UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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:
110,057,191 SHARES OUTSTANDING ON APRIL 30, 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>
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income--
Three Months Ended March 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements 4 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 26
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28 - 29
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 13,393 $ 27,278
Restricted cash (Note 2) - 115,956
Accounts receivable 491,925 619,581
Inventories 45,029 65,161
Income taxes 65,419 1,985
Gas imbalance receivables 11,874 16,644
Assets from price risk management activities 68,079 92,150
Other 38,393 42,052
---------- ----------
Total Current Assets 734,112 980,807
---------- ----------
Investments in Unconsolidated Affiliates and Other 596,442 553,618
---------- ----------
Plant, Property and Equipment 6,193,077 6,079,239
Less accumulated depreciation, depletion
and amortization 3,048,822 3,096,541
---------- ----------
3,144,255 2,982,698
---------- ----------
Deferred Charges and Other:
Assets from price risk management activities 14,033 9,638
Other 177,966 192,048
---------- ----------
191,999 201,686
---------- ----------
Total Assets $4,666,808 $4,718,809
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 9,791 $ 14,508
Unsecured notes 663,718 446,721
Accounts payable 515,122 615,322
Accrued income taxes 14,903 18,274
Accrued interest 40,799 37,242
Accrued long-term compensation (Note 2) - 73,799
Gas imbalance payables 11,189 14,320
Liabilities from price risk management activities 59,256 85,398
Other 43,523 75,299
---------- ----------
Total Current Liabilities 1,358,301 1,380,883
---------- ----------
Long-Term Debt 1,106,600 1,237,734
---------- ----------
Deferred Credits and Other:
Deferred income taxes 382,103 298,681
Liabilities from price risk management activities 9,427 5,014
Other 184,442 182,507
---------- ----------
575,972 486,202
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 169,103 167,786
Retained earnings 1,519,411 1,511,085
---------- ----------
1,688,514 1,678,871
Less treasury stock 62,579 64,881
---------- ----------
Total Stockholders' Equity 1,625,935 1,613,990
---------- ----------
Total Liabilities and Stockholders' Equity $4,666,808 $4,718,809
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
(In Thousands, Except
Per-Share Amounts)
<S> <C> <C>
Revenues $1,108,885 $1,123,570
---------- ----------
Costs and Expenses:
Natural gas cost 763,483 775,098
Electric power cost 65,191 32,886
Operating and maintenance 40,480 38,939
Exploration cost 24,687 32,557
General and administrative 38,934 44,684
Depreciation, depletion and amortization 87,548 82,579
Taxes, other than income 13,605 5,794
---------- ----------
1,033,928 1,012,537
---------- ----------
Operating Income 74,957 111,033
---------- ----------
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 9,653 10,122
Minority interest (542) (872)
Other income, net 712 6,167
---------- ----------
9,823 15,417
---------- ----------
Earnings Before Interest and Taxes 84,780 126,450
---------- ----------
Interest:
Interest income 2,200 1,182
Interest expense (32,130) (24,853)
Interest capitalized 1,424 2,043
---------- ----------
(28,506) (21,628)
---------- ----------
Income Before Income Taxes 56,274 104,822
Income Tax Expense 18,261 34,956
---------- ----------
Net Income $ 38,013 $ 69,866
========== ==========
Earnings Per Share of Common Stock $ .35 $ .63
========== ==========
Earnings Per Share of Common Stock-
Assuming Dilution $ .34 $ .62
========== ==========
Weighted Average Shares Outstanding 109,966 110,387
========== ==========
Weighted Average Shares Outstanding-
Assuming Dilution 111,134 112,057
========== ==========
Cash Dividends Paid Per Share $ .27 $ .27
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 38,013 $ 69,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 87,548 82,578
Exploration cost 24,687 32,557
Deferred income taxes 83,422 11,431
Equity in earnings of unconsolidated
affiliates, less distributions (7,406) (10,117)
Reserves for regulatory matters (4,046) 288
Gas supply realignment costs 353 2,375
Change in:
Accounts receivable 127,656 207,759
Inventories 20,132 (564)
Accounts payable (100,200) (138,737)
Accrued interest and income taxes, net (63,247) 18,799
Accrued long-term compensation (73,799) 1,135
Other current assets and liabilities (28,546) 3,095
Net change in restricted cash 115,956 -
Other, net 9,095 7,414
----------- ----------
Net cash provided by operating activities 229,618 287,879
----------- ----------
Cash Flows from Investing Activities:
Plant, property and equipment additions (251,435) (209,567)
Net proceeds from disposal of assets 1,109 3,534
Exploration costs, excluding lease write-offs (13,830) (24,333)
Investments in unconsolidated affiliates and
other (33,234) (241)
----------- -----------
Net cash used in investing activities (297,390) (230,607)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 400,000 450,000
Payments of long-term debt (535,851) (452,045)
Changes in short-term borrowings 216,997 (17,630)
----------- -----------
Net changes in debt 81,146 (19,675)
Dividends paid (29,689) (23,248)
Treasury stock purchases (100) (26,510)
Other equity 2,530 3,581
----------- -----------
Net cash provided by (used in)
financing activities 53,887 (65,852)
----------- -----------
Net Decrease in Cash and Cash Equivalents (13,885) (8,580)
Cash and Cash Equivalents at Beginning of Period 27,278 48,009
----------- -----------
Cash and Cash Equivalents at End of Period $ 13,393 $ 39,429
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 25,187 $ 21,112
Income taxes paid, net $ 2,129 $ 7,769
</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 period has 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.
