the second quarter of 1997 relating to Southern's
obligation to pay royalty claims in connection with take-or-pay settlements
entered into in the 1980's. The adjustment related to a favorable state court
ruling.
Market transportation revenues increased as a result of recent
expansions. Other revenue decreased primarily due to the reserve adjustment of
$10 million included in the 1997 period. Operating and maintenance expense
decreased primarily due to lower fuel costs. General and administrative expenses
decreased primarily due to lower employee benefit expenses and stock-based
compensation. Depreciation and amortization expense increased in the 1998 period
due to plant additions and pursuant to a provision of the customer settlement
allowing a deferral of depreciation on certain plant categories until March 1,
1998.
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin Pipeline, primarily resulting from the allowance for funds
used during construction (AFUDC) capitalized.
Citrus - Equity in earnings of Citrus increased $4.6 million to $10.8
million. The increase is primarily due to the recognition of credits on a gas
supply agreement and lower operating expenses, slightly offset by reduced
utilization of firm transportation capacity held by Citrus Trading.
<PAGE>
Six Months 1998 to Six Months 1997 Analysis
Southern Natural Gas Company and Subsidiaries - EBIT was $116.9 million
for the six months ending June 30, 1998, compared with $102.4 million for the
1997 period. The increase was primarily due to expansions placed in service,
lower expenses and earnings of Destin Pipeline. Partially offsetting was the net
effect of reserve adjustments made in the 1997 and 1998 periods, which is
discussed below.
Market transportation revenues improved primarily due to recent
expansions. Other revenues decreased due to a favorable 1997 reserve adjustment,
discussed earlier, offset partially by the reversal of the remaining royalty
reserves in 1998. Such reversal has been made because management has determined
that the likelihood of the Company making any significant royalty payments as a
result of its prior take-or-pay settlements is remote. Operating and maintenance
expense decreased primarily due to lower fuel costs. General and administrative
expenses decreased primarily due to lower employee benefit expenses, lower
insurance expenses and lower stock-based compensation. Depreciation and
amortization expense decreased primarily due to an adjustment of the salvage
value on certain fixed assets (see Note 1 of the Notes to Condensed Consolidated
Financial Statements).
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin Pipeline, primarily resulting from AFUDC capitalized on
its current construction costs. Other income was lower primarily due to the
recognition of a gain on the termination of a forward rate agreement in the 1997
period.
Citrus - Equity in earnings of Citrus increased $2.9 million to $15.7
million. The increase is the result of the recognition of credits on a gas
supply agreement, lower operating expenses and lower interest expense, partially
offset by reduced utilization of firm transportation capacity held by Citrus
Trading and lower revenues at Florida Gas due to lower throughput.
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's remaining gas supply is sold on a
month-to-month basis. Gas sales revenue and natural gas cost are included in
other revenue.
Southern's annual purchase commitments total less than $25 million per
year for 1998 and subsequent years. Based on Southern's current expectations
with respect to natural gas prices in 1998 and the years following, only an
insignificant amount of gas volumes is expected to be at prices above market.
Rate Matters
Under terms of a settlement approved by the FERC, all of Southern's
previously pending rate proceedings and proceedings to recover gas supply
realignment and other transition costs associated with the implementation of
FERC Order No. 636 have been resolved. The settlement requires Southern to file
a new rate case no later than September 1, 1999.
<PAGE>
ENERGY SERVICES
Sonat Energy Services, through its majority-owned subsidiaries, Sonat
Marketing and Sonat Power Marketing L.P. (Sonat Power Marketing), conducts
marketing activities in the natural gas and electric industries, respectively.
Sonat Marketing purchases and resells substantially all of Sonat Exploration's
natural gas production, as well as purchasing and reselling gas for other
customers. Sonat Power Marketing has executed electric power purchase, sales and
transmission agreements with numerous companies and is focused on expanding its
wholesale electric business. Both of these subsidiaries utilize derivative
instruments in managing commodity price risk (see Market Risk and Note 3 of the
Notes to Condensed Consolidated Financial Statements).
In 1998 a subsidiary of Sonat Energy Services acquired a 50 percent
interest in a natural gas-fired power plant in Georgia (the Mid-Georgia Cogen
plant) for a gross investment of approximately $28 million. The power plant
began operations in June 1998. In July 1998, Sonat Energy Services announced a
joint venture with Calpine Corporation to develop a 680-megawatt natural
gas-fired peaking power plant near Columbus, Georgia. The Cataula Power Plant is
scheduled to begin commercial operation in June 2000. The plant will provide
energy to serve the growing Georgia and Southeast power markets during peak
power demand periods. Sonat Energy Services is pursuing additional power plant
opportunities.
