<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1999
REGISTRATION NO. 333-75781
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
EL PASO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4922 76-0568816
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
---------------------
<TABLE>
<S> <C>
BRITTON WHITE JR., ESQ.
EL PASO ENERGY CORPORATION EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
EL PASO ENERGY BUILDING EL PASO ENERGY CORPORATION
1001 LOUISIANA STREET EL PASO ENERGY BUILDING
HOUSTON, TEXAS 77002 1001 LOUISIANA STREET
(713) 420-2131 HOUSTON, TEXAS 77002
(713) 420-2131
(Address, including zip code, and telephone number,
including area code, of registrant's principal (Name and address, including zip code, and telephone
executive offices) number,
including area code, of agent for service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C> <C>
GARY P. COOPERSTEIN, ESQ. WILLIAM A. SMITH, ESQ. SETH A. KAPLAN, ESQ.
WARREN DE WIED, ESQ. EXECUTIVE VICE PRESIDENT AND WACHTELL, LIPTON, ROSEN & KATZ
FRIED, FRANK, HARRIS, SHRIVER & GENERAL COUNSEL 51 WEST 52ND STREET
JACOBSON SONAT INC. NEW YORK, NEW YORK 10019
ONE NEW YORK PLAZA AMSOUTH-SONAT TOWER (212) 403-1000
NEW YORK, NEW YORK 10004 1900 FIFTH AVENUE NORTH
(212) 859-8000 BIRMINGHAM, ALABAMA 35203
(205) 325-3800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effectiveness of this Registration
Statement and the effective time of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THE SECURITIES DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 8, 1999
[EL PASO LOGO] [SONAT LOGO]
JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of El Paso Energy Corporation and Sonat Inc. have
approved a merger agreement that contemplates the merger of Sonat into El Paso.
If we complete the merger, Sonat stockholders will receive one share of El Paso
common stock for each share of Sonat common stock they own. El Paso stockholders
will retain their El Paso common stock. We estimate that El Paso will issue
approximately 110,047,818 shares to Sonat stockholders in the merger, without
giving effect to the exercise of any outstanding Sonat options. Those shares
will represent approximately 48% of the outstanding shares of El Paso common
stock after the merger. The El Paso common stock is listed on the New York Stock
Exchange under the symbol "EPG."
We believe that by combining El Paso and Sonat we will create the
preeminent natural gas company in North America. The combined company will rank
among the leaders in all of the key sectors of the natural gas industry,
including interstate and intrastate natural gas transmission, gas gathering and
processing and energy marketing. Our combined interstate pipeline systems will
consist of over 40,000 miles of natural gas pipeline and are expected to carry
approximately 25% of the natural gas transported every day in the United States.
This merger will combine two companies with highly complementary operations
and pipeline systems, and we expect that this combination should provide
significant opportunities for growth. The combined company's pipeline system
will serve the gas and power markets in the west, midwest, northeast and
mid-Atlantic currently served by El Paso, as well as the high-growth gas and
power markets of the southeastern United States currently served by Sonat. The
company will also be uniquely positioned to tap some of the richest natural gas
supply basins in the United States and the Gulf of Mexico.
YOUR VOTE IS VERY IMPORTANT. PLEASE TAKE THE TIME TO FOLLOW THE
INSTRUCTIONS INCLUDED IN THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS. We
cannot complete the merger in the manner described in the first paragraph unless
stockholders of both companies vote to approve it. We have each scheduled a
special meeting of our stockholders to vote on the merger agreement. We have
included in the attached joint proxy statement/prospectus detailed information
about the times, dates and places of the special meetings.
To provide greater certainty of closing to Sonat stockholders, El Paso has
committed to proceed with the merger regardless of the outcome of the vote of El
Paso stockholders on the merger agreement. If Sonat stockholders approve the
merger agreement and El Paso stockholders do not approve the merger agreement,
the merger will be completed under an alternative structure not requiring a vote
of El Paso stockholders. Under the alternative merger structure, Sonat would
merge with an El Paso subsidiary, and El Paso would issue to Sonat stockholders,
for each share of Sonat common stock they own, approximately .17 of a share of
El Paso common stock, and between approximately .266 and .369 of a depositary
share, depending on the trading price of the El Paso common stock during the
period preceding the special meetings. Each depositary share would represent a
1/50th interest in a share of a new series of senior voting preferred stock of
El Paso. We would instruct our respective financial advisors to agree on a
dividend rate for the senior voting preferred stock that they believe will cause
the depositary shares, when fully distributed after completion of the merger, to
trade initially as nearly equal as possible to $100 per share.
The attached joint proxy/prospectus gives you detailed information about
the meetings and the proposed transactions. We encourage you to read this
document carefully. IN PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTIONS
BEGINNING ON PAGE 20 FOR A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN
EVALUATING THE PROPOSED TRANSACTIONS.
We are very enthusiastic about this merger and the strength and
opportunities of the combined company. We join all the other members of our two
companies' boards of directors in recommending that you vote in favor of the
merger.
<TABLE>
<S> <C>
William A. Wise Ronald L. Kuehn, Jr.
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
El Paso Energy Corporation Sonat Inc.
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE
SECURITIES TO BE ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR
DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED [ ], 1999, AND
IS FIRST BEING MAILED TO SONAT AND EL PASO STOCKHOLDERS ON OR ABOUT
[ ], 1999.
<PAGE> 3
[EL PASO LOGO]
---------------------
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
---------------------
To the Stockholders of El Paso Energy Corporation:
A special meeting of the stockholders of El Paso will be held at
, at a.m., local time, on , , 1999, for the
following purposes:
1. To consider and vote on a proposal to approve and adopt the Amended
and Restated Agreement and Plan of Merger, dated as of March 13, 1999, by
and between El Paso and Sonat under which, among other things, Sonat will
merge into El Paso, El Paso will issue to Sonat stockholders one share of
El Paso common stock for each share of Sonat common stock owned by them and
El Paso's certificate of incorporation will be amended to authorize El Paso
to issue 750 million shares of common stock and 50 million shares of
preferred stock. The preferred stock will be issuable in one or more
series, with each series having terms determined by El Paso's board of
directors. We have attached a copy of the merger agreement as Annex A to
the attached joint proxy statement/prospectus; and
2. To act on any other matters that may properly be brought before the
special meeting or any adjournment or postponement of the special meeting.
Only stockholders of record at the close of business on , 1999
are entitled to notice of and to vote at the special meeting or any adjournment
or postponement of the special meeting.
THE BOARD OF DIRECTORS OF EL PASO UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
You are cordially invited to attend the special meeting. Your vote is very
important to us. Whether or not you plan to attend, please act promptly to vote
your shares with respect to the proposals described above. You may vote your
shares by marking, signing and dating the enclosed proxy and returning it in the
return envelope provided, which requires no postage if mailed in the United
States. You may also vote your shares by telephone or through the Internet by
following the instructions we have provided on the enclosed proxy card. If you
attend the special meeting, you may vote your shares in person, even if you have
previously submitted a proxy in writing, by telephone or through the Internet.
By Order of the Board of Directors,
David L. Siddall
Corporate Secretary
Houston, Texas
, 1999
<PAGE> 4
[SONAT LOGO]
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
---------------------
To the Stockholders of Sonat Inc.:
A special meeting of the stockholders of Sonat Inc. will be held at
a.m., local time, on , , 1999, at , for the
following purposes:
1. To consider and vote on a proposal to approve and adopt the Amended
and Restated Agreement and Plan of Merger, dated as of March 13, 1999, by
and between El Paso and Sonat under which, among other things, Sonat will
merge into El Paso and Sonat stockholders will receive one share of El Paso
common stock for each share of Sonat common stock owned by them or, as more
fully described in the attached joint proxy statement/prospectus, if El
Paso stockholders do not approve the merger agreement, Sonat will instead
merge with a subsidiary of El Paso and Sonat stockholders will receive, for
each share of Sonat common stock, a fraction of a share of El Paso common
stock and a fraction of a depositary share representing a fractional
interest in a new series of senior voting preferred stock of El Paso. We
have attached a copy of the merger agreement as Annex A to the joint proxy
statement/prospectus; and
2. To act on any other matters that may properly be brought before the
special meeting or any adjournment or postponement of the special meeting.
Only stockholders of record at the close of business on , 1999
are entitled to notice of and to vote at the special meeting or any adjournment
or postponement of the special meeting.
THE BOARD OF DIRECTORS OF SONAT UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
You are cordially invited to attend the special meeting. Your vote is very
important to us. Whether or not you plan to attend, please act promptly to vote
your shares with respect to the proposals described above. You may vote your
shares by marking, signing and dating the enclosed proxy and returning it in the
return envelope provided, which requires no postage if mailed in the United
States. If you attend the special meeting, you may vote your shares in person
even if you have previously submitted a proxy.