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 of
1,168,000 and 1,670,000 for the three month periods ended March 31, 1998 and
1997, respectively.
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 APB 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.
Three Months
Ended March 31, 1997
(In Thousands)
Revenues
Sonat Inc. $1,072,143
Sonat Exploration GOM 51,427
Combined $1,123,570
Net Income
Sonat Inc. $ 66,846
Sonat Exploration GOM 3,020
----------
Combined $ 69,866
==========
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 was used to settle this liability and certain other merger related
expenses.
3. Price Risk Management and Derivative Financial Instruments
Through May 1997, the Company used derivative instruments (commodity
futures contracts, options and price swap agreements) solely to hedge its
commodity price risk on natural gas, crude oil and electricity. In June 1997,
the Company also began using derivative instruments 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 options give the owner the right, but not the obligation, to a
<PAGE>
3. Price Risk Management and Derivative Financial Instruments (Cont'd)
futures contract. Over-the-counter options give the owner the right, but not
the obligation, to buy or sell an
underlying commodity at a given price.
At March 31, 1998, the Company had outstanding energy commodity
futures, swaps and options. In the table below, buys of swaps represent payment
of fixed price and receipt of NYMEX or index and payment of NYMEX and receipt of
index. The notional volume and terms of these transactions are as follows:
Notional Volume Maximum
Commodity Buy Sell Term
- --------- --- ---- ----
Natural Gas (Tbtu) 618.4 663.1 55 months
Electricity (Thousands of MWh) 221.6 204.8 2 months
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 and Liabilities from Price Risk Management 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.
Fair Value Average Fair Value
(Carrying Amount) for the Three Months
as of 3/31/98 Ended 3/31/98
(In Thousands)
Energy Commodity Trading:
Assets $82,112 $79,530
Liabilities 68,684 66,946
===============================================================================
Net trading gains for the first quarter of 1998 were $9.3 million.
<PAGE>
3. Price Risk Management 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 earnings recognition of the underlying physical. Each net
payment/receipt due or owed under the 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 outstanding
derivative positions as of March 31, 1998. Not included are the related physical
positions that these derivative positions hedge.
Fair Value
(In Thousands)
Natural Gas $(61,564)
Electricity (456)
Deferred amounts on open futures positions will mature over 1998 and
1999.
<PAGE>
3. Price Risk Management and Derivative Financial Instruments (Cont'd)
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 in relation to the Company.
At March 31, 1998, the market value of the Company's in-the-money swaps and
options was $7.7 million, and all counterparties were within collateral limits.
Reserves for credit risk are established as necessary.
4. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates:
Three Months
Ended March 31,
1998 1997
(In Thousands)
Company's Share of Reported Earnings (Losses):
Exploration and Production $ 144 $ 117
------ -------
Natural Gas Transmission:
Citrus Corp. 4,511 6,295
Amortization of Citrus basis difference 346 346
Bear Creek Storage 2,089 2,708
Destin Pipeline 2,060 13
Other (24) (25)
------ -------
8,982 9,337
------ -------
Energy Services 225 292
------ -------
Other 302 376
------ -------
$9,653 $10,122
====== =======
<PAGE>
4. Unconsolidated Affiliates (Cont'd)
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.
The following is summarized income statement information for Citrus:
Three Months
Ended March 31,
1998 1997
(In Thousands)
Revenues $133,581 $170,763
Expenses:
Natural gas cost 58,614 83,436
Operating expenses 23,987 22,446
Depreciation and amortization 12,722 20,205
Interest and other 23,420 24,239
Income taxes 5,816 7,847
-------- --------
Income Reported $ 9,022 $ 12,590
======== ========
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.
Three Months
Ended March 31,
1998 1997
(In Thousands)
Revenues $9,029 $9,346
Expenses:
Operating expenses 2,301 1,241
Depreciation 1,359 1,356
Other expenses, net 1,192 1,333
------ ------
Income Reported $4,177 $5,416
====== ======
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,
$313 million 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 by
July 1998 and fully in service by January 1999. Destin's earnings primarily
relate to the allowance for funds used during construction capitalized on its
pipeline.
<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 January 1, 1998, there was an outstanding balance of
$130.0 million. During the first three 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 March 31, 1998.
In late January 1998, Sonat made two public offerings of Notes pursuant
to its 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 March 31, 1998, Sonat had short-term lines of credit of $700.0
million available through January 25, 1999. Southern had a short-term line of
credit of $50.0 million available through May 26, 1998. Borrowings are available
for a period of not more than 364 days and are in the form of unsecured
promissory notes that bear interest at rates based on the banks' prevailing
prime, international or money-market lending rates. At March 31, 1998, Sonat had
$22.4 million outstanding at a rate of 6.31 percent. No amounts were outstanding
under Southern's agreement.
