SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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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
1-8094
Seagull Energy Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1764876
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Fannin, Suite 1700, Houston, Texas 77002-6714
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(Address of principal executive offices) (Zip code)
(713) 951-4700
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(Registrant's telephone number, including area code)
None
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(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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 7, 1996
----- -----------------------------
Common Stock, $.10 par value 36,454,366
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
- ------------------------------
Presentation of Financial Information ...................... 3
Consolidated Statements of Earnings - Three Months
Ended March 31, 1996 and 1995 (Unaudited) .................. 4
Consolidated Balance Sheets - March 31, 1996
and December 31, 1995 (Unaudited) .......................... 5
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1996 and 1995 (Unaudited) .................. 6
Notes to Consolidated Financial Statements (Unaudited) ..... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited) ............ 8
PART II. OTHER INFORMATION ................................. 16
- --------------------------
SIGNATURES ................................................. 17
- ----------
2
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PRESENTATION OF FINANCIAL INFORMATION
In the opinion of management, the following unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Seagull Energy Corporation and Subsidiaries (the "Company"
or "Seagull") as of March 31, 1996, and the results of its operations and cash
flows for the three months ended March 31, 1996 and 1995. As discussed in Note 1
to the Company's Consolidated Financial Statements, Seagull adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective
March 31, 1995. Under SFAS No. 121, the Company recorded a non-cash impairment
of gas and oil properties as a separate line item in the accompanying unaudited
consolidated statement of earnings for the three months ended March 31, 1995.
All other adjustments made are of a normal, recurring nature. The results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the full year.
The financial information presented herein should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Item 2 of this document includes "forward looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause the actual
results to differ materially from the Company's expectations are disclosed in
conjunction with the forward looking statements included herein ("Cautionary
Disclosures"). Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures.
3
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------
1996 1995
--------- ---------
Revenues:
Gas and oil operations ................................. $ 75,217 $ 58,560
Alaska transmission and distribution ................... 35,430 36,290
--------- ---------
110,647 94,850
Costs of Operations:
Alaska transmission and distribution cost of gas sold .. 16,200 18,565
Operations and maintenance ............................. 25,052 28,928
Exploration charges .................................... 4,166 9,882
Depreciation, depletion and amortization ............... 31,264 34,811
Impairment of gas and oil properties ................... -- 44,376
--------- ---------
76,682 136,562
--------- ---------
Operating Profit (Loss) .................................. 33,965 (41,712)
Other (Income) Expense:
General and administrative ............................. 3,356 2,654
Interest expense ....................................... 11,431 13,997
Interest income and other .............................. (508) (563)
--------- ---------
14,279 16,088
--------- ---------
Earnings (Loss) Before Income Taxes ...................... 19,686 (57,800)
Income Tax Expense (Benefit) ............................. 4,840 (19,250)
--------- ---------
Net Earnings (Loss) ...................................... $ 14,846 $ (38,550)
========= =========
Earnings (Loss) Per Share ................................ $ 0.40 $ (1.07)
========= =========
Weighted Average Number of Common Shares
Outstanding (in thousands) ............................. 36,922 36,106
========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
MARCH 31, December 31,
1996 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 20,922 $ 11,205
Accounts receivable, net ............................... 126,807 119,898
Inventories ............................................ 5,258 4,947
Prepaid expenses and other ............................. 11,242 11,331
----------- -----------
Total Current Assets ................................. 164,229 147,381
Property, Plant and Equipment - at cost
(successful efforts method for gas and oil properties) .. 1,594,174 1,581,002
Accumulated Depreciation, Depletion and Amortization ..... 600,754 569,587
----------- -----------
993,420 1,011,415
Other Assets ............................................. 39,987 40,000
----------- -----------
Total Assets ............................................. $ 1,197,636 $ 1,198,796
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................... $ 84,975 $ 83,111
Accrued expenses ....................................... 23,624 33,080
Current maturities of long-term debt ................... 1,214 1,214
----------- -----------
Total Current Liabilities ............................ 109,813 117,405
Long-Term Debt ........................................... 530,285 545,343
Other Noncurrent Liabilities ............................. 52,428 52,276
Deferred Income Taxes .................................... 40,572 36,104
Shareholders' Equity:
Common Stock, $.10 par value; authorized
100,000,000 shares; issued 36,704,678 shares (1996)
and 36,561,290 shares (1995) .......................... 3,670 3,656
Additional paid-in capital ............................. 328,632 326,918
Retained earnings ...................................... 139,437 124,591
Foreign currency translation adjustment ................ 685 389
Less - note receivable from employee stock
ownership plan ........................................ (4,922) (4,922)
Less - 308,812 shares of Common Stock
held in Treasury, at cost ............................. (2,964) (2,964)
----------- -----------
Total Shareholders' Equity ........................... 464,538 447,668
Commitments and Contingencies ............................