Sonat Intrastate-Alabama Inc. (SIA), a wholly owned subsidiary of Sonat
Energy Services, owns an approximately 450-mile intrastate pipeline system
extending from natural gas fields and coal seam gas production areas in the
Black Warrior Basin in northwest and central Alabama to connections with
customers in Alabama, as well as interconnections with three other pipelines,
including Southern. SIA's throughput in the first six months of 1998 was 20 Bcf
compared with 16 Bcf in the first six months of 1997.
Sonat Power Systems Inc., a wholly owned subsidiary of Sonat, formed a
strategic alliance in 1997 with AlliedSignal Power Systems Inc., an unaffiliated
company, to market and support its onsite electric power systems in 13 Southern
states from Texas to Virginia, plus the District of Columbia.
<PAGE>
ENERGY SERVICES
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Revenues $800.2 $696.4 $1,737.2 $1,656.2
====== ====== ======== ========
Operating Income (Loss) $ 2.2 $ (0.4) $ 3.3 $ 1.1
====== ====== ======== ========
Earnings (Loss) Before Interest
and Taxes $ 1.7 $ (0.2) $ 2.5 $ 0.7
====== ====== ======== ========
Physical Volumes:
Sonat Marketing Gas Sales
Volumes (100%)
(Billion Cubic Feet) 284 299 644 603
====== ====== ======== ========
Sonat Power Marketing Sales
Volumes (100%)
(Thousands of Megawatt Hours) 2,729 1,921 5,899 3,318
====== ====== ======== ========
Financial Settlements (Notional):
(Bcf/d) 7.3 3.0 7.0 3.0
====== ====== ======== ========
</TABLE>
Second Quarter 1998 to Second Quarter 1997 Analysis
Second quarter 1998 financial results improved from second quarter 1997
levels as EBIT rose to $1.7 million from a loss of $.2 million in 1997. The
improvement reflects higher volumes, better margins and the contribution of the
Mid-Georgia Cogen power plant, which began operations in June 1998. Sonat
Marketing's physical sales volumes were slightly below 1997 levels. Notional
volumes from natural gas derivative transactions more than doubled from the
second quarter of 1997. Sonat Power Marketing's sales volumes increased 42
percent. Sonat Power Marketing's trading margins improved due to opportunities
created by very volatile electric power prices during the second quarter of
1998. Operating results were better than expected at the Mid-Georgia Cogen plant
due to very hot weather in the Southeast, which caused this facility to operate
almost every day since it began operating. Results for 1998 reflect start-up
losses for Sonat Power Systems, which slightly offset these favorable factors.
Six Months 1998 to Six Months 1997 Analysis
EBIT for the first six months of 1998 rose to $2.5 million compared
with $.7 million for the first six months of 1997. The improved results reflect
higher volumes, better margins and the contribution of the Mid-Georgia Cogen
power plant. Sonat Marketing's physical sales volume rose to 4 Bcf per day from
3 Bcf per day in 1997. Notional volumes from natural gas derivative transactions
increased sharply. Sonat Power Marketing's sales volumes reached 5.9 million
megawatt hours, up significantly from 3.3 million megawatt hours in the first
six months of 1997. The initiation of commercial operations at the Mid-Georgia
power plant in June 1998 and very hot weather in the Southeast contributed to
the increase in EBIT. Results for 1998 reflect start-up losses for Sonat Power
Systems, which slightly offset these favorable factors.
<PAGE>
Income Statement Items
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $ 32.3 $23.7 $ 60.8 $ 45.3
</TABLE>
Net interest expense increased in both the three-month and six-month
periods of 1998 compared to the same periods of 1997 due to higher average debt
levels. Partially offsetting was the effect of lower interest rates on debt in
both periods of 1998. In addition, the six-month period of 1998 reflects higher
interest income on restricted cash and other investments. Interest capitalized
decreased in both periods of 1998 due to lower interest capitalized at Sonat
Exploration.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense (Benefit) $(143.3) $ 7.5 $(125.1) $ 42.5
</TABLE>
Income tax expense decreased in both periods due to the taxes
associated with the restructuring and impairment charge recorded at Sonat
Exploration in the second quarter of 1998. Absent this unusual item, the
effective tax rate was lower in both periods of 1998 as compared to 1997 because
tax preference items had a greater impact on income before income taxes in the
1998 periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
(In Millions)
<S> <C> <C>
Operating Activities $ 360.8 $364.1
</TABLE>
Cash flow from operations was essentially flat as compared to the 1997
period, with lower cash flows at Sonat Exploration essentially offset with
higher cash flows from Sonat Energy Services. Operating results were discussed
earlier in the operating sections.