Sonat had $639.5 million in commercial paper outstanding at an average rate
of 5.76 percent at March 31, 1998.
<PAGE>
6. Rate Matters and Contingencies
Periodically, Southern and its subsidiaries make general rate filings
with the Federal Energy Regulatory Commission (FERC) to provide for the recovery
of cost of service and a return on equity. The FERC normally allows the filed
rates to become effective, subject to refund, until it rules on the approved
level of rates. Southern and its subsidiaries provide reserves relating to such
amounts collected subject to refund, as appropriate, and make refunds upon
establishment of the final rates. At March 31, 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.
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 or shareholders' 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, for the
three-month periods ended March 31, 1998 and 1997 is as follows:
Three Months
Ended March 31,
1998 1997
(In Thousands)
Net Income $38,013 $69,866
Unrealized Gains on Securities 1,265 1,403
------- -------
Comprehensive Income $39,278 $71,269
======= =======
Common stock and other capital in the Condensed Consolidated Balance
Sheets includes $4.5 million at March 31, 1998, and $3.2 million at December 31,
1997, related to other comprehensive income, which is comprised of unrealized
gains on securities.
<PAGE>
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 shareholders. 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.
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 March 31, 1998
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $79,839 $92,288 $936,755 $ 3 $1,108,885
Intersegment Revenues 82,064 13,214 - 12,373 107,651
Earnings Before
Interest and Taxes 13,037 68,915 836 1,992 84,780
==============================================================================
Three Months Ended March 31, 1997
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
External Customers $ 91,272 $72,607 $959,684 $ 7 $1,123,570
Intersegment Revenues 114,357 26,559 - 8,889 149,805
Earnings Before
Interest and Taxes 62,902 60,104 924 2,520 126,450
===============================================================================
</TABLE>
<PAGE>
8. Segment Information (Cont'd)
Three Months
Ended March 31,
1998 1997
(In Thousands)
Total Earnings Before Interest and Taxes
for Reportable Segments $ 84,780 $126,450
Interest Income 2,200 1,182
Interest Expense (32,130) (24,853)
Interest Capitalized 1,424 2,043
-------- --------
Income Before Income Taxes $ 56,274 $104,822
======== ========
9. Subsequent Event
Sonat Exploration Company Restructuring - On April 23, 1998, the
Company announced a restructuring of Sonat Exploration Company. The
restructuring will include significant property sales and certain cost reduction
activities. Oil and natural gas properties having approximately 500 billion
cubic feet of natural gas equivalent reserves and daily production of
approximately 200 million cubic feet of natural gas equivalent will be sold. The
volumes represent approximately 19 percent of the Company's total proven oil and
natural gas reserves and approximately 24 percent of its current daily
production. Although the timing of the property sales will depend on market
conditions, 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 a
preliminary estimate of sales proceeds and estimates of certain restructuring
expenses, the Company expects to take an after-tax charge of approximately $250
million to $275 million in the second quarter of 1998, substantially all of
which will be non-cash.
<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.
Three Months
Ended March 31,
1998 1997
(In Millions)
Earnings Before Interest and Taxes:
Exploration and production $13.0 $ 62.9
Natural gas transmission 68.9 60.1
Energy services .8 .9
Other 2.1 2.6
----- ------
$84.8 $126.5
===== ======
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. This effort was recently completed, and a major
restructuring program was announced on April 23, 1998. The restructuring program
includes the following steps.
Oil and gas properties having approximately 500 billion cubic feet
(Bcf) of proven natural gas equivalent reserves and daily production of
approximately 200 million cubic feet (MMcf) of natural gas equivalent will be
sold. These volumes represent approximately 19 percent of the Company's total
proven oil and natural gas reserves and approximately 24 percent of its current
daily production. The divestiture will include 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. Although the exact timing of the property
sales will depend on market conditions, it is expected that the divestiture
program will be substantially completed by the end of the third quarter of 1998
with the proceeds used to pay down debt.
<PAGE>
Sonat Exploration will consolidate its business units from seven to
three. This action, together with related staff reductions, will reduce its
workforce by approximately 220 people, or approximately one-fourth of the Sonat
Exploration workforce, including those currently employed by Sonat Exploration
GOM Inc., the former Zilkha Energy.
Based on a preliminary estimate of sales proceeds from the divestiture
program and the costs related to the restructuring, the Company expects to take
an after-tax charge of approximately $250 million to $275 million in the second
quarter of 1998, substantially all of which will be non-cash.
The steps being taken will significantly improve Sonat Exploration's
financial performance. General and administrative and operating costs are
expected to be reduced by approximately $55 million on an annual basis. Annual
interest expense is expected to be reduced by $20 million or more. In addition,
the per-unit amortization rate is expected to decline from a current $1.01 per
thousand cubic feet (Mcf) of natural gas equivalent to about $.75 per Mcf, as of
April 1, 1998. These actions are not expected to result in a material change to
Sonat's debt to capitalization ratio.