----------- -----------
Total Liabilities and Shareholders' Equity ............... $ 1,197,636 $ 1,198,796
=========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1996 1995
--------- ---------
OPERATING ACTIVITIES:
Net earnings (loss) ........................................... $ 14,846 $ (38,550)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization .................... 32,011 35,655
Impairment of gas and oil properties ........................ -- 44,376
Amortization of deferred financing costs .................... 876 852
Deferred income taxes ....................................... 4,408 (19,497)
Dry hole expense ............................................ 474 4,935
Other ....................................................... (402) (205)
--------- ---------
52,213 27,566
Changes in operating assets and liabilities, net of acquisitions:
Decrease (Increase) in accounts receivable ................ (6,874) 25,342
Increase in inventories, prepaid
expenses and other ....................................... (922) (2,922)
Increase (Decrease) in accounts payable ................... 1,588 (7,490)
Decrease in prepaid gas and oil sales ..................... -- (1,366)
Decrease in accrued expenses and other .................... (7,150) (8,349)
--------- ---------
Net Cash Provided By Operating Activities .............. 38,855 32,781
INVESTING ACTIVITIES:
Capital expenditures .......................................... (13,504) (19,298)
Acquisitions, net of cash acquired ............................ (877) --
Proceeds from sales of property, plant and equipment .......... 804 153
--------- ---------
Net Cash Used In Investing Activities .................. (13,577) (19,145)
FINANCING ACTIVITIES:
Proceeds from revolving lines of credit and other borrowings .. 86,450 180,683
Principal payments on revolving lines of credit and
other borrowings ............................................. (100,027) (186,957)
Principal payments on monetary production payment liability ... (1,697) --
Fees paid to acquire financing ................................ (109) (125)
Proceeds from sales of common stock ........................... 1,605 --
Other ......................................................... (1,793) (1,426)
--------- ---------
Net Cash Used in Financing Activities .................. (15,571) (7,825)
Effect of Exchange Rate Changes on Cash ......................... 10 (1,104)
--------- ---------
Increase In Cash And Cash Equivalents .................. 9,717 4,707
Cash And Cash Equivalents At Beginning Of Period ................ 11,205 6,432
--------- ---------
Cash And Cash Equivalents At End Of Period ...................... $ 20,922 $ 11,139
========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Supplemental Disclosures of Cash Flow Information.
- ------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended
March 31,
------------------
1996 1995
------- --------
Cash paid during the period for:
Interest, net of amount capitalized.. $17,054 $19,559
Income taxes ........................ $ 2,381 $ 88
- ------------------------------------------------------------
Gas And Oil Properties.
Effective March 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This SFAS
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the estimated future cash flow (undiscounted) of the
asset. Under SFAS No. 121, the Company reviewed the impairment of gas and oil
properties on a depletable unit basis. For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit was recognized. Fair value, on a
depletable unit basis, was estimated to be the present value of expected future
cash flows computed by applying estimated future gas and oil prices, as
determined by management, to estimated future production of gas and oil reserves
over the economic lives of the reserves. As a result of the adoption of SFAS No.