By Order of the Board of Directors,
Beverley T. Krannich
Secretary
Birmingham, Alabama
, 1999
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... 4
The Companies............................................. 4
Our Reasons for the Merger................................ 4
The Merger................................................ 5
The Special Meetings...................................... 5
Our Recommendation to Stockholders........................ 5
Record Date; Stock Entitled to Vote....................... 5
Votes Required............................................ 5
Voting Agreements......................................... 6
Share Ownership by Management............................. 6
What Stockholders will Receive in the Merger.............. 6
Principal Terms of the Depositary Shares.................. 7
Determination of the Merger Consideration under the
Alternative Merger Structure........................... 7
Amendment to El Paso's Certificate of Incorporation....... 9
Amendment to El Paso's By-laws............................ 9
Opinions of Financial Advisors............................ 9
Material Terms of the Merger Agreement.................... 9
Accounting Treatment...................................... 11
Stock Option Agreements................................... 11
Listing of El Paso Stock.................................. 11
Directors of El Paso after the Merger..................... 11
Termination and Consulting Agreement with Mr. Kuehn....... 12
Regulatory Approvals Required for the Merger.............. 12
Interests of Certain Persons in the Merger................ 12
Comparative Market Prices................................. 13
El Paso Selected Historical Financial Data................ 14
Sonat Selected Historical Financial Data.................. 15
Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................ 16
Comparative Per Share Data................................ 19
RISK FACTORS................................................ 20
Operational Risks......................................... 20
Transaction Risks......................................... 23
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 25
THE MERGER.................................................. 27
Background of the Merger.................................. 27
Recommendation of the Board of Directors of El Paso; El
Paso's Reasons for the Merger.......................... 32
Recommendation of the Board of Directors of Sonat; Sonat's
Reasons for the Merger................................. 36
Accounting Treatment...................................... 38
Description of Material United States Federal Income Tax
Consequences........................................... 38
Regulatory Approvals required for the Merger.............. 40
No Appraisal Rights....................................... 41
Federal Securities Laws Consequences; Stock Transfer
Restrictions........................................... 41
Amendment to El Paso's By-laws............................ 42
OPINIONS OF FINANCIAL ADVISORS.............................. 43
Opinion of Financial Advisor to El Paso................... 43
Opinion of Financial Advisor to Sonat..................... 50
MATERIAL TERMS OF THE MERGER AGREEMENT...................... 57
The Merger................................................ 57
The Alternative Merger Structure.......................... 57
Closing; Effective Time................................... 57
Consideration to be Received in the Merger................ 57
Consideration to be Received Under the Alternative Merger
Structure.............................................. 58
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cancellation of Shares.................................... 58
Procedures for Surrender of Certificates; Fractional
Shares................................................. 59
Representations and Warranties............................ 59
Covenants................................................. 60
Additional Agreements..................................... 63
Conditions to the Completion of the Merger................ 66
Termination............................................... 66
Amendments................................................ 68
MATERIAL TERMS OF THE STOCK OPTION AGREEMENTS............... 68
Terms of the Options...................................... 68
Substitute Option......................................... 68
Exchange at the Option of the Grantee..................... 69
Limitation of Profit...................................... 69
Effect of Stock Option Agreements......................... 69
MATERIAL TERMS OF THE VOTING AGREEMENTS..................... 69
MATERIAL TERMS OF THE KUEHN TERMINATION AND CONSULTING
AGREEMENT................................................. 70
THE SPECIAL MEETINGS........................................ 70
Dates, Times and Places................................... 70
Matters to be Considered at the Special Meetings.......... 70
Record Date; Stock Entitled to Vote; Quorum............... 71
Votes Required............................................ 71
Share Ownership of Management............................. 71
Voting of Proxies......................................... 72
FINANCIAL INFORMATION....................................... 74
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION............................................... 86
DESCRIPTION OF SENIOR CUMULATIVE EXCHANGEABLE PREFERRED
STOCK AND DEPOSITARY SHARES............................... 87
El Paso Senior Cumulative Exchangeable Preferred Stock.... 87
El Paso Depositary Shares................................. 88
DIRECTORS OF EL PASO AFTER THE MERGER....................... 91
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 91
COMPARISON OF STOCKHOLDER RIGHTS............................ 96
WHERE YOU CAN FIND MORE INFORMATION......................... 103
EXPERTS..................................................... 105
LEGAL MATTERS............................................... 106
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 106
SUBMISSION OF STOCKHOLDER PROPOSALS......................... 106
OTHER MATTERS............................................... 106
INFORMATION REGARDING EL PASO AND SONAT DIRECTORS........... 107
</TABLE>
LIST OF ANNEXES
<TABLE>
<S> <C> <C>
ANNEX A Amended and Restated Agreement and Plan of Merger........... A-1
ANNEX B Amended and Restated Stock Option Agreement for Option
Granted by Sonat to El Paso................................. B-1
ANNEX C Amended and Restated Stock Option Agreement for Option
Granted by El Paso to Sonat................................. C-1
ANNEX D Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation................................................. D-1
ANNEX E Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ E-1
</TABLE>
ii
<PAGE> 7
THIS DOCUMENT INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT OUR COMPANIES FROM DOCUMENTS WE HAVE FILED WITH THE SEC THAT WE HAVE NOT
INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. EL PASO WILL PROVIDE YOU WITH
COPIES OF THIS INFORMATION RELATING TO EL PASO, WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST TO:
EL PASO ENERGY CORPORATION
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
ATTENTION: OFFICE OF INVESTOR RELATIONS
TELEPHONE NUMBER: (713) 420-2131
SONAT WILL PROVIDE YOU WITH COPIES OF THIS INFORMATION RELATING TO SONAT,
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST TO:
SONAT INC.
AMSOUTH-SONAT TOWER
1900 FIFTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
ATTENTION: OFFICE OF INVESTOR RELATIONS
TELEPHONE NUMBER: (205) 325-3898
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF OUR
SPECIAL STOCKHOLDERS' MEETINGS, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN
, 1999.
FOR MORE INFORMATION ON THE MATTERS INCORPORATED BY REFERENCE IN THIS
DOCUMENT, SEE "WHERE YOU CAN FIND MORE INFORMATION."
iii
<PAGE> 8
[Map of the Combined Company's North American Operations]
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE EL PASO/SONAT MERGER
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document,
just indicate on your proxy card how you want to vote. Sign and mail the
proxy card in the enclosed prepaid return envelope as soon as possible. If
you are an El Paso stockholder, you may also vote your shares via the
Internet or by telephone. To vote via the Internet or by telephone, please
follow the instructions on your proxy card.
- Sonat Stockholders. For us to complete the merger, holders of a majority
of the outstanding shares of Sonat common stock must adopt the merger
agreement. If you do not vote your Sonat shares, the effect will be a
vote against the merger agreement.
- El Paso Stockholders. Holders of a majority of the outstanding shares of
El Paso common stock must approve the merger agreement for El Paso to
issue solely common stock in the merger and to adopt the described
amendment to the El Paso certificate of incorporation. If Sonat
stockholders approve the merger agreement and El Paso stockholders do not
approve the merger agreement, the merger will occur
under an alternative structure described more fully in this joint proxy
statement/prospectus. Under the alternative merger structure, El Paso
will issue a combination of (1) common stock and (2) depositary shares
representing interests in a new series of senior voting preferred stock.
If you do not vote your El Paso shares, the effect will be a vote against
the issuance of solely El Paso common stock in the merger and against the
described amendment to El Paso's certificate of incorporation.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: You may change your vote:
- by sending a written notice to the corporate secretary of your company
before your stockholders' meeting stating that you would like to revoke
your proxy;
- by signing another proxy card and returning it by mail prior to your
stockholders' meeting; or
- by attending your stockholders' meeting and voting in person.
El Paso stockholders can also change their vote by telephone or over the
Internet by following the instructions provided on their proxy card.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES AT THIS
TIME?
A: No. After we complete the merger, El Paso
will send Sonat stockholders written instructions for exchanging their
Sonat stock certificates for El Paso stock certificates. Stock certificates
held by El Paso stockholders will continue to represent an identical number
of shares of El Paso common stock after the merger is completed.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you
provide your broker with instructions on how to vote. Your broker will
contact you regarding the procedures necessary for him or her to vote your
shares. Please tell your broker how you would like him or her to vote your
shares. If you do not tell your broker how to vote, your shares will not be
voted, which will have the same effect as a vote against the merger
agreement.
Q: IS THE MERGER TAXABLE?
A: We expect the merger to be tax free. We
have structured the merger so that our legal counsel will be able to
deliver opinions that neither El Paso, Sonat nor the Sonat stockholders
should recognize any gain or loss for United States federal income tax
purposes in the merger, except with respect to any cash that Sonat
stockholders will receive instead of fractional shares. The opinion will
apply whether Sonat stockholders receive only El Paso common stock in the
merger or both El Paso common stock and depositary shares in the
alternative merger. Receipt of these opinions is a condition to completing
the
1
<PAGE> 10
merger. In addition, El Paso stockholders will not recognize any gain or
loss with respect to their El Paso shares as a result of the merger.
We describe the material United States federal income tax consequences of
the transactions in more detail on page 38. The tax consequences to you
will depend on the facts of your own situation. Please consult your tax
advisors for a full understanding of the tax consequences to you.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working toward completing the merger as quickly as possible. We must
first obtain the necessary regulatory clearance and the approvals of our
stockholders at the special meetings. We hope to complete the merger in the
third or fourth quarter of 1999. However, we cannot assure you as to when
or if the merger will occur.