In March 1998, Sonat Exploration was the apparent successful bidder on
five tracts in the Central Gulf of Mexico Lease Sale 169. Sonat Exploration's
net share of the high bids is $12.7 million. While three of the tracts are in
shallow water areas, two of the tracts are in deep water, an emerging
exploratory area for the Company. Sonat Exploration will have a 100 percent
working interest in four of the tracts and a 25 percent interest in one of the
deep-water tracts. The bids are subject to review and evaluation by the Minerals
Management Service before being finally awarded. So far this year, Sonat
Exploration has drilled four exploratory wells in the Gulf of Mexico with a 50
percent success rate.
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
Three Months
Ended March 31,
1998 1997
(In Millions)
Revenues:
Sales to others $ 79.8 $ 91.3
Intersegment sales 82.1 114.3
------ ------
Total Revenues 161.9 205.6
------ ------
Costs and Expenses:
Operating and maintenance 19.4 19.3
Exploration cost 24.7 32.5
General and administrative 18.2 17.6
Depreciation, depletion and
amortization 79.4 68.3
Taxes and other 7.3 7.1
------ ------
149.0 144.8
------ ------
Operating Income 12.9 60.8
Other Income .1 2.1
------ ------
Earnings Before Interest and Taxes $ 13.0 $ 62.9
====== ======
Net Sales Volumes:
Gas (Bcf) 63 66
Oil and condensate (MBbls) 1,950 1,394
Natural gas liquids (MBbls) 584 383
- ----------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 2.01 $ 2.53
Oil and condensate ($/Bbl) 14.76 21.91
Natural gas liquids ($/Bbl) 9.73 16.75
- ----------------------------------------------------------------------------
First Quarter 1998 to First Quarter 1997 Analysis
Earnings before interest and taxes (EBIT) decreased $49.9 million
primarily due to lower revenues resulting from lower gas and oil and condensate
prices and lower natural gas production. Average realized natural gas prices
decreased 21 percent to $2.01 per Mcf in the first quarter of 1998 from $2.53
per Mcf in the first quarter of 1997. Realized oil and condensate prices
decreased 33 percent to an average of $14.76 per barrel from $21.91 per barrel
in the first quarter of 1997. Natural gas production declined five percent.
Higher oil and condensate production slightly offset these unfavorable factors.
Costs and expenses were slightly higher in the first quarter of 1998,
primarily due to higher depreciation, depletion and amortization expense
reflecting a higher amortization rate ($1.01 for the 1998 period compared to
$.89 for the 1997 period). The higher rate was primarily attributable to high
cost areas that are included in the Company's disposal plans. The higher
depreciation, depletion and amortization expense was partially offset by lower
exploration expense as a result of lower seismic and lease write-off expenses
compared with the same period in 1997.
<PAGE>
Other income was lower for the first three months of 1998 compared to
the first three months of 1997 due to gains on the disposal of marketable
securities in March 1997.
Hedging Activities
Sonat Exploration, through Sonat Marketing, uses derivative financial
instruments to manage the risks associated with price volatility for both its
natural gas production and its oil production, which it sells in the spot
market. (See Market 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 increased by $1.2 million and were reduced by
$17.2 million in the 1998 and 1997 periods, respectively, as a result of hedging
activities. There were no oil hedging activities reflected in the 1998 period.
Hedging activities reduced oil revenues by $.9 million in the 1997 period.
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 44.8 $2.15
1999 62.5 $2.13
2000 42.2 $2.16
2001 4.4 $2.30
- ----------------------------------------------------------
153.9 $2.15
==========================================================
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, $313 million 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. Three 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 by July 1998 and fully in
service by January 1999. In February 1998 Destin filed for Federal Energy
Regulatory Commission (FERC) approval 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, subject to FERC approval.
<PAGE>
Southern is moving forward on three expansions to eastern Tennessee,
northern Alabama, 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 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. 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 other Southeastern customers. Peaking services provide supplemental
gas supplies on days when demand is highest, typically during the winter. 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
Three Months
Ended March 31,
1998 1997
(In Millions)
Revenues:
Market transportation and storage $ 83.5 $ 83.2
Supply transportation 11.6 10.5
Other 10.4 5.4
------ ------
Total Revenues 105.5 99.1
------ ------
Costs and Expenses:
Operating and maintenance 19.6 17.6
General and administrative 15.5 18.0
Depreciation and amortization 5.5 11.7
Taxes, other than income 5.3 5.2
------ ------
45.9 52.5
------ ------
Operating Income 59.6 46.6
------ ------
Other Income:
Equity in earnings of
unconsolidated affiliates 4.1 2.7
Other .7 4.0
------ ------
4.8 6.7
------ ------
Earnings Before Interest and Taxes $ 64.4 $ 53.3
====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 185 170
Supply transportation 95 80
------ ------
Total Volumes 280 250
====== ======
Transition gas sales 3 18
====== ======
CITRUS CORP.