121, the Company recognized a non-cash pre-tax charge against earnings during
the first quarter of 1995 of $44.4 million.
Earnings Per Share.
The weighted average number of common shares outstanding for the
computation of earnings per share for the quarter ended March 31, 1996 gives
effect to the assumed exercise of dilutive stock options as of the beginning of
the period. The effect of the assumed exercise of stock options as of the
beginning of the period has an anti-dilutive effect on the computation of
earnings per share for the quarter ended March 31, 1995 and has therefore not
been included in the weighted average number of common shares outstanding.
NOTE 2. COMMITMENTS AND CONTINGENCIES
The Company is a party to ongoing litigation in the normal course of
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. While the outcome of lawsuits or other proceedings against the Company
cannot be predicted with certainty, management believes that the effect on its
financial condition, results of operations and cash flows, if any, will not be
material.
7
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GENERAL
The following discussion is intended to assist in an understanding of the
Company's financial position, results of operations and cash flows for each of
the quarters ended March 31, 1996 and 1995. The Company's accompanying unaudited
consolidated financial statements and the notes thereto contain detailed
information that should be referred to in conjunction with the following
discussion.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended March 31,
--------------------------------
Percent
1996 1995 Change
-------- -------- --------
Revenues:
Gas and oil operations (*) .......................................... $ 75,217 $ 58,560 + 28
Alaska transmission and distribution ................................ 35,430 36,290 - 2
-------- -------- --------
$110,647 $ 94,850 + 17
======== ======== ========
Operating Profit (Loss):
Gas and oil operations (*) .......................................... $ 22,160 $(52,163) +142
Alaska transmission and distribution ................................ 11,805 10,451 + 13
-------- -------- --------
$ 33,965 $(41,712) +181
======== ======== ========
Net Earnings (Loss) .................................................. $ 14,846 $(38,550) +139
Earnings (Loss) Per Share ............................................ $ 0.40 $ (1.07) +137
Net Cash Provided by Operating Activities Before Changes
in Operating Assets and Liabilities ................................ $ 52,213 $ 27,566 + 89
Net Cash Provided by Operating Activities ............................ $ 38,855 $ 32,781 + 19
Weighted Average Number of Common Shares Outstanding (in thousands) .. 36,922 36,106 + 2
=================================================================================================================================
<FN>
(*) For the three months ended March 31, 1995, the Company's former
Exploration and Production ("E&P") segment and Pipeline and Marketing
segment have been combined into Gas and Oil Operations. Substantially
all of the Company's gas processing and gas gathering assets were sold
in September 1995.
</FN>
Net earnings increased 139% for the first quarter of 1996 over the same
period in 1995 due to substantially improved operating profit and an 18%
decrease in interest expense, partially offset by higher income taxes. The
improvement in operating profit was seen in both business segments but was
primarily due to the Gas and Oil Operations segment where there was a 40%
improvement in the average realized price of natural gas sold for the quarter,
lower levels of exploration charges, higher volumes and margins related to
natural gas marketing for third parties and the absence of a $44.4 million
non-cash impairment of gas and oil properties recorded in 1995. Revenues and
operating profit are discussed in the respective segment sections.
8
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
CONSOLIDATED HIGHLIGHTS, CONTINUED
Net cash provided by operating activities before and after changes in
operating assets and liabilities increased in the 1996 quarter versus 1995 due
to the improvement in Gas and Oil Operations results discussed above. In
addition, the increase in net cash after changes in operating assets and
liabilities was partially offset by a significant increase in accounts
receivable during the first quarter of 1996 versus a decrease in accounts
receivable during the 1995 period. This increase in accounts receivable was
primarily due to the increase in Seagull's own E&P production as well as
third-party marketing revenues as a result of the higher volumes and prices
realized for natural gas marketed.