Q: WILL THERE BE ANY CHANGES TO THE AMOUNT OF
DIVIDENDS I RECEIVE?
A: Before the merger, we expect no changes in the dividend policies of El Paso
or Sonat. After the merger, we expect the initial dividend rate to be $.20
per share on the combined company's common stock per quarter, or $.80 per
share per year. In its decision to declare future dividends, the combined
company's board will consider business conditions and the earnings and
financial conditions of the combined company and its subsidiaries.
Q: WILL I HAVE THE RIGHT TO HAVE MY SHARES
APPRAISED IF I DISSENT FROM THE MERGER?
A: No. Both El Paso and Sonat are organized
under Delaware law. Under Delaware law, neither El Paso nor Sonat
stockholders have a right to dissent and receive the appraised value of
their shares in connection with the merger, even if the merger is completed
under the alternative merger structure.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES?
A: Both companies file reports and other information with the SEC. You may
read and copy this information at the SEC's public reference facilities.
Please call the SEC at 1-800-SEC-0330 for information about these
facilities. This information is also available at the Internet site the SEC
maintains at http://www.sec.gov and at the offices of the New York Stock
Exchange. You can also request copies of these documents from us. Also, you
can get information about our companies from our Internet sites located at
http://www.epenergy.com and http://www.sonat.com. For more information,
please see "Where You Can Find More Information," beginning on p. 103.
2
<PAGE> 11
WHO CAN ANSWER YOUR QUESTIONS?
If you have additional questions, you should contact:
EL PASO STOCKHOLDERS:
El Paso Energy Corporation
El Paso Energy Building
1001 Louisiana Street
Houston, Texas 77002
Attention: Office of Investor Relations
Telephone Number: (713) 420-2131
SONAT STOCKHOLDERS:
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35203
Attention: Office of Investor Relations
Telephone Number: (205) 325-3898
---------------------
If you would like additional copies of this
joint proxy statement/prospectus, or if you
have questions about the merger, you may also contact:
EL PASO STOCKHOLDERS:
[GEORGESON & COMPANY INC. LOGO]
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect (212) 440-9800
CALL TOLL FREE: 1-800-223-2064
SONAT STOCKHOLDERS:
D.F. KING & CO., INC.
77 WATER STREET
NEW YORK, NEW YORK 10005
CALL TOLL FREE: 1-800-659-5550
3
<PAGE> 12
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus. It may not contain all of the information that is
important to you. To understand the proposed transactions fully and for a more
detailed description of the legal terms of the transactions, we urge you to read
carefully the entire joint proxy statement/prospectus and the documents we refer
to in this document. See "Where You Can Find More Information" (page 103). We
have included page references directing you to a more complete description of
each item presented in this summary.
THE COMPANIES
EL PASO ENERGY CORPORATION
El Paso Energy Building
1001 Louisiana Street
Houston, Texas 77002
(713) 420-2131
El Paso is a diversified energy holding company. It is engaged through its
subsidiaries in the interstate and intrastate transportation, gathering and
processing of natural gas, marketing of natural gas, power and other
commodities, power generation, and the development and operation of energy
infrastructure facilities worldwide. El Paso owns the only integrated
coast-to-coast natural gas pipeline system in the United States.
El Paso has approximately 3,600 full-time employees.
SONAT INC.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35203
(205) 325-3800
Sonat is a diversified energy holding company. It is engaged through its
subsidiaries and joint ventures in domestic oil and natural gas exploration and
production, in the transmission and storage of natural gas, and in natural gas
and electric power marketing. Sonat has interests in oil and gas producing
properties located primarily in Louisiana, Texas, Oklahoma, Arkansas, Alabama,
New Mexico and the Gulf of Mexico. Sonat owns approximately 1.6 trillion cubic
feet equivalent of proved reserves.
Sonat has approximately 1,900 full-time employees.
OUR REASONS FOR THE MERGER (PAGE 32-38)
El Paso. The El Paso board believes that the merger offers an excellent
opportunity to create value for the combined company and its stockholders for
the following principal reasons, among others:
- The combined company will be the preeminent natural gas company in North
America, ranking among the leaders in all key sectors of the natural gas
industry.
- The El Paso board believes that Sonat's assets and operations are highly
complementary to El Paso's, and that its pipeline systems will occupy a
prominent position in the geographical regions with the fastest growing
natural gas markets in the United States.
- The merger furthers El Paso's strategy of growing its natural gas
pipeline, gathering and processing, energy marketing and power generation
businesses.
- The merger is expected to enable the combined company to realize
corporate and operational cost-savings of at least $60 million in the
year 2000.
- The combined company, as compared to El Paso on a stand-alone basis, is
expected to have a relatively greater amount of cash flow available to
cover its interest expense and relatively greater amount of cash flow as
compared to total indebtedness. This should enhance the combined
company's ability to obtain financing at lower rates of interest,
increasing its financial flexibility to pursue its growth strategy.
Sonat. The Sonat board believes that the merger provides Sonat stockholders
with an investment in an attractive company with strong growth prospects that
will enhance stockholder value for Sonat's stockholders, for various reasons,
including the following:
- The combined company will constitute the premier natural gas company in
North
4
<PAGE> 13
America and will rank among the leaders in all key sectors of the natural
gas industry, including interstate and intrastate natural gas
transmission, gas gathering and processing and energy marketing.
- The combination of Sonat with El Paso will provide a complementary fit of
both companies' strengths and needs.
- The merger will allow the combined company to realize significant
combination benefits.
- The merger will create a larger, more competitive company that will have
advantages of scale and scope in many areas.
- The combined company's size and enhanced financial strength should, among
other things, enable the combined company to participate in larger and
more profitable projects in the United States and internationally than
either company could on a stand-alone basis.
- The corporate cultures and management philosophies of the two companies
are compatible.
THE MERGER (PAGE 27)
In the merger, Sonat will merge into El Paso, with El Paso continuing as
the surviving company. If El Paso's stockholders do not approve the merger
agreement, the merger will be completed under an alternative structure. Under
the alternative merger structure, a subsidiary of El Paso will merge into Sonat,
and Sonat will become a wholly owned subsidiary of El Paso.
THE SPECIAL MEETINGS (PAGE 70)
El Paso Stockholders. We will hold the El Paso special meeting on
, 1999 at a.m., local time, at . At El Paso's
special meeting we will ask you to adopt the merger agreement which provides for
the merger, the issuance of shares of El Paso common stock in the merger and an
amendment to El Paso's certificate of incorporation increasing the number of
shares of common and preferred stock El Paso is authorized to issue.
Sonat Stockholders. We will hold the Sonat special meeting on ,
1999 at a.m., local time, at . At Sonat's special meeting,
we will ask you to adopt the merger agreement.
OUR RECOMMENDATION TO STOCKHOLDERS (PAGES 32-38)
El Paso Stockholders. The El Paso board believes that the merger agreement
and the transactions contemplated by it are fair to and in the best interests of
El Paso and its stockholders and unanimously recommends that you vote FOR the
adoption of the merger agreement.
Sonat Stockholders. The Sonat board believes that the merger agreement and
the transactions contemplated by it are fair to and in the best interests of
Sonat and its stockholders and unanimously recommends that you vote FOR the
adoption of the merger agreement.
RECORD DATE; STOCK ENTITLED TO VOTE (PAGE 71)
You may vote at your stockholders' meeting if you owned shares of common
stock at the close of business on , 1999.
El Paso. On March 5, 1999, approximately 120,989,489 shares of El Paso
common stock were outstanding. For each share of common stock that they owned on
that date, El Paso stockholders will have one vote at the El Paso special
meeting on the proposal to approve and adopt the merger agreement.
Sonat. On March 5, 1999, approximately 110,047,818 shares of Sonat common
stock were outstanding. For each share of Sonat common stock that they owned on
that date, Sonat stockholders will have one vote at the Sonat special meeting on
the proposal to approve and adopt the merger agreement.
VOTES REQUIRED (PAGE 71)
El Paso. The adoption of the merger agreement, including approval of the
issuance of shares of El Paso common stock in the merger and the amendment to El
Paso's certificate of incorporation increasing the number of shares of common
and preferred stock El Paso is authorized to issue, requires the favorable vote
of El Paso stockholders holding a majority of the outstanding shares of El Paso
common stock.
To provide greater certainty of closing to Sonat stockholders, the merger
agreement obli-
5
<PAGE> 14
gates El Paso to proceed with the merger regardless of the outcome of the vote
of El Paso stockholders on the merger agreement. If El Paso stockholders do not
approve the merger agreement, the merger will be completed under an alternative
structure not requiring a vote of El Paso stockholders. Under the alternative
merger structure, El Paso would issue to Sonat stockholders the maximum number
of shares of common stock El Paso may issue under the rules of the New York
Stock Exchange without a vote of its stockholders, less the number of shares
reserved for issuance on the exercise of Sonat options. Based on the number of
shares of El Paso common stock and Sonat options outstanding as of March 5,
1999, this number would be approximately 18,726,781 shares.