<PAGE>
Depreciation, depletion, and amortization and deferred income taxes
include $429.8 million and $155.7 million, respectively, related to the
restructuring and impairment charge recorded at Sonat Exploration in the second
quarter of 1998. Net accounts receivable and accounts payable was essentially
flat as compared to the 1997 period. The change in inventory primarily
represents the purchase of natural gas inventory by Sonat Energy Services in
1997 as well as material for Sonat Exploration's Cotton Valley Pinnacle Reef
trend drilling program in the 1997 period. The change in restricted cash,
accrued long-term compensation, and other current assets and liabilities
primarily represents the payment of certain expenses in connection with the
merger between the Company and Zilkha Energy in January 1998 (see Note 2 of the
Notes to Condensed Consolidated Financial Statements).
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
(In Millions)
<S> <C> <C>
Investing Activities $(549.3) $(463.9)
</TABLE>
Net cash used in investing activities was $85.4 million higher in 1998
compared to 1997. The increase was primarily attributable to higher investments
in unconsolidated affiliates, specifically, the Destin Pipeline and the
Mid-Georgia Cogen power plant joint ventures. Higher capital expenditures
resulting from increased developmental drilling at Sonat Exploration and
expansions at Southern also contributed to the increase.
Capital expenditures for the Company's business segments (excluding
exploratory costs and unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
(In Millions)
<S> <C> <C>
Exploration and Production $ 360.3 $ 350.7
Natural Gas Transmission 82.2 59.0
Energy Services 5.9 5.2
Other 3.0 1.9
------- -------
Total $ 451.4 $ 416.8
======= =======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $66.1 million and $8.5 million in the first six months of 1998
and 1997, respectively.
<TABLE>
<S> <C> <C>
Financing Activities $ 172.3 $ 92.5
</TABLE>
Net cash provided by financing activities was $79.8 million higher in
1998 compared to 1997. The change was primarily attributable to increased net
borrowings in the current period to fund investments in unconsolidated
affiliates and capital expenditures.
<PAGE>
CAPITAL RESOURCES
At June 30, 1998, the Company had bank lines of credit and a revolving
credit agreement with banks with a total capacity of $1.25 billion. The
Company's bank and commercial paper borrowings in the aggregate are not
authorized to exceed the maximum amount available under its lines of credit and
revolving credit agreement. As a result, after giving effect to the $804.2
million of commercial paper and $12.7 million of borrowings from the short-term
lines of credit, $433.1 million was available to the Company under such lines of
credit and revolving credit agreement at June 30, 1998.
Southern has a shelf registration statement with the Securities and
Exchange Commission which provides for the issuance of up to $500 million in
debt securities. Sonat plans to file a similar shelf registration statement in
1998.
The Company's capital expenditures and other investing requirements for
1998 are expected to aggregate $860.1 million. This amount reflects investments
in unconsolidated affiliates and proposed expenditures for oil and gas property
acquisitions, exploration and development, pipeline expansion and other
projects. The Company completed the Zilkha Energy merger on January 30, 1998,
issuing $1.04 billion of common stock to the Zilkha Energy shareholders (see
Note 2 of the Notes to Condensed Consolidated Financial Statements). The
Company's cash requirements relating to the Zilkha Energy merger totaled
approximately $290 million, principally for repayment of debt and certain other
liabilities of Zilkha Energy and transaction expenses.
The Company has a stock repurchase program in effect through the end of
1998. As of June 30, 1998, the Company had remaining authority to purchase
approximately 967,000 shares of the Company's common stock. Shares purchased
under the program are expected to be reissued in connection with employee stock
option and restricted stock programs.
The Company believes that cash flow from operations and borrowings in
either the private or public market will provide the Company with the means to
fund operations and currently planned investment and capital expenditures.
MARKET RISK
Financial instruments of the Company expose it to both commodity price
risk and interest rate risk.
Commodity Price Risk - The Company's primary market risk exposure is
the volatility of spot-market energy commodity prices, relating to the portfolio
position of its financial instruments and physical commitments, which can affect
the operating results of Sonat Exploration and Sonat Energy Services. The
Company uses commodity futures contracts, options and price swap agreements to
hedge its commodity price risk on crude oil, natural gas and electricity. Sonat
Energy Services performs all hedging activity (non-trading) for both its own
operations and for the operations of Sonat Exploration. In June 1997, Sonat
Energy Services, through its subsidiary, Sonat Marketing, also began using
derivative instruments as a market maker (trading activity) by maintaining
active trading positions in natural gas futures and swap contracts and limiting
its risk to changes in the value of its outstanding positions through the use of
Value-at-Risk models, establishment of offsetting positions, and limit and
monitoring procedures.