On September 25, 1995, the Company and three other sellers completed the
sale of their disparate interests in 19 natural gas gathering systems and a gas
processing plant (the "Pipeline Assets"). Net proceeds after payment of
transaction costs were used to reduce the Company's borrowings under its
revolving credit facilities. For the three months ended March 31, 1995, the
Pipeline Assets contributed $1.6 million to the operating profit of the Gas and
Oil Operations segment. With the sale of the Pipeline Assets, the Company's
former Exploration and Production segment and Pipeline and Marketing segment
have been combined into Gas and Oil Operations.
In September 1995, the Company sold certain Internal Revenue Code Section
29 Tax Credit-bearing gas properties (the "Section 29 Properties") to an
investment group which includes a Seagull subsidiary and two financial
investors. For accounting purposes, the Company has treated the sale as a
non-recourse monetary production payment reflected in long-term debt on the
balance sheet. The net proceeds from the sale were used to pay down the
Company's borrowings under the revolving credit facilities.
9
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAS AND OIL OPERATIONS (1)
- -------------------------------------------------------------------------------
(Dollars in Thousands Except Per Unit Amounts)
Three Months Ended March 31,
---------------------------------
Percent
1996 1995 Change
--------- --------- ---------
Revenues .................................... $ 75,217 $ 58,560 + 28
Direct Operating Expense .................... 16,619 19,216 - 14
General Operating Expense ................... 2,991 4,395 - 32
Exploration Charges ......................... 4,166 9,882 - 58
Depreciation, Depletion and Amortization .... 29,281 32,854 - 11
Impairment of Gas And Oil Properties ........ -- 44,376 -100
--------- --------- ---------
Operating Profit (Loss) ..................... $ 22,160 $ (52,163) +142
===============================================================================
EXPLORATION AND PRODUCTION OPERATING DATA:
Natural Gas Sales (2):
Revenues .................................. $ 62,948 $ 43,662 + 44
Net Daily Production (MMcf)................ 348.7 343.4 + 2
Average Sales Price per Mcf................ $ 1.98 $ 1.41 + 40
Oil and Condensate Sales (2):
Revenues .................................. $ 5,066 $ 5,183 - 2
Net Daily Production (Bbl) ................ 3,002 3,510 - 14
Average Sales Price per Bbl ............... $ 18.55 $ 16.40 + 13
Natural Gas Liquids Sales (2):
Revenues .................................. $ 1,157 $ 780 + 48
Net Daily Production (Bbl) ................ 1,257 850 + 48
Average Sales Price per Bbl ............... $ 10.11 $ 10.21 - 1
Combined Net Daily Production (MMcfe)(3) .... 374.3 369.6 + 1
Combined Average Sales Price per Mcfe(3) .... $ 2.02 $ 1.49 + 36
Lifting Costs per Mcfe:
Lease Operating ........................... $ 0.27 $ 0.27 -
Workovers ................................. 0.01 0.03 - 67
Production Taxes .......................... 0.05 0.05 -
Transportation ............................ 0.10 0.08 + 25
Ad Valorem Taxes .......................... 0.03 0.03 -
--------- --------- ---------
Total ..................................... 0.46 $ 0.46 -
DD&A Rate per Mcfe .......................... $ 0.85 $ 0.96 - 11
================================================================================
THIRD-PARTY GAS MARKETING OPERATING DATA:
Revenues (4) ................................ $ 6,496 $ 600 +983
Average Daily Volumes (MMcf) ................ 426 187 +128
================================================================================
<FN>
(1) For the three months ended March 31, 1995, the Company's former
E&P segment and Pipeline and Marketing segment have been combined into
Gas and Oil Operations. Substantially all of the Company's gas pro-
cessing and gas gathering assets were sold in September 1995.
(2) Natural gas stated in million cubic feet ("MMcf") or thousand cubic
feet ("Mcf"); oil and condensate and natural gas liquids stated in
barrels ("Bbl").