Under the alternative merger structure El Paso would also issue to Sonat
stockholders depositary shares representing shares of a new series of senior
voting preferred stock as the remainder of the consideration. We expect that
these depositary shares representing senior voting preferred stock would have a
total liquidation preference of between approximately $2.92 and $4.07 billion,
depending on the trading value of the El Paso common stock over the ten trading
days preceding the second trading day before the Sonat special meeting, and we
would instruct our respective financial advisors to agree on a dividend rate for
the senior voting preferred stock that they believe would cause the depositary
shares, when fully distributed after the completion of the merger, to have an
aggregate initial trading value as nearly equal as possible to their total
liquidation preference. We describe in "-- What Stockholders will Receive in the
Merger" below the consideration that Sonat stockholders will receive under the
alternative merger structure for each share of Sonat common stock. We describe
the terms of the depositary shares in "--Principal Terms of the Depositary
Shares" below.
Sonat. The adoption of the merger agreement requires the favorable vote of
Sonat stockholders holding at least a majority of the outstanding shares of
Sonat common stock.
VOTING AGREEMENTS (PAGE 69)
Selim K. Zilkha and Michael S. Zilkha, directors of Sonat, and a trust of
which Selim K. Zilkha is the trustee, have agreed to vote shares representing
approximately 20.8% of the total outstanding shares of Sonat common stock as of
March 11, 1999 in favor of adoption of the merger agreement. El Paso has agreed
that the rights of the Zilkhas contained in a registration rights agreement to
which they and Sonat are a party to, will continue in effect after the
completion of the merger.
Ronald L. Kuehn, Jr., Chairman, President and Chief Executive Officer of
Sonat has also agreed to vote his shares representing less than one percent of
the total outstanding shares of Sonat common stock, in favor of the adoption of
the merger agreement.
SHARE OWNERSHIP BY MANAGEMENT (PAGE 71)
El Paso. On , 1999, the directors and executive officers of El
Paso and their affiliates were entitled to vote approximately shares
of El Paso common stock. These shares represent approximately % of the
outstanding shares of El Paso common stock. All of the executive officers and
directors of El Paso have indicated to us that they intend to vote their shares
in favor of the merger agreement.
Sonat. On , 1999, the directors and executive officers of Sonat
and their affiliates were entitled to vote approximately shares of
Sonat common stock. These shares represent approximately % of the outstanding
shares of Sonat common stock. All of the executive officers and directors of
Sonat have indicated to us that they intend to vote their shares in favor of the
merger agreement.
WHAT STOCKHOLDERS WILL RECEIVE IN THE MERGER (PAGES 57-58)
Sonat Stockholders. If we complete the merger, you will receive one share
of El Paso common stock for each share of Sonat common stock you own. This
exchange ratio will not change if the market price of El Paso or Sonat common
stock increases or decreases between now and the date of the merger.
If El Paso stockholders do not approve the adoption of the merger
agreement, El Paso will be required to proceed with the merger under the
alternative merger structure. In the alternative merger, you will receive, for
each share of Sonat common stock you own:
- a fraction of a share of El Paso common stock; and
- a fraction of an El Paso depositary share, which will represent a
fractional interest in
6
<PAGE> 15
a share of a new series of senior voting preferred stock of El Paso.
We describe the method we will use to calculate the El Paso common stock
and depositary shares that you will receive under the alternative merger
structure in "-- Determination of the Merger Consideration under the Alternative
Merger Structure" below.
Each share of El Paso common stock you receive in the merger, including
under the alternative merger structure, will have attached to it one preferred
stock purchase right issued under El Paso's shareholder rights plan. If a party
acquires 15% or more of El Paso's common stock without receiving the prior
approval of the El Paso board these rights will permit their holders, other than
the acquiring party, to acquire securities of El Paso at a discount.
El Paso Stockholders. You will not receive any new shares in the merger.
You will continue to own your shares of El Paso common stock after the merger.
PRINCIPAL TERMS OF THE DEPOSITARY SHARES (PAGE 87)
- Each depositary share will represent a 1/50th interest in a share of a
new series of El Paso senior voting preferred stock.
- Each depositary share will entitle its holder to $100, to the extent
available, if El Paso is liquidated. This $100 preference amount would
have to be paid in full before holders of El Paso common stock could
receive any distribution on a liquidation of El Paso.
- The dividend rate on the senior voting preferred stock will be determined
prior to the closing by El Paso's and Sonat's financial advisors. They
will be instructed to agree on a dividend rate that they believe will
cause the depositary shares, when fully distributed after completion of
the alternative merger, to trade initially at a value as nearly equal as
possible to $100 per share. If they cannot agree on a dividend rate, they
will select a third investment banking firm to determine the rate.
- Dividends will be payable on a quarterly basis.
- The senior voting preferred stock will rank senior, for purposes of
dividends and liquidation rights, to the El Paso common stock. We will
not be permitted to issue shares that rank senior to the senior voting
preferred stock for those purposes, but will be permitted to issue shares
that rank equally with the senior voting preferred stock.
- Each depositary share will entitle its holder to one vote on all matters
that El Paso stockholders vote on in the future. If El Paso fails to pay
six quarterly dividends, the holders of the depositary shares will have
the right to directly elect two members of El Paso's board.
- El Paso will have the right, subject to any required approvals, to
exchange each depositary share for shares of El Paso common stock having
a market value equal to $100 plus the amount of any unpaid dividends for
prior periods.
- If El Paso completes a merger and its common stock is converted into
stock of another party or cash, the senior voting preferred stock will in
most instances be assumed by the other party.
- The maturity date of the senior voting preferred stock will be on the
21st anniversary of the completion of the alternative merger. At
maturity, El Paso will be required to redeem each depositary share for
$100 in cash plus the amount of any unpaid dividends for prior periods.
DETERMINATION OF THE MERGER CONSIDERATION UNDER THE ALTERNATIVE MERGER STRUCTURE
(PAGE 58)
The fraction of a share of El Paso common stock that will be received by
Sonat stockholders in exchange for each share of Sonat common stock under the
alternative merger structure will be determined by dividing
- the maximum number of shares of common stock El Paso may issue under the
rules of the New York Stock Exchange without a vote of its stockholders
which as of March 5, 1999 was 24,197,897 less the number of shares
reserved for issuance on the exercise of Sonat options, which as of March
5, 1999, was approximately 5,471,115 options, by
7
<PAGE> 16
- the number of shares of Sonat common stock outstanding at the time the
merger is completed.
The fraction of a depositary share that will be received in exchange for
each share of Sonat common stock will be determined by dividing
- - the product of
(1) one minus the fraction of a share of El Paso common stock that will be
received for each share of Sonat common stock, and
(2) an implied price for a share of El Paso common stock equal to the
average of the closing prices for the El Paso common stock over the ten
trading days preceding the second trading day before the Sonat special
meeting, except that the implied price will not be less than $32.00 or
greater than $44.50.
- - by $100.
Based on the number of shares of El Paso and Sonat common stock and Sonat
options outstanding as of March 5, 1999, each share of Sonat common stock would
be exchanged, under the alternative merger structure, for approximately 0.17 of
a share of El Paso common stock and between .266 and .369 of a depositary share.
El Paso will not issue any fractional shares of common stock or depositary
shares.
The following table illustrates how differences in the average trading
price of El Paso common stock over the ten trading days preceding the second
trading day before the merger will affect the implied price for a share of the
El Paso common stock for purposes of calculating the number of depositary shares
to be issued in the alternative merger and the number and intended initial,
fully distributed trading value of a fraction of the El Paso depositary shares
to be received by Sonat stockholders in the alternative merger for each share of
Sonat common stock they own. Each depositary share is intended to have an
initial, fully distributed trading value of $100.
<TABLE>
<CAPTION>
INTENDED
INITIAL
FRACTION OF A TRADING VALUE
AVERAGE TRADING DEPOSITARY OF THE
PRICE OF SHARE TO BE FRACTION OF A
EL PASO RECEIVED FOR DEPOSITARY
COMMON IMPLIED EACH SONAT SHARE TO BE
STOCK PRICE SHARE RECEIVED
- --------------- ------- ------------- -------------
<S> <C> <C> <C>
$30.00 $32.00 .266 $26.56
32.00 32.00 .266 26.56
33.00 33.00 .274 27.39
34.00 34.00 .282 28.22
36.00 36.00 .299 29.88
38.00 38.00 .315 31.54
40.00 40.00 .332 33.20
42.00 42.00 .349 34.86
44.00 44.00 .365 36.52
44.50 44.50 .369 36.94
46.00 44.50 .369 36.94
</TABLE>
For Sonat stockholders to determine the value as of the close of business
on the closing date of the El Paso common stock they will receive in the
alternative merger for each share of Sonat common stock they own, they should
multiply (1) .17, the fraction of a share of El Paso common stock that we expect
Sonat stockholders to receive for each share of Sonat common stock, and (2) the
closing trading price for a share of El Paso common stock on the closing date.
The initial value of the total consideration to be received by Sonat
stockholders, for each share of Sonat common stock in the alternative merger
would equal this amount plus the applicable intended initial trading value of
the fraction of the depositary share to be received as shown in the table above.