Three Months
Ended March 31,
1998 1997
(In Millions)
Equity in Earnings of
Citrus Corp. $4.9 $6.6
==== ====
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 95 98
Supply transportation 7 7
----- ----
Total Volumes 102 105
===== ====
<PAGE>
First Quarter 1998 to First Quarter 1997 Analysis
Southern Natural Gas - EBIT for the first quarter of 1998 increased
$11.1 million compared with the prior year. The increase was due to increased
revenue from expansions, improved operations at Sea Robin Pipeline Company and
other quarter-to-quarter variances discussed below. Partially offsetting the
increase was lower other income in 1998.
Supply transportation revenues increased due to an expansion at
Southern and higher volumes at Sea Robin. Other revenue was up primarily due to
a reversal of certain reserves relating to Southern's obligation to indemnify
certain parties in connection with take-or-pay settlements entered into in the
1980's. Operation and maintenance expense increased primarily due to higher fuel
expense. General and administrative expense decreased primarily due to lower
stock-based compensation and employee benefit expenses. Depreciation expense
decreased primarily due to an adjustment of salvage value on certain fixed
assets.
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. 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 decreased $1.7 million to $4.9
million. The decline was primarily due to lower trading margins and lower prices
for firm transportation capacity at Citrus Trading.
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. 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).
Sonat Marketing's natural gas business has continued to grow rapidly,
although margins have remained under intense pressure. Sonat Marketing's sales
volumes for the first quarter of 1998 increased 18 percent from the first
quarter of 1997. This growth was achieved in large part by the Company's
continuing focus on its strategy of working closely with its customers and
delivering outstanding customer service.
Sonat Power Marketing has executed electric power purchase, sales and
transmission agreements with numerous companies. Sonat Power Marketing has
remained focused on expanding its wholesale electric business, which is
evidenced by the significant growth in sales volumes. Sales volumes increased
127 percent to 3.2 million megawatt hours in the first quarter of 1998 compared
with the first quarter of 1997. Despite its rapid growth, however, Sonat Power
Marketing is not yet profitable in the very competitive emerging power marketing
business.
In February 1998, a subsidiary of Sonat Energy Services acquired a 50
percent interest in a natural gas-fired power plant in Georgia for a gross
investment of approximately $12 million.
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 quarter of 1998 was 12 Bcf
compared to 8 Bcf in the first quarter 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
Three Months
Ended March 31,
1998 1997
(In Millions)
Revenues $936.8 $959.7
====== ======
Operating Income $ 1.1 $ 1.5
====== ======
Earnings Before Interest and Taxes $ 0.8 $ 0.9
====== ======
Sonat Marketing Gas Sales Volumes (100%)
(Billion Cubic Feet) 360 304
====== ======
Sonat Power Marketing Sales Volumes (100%)
(Thousands of Megawatt Hours) 3,170 1,397
====== ======
First Quarter 1998 to First Quarter 1997 Analysis
First quarter 1998 financial results were essentially flat with the
previous year with EBIT of $.8 million compared with $.9 million in 1997. While
natural gas and electric marketing volumes were both higher and origination
activities increased, mild winter weather depressed margin opportunities. Sonat
Marketing's sales volume rose to 4 Bcf per day from 3.5 Bcf per day in 1997,
while Sonat Power Marketing's sales volumes reached 3.2 million megawatt hours,
up significantly from 1.4 million megawatt hours in the first quarter of 1997.
Results for 1998 also include start-up losses for Sonat Power Systems which were
not included in the prior period.
Both revenues and natural gas cost decreased when compared to the prior
period due to a sharp decline in natural gas prices.
<PAGE>
Income Statement Items
Three Months
Ended March 31,
1998 1997
(In Millions)
Interest Expense, Net $ 28.5 $ 21.6
Net interest expense increased in the 1998 period compared to the same
period last year due to higher average debt levels partly offset by the effect
of lower interest rates on debt and higher interest income on restricted cash
and other investments. Interest capitalized decreased due to lower interest
capitalized at Sonat Exploration.
Income Tax Expense $ 18.3 $ 35.0
Income tax expense decreased in the 1998 period compared to the 1997
period due to lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating Activities $229.6 $287.9
Cash flow from operations decreased $58.3 million compared to the 1997
period primarily due to lower operating results at Sonat Exploration, which was
discussed earlier in the operating section.
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). The change in deferred income taxes and accrued income taxes
primarily reflects much higher levels of intangible drilling costs compared to
the 1997 period and the payment of accrued long-term compensation upon closure
of the Zilkha merger. The change in accounts receivable and accounts payable is
primarily attributable to higher receivable and payable balances in December
1996 reflecting higher natural gas prices as compared to December 1997. The
change in inventory represents the sale of gas storage inventory purchased in
December 1997 at Sonat Marketing.
Investing Activities $(297.4) $(230.6)
Net cash used in investing activities was $66.8 million higher in 1998
compared to 1997. The increase was primarily attributable to capital
expenditures, which were higher due to increased developmental drilling at Sonat
Exploration. Advances to unconsolidated affiliates, specifically the Destin
Pipeline and the Georgia natural gas-fired power plant joint ventures, also
contributed to the increase.
<PAGE>
Three Months
Ended March 31,
1998 1997
(In Millions)
Capital expenditures for the Company's business segments (excluding
exploratory costs and unconsolidated affiliates) were as follows:
Exploration and Production $ 221.3 $ 174.0
Natural Gas Transmission 25.6 31.8
Energy Services 2.2 2.8
Other 2.3 1.0
------- -------
Total $ 251.4 $ 209.6
======= =======
The Company's share of capital expenditures by its unconsolidated
affiliates was $34.9 million and $2.0 million in the first quarter of 1998 and
1997, respectively.
Financing Activities $ 53.9 $ (65.9)
Financing activities provided $53.9 million in 1998 compared to
requiring $65.9 million in 1997. The change was primarily attributable to
increased borrowings in the current period, which helped finance higher capital
expenditures and investments in joint ventures. The 1997 period also reflects
much higher repurchases under the Company's stock repurchase program.
CAPITAL RESOURCES
At March 31, 1998, the Company had bank lines of credit and a revolving
credit agreement with banks with a total capacity of $1,250.0 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 $639.5
million of commercial paper and $22.4 million of borrowings from the short-term
line of credit, $588.1 million was available to the Company under such lines of
credit and revolving credit agreement at March 31, 1998.
Southern has filed a shelf registration statement with the Securities
and Exchange Commission which, when effective, will provide 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 $817 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.
<PAGE>
The Company has a stock repurchase program in effect through the end of
1998. As of March 31, 1998, the Company had remaining authority to purchase
approximately 997,500 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.
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.
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains 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 may differ materially from those
expressed in such forward-looking statements. 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 costs and benefits of Sonat Exploration's restructuring program
have been estimated based on a number of assumptions, including estimates of
sales proceeds from its divestiture program, the timing of such sales, the
expenses associated with the reorganization and assumed oil and gas prices.
Actual results may differ from such assumptions and there can be no assurance
that the estimated costs and benefits will be incurred or realized as planned or
that the expected charge to earnings will be in the range estimated.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders in Houston, Texas on
January 30, 1998. The stockholders voted on the issuance of shares of the
Company's common stock, as contemplated in the Agreement and Plan of Merger
dated as of November 22, 1997, between the Company and Zilkha Energy Company (as
set forth in the Proxy Statement/Prospectus for the Meeting)("Proposal No. 1").
The Vote on Proposal No. 1 was as follows:
- ------------------ ------------------- --------------------- ------------------
Voted For Voted Against Abstained
- ------------------ ------------------- --------------------- ------------------
- ------------------ ------------------- --------------------- ------------------
Proposal No. 1 64,094,347 427,775 269,615
- ------------------ ------------------- --------------------- ------------------
There were no broker non-votes (shares not voted on a matter because a
nominee holding shares for a beneficial owner neither receives voting
instructions from such beneficial owner nor has discretionary voting power with
respect thereto) with respect to the matter voted upon at the meeting, which was
approved by the shareholders.
The Company held its 1998 Annual Meeting of Stockholders in Birmingham,
Alabama, on April 23, 1998. The stockholders voted (1) to elect four Directors
as members of the Board of Directors of the Company, to serve until the 2001
Annual Meeting of Stockholders and until their respective successors have been
duly elected and qualified, and (2) on a proposal to elect Ernst & Young LLP as
the Company's Auditor ("Proposal No. 1").
The vote for the nominees for Director was as follows:
- ------------------------------- -------------------- --------------------------
Name of Nominee Voted For Authority Withheld
- ------------------------------- -------------------- --------------------------
- ------------------------------- -------------------- --------------------------
Max L. Lukens 99,594,857 1,465,402
- ------------------------------- -------------------- --------------------------
- ------------------------------- -------------------- --------------------------
Benjamin F. Payton 99,557,304 1,502,955
- ------------------------------- -------------------- --------------------------
- ------------------------------- -------------------- --------------------------
John J. Phelan, Jr. 99,577,828 1,482,431
- ------------------------------- -------------------- --------------------------
- ------------------------------- -------------------- --------------------------
Selim K. Zilkha 99,523,792 1,536,467
- ------------------------------- -------------------- --------------------------
The terms of William O. Bourke, Ronald L. Kuehn, Jr., Robert J. Lanigan,
Charles Marshall, Michael S. Zilkha, Jerome J. Richardson, Donald G. Russell,
Adrian M. Tocklin, James B. Williams, and Joe B. Wyatt continued after the
meeting.