(3) MMcfe and Mcfe represent the equivalent of one million and one thousand
cubic feet of natural gas, respectively. Oil and condensate and natural
gas liquids are converted to gas at a ratio of one barrel of liquids
per six Mcf of gas, based on relative energy content.
(4) Marketing revenues are net of cost of gas and third-party delivery fees.
</FN>
10
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAS AND OIL OPERATIONS, CONTINUED
The increase in operating profit of the Gas and Oil Operations segment for
the first quarter of 1996 as compared to the 1995 period was principally due to
a 28% increase in revenues, a decrease in expenses and the absence of a non-cash
charge for impairment of gas and oil properties recorded in 1995, partially
offset by the absence of the operating profit contributed by the Pipeline Assets
sold during the third quarter of 1995. For the three months ended March 31,
1995, the Pipeline Assets contributed $1.6 million to the operating profit of
the Gas and Oil Operations segment.
The increase in revenues for the 1996 quarter as compared to 1995 was
primarily the result of a 40% increase in the Company's average realized price
of natural gas sold, slightly higher levels of production and a significant
increase in net third-party marketing revenues, partially offset by a decrease
in revenues related to the Pipeline Assets. While the Company had voluntary
curtailments in the U.S. during the first quarter of 1995 as a result of the low
natural gas price environment, there have been no voluntary curtailments since
October 1995. The resulting increase in natural gas production was nearly offset
by normal declines in production from developed properties combined with the
impact of substantially lower levels of development expenditures in late 1994
and all of 1995, which was also a result of the low natural gas price
environment.
In late 1995, Seagull began expanding its marketing activities by adding
staff, upgrading facilities and expanding the marketing activities it conducts
for third parties. This ongoing expansion combined with improved margins was
responsible for the $5.9 million increase in thrid-party marketing revenues over
the prior year quarter.
Direct operating expenses for the first quarter decreased from 1995
primarily due to the absence of substantially all of the Pipelines and Gas
Processing operations and maintenance costs as a result of the sale of the
Pipeline Assets. While lifting costs per equivalent unit of production were
unchanged, overall lifting costs increased 4% over the prior year quarter as a
result of the increase in production.
General operating expense was lower quarter-to-quarter largely due to the
workforce reduction and consolidation implemented by Seagull during the second
quarter of 1995.
Exploration charges decreased for the 1996 quarter due to a decrease in
seismic and dry hole costs as a result of the decrease in the number of
exploratory wells drilled during the quarter. One exploratory well drilled out
of two attempts during 1996 was successful, one exploratory well was being
completed and nine exploratory wells were drilling or being evaluated as of
early May 1996 in comparison to two successes out of six exploratory wells
drilled for the 1995 period.
Effective March 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of
the adoption of SFAS No. 121, the Company recognized a non-cash pre-tax charge
against earnings during the first quarter of 1995 of $44.4 million. Primarily as
a result of
11
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GAS AND OIL OPERATIONS, CONTINUED
the impairment, the Company's average depreciation, depletion and amortization
("DD&A") rate per equivalent unit of production decreased from $0.96 per Mcfe
for the first quarter of 1995 to approximately $0.85 per Mcfe for the first
quarter of 1996.
In late 1995, the Company initiated an active risk management program for
both its own E&P production and third party activities, utilizing such
derivative financial instruments as futures contracts, options and swaps. The
primary objective of the risk management program is to help ensure more stable
cash flow. However, Seagull expects to leave the majority of its own E&P
production either unhedged or protected only from price decreases so that it can
benefit from expected gas price strengthening. The risk management program is
also an important part of the Company's third party marketing efforts, allowing
the Company to convert a customer's requested price to a price structure that is
consistent with the Company's overall pricing strategy. The Company accounts for
its commodity derivative contracts as hedging activities and, accordingly, gains
or losses are included in revenues when the commodities are produced. During the
first quarter of 1996, Seagull incurred $2.6 million in costs associated with
its hedging activities for its own equity production which was offset by the
increase in the Company's average realized price of natural gas sold. The effect
of these hedging activities is not included in natural gas sales revenues or
average sales price. As of May 7, 1996, the Company had entered into commodity
derivative contracts for approximately 37% of the Company's domestic natural gas
production for the last nine months of 1996. The Company's combined U.S. and
Canadian natural gas production is expected to be approximately 350,000 Mcf per
day throughout much of 1996, including approximately 55,000 Mcf per day from the
Company's Canadian operations. The terms of a majority of the Company's
derivative contracts range from one to seven months, with only minor contracts
extending beyond December 1996. Of the total volume of production that has been
hedged, over 81% has been hedged in a manner which only limits the Company's
exposure to price decreases while allowing it to benefit from any price
increases.