8
<PAGE> 17
AMENDMENT TO EL PASO'S CERTIFICATE OF INCORPORATION (PAGE 27)
If the El Paso stockholders approve the merger agreement, as part of the
merger, the El Paso certificate of incorporation will be amended with the effect
that after the merger the authorized capital stock of El Paso will increase from
275 million to 750 million shares of common stock and from 25 million to 50
million shares of preferred stock. The combined company will have the right to
issue these shares of preferred stock in one or more series. The terms of each
series issued will be determined by the combined company's board of directors.
AMENDMENT TO EL PASO'S BY-LAWS (PAGE 42)
Under the merger agreement, El Paso's by-laws will be amended to require
that any stockholder wishing to nominate candidates for election as directors at
El Paso's annual stockholders' meeting or to bring other business before the
meeting must notify El Paso between 120 and 90 days before the anniversary of
the prior year's annual meeting. El Paso's current by-laws require that
stockholders provide notice between 90 and 60 days before the anniversary of the
prior year's annual meeting.
El Paso intends to make this amendment regardless of the structure used to
complete the merger.
OPINIONS OF FINANCIAL ADVISORS (PAGE 43)
El Paso. In deciding to approve the merger, the El Paso board considered,
among the various factors described below in "The Merger -- Recommendation of
the Board of Directors of El Paso; El Paso's Reasons for the Merger," the
opinion of its financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation, as to the fairness to El Paso, from a financial point of view, of
the exchange ratio in the merger and the consideration to be paid by El Paso
under the alternative merger structure. We have attached this opinion as Annex D
to this joint proxy statement/prospectus and encourage you to read it.
Sonat. In deciding to approve the merger, the Sonat board considered, among
the various factors described below in "The Merger -- Recommendation of the
Board of Directors of Sonat; Sonat's Reasons for the Merger," the opinion of its
financial advisor Merrill Lynch, Pierce, Fenner & Smith Incorporated, as to the
fairness to Sonat, from a financial point of view, of the consideration to be
received by Sonat stockholders in the merger and under the alternative merger
structure. We have attached this opinion as Annex E to this joint proxy
statement/prospectus and encourage you to read it.
MATERIAL TERMS OF THE MERGER AGREEMENT (PAGE 57)
We have attached the merger agreement as Annex A to this joint proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
Conditions to Completion of the Merger (page 66)
We will complete the merger only if a number of conditions are satisfied or
waived including:
- Sonat stockholders adopt the merger agreement;
- no law or court order prohibits the transaction;
- the waiting period under federal antitrust laws applicable to the merger
expires or terminates;
- all other regulatory approvals are received without conditions that would
be materially adverse to El Paso's and Sonat's combined businesses,
financial condition or results of operations; and
- attorneys for El Paso and Sonat issue opinions that the merger is
expected to be tax free.
Termination of the Merger Agreement (page 66)
El Paso and Sonat can jointly agree to terminate the merger agreement at
any time without completing the merger. In addition, either company can
terminate the merger agreement if:
(1) we do not complete the merger by March 31, 2000;
(2) the Sonat stockholders fail to adopt the merger agreement; or
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<PAGE> 18
(3) a governmental authority permanently prohibits the merger.
Sonat can also terminate the merger agreement if:
(1) El Paso's representations and warranties in the merger agreement
were untrue, or El Paso does not do the things it agreed to do in the
merger agreement, and, in either case, the unresolved problem is so
significant that it is materially adverse to El Paso's business, financial
condition or results of operations; or
(2) Sonat receives, before its special meeting, an unsolicited
proposal to acquire in a tender offer, merger or otherwise 50% or more of
its common stock or assets, and
- Sonat's board of directors believes that its legal duties require
that it consider the new proposal;
- after considering the new proposal, the board of directors concludes
that the new proposal is more favorable to Sonat stockholders than
our proposed merger;
- Sonat gives El Paso five business days to respond to the new
proposal; and
- Sonat pays El Paso a termination fee of $150 million; or
(3) the preferred stock purchase rights under El Paso's shareholder
rights plan are triggered, and assuming all of the purchase rights are
exercised, the triggering stockholder would own 25% or more of El Paso's
common stock.
In addition, El Paso can terminate the merger agreement if:
(1) Sonat's representations and warranties in the merger agreement
were untrue, or Sonat does not do the things it agreed to do in the merger
agreement, and, in either case, the unresolved problem is so significant
that it is materially adverse to Sonat's business, financial condition or
results of operations;
(2) Sonat's board of directors no longer recommends that Sonat
stockholders vote to adopt the merger agreement or recommends that Sonat
stockholders accept a proposal from a third party for a tender or exchange
offer, merger or other takeover transaction for at least 25% of Sonat's
common stock or assets; or
(3) the preferred stock purchase rights under Sonat's shareholder
rights plan are triggered, and assuming all of the purchase rights are
exercised, the triggering stockholder would own 25% or more of Sonat's
common stock.
Termination Fees (page 67)
Sonat must pay El Paso a termination fee of $150 million following
termination of the merger agreement and reimburse El Paso for expenses up to $10
million if:
(1) Sonat or the Sonat stockholders receive a proposal from a third
party to acquire in a tender or exchange offer, merger or other takeover
transaction 25% or more of Sonat's common stock or assets; and
- Sonat or El Paso terminates the merger agreement because the Sonat
stockholders do not adopt the merger agreement or because we do not
complete the merger by March 31, 2000; and
- Sonat enters into an agreement with respect to, or completes, a
takeover transaction within 12 months of the termination, although,
if Sonat stockholders do not adopt the merger agreement, El Paso
will be reimbursed for its expenses whether or not Sonat enters into
a subsequent transaction;
(2) El Paso terminates the merger agreement because Sonat's board of
directors no longer recommends that Sonat stockholders vote to adopt the
merger agreement or recommends that Sonat stockholders accept another
takeover transaction; or
(3) El Paso terminates the merger agreement as a result of the Sonat
shareholder rights plan termination event described above under
"--Termination of the Merger Agreement."
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<PAGE> 19
El Paso must pay Sonat a termination fee of $150 million following
termination of the merger agreement and reimburse Sonat for expenses up to $10
million if:
(1) El Paso receives a proposal from third party to acquire in a
tender or exchange offer, merger or other takeover transaction 25% or more
of El Paso's common stock or assets; and
- El Paso or Sonat terminates the merger agreement because we do not
complete the merger by March 31, 2000; and
- El Paso enters into an agreement with respect to, or completes, a
takeover transaction within 12 months of the termination; or
(2) Sonat terminates the merger agreement as a result of the El Paso
shareholder rights plan termination event described above under
"-- Termination of the Merger Agreement."
ACCOUNTING TREATMENT (PAGE 38)
We expect that the merger will be accounted for as a pooling of interests,
which means that we will treat our companies as if they had always been combined
for accounting and financial reporting purposes.
If the merger is completed under the alternative merger structure, it will
be accounted for as a purchase, which means we will reflect Sonat's assets and
liabilities on our books based on their estimated fair value when the merger is
completed.
STOCK OPTION AGREEMENTS (PAGE 68)
In connection with the merger agreement, Sonat entered into a stock option
agreement in which it granted El Paso an option to purchase up to 21,899,515
shares of Sonat common stock for $27.238 per share.
In connection with the merger agreement, El Paso entered into a similar
stock option agreement in which it granted Sonat an option to purchase up to
24,349,638 shares of El Paso common stock for $37.725 per share.
Each option will become exercisable only if the company that granted the
option becomes obligated to pay a termination fee under the merger agreement to
the other company. The stock option agreements, however, limit the amount of
profit a company is permitted to receive under the termination fee and as a
result of the exercise of an option, including profit made on the sale of shares
received as a result of the exercise of the option, to $175 million.
If either option is exercised, the company selling shares under the option
will likely be precluded from accounting for business combinations as a pooling
of interests within the following two years. A company subject to this
disqualification may be limited in the number of other companies willing to
merge with it, and this disqualification may also limit the amount other
companies would pay for that company.
We have attached copies of both stock option agreements as Annexes B and C,
respectively, to this joint proxy statement/prospectus.
LISTING OF EL PASO STOCK (PAGE 64)
It is a condition to the merger that the New York Stock Exchange approve
for listing the shares of El Paso common stock and, if the merger is to be
completed under the alternative merger structure, the depositary shares to be
issued to Sonat stockholders. El Paso expects that the New York Stock Exchange
will grant this approval. El Paso common stock will continue to trade under El
Paso's current symbol "EPG" after the merger.
DIRECTORS OF EL PASO AFTER THE MERGER (PAGE 91)
Upon completion of the merger, the El Paso board will increase its size
from eight members to 15 members. El Paso will designate nine individuals to
serve on the El Paso board of directors after the merger. Only one El Paso
designee will be an insider of El Paso. Sonat will designate six individuals,
who will be selected from among the members of Sonat's current board, to serve
on the El Paso board of directors after the merger. Ronald L. Kuehn, Jr., who
will be the non-executive chairman of the El Paso board, will be a Sonat
designee and the only Sonat designee who is a former insider of Sonat. Selim K.