<PAGE>
The Company's non-trading (hedging) and trading activities are
implemented under a set of policies approved by the Board of Directors. In
addition, all derivative activities are internally reviewed by a Risk Oversight
Committee to ensure compliance with all policies. The Company's use of
derivative instruments to reduce the effect of market volatility is described in
Note 3 of the Notes to Condensed Consolidated Financial Statements. The Risk
Oversight Committee and management monitor the portfolio Value-at-Risk
frequently to ensure compliance with Board limits.
Interest Rate Risk - The Company's entire portfolio of interest rate
risk instruments is classified as non-trading. The Company's interest income and
expense are sensitive to changes in the level of short-term interest rates in
the United States. In general, the Company uses excess funds to reduce
short-term debt levels and therefore has minimal cash equivalent investments. To
mitigate the impact of fluctuations in interest rates, the Company maintains a
balance among components of its capital structure, providing a mix of maturities
and pricing methods for its debt obligations. In the past the Company has used
derivative instruments to aid in its management of interest rate risk, although
it is not currently doing so.
YEAR 2000 PROJECT
The Company is aware of the potential impact the Year 2000 could have
on its information technology and business infrastructure. To answer the Year
2000 challenge, the Sonat Board of Directors directed that a corporate-wide
initiative be undertaken. A consulting firm was engaged to assist in this
effort.
The Company has divided its Year 2000 project into assessment,
implementation, and testing phases. During the assessment phase, the Company
completed a comprehensive inventory of IT and non-IT systems, equipment,
computer hardware, and software that rely on a computer chip as well as service
providers that could be impacted by the Year 2000 problem. For vendor supplied
items, the Company has contacted its vendors seeking written verification of
Year 2000 readiness. In addition, the Company is also communicating with its
larger customers and business partners to determine the extent to which the
Company is vulnerable to the failure of those third parties to remediate their
Year 2000 issue.
The Company is currently engaged in the implementation and testing
phases of the Year 2000 project. The implementation phase includes completing
the replacement of mainframe systems with Year 2000-compliant vendor packages on
new client/server platforms and performing any required modifications and
upgrades identified during the assessment phase. The testing phase involves
testing systems for Year 2000 readiness and developing contingency plans for
critical systems and service providers. The Company has not completely finished
analyzing the most reasonably likely worst case scenarios and cannot estimate
potential lost revenue at this time. The Company is scheduled to be completed
with the implementation and testing phases by December 31, 1998.
The estimated cost to the Company of the Year 2000 project for capital
as well as general and administrative costs is expected to be $5 million to $10
million. As of June 30, 1998, the Company has incurred approximately $800,000 in
Year 2000 project costs. The Company expects to be able to fund Year 2000
expenditures from normal operations.
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income as changes
occur. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. SFAS No. 133 becomes effective for fiscal
years beginning after June 15, 1999. As a result, calendar year-end companies
have until January 1, 2000, to adopt. Early application is encouraged, but only
permitted as of the beginning of any fiscal quarter. Retroactive application to
previous periods, even previous quarters within the same fiscal year, is not
permitted. The Company has not yet determined what the effect of SFAS No. 133
will be on the earnings and financial position of the Company.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements
regarding the Company's business plans and prospects, objectives, future
drilling plans, expansion projects, proposed capital expenditures and expected
performance or results. These forward-looking statements are based on
assumptions that the Company believes are reasonable, but are subject to a wide
range of risks and uncertainties and, as a result, actual results and experience
may differ materially from the anticipated results or other expectations
expressed in such forward-looking statements. Such statements are made in
reliance on the safe habor provisions of the Private Securities Litigation
Reform Act of 1995.
Important factors that could cause actual results to differ include
changes in oil and gas prices and underlying demand, which would affect
profitability and might cause the Company to alter its plans; the timing and
success of the Company's exploration and development drilling programs, which
would affect production levels and reserves; the results of the Company's
hedging activities; risks incident to the drilling and operation of oil and gas
wells; future drilling, production and development costs and the success of the
Company's internal cost reduction activities; and the requirements to receive
various governmental approvals to proceed with expansion projects at Southern,
and unanticipated construction delays in connection with such projects.
Realization of the Company's objectives and expected performance can also be
adversely affected by the actions of customers and competitors, changes in
governmental regulation of the Company's businesses, and changes in general
economic conditions and the state of domestic capital markets.
The Company believes that actual sales proceeds from its property
divestiture program will equal or exceed current estimates. Such estimates are
based on signed purchase and sale agreements for the Austin Chalk and Arkoma
Basin properties and offers for certain of the remaining properties. Final sales
proceeds will be determined, however, only as such sales are closed.
Estimates of future production of oil and gas depend on a number of
assumptions, including the timing and success of the Company's drilling
programs, performance of wells, expected levels of capital spending and oil and
natural gas prices. In addition, estimates of future unit costs of production
depend on assumptions of production levels and expected future costs. Because of
these and other variables, there can be no assurances that the actual level of
production will equal projected volumes or that the actual future unit costs of
production will equal the current estimate.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Legal Proceedings
As reported in Item 3 of the Company's Report on Form 10-K for the year
ended December 31, 1997, Tennessee Gas Pipeline Company ("Tennessee") had filed
an application with the FERC seeking to have the exchange agreement between
Southern and Tennessee, pursuant to which Southern delivers and receives gas to
and from the Bear Creek Storage Field at no charge, converted into a standard
transportation agreement by which Tennessee would charge Southern tariff rates
for providing that service. In May 1998 the FERC denied Tennessee's application.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 1
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedules for the period ended June 30, 1998, filed
electronically only
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on April 23, 1998, reporting
certain information under Item 5 with respect to the restructuring of Sonat
Exploration Company, which was included in the Company's press release relating
to first quarter earnings.
The Company filed a Report on Form 8-K on July 23, 1998, reporting
certain information under Item 5 with respect to the second quarter results of
operations and the completion of the restructuring of its wholly owned
subsidiary, Sonat Exploration Company.
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 13, 1998 By: /s/ James E. Moylan, Jr.
------------------------- --------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
Date: August 13, 1998 By: /s/ Thomas W. Barker, Jr.
------------------------- ---------------------------
Thomas W. Barker, Jr.
Vice President-Finance
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,
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(345,026) $129,222 $122,849 $351,302 $300,373 $144,423 $354,325
Fixed charges (see computation below) 95,830 81,039 168,981 162,291 174,634 133,902 130,670
Less allowance for interest
capitalized (2,872) (3,867) (7,447) (7,642) (8,072) (7,736) (4,329)
--------- -------- -------- -------- -------- -------- --------
Total Earnings Available for
Fixed Charges $(252,068) $206,394 $284,383 $505,951 $466,935 $270,589 $480,666
========= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 91,531 $ 77,062 $160,829 $154,769 $167,068 $126,193 $123,619
Rentals(b) 4,299 3,977 8,152 7,522 7,566 7,709 7,051
--------- -------- -------- -------- -------- -------- --------
$ 95,830 $ 81,039 $168,981 $162,291 $174,634 $133,902 $130,670
========= ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges (c) 2.5 1.7 3.1 2.7 2.0 3.7
========= ======== ======== ======== ======== ======== ========
</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.
(c) Earnings from continuing operations for the six months ended June 30, 1998
reflect a second quarter restructuring charge for the impairment of certain
oil and gas properties and other restructuring expenses primarily
associated with a reduction in work force. Earnings for the second quarter
were reduced $444.8 million pretax and $289.1 million after tax as a result
of the restructuring and impairment charges. Because of these charges,
earnings were inadequate to cover fixed charges of $95.8 million for the
six months ended June 30, 1998. The coverage deficiency was $347.9 million
for the six month period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,139
<SECURITIES> 0
<RECEIVABLES> 490,760
<ALLOWANCES> 0
<INVENTORY> 63,021
<CURRENT-ASSETS> 737,635
<PP&E> 6,328,070
<DEPRECIATION> 3,578,615
<TOTAL-ASSETS> 4,348,227
<CURRENT-LIABILITIES> 1,500,819
<BONDS> 1,101,691
0
0
<COMMON> 111,388
<OTHER-SE> 1,228,419
<TOTAL-LIABILITY-AND-EQUITY> 4,348,227
<SALES> 1,735,754
<TOTAL-REVENUES> 2,034,407
<CGS> 1,495,829
<TOTAL-COSTS> 1,626,032
<OTHER-EXPENSES> 172,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,050
<INCOME-PRETAX> (345,026)
<INCOME-TAX> (125,061)
<INCOME-CONTINUING> (219,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (219,965)
<EPS-PRIMARY> (2.00)
<EPS-DILUTED> (1.98)
</TABLE>