12
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
ALASKA TRANSMISSION AND DISTRIBUTION
- ------------------------------------------------------------------------
(Dollars in Thousands Except Per Unit Amounts)
Three Months Ended March 31,
----------------------------
Percent
1996 1995 Change
------- ------- ------
Revenues ................................. $35,430 $36,290 - 2
Cost of Gas Sold ......................... 16,200 18,565 -13
------- ------- ------
Gross Margin ............................. 19,230 17,725 + 8
Operations and Maintenance Expense ....... 5,442 5,317 + 2
Depreciation, Depletion and Amortization.. 1,983 1,957 + 1
------- ------- ------
Operating Profit ......................... $11,805 $10,451 +13
======= ======= ======
OPERATING DATA:
Degree Days (1) .......................... 4,353 4,177 + 4
Volumes (Bcf) (2):
Gas Sold ................................. 10.4 10.5 - 1
Gas Transported .......................... 5.3 3.6 +47
Combined ................................. 15.7 14.1 +11
Margins ($ per Mcf):
Gas Sold ................................. 1.61 1.54 + 5
Gas Transported .......................... 0.48 0.42 +14
Combined ................................. 1.23 1.26 - 2
========================================================================
<FN>
(1) A measure of weather severity calculated by subtracting the mean
temperature for each day from 65 degrees Fahrenheit. More degree days
equate to colder weather.
(2) Natural gas stated in billion cubic feet ("Bcf").
</FN>
Operating profit of the Alaska transmission and distribution segment for
the quarter ended March 31, 1996 increased $1.4 million from that of the prior
year quarter primarily due to increased volumes as a result of a 4% increase in
degree days from colder weather in the utility's service area and slightly
higher margins on both gas sold and gas transported.
In the first quarter of 1995, two large utility customers that previously
purchased gas from ENSTAR Alaska began purchasing gas directly from gas
producers. ENSTAR Alaska currently transports the customers' gas supplies for a
fee that is comparable to the margin (revenues net of the associated cost of gas
sold) it previously earned. Accordingly, operating profit for the Alaska
transmission and distribution segment was basically unaffected by this change.
This segment's business is seasonal with approximately 65% of its sales
made in the first and fourth quarters of each year.
13
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
OTHER (INCOME) EXPENSE
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended March 31,
---------------------------------
Percent
1996 1995 Change
--------- --------- ---------
General and Administrative ................ $ 3,356 $ 2,654 + 26
Interest Expense .......................... 11,431 13,997 - 18
Interest Income and Other ................. (508) (563) + 10
--------- --------- ---------
$ 14,279 $ 16,088 - 11
========= ========= =========
General and administrative expenses increased quarter-to-quarter due
primarily to an increase in accrued incentive compensation expense for the first
quarter of 1996.
Interest expense decreased in the first quarter of 1996 as a result of a
decrease in the overall level of debt outstanding and a decrease in the overall
level of interest rates. With proceeds from the sale of the Pipeline Assets, the
Company repaid a portion of balances outstanding under its revolving credit
facilities. The average interest rate on the Company's revolving credit was 6.4%
for the first quarter of 1996 versus 7.2% for the first quarter of 1995.