Zilkha will also be a Sonat designee and will be nominated for election at all
annual meetings of El Paso
11
<PAGE> 20
stockholders after the completion of the merger so
long as he and his immediate family and related trusts own at least 5% of the
outstanding shares of common stock of El Paso. If the alternative merger is
completed, so long as depositary shares are outstanding, each depositary share
will be considered, for purpose of determining whether the Zilkhas own at least
5% of El Paso's common stock, to represent the number of shares of El Paso
common stock a recipient of a depositary share would have received instead of
that depositary share had the all common stock merger been completed.
TERMINATION AND CONSULTING AGREEMENT WITH MR. KUEHN (PAGE 70)
Concurrently with our completion of the merger, El Paso and Mr. Kuehn will
enter into a termination and consulting agreement. Under this agreement, Mr.
Kuehn will retire in connection with the merger and will be a member of the El
Paso board of directors and its non-executive chairman until December 31, 2000.
REGULATORY APPROVALS REQUIRED FOR THE MERGER (PAGE 40)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules under that Act (the HSR Act), we cannot complete the merger until we have
given notification and furnished information relating to the operations of the
parties and the industries in which they operate to the Antitrust Division of
the United States Department of Justice and the Federal Trade Commission and a
specified waiting period expires or is terminated. We both filed notification
and report forms under the HSR Act with the Antitrust Division of the United
States Department of Justice and the Federal Trade Commission on April 2, 1999.
Even after the waiting period expires or terminates, the Antitrust Division of
the United States Department of Justice and the Federal Trade Commission will
have the authority to challenge the merger on antitrust grounds before or after
the merger is completed.
In addition, because we both currently operate subsidiary companies that
are engaged in the wholesale marketing of power, under the Federal Power Act,
the Federal Energy Regulatory Commission (the FERC) has the authority to review
the proposed merger to determine if it is in the public interest. On ,
1999 we filed a joint application with the FERC for approval of the merger. In
its consideration of prior applications, the FERC has considered the effect of
the proposed combination on the ability and incentives of the merged companies
to adversely affect competition in power markets. The FERC has, in some cases,
imposed conditions on its approval of a merger. Even after it approves the
merger, the FERC will have continuing jurisdiction over the combined company's
power marketing business to affect the rates, terms and conditions of its
service and to affect its dealings with affiliates.
Under the merger agreement, we have both agreed to use "reasonable best
efforts" to take all actions to obtain all material regulatory and governmental
approvals necessary to complete the merger and to address concerns of antitrust
regulators and the FERC. Neither El Paso nor Sonat is required under the merger
agreement to sell any portion of its business or take any other action to
address concerns of regulators if the result would reasonably be expected to be
materially adverse to the business, financial condition or results of operations
of the combined company after the merger. El Paso is also not required to take
actions that would reasonably likely be materially adverse to Tennessee Gas
Pipeline Company, a subsidiary of El Paso.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 91)
In evaluating the merger, you should recognize that a number of directors
and executive officers of El Paso and Sonat may have interests in the merger
that are different from, or in addition to, your interests as stockholders.
After the merger, six individuals designated by Sonat, who are expected to be
selected from the current Sonat board and who will include Selim K. Zilkha,
whose family and trusts own approximately 20.8% of the Sonat common stock, will
become members of El Paso's board of directors. Mr. Kuehn will retire in
connection with the merger and receive payments under his severance agreement.
In addition, Mr. Kuehn will become the non-executive chairman of El Paso's board
of directors and will receive benefits under his termination and consulting
agreement. All of El Paso's executive officers and all of Sonat's directors and
executive officers also have stock options and/or other rights that will
automatically
12
<PAGE> 21
become exercisable, vested and/or payable as a
result of the merger, which could provide these directors and officers with
additional compensation.
In addition, Sonat has severance agreements with its executive officers. As
a result of the merger, Sonat may be obligated to pay those officers significant
cash severance payments and provide them with other severance benefits if they
or El Paso terminate their employment. El Paso has also agreed to provide or
continue indemnification arrangements for existing directors and officers of
Sonat.
El Paso has a severance plan that covers its executive officers, but it is
not expected that these individuals will be entitled to terminate their
employment and receive severance from this plan after the merger. Therefore, El
Paso does not expect to owe significant severance payments to its executive
officers as a result of the merger.
COMPARATIVE MARKET PRICES
The following table presents trading information for El Paso common stock
and Sonat common stock on March 12, 1999 and April 7, 1999. March 12, 1999 was
the last full trading day before our announcement of the signing of the merger
agreement. April 7, 1999 was the last practicable trading day for which
information was available before the date of this joint proxy
statement/prospectus. You should read the information presented below in
conjunction with "Comparative Per Share Market Price and Dividend Information"
on page 86.
<TABLE>
<CAPTION>
EL PASO COMMON STOCK SONAT COMMON STOCK
------------------------------ ------------------------------
HIGH LOW LAST HIGH LOW LAST
-------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
March 12, 1999............ $38.75 $35.4375 $35.75 $31.75 $27.375 $30.0625
April 7, 1999............. $32.4375 $31.9375 $32.0625 $31.25 $30.75 $31.125
</TABLE>
The market prices of the shares of El Paso common stock and Sonat common
stock fluctuate. These fluctuations will affect the value of the consideration
Sonat stockholders will receive in the merger or the alternative merger, as the
case may be. You should obtain current market quotations.
13
<PAGE> 22
EL PASO SELECTED HISTORICAL FINANCIAL DATA
The following table shows consolidated selected historical financial data
for El Paso as of and for each of the years indicated. We derived the
consolidated financial data for each year from El Paso's audited historical
financial statements for that year. The audited consolidated financial
statements of El Paso for the year ended December 31, 1998, included in El
Paso's Annual Report on Form 10-K for the year ended December 31, 1998, are
incorporated by reference into this joint proxy statement/prospectus. See "Where
You Can Find More Information," on page 103.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(A)(B):
Operating revenues............................... $ 5,782 $5,638 $3,012 $1,038 $ 870
Depreciation, depletion and amortization......... 269 236 101 72 65
Employee separation and asset impairment
charge......................................... -- -- 99 -- --
Net income....................................... 225 186 38 85 90
Basic earnings per common share.................. 1.94 1.64 .53 1.24 1.23
Diluted earnings per common share................ 1.85 1.59 .52 1.24 1.23
Cash dividends declared per common share......... .76 .73 .70 .66 .61
Basic average common shares outstanding.......... 116 114 72 69 73
Diluted average common shares outstanding........ 126 117 73 69 73
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements.......... 2.01 2.26 1.59 2.51 2.87
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION DATA(A):
Total assets..................................... $10,069 $9,532 $8,843 $2,535 $2,332
Short-term debt (including current maturities of
long-term debt)................................ 812 885 841 285 114
Long-term debt................................... 2,552 2,119 2,215 772 779
Company-obligated mandatorily redeemable
convertible preferred securities of El Paso
Energy Capital Trust I......................... 325 -- -- -- --
Minority interest................................ 365 365 335 -- --
Stockholders' equity............................. 2,108 1,959 1,638 712 710
</TABLE>
- ---------------
(a) Our operating results and financial position data reflect the acquisition
by El Paso of Eastex Energy, Inc. in September 1995, Premier Gas Company in
December 1995, Cornerstone Natural Gas, Inc. in June 1996, El Paso
Tennessee Pipeline Co. (formerly Tenneco Inc.) in December 1996, and
DeepTech International Inc. in August 1998. We accounted for all of these
acquisitions using the purchase method of accounting and, in accordance
with this method, we recorded the assets and liabilities of each acquired
company at their fair values on the date each company was acquired and we
have reflected the operating results of each acquired company in our
operating results only for the period beginning on the date the company was
acquired.
(b) We adjusted all common share and per share amounts to give retroactive
effect to a two-for-one stock split in the form of a 100% stock dividend
that occurred on April 1, 1998.
14
<PAGE> 23
SONAT SELECTED HISTORICAL FINANCIAL DATA
The following table shows consolidated selected historical financial data
for Sonat as of and for each of the years indicated. We derived the consolidated
financial data for each year from Sonat's audited historical financial
statements for that year. The audited consolidated financial statements of Sonat
for the year ended December 31, 1998, included in Sonat's Annual Report on Form
10-K for the year ended December 31, 1998, are incorporated by reference into
this joint proxy statement/prospectus. See "Where You Can Find More
Information," on page 103.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA(A):
Operating revenues............................. $3,710 $4,372 $3,204 $1,902 $1,482
Depreciation, depletion and amortization....... 349 398 384 370 324
Ceiling test charges(b)........................ 1,035 -- -- -- --
Net income (loss).............................. (531) 218 256 269 156
Basic earnings (loss) per common share......... (4.82) 1.98 2.32 2.43 1.40
Diluted earnings (loss) per common share....... (4.82)(c)(d) 1.95 2.29 2.41 1.39
Cash dividends declared per common share....... 1.08 1.08 1.08 1.08 1.08
Basic average common shares outstanding........ 110 110 110 110 111
Diluted average common shares outstanding...... 111 112 112 111 112
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION DATA(A):
Assets......................................... $4,361 $5,252 $4,363 $4,013 $3,885
Debt maturing within one year.................. 830 461 216 242 225
Long-term debt................................. 1,099 1,236 980 805 993
Stockholders' equity........................... 1,329 1,962 1,876 1,716 1,549
</TABLE>
- ---------------
(a) The 1994-1997 periods have been restated to reflect the change to the full
cost method of accounting for Sonat's oil and gas operations and Sonat's
January 1998 acquisition of Zilkha Energy Company accounted for as a
pooling of interests.
(b) Ceiling test charges are reductions in earnings which result when
capitalized costs of certain oil and gas properties exceed the upper
limitation, or ceiling, value for those properties as calculated under the
accounting rules.
(c) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per
common share. If we had included those securities, Sonat would have shown a
lower loss per common share.
(d) If we had excluded the ceiling test charges in determining diluted earnings
(loss) per common share, Sonat would have shown diluted earnings per common
share of $1.28.
15
<PAGE> 24
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We present below selected unaudited pro forma financial information
reflecting the merger using the pooling of interests method of accounting and
selected unaudited pro forma financial information reflecting the alternative
merger using the purchase method of accounting. We have included this
information to give you a better understanding of what the combined results of
operations and financial position of El Paso and Sonat may have looked like had
the merger occurred on an earlier date.
In accordance with the requirements of the pooling of interests method, the
unaudited pro forma operating results data reflecting the merger combines
information from the historical consolidated statements of income of El Paso and
Sonat giving effect to the merger as if it had been completed on January 1,
1996. In accordance with the requirements of the purchase method, the unaudited
pro forma operating results data reflecting the alternative merger combines
information from the historical consolidated statements of income of El Paso and
Sonat giving effect to the alternative merger as if it had been completed on
January 1, 1998. Both the unaudited pro forma financial position data reflecting
the merger and the unaudited pro forma financial position data reflecting the
alternative merger combine information from the historical consolidated balance
sheets of El Paso and Sonat giving effect to the merger or the alternative
merger, as applicable, as if it had been completed on December 31, 1998.
We derived the pro forma information reflecting the merger assuming (1)
each share of Sonat common stock will be converted into one share of El Paso
common stock and (2) El Paso will issue a total of 110 million shares in the
merger.
We derived the pro forma information reflecting the alternative merger
assuming (1) each share of Sonat common stock will be converted into .170 of a
share of El Paso common stock and .274 of a depositary share, (2) El Paso will
issue in the alternative merger a total of 18.7 million shares of common stock
and 30.1 million depositary shares, which depositary shares would entitle the
holders thereof to receive up to $3.01 billion of value if El Paso were
liquidated, (3) each share of El Paso common stock issued will have a $33.00
value, and (4) the annual dividend rate on the senior voting preferred stock
will be 8.75%. The actual dividend rate will be a rate that our respective
financial advisors believe will cause the depositary shares, when fully
distributed after completion of the alternative merger, to trade initially at
approximately $100 per share, considering the pro forma capitalization and
credit profile of the combined company after the completion of the alternative
merger.
We are providing this information for illustrative purposes only. It does
not necessarily reflect what the results of operations or financial position of
the combined company would have been if the merger or alternative merger had
actually occurred at the beginning of the periods presented. This information
also does not necessarily indicate what the combined company's future operating
results or consolidated financial position will be. This information does not
reflect (1) the effect of any operating income improvements that we may achieve
by combining our companies or (2) cost savings associated with the combining of
our companies.
Please see "Financial Information" on page 74 for a more detailed
explanation of this analysis.
16
<PAGE> 25
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION REFLECTING
COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- ---------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING RESULTS DATA:
Operating revenues......................................... $9,492 $10,010 $6,216
Depreciation, depletion and amortization................... 618 634 485
Employee separation and asset impairment charge............ -- -- 99
Ceiling test charges....................................... 1,035 -- --
Net income (loss).......................................... (306) 404 294
Basic earnings (loss) per common share..................... (1.35) 1.80 1.62
Diluted earnings (loss) per common share................... (1.35)(a)(b) 1.76 1.59
Cash dividends declared per share of common stock(c)....... .76 .73 .70
Basic average common shares outstanding.................... 226 224 182
Diluted average common shares outstanding.................. 237 229 185
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNT)
<S> <C>
FINANCIAL POSITION DATA:
Total assets................................................ $14,430
Short-term debt (including current maturities of long-term
debt)..................................................... 1,642
Long-term debt.............................................. 3,651
Company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital Trust I.... 325
Minority interest........................................... 374
Stockholders' equity........................................ 3,375
Book value per common share................................. 14.66
</TABLE>
- ---------------
(a) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per common
share. If we had included those securities, we would have shown a lower loss
per common share.
(b) If we had excluded the ceiling test charges in determining diluted earnings
(loss) per common share we would have shown diluted earnings per share of
$1.55.
(c) For purposes of calculating cash dividends declared per share of common
stock we have assumed that those dividends are the same as the historical
dividends declared by El Paso during the periods presented.
17
<PAGE> 26
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION REFLECTING
COMPLETION OF THE MERGER
UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1998
-----------------
(IN MILLIONS,
EXCEPT PER SHARE
AND RATIO
AMOUNTS)
<S> <C>
OPERATING RESULTS DATA:
Operating revenues.......................................... $9,492
Depreciation, depletion and amortization.................... 693
Ceiling test charges........................................ 1,035
Net loss available to common stockholders(a)................ (617)
Basic loss per common share(a).............................. (4.57)
Diluted loss per common share(a)(b)(c)...................... (4.57)
Cash dividends declared per share of common stock(d)........ .76
Cash dividends per El Paso preferred depositary share....... 8.75
Basic average common shares outstanding..................... 135
Diluted average common shares outstanding................... 150
Ratio of earnings to combined fixed charges and preferred
stock dividend requirements............................... --(e)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNT)
<S> <C>
FINANCIAL POSITION DATA:
Total assets................................................ $17,824
Short-term debt (including current maturities of long-term
debt)..................................................... 1,642
Long-term debt.............................................. 3,700
Company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital Trust I.... 325
Mandatorily redeemable preferred stock...................... 3,014
Minority interest........................................... 374
Stockholders' equity........................................ 2,452
Book value per common share................................. 17.64
</TABLE>
- ---------------
(a) Each percentage point change to the assumed annual dividend rate for the
senior voting preferred stock would impact net loss available to common
stockholders by $30 million and loss per share by $.22.
(b) If we had excluded the ceiling test charges in determining diluted loss per
common share, we would have shown diluted earnings per share of $.37.
(c) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per common
share. If we had included those securities we would have shown a lower loss
per common share.
(d) For purposes of calculating cash dividends declared per share of common
stock we have assumed that those dividends are the same as the historical
dividends declared by El Paso during the periods presented.
(e) Earnings would be inadequate to cover fixed charges by $1.1 billion. If we
had excluded the ceiling test charges in determining the ratio of earnings
to combined fixed charges and preferred stock dividend requirements, we
would have shown a ratio of .97 and earnings would be inadequate to cover
fixed charges by $24 million.
18
<PAGE> 27
COMPARATIVE PER SHARE DATA
(UNAUDITED)
We present below (1) historical per share data for El Paso and Sonat, (2)
unaudited pro forma combined per share data and (3) Sonat equivalent unaudited
pro forma per share data. We calculated the pro forma per share data to reflect
both the completion of the merger using the pooling of interests method of
accounting and the completion of the alternative merger using the purchase
method of accounting. You should read this table in conjunction with the
unaudited pro forma condensed combined financial information and related notes
included in "Financial Information" in this joint proxy statement/prospectus and
the separate audited historical consolidated financial statements of El Paso and
Sonat and the related notes incorporated by reference in this joint proxy
statement/prospectus. The pro forma diluted earnings (loss) per common share and
cash dividends declared per common share data reflecting the merger assume the
merger had been completed on January 1, 1996 and the pro forma diluted earnings
(loss) per common share and cash dividends declared per common and per
depositary share data reflecting the alternative merger assume the alternative
merger was completed on January 1, 1998. The pro forma book value per common
share data assumes the merger occurred December 31, 1998.
<TABLE>
<CAPTION>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
HISTORICAL -- EL PASO
Diluted earnings per common share......................... $ 1.85 $ 1.59 $ .52
Cash dividends declared per common share.................. .76 .73 .70
Book value per common share............................... 17.52
HISTORICAL -- SONAT
Diluted earnings (loss) per common share.................. (4.82)(a) 1.95 2.29
Cash dividends declared per common share.................. 1.08 1.08 1.08
Book value per common share............................... 12.08
MERGER PRO FORMA -- POOLING OF INTERESTS
Diluted earnings (loss) per common share.................. (1.35)(b) 1.76 1.59
Cash dividends declared per common share(c)............... .76 .73 .70
Book value per common share............................... 14.66
ALTERNATIVE MERGER PRO FORMA -- PURCHASE
Diluted loss per common share............................. (4.57)(b)
Cash dividends declared per common share(c)............... .76
Cash dividends declared per depositary share.............. 8.75
Book value per common share............................... 17.64
SONAT EQUIVALENT MERGER PRO FORMA -- POOLING OF INTERESTS(D)
Diluted earnings (loss) per common share.................. (1.35)(b) 1.76 1.59
Cash dividends declared per common share.................. .76 .73 .70
Book value per common share............................... 14.66
SONAT EQUIVALENT ALTERNATIVE MERGER PRO FORMA -- PURCHASE
Diluted loss per common share(e).......................... (.78)(b)
Cash dividends declared per common share(e)............... .13
Cash dividends declared per depositary share(f)........... 2.40
Book value per common share(e)............................ 3.00
</TABLE>
- ---------------
(a) If we had excluded the ceiling test charges in determining diluted earnings
(loss) per common share, we would have shown diluted earnings per common
share of $1.28.