The vote on Proposal No. 1 was as follows:
- ------------------- ------------------- --------------------- ------------------
Voted For Voted Against Abstained
- ------------------- ------------------- --------------------- ------------------
- ------------------- ------------------- --------------------- ------------------
Proposal No. 1 100,738,115 183,214 138,930
- ------------------- ------------------- --------------------- ------------------
There were no broker non-votes with respect to either matter voted upon at
the meeting. The four nominees for Director were duly elected as members of the
Board of Directors and Proposal No. 1 was approved by the stockholders.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
12* Computation of Ratio of Earnings to Fixed Charges
27.1* Financial Data Schedule for the period ended March 31, 1998
27.2* Restated Financial Data Schedule for the period ended March 31, 1997
27.3* Restated Financial Data Schedule for the period ended June 30, 1997
27.4* Restated Financial Data Schedule for the period ended September 30, 1997
27.5* Restated Financial Data Schedule for the period ended December 31, 1997
27.6* Restated Financial Data Schedule for the period ended March 31, 1996
27.7* Restated Financial Data Schedule for the period ended June 30, 1996
27.8* Restated Financial Data Schedule for the period ended September 30, 1996
- -------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 22, 1998, reporting
certain information under Item 5 with respect to the issuance of the Company's
press release relating to its 1997 results of operations.
The Company filed a report on Form 8-K on January 30, 1998, reporting
certain information under Item 5 with respect to the issuance and sale by the
Company of $100,000,000 aggregate principal amount of 6-5/8% Notes due February
1, 2008 and furnishing certain related exhibits under Item 7.
The Company filed a report on Form 8-K on February 2, 1998, reporting
certain information under Item 5 with respect to the issuance and sale by the
Company of $100,000,000 aggregate principal amount of 7% Notes due February 1,
2018 and furnishing certain related exhibits under Item 7.
The Company filed a report on Form 8-K on February 4, 1998, reporting
certain information under Item 5 with respect to the approval by the
stockholders of Sonat Inc., at a Special Meeting held on January 30, 1998, to
issue common shares for the merger of a wholly owned subsidiary of Sonat into
Zilkha Energy Company and furnishing certain related exhibits, including
financial statements of Zilkha, under Item 7.
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.
- ----------------------
(1) The Company will furnish to requesting security holders the exhibits on this
list upon the payment of a fee of $.10 per page up to a maximum of $5.00 per
exhibit. Requests must be in writing and should be addressed to Beverley T.
Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham, Alabama 35202-2563.
<PAGE>
SONAT INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
Date: May 13, 1998 By: /s/ James E. Moylan, Jr.
-------------------------- --------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
Date: May 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>
Three Months Ended March 31, 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 $54,215 $104,809 $122,849 $351,302 $300,373 $144,423 $354,325
Fixed charges (see computation below) 46,412 39,688 168,981 162,291 174,634 133,902 130,670
Less allowance for interest
capitalized (1,424) (2,043) (7,447) (7,642) (8,072) (7,736) (4,329)
------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $99,203 $142,454 $284,383 $505,951 $466,935 $270,589 $480,666
======= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $44,208 $ 37,711 $160,829 $154,769 $167,068 $126,193 $123,619
Rentals(b) 2,204 1,977 8,152 7,522 7,566 7,709 7,051
------- -------- -------- -------- -------- -------- --------
$46,412 $ 39,688 $168,981 $162,291 $174,634 $133,902 $130,670
======= ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.1 3.6 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,393
<SECURITIES> 0
<RECEIVABLES> 491,925
<ALLOWANCES> 0
<INVENTORY> 45,029
<CURRENT-ASSETS> 734,112
<PP&E> 6,193,077
<DEPRECIATION> 3,048,822
<TOTAL-ASSETS> 4,666,808
<CURRENT-LIABILITIES> 1,358,301
<BONDS> 1,106,600
0
0
<COMMON> 111,385
<OTHER-SE> 1,514,550
<TOTAL-LIABILITY-AND-EQUITY> 1,625,935
<SALES> 936,194
<TOTAL-REVENUES> 1,108,885
<CGS> 828,674
<TOTAL-COSTS> 893,841
<OTHER-EXPENSES> 87,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,706
<INCOME-PRETAX> 56,274
<INCOME-TAX> 18,261
<INCOME-CONTINUING> 38,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,013