After giving effect to the Company's interest rate swaps, approximately 50%
to 60% of the Company's long-term debt bears interest at various fixed rates
through the end of 1996. The remainder of the outstanding long-term debt bears
interest at various market-sensitive interest rates.
INCOME TAXES
The increase in income taxes in the 1996 quarter was primarily a result of
the increase in earnings before income taxes for the period and utilization of
Internal Revenue Code Section 29 Tax Credits ("Section 29 Credits") which
reduced the Company's first quarter 1995 effective tax rate. The Section 29
Credits are allowed for production of fuels derived from nonconventional sources
that are sold to nonrelated parties. The Company has no significant remaining
Section 29 Credits due to the sale of the Section 29 Properties in the third
quarter of 1995.
14
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Three Months Ended March 31,
---------------------------------
Percent
1996 1995 Change
--------- --------- ---------
Gas and Oil Operations:
Lease acquisitions ........................ $ 1,101 $ 527 + 109
Exploration ............................... 4,516 10,222 - 56
Development ............................... 6,343 7,003 - 9
--------- --------- ---------
11,960 17,752 - 33
Alaska Transmission and Distribution ...... 1,178 1,012 + 16
Corporate ................................. 366 534 - 31
--------- --------- ---------
$ 13,504 $ 19,298 - 30
========= ========= =========
The 30% decrease in total capital expenditures from the prior year quarter
was primarily due to a 50% decrease in the number of exploratory wells drilled
during the first quarter of 1996 versus the prior year quarter. Plans for 1996
call for capital expenditures of approximately $132 million, including about
$122 million in Gas and Oil Operations. Seagull anticipates spending
approximately $66 million for development, $9 million for lease acquisitions and
$47 million will be devoted to exploration. In accordance with Seagull's
long-standing policy that total capital expenditures will not be allowed to
exceed net cash flow from operating activities before changes in operating
assets and liabilities, the Company will reduce capital expenditures if and when
economic conditions dictate.
The Company has two revolving credit facilities (the "Credit Facilities")
with a maximum commitment of $750 million. The amount of senior indebtedness
available to the Company under the provisions of the Credit Facilities is
subject to a borrowing base (the "Borrowing Base") based upon the proved
reserves of the Company's exploration and production segment and the financial
performance of the Company's other business segments. The Borrowing Base is
generally determined annually, but may be redetermined, at the option of either
Seagull or the banks, one additional time each year, and will be redetermined
upon the sale of certain assets included in the Borrowing Base.
Currently, the available commitment under the Credit Facilities is subject
to a $500 million Borrowing Base and is determined after consideration of
outstanding borrowings under Seagull's other senior debt facilities. As of May
7, 1996, borrowings outstanding under the Credit Facilities were $160 million,
leaving immediately available unused commitments of approximately $237 million,
net of outstanding letters of credit of $3 million $100 million of borrowings
outstanding under the Company's senior notes.
15
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
In addition to the facilities discussed above, Seagull has money market
facilities with two major U.S. banks with a combined maximum commitment of $70
million. These lines of credit bear interest at rates made available by the
banks at their discretion and may be canceled at either Seagull's or the banks'
discretion. The lines are subject to annual renewal.
Management believes that the Company's capital resources will be sufficient
to finance current and forecasted operations. However, the Company continues to
actively pursue potential acquisitions and, depending upon the size and terms of
any such acquisition, additional financing may be required.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
* 27.1 Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the three months ended March
31, 1996.
- ---------------------------
* Filed herewith.
16
SEAGULL ENERGY CORPORATION 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.
SEAGULL ENERGY CORPORATION
By: /s/ William L. Transier
William L. Transier
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1996
By: /s/ Rodney W. Bridges
Rodney W. Bridges
Vice President and Controller
(Principal Accounting Officer)
Date: May 10, 1996
17
EXHIBIT INDEX
EXHIBIT
* 27.1 Financial Data Schedule.
- ---------------------------
* Filed herewith.