(b) If we had excluded the ceiling test charges in determining diluted earnings
(loss) per common share, we would have shown earnings per common share as
follows for:
<TABLE>
<CAPTION>
MERGER-- ALTERNATIVE
POOLING OF MERGER--
INTERESTS PURCHASE
---------- -----------
<S> <C> <C>
Pro forma................................................... $1.55 $.37
Sonat equivalent pro forma.................................. 1.55 .06
</TABLE>
(c) For purposes of calculating cash dividends declared per common share we have
assumed that those dividends are the same as the historical dividends
declared by El Paso during the periods presented.
(d) Calculated using the exchange ratio of one share of El Paso common stock for
each share of Sonat common stock contemplated by the merger agreement.
(e) Calculated as the product of the alternative merger pro forma-purchase data
and the exchange ratio of .17 (based on an assumed number of El Paso and
Sonat common shares outstanding of 120,989,489 and 110,047,818,
respectively, and 5,471,115 Sonat stock options outstanding).
(f) Calculated as the product of the alternative merger pro forma-purchase data
and the exchange ratio of .274 (based on the assumptions used to derive the
common stock exchange ratio in addition to the implied El Paso common stock
price described on p. 74).
19
<PAGE> 28
RISK FACTORS
In addition to the other information included and incorporated by reference
in this joint proxy statement/prospectus, you should carefully read and consider
the following factors in evaluating the proposals to be voted on at your special
stockholders' meeting.
OPERATIONAL RISKS
OUR REVENUES MAY BE NEGATIVELY AFFECTED BY FLUCTUATING ENERGY PRICES.
Our ability to generate revenue is dependent, in part, upon the price of
natural gas, natural gas liquids and, to a lesser extent, oil as compared to the
prices for alternative sources of energy. Energy prices fluctuate as a result of
a number of factors, including:
- regional, domestic and international demand;
- availability and adequacy of transportation facilities;
- energy legislation;
- federal or state taxes imposed on the sale or transportation of natural
gas and natural gas liquids; and
- the abundance of supplies of alternative energy sources.
THE RATES WE ARE ABLE TO CHARGE OUR CUSTOMERS MAY BE REDUCED BY GOVERNMENTAL
AUTHORITIES.
Our pipeline businesses are regulated by the FERC and various state and
local regulatory agencies. In particular, the FERC limits the rates we are
permitted to charge our customers for interstate transportation and, in some
cases, sales of natural gas. If the rates we are permitted to charge our
customers for use of our regulated pipelines are lowered, the profitability of
our pipeline businesses may be reduced. Under the terms of a settlement approved
by the FERC, Sonat's subsidiary, Southern Natural Gas Company, is required to
file a new rate case no later than September 1, 1999 to become effective by
March 1, 2000. We cannot predict the outcome of that rate case.
WE WILL BE OPERATING IN HIGHLY COMPETITIVE INDUSTRIES.
The FERC's recent actions to strengthen market forces throughout the
natural gas pipeline industry have caused increased competition in the industry.
Interstate pipelines are facing competitive pressure from other major pipeline
systems in a number of key markets. This has enabled local distribution
companies and end users to choose a supplier or switch suppliers based on the
short-term price of natural gas and the cost of transportation. If these
competitive factors continue to intensify, the rates we are able to charge our
customers may decline significantly.
MANY OF OUR FAVORABLE CONTRACTS FOR NATURAL GAS TRANSMISSION WILL EXPIRE
WITHIN THE NEXT FEW YEARS.
Substantially all of the revenues of Sonat's subsidiary, Southern Natural
Gas Company, are generated under long-term natural gas transportation contracts.
Contracts representing approximately 58% of Southern Natural Gas Company's firm
transportation capacity will expire by their terms by September 1, 2003.
Contracts with one gas distribution customer account for 46% of these expiring
contracts. Although we expect to negotiate to extend these contracts, there can
be no assurance that we will be able to extend or replace these contracts or
that the terms of any renegotiated contracts will be as favorable as the
existing contracts. If we are unable to renew these contracts or if we renew
them on less favorable terms, we may suffer a material reduction in our revenue
and earnings.
Substantially all of the revenues of El Paso's subsidiary, Tennessee Gas
Pipeline Company, are generated under long-term natural gas transmission
contracts. Contracts representing approximately 70% of the subsidiary's firm
transportation capacity will be expiring over the next two years, principally in
November 2000. Although the subsidiary is actively pursuing the renegotiation,
extension and/or
20
<PAGE> 29
replacement of these contracts, we cannot give any assurance that it will be
able to extend or replace all or most of these contracts or that the terms of
any renegotiated contracts will be as favorable to the subsidiary as the
existing contracts.
THE SUCCESS OF SONAT'S EXPLORATION AND PRODUCTION BUSINESS IS DEPENDENT ON
FACTORS WHICH CANNOT BE PREDICTED WITH CERTAINTY.
The performance of Sonat's exploration and production business is dependent
upon a number of factors that cannot be predicted with certainty. These factors
include:
- the effect of oil and natural gas prices on revenues;
- the results of future drilling activity;
- our ability to identify and precisely locate prospective geologic
structures and to drill and successfully complete wells in those
structures; and
- our ability to expand our leased land positions in desirable areas, which
often are subject to intensely competitive leasing conditions.
COSTS OF ENVIRONMENTAL LIABILITIES, REGULATION AND LITIGATION COULD EXCEED OUR
ESTIMATES.
The companies' current and former operations involve management of
regulated materials and are subject to various environmental laws and
regulations. These laws and regulations obligate us to clean up various sites at
which petroleum, chemicals, low-level radioactive substances or other regulated
materials may have been disposed of or released. Some of these sites have been
designated Superfund sites by the United States Environmental Protection Agency
under the Comprehensive Environmental Response, Compensation and Liability Act.
Each of the companies is also a party to legal proceedings involving
environmental matters pending in various courts and agencies.
It is not possible for us to estimate reliably the amount and timing of all
future expenditures related to environmental matters because of:
- the difficulty of estimating clean up costs;
- the uncertainty in quantifying liability under environmental laws that
impose joint and several liability on all potentially responsible
parties; and
- the nature of environmental laws and regulations.
Although management of both companies believe that they have established
appropriate reserves for liabilities, including clean up costs, due to these
uncertainties we could be required to set aside additional reserves in the
future.
OUR OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNINSURED RISKS.
Our transportation, gathering and processing operations are subject to the
inherent risks normally associated with the transportation, gathering and
processing of natural gas, including explosions, pollution and fires, each of
which could result in damage to or destruction of natural gas transportation,
gathering and processing facilities or damage to persons and property.
In addition, oil and gas exploration and production also involves various
operating hazards such as well blowouts, explosions, uncontrollable flows of
oil, gas or well fluids, fires, formations with abnormal pressures, pollution,
releases of toxic gas and other hazards.
If any of these events were to occur, we could suffer substantial losses.
While we maintain insurance against these types of risks to the extent and
in amounts that we believe are reasonable, our financial condition and
operations could be adversely affected if a significant event occurs that is not
fully covered by insurance.
21
<PAGE> 30
WEATHER CONDITIONS OR THE AVAILABILITY OF SUBSTITUTE ENERGY SOURCES MAY
ADVERSELY AFFECT OUR FUTURE RESULTS OF OPERATIONS.
Our results of operations can be adversely affected by weather conditions.
Depending on weather conditions, the public may use less energy. In addition,
alternative energy sources may become more readily available or available at a
lower cost. If either of these events occurs, demand for and prices of natural
gas and pipeline capacity may be reduced.
KEY PERSONNEL COULD TERMINATE THEIR EMPLOYMENT WITH THE COMBINED COMPANY.
El Paso's senior management has limited experience in the oil and gas
exploration and production business. Although we expect Sonat personnel who
currently operate Sonat's exploration and production business to remain with the
combined company, we cannot assure you that any of these personnel will remain
with the combined company after we complete the merger.
All of the executive officers and other key employees of Sonat are parties
to severance agreements and have the right to receive substantial payments if
their employment is terminated by the combined company, if they terminate their
employment for good reason after the merger or, in the case of its executive
officers and two other key executives, if they terminate employment for any
reason during the 30-day period immediately following the first anniversary of
the merger. Executive officers and certain other key employees of El Paso have
similar rights under applicable plans, unless the merger is completed under the
alternative merger structure. In addition, several Sonat executive officers are
eligible to participate in the voluntary reduction-in-force window program
described in "Material Terms of the Merger Agreement -- Additional
Agreements -- Window Program," if they (1) give notice of intent to terminate
their employment within a 45-day period currently expected to end on December
31, 1999 and (2) terminate their employment during a 6-month period currently
expected