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 39,430
<SECURITIES> 0
<RECEIVABLES> 404,042
<ALLOWANCES> 0
<INVENTORY> 32,164
<CURRENT-ASSETS> 517,214
<PP&E> 5,602,729
<DEPRECIATION> 2,875,284
<TOTAL-ASSETS> 3,910,818
<CURRENT-LIABILITIES> 769,944
<BONDS> 978,882
0
0
<COMMON> 111,388
<OTHER-SE> 1,570,269
<TOTAL-LIABILITY-AND-EQUITY> 3,910,818
<SALES> 955,960
<TOTAL-REVENUES> 1,123,570
<CGS> 807,984
<TOTAL-COSTS> 879,480
<OTHER-EXPENSES> 82,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,810
<INCOME-PRETAX> 104,822
<INCOME-TAX> 34,956
<INCOME-CONTINUING> 69,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,866
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 40,737
<SECURITIES> 0
<RECEIVABLES> 451,386
<ALLOWANCES> 0
<INVENTORY> 51,979
<CURRENT-ASSETS> 612,840
<PP&E> 5,782,668
<DEPRECIATION> 2,947,397
<TOTAL-ASSETS> 4,118,478
<CURRENT-LIABILITIES> 909,474
<BONDS> 1,027,637
0
0
<COMMON> 111,388
<OTHER-SE> 1,549,935
<TOTAL-LIABILITY-AND-EQUITY> 4,118,478
<SALES> 1,647,773
<TOTAL-REVENUES> 1,979,140
<CGS> 1,399,248
<TOTAL-COSTS> 1,550,115
<OTHER-EXPENSES> 160,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,504
<INCOME-PRETAX> 129,222
<INCOME-TAX> 42,505
<INCOME-CONTINUING> 86,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,717
<EPS-PRIMARY> .79
<EPS-DILUTED> .77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 119,606
<SECURITIES> 0
<RECEIVABLES> 536,977
<ALLOWANCES> 0
<INVENTORY> 40,662
<CURRENT-ASSETS> 838,995
<PP&E> 6,005,506
<DEPRECIATION> 3,088,213
<TOTAL-ASSETS> 4,465,237
<CURRENT-LIABILITIES> 961,129
<BONDS> 1,347,597
0
0
<COMMON> 111,388
<OTHER-SE> 1,521,823
<TOTAL-LIABILITY-AND-EQUITY> 4,465,237
<SALES> 2,557,057
<TOTAL-REVENUES> 3,052,643
<CGS> 2,188,555
<TOTAL-COSTS> 2,425,891
<OTHER-EXPENSES> 305,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,475
<INCOME-PRETAX> 117,892
<INCOME-TAX> 36,559
<INCOME-CONTINUING> 81,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,333
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 143,234
<SECURITIES> 0
<RECEIVABLES> 619,581
<ALLOWANCES> 0
<INVENTORY> 65,161
<CURRENT-ASSETS> 980,807
<PP&E> 6,079,239
<DEPRECIATION> 3,096,541
<TOTAL-ASSETS> 4,718,809
<CURRENT-LIABILITIES> 1,380,883
<BONDS> 1,237,734
0
0
<COMMON> 111,385
<OTHER-SE> 1,502,605
<TOTAL-LIABILITY-AND-EQUITY> 4,718,809
<SALES> 3,694,942
<TOTAL-REVENUES> 4,371,902
<CGS> 3,174,060
<TOTAL-COSTS> 3,510,673
<OTHER-EXPENSES> 410,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,100
<INCOME-PRETAX> 122,849
<INCOME-TAX> 35,437
<INCOME-CONTINUING> 87,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,412
<EPS-PRIMARY> .79
<EPS-DILUTED> .78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 28,151
<SECURITIES> 0
<RECEIVABLES> 408,524
<ALLOWANCES> 0
<INVENTORY> 169,632
<CURRENT-ASSETS> 541,016
<PP&E> 5,189,473
<DEPRECIATION> 2,724,293
<TOTAL-ASSETS> 3,775,007
<CURRENT-LIABILITIES> 719,825
<BONDS> 837,443
0
0
<COMMON> 111,402
<OTHER-SE> 1,463,391
<TOTAL-LIABILITY-AND-EQUITY> 3,775,007
<SALES> 583,189
<TOTAL-REVENUES> 746,580
<CGS> 460,951
<TOTAL-COSTS> 482,605
<OTHER-EXPENSES> 85,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,084
<INCOME-PRETAX> 112,551
<INCOME-TAX> 37,102
<INCOME-CONTINUING> 75,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,449
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,892
<SECURITIES> 0
<RECEIVABLES> 391,568
<ALLOWANCES> 0
<INVENTORY> 36,141
<CURRENT-ASSETS> 547,125
<PP&E> 5,355,139
<DEPRECIATION> 2,793,110
<TOTAL-ASSETS> 3,690,263
<CURRENT-LIABILITIES> 768,817
<BONDS> 863,324
0
0
<COMMON> 111,402
<OTHER-SE> 1,474,229
<TOTAL-LIABILITY-AND-EQUITY> 3,690,263
<SALES> 1,100,778
<TOTAL-REVENUES> 1,419,919
<CGS> 856,876
<TOTAL-COSTS> 941,464
<OTHER-EXPENSES> 172,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,015
<INCOME-PRETAX> 161,172
<INCOME-TAX> 53,356
<INCOME-CONTINUING> 107,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,817
<EPS-PRIMARY> .98
<EPS-DILUTED> .97
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 35,862
<SECURITIES> 0
<RECEIVABLES> 362,370
<ALLOWANCES> 0
<INVENTORY> 38,414
<CURRENT-ASSETS> 509,633
<PP&E> 5,414,677
<DEPRECIATION> 2,794,335
<TOTAL-ASSETS> 3,714,525
<CURRENT-LIABILITIES> 673,568
<BONDS> 947,606
0
0
<COMMON> 111,402
<OTHER-SE> 1,509,504
<TOTAL-LIABILITY-AND-EQUITY> 3,714,525
<SALES> 1,732,511
<TOTAL-REVENUES> 2,197,614
<CGS> 1,358,431
<TOTAL-COSTS> 1,485,390
<OTHER-EXPENSES> 259,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,884
<INCOME-PRETAX> 250,658
<INCOME-TAX> 81,568
<INCOME-CONTINUING> 169,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,090
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.51
</TABLE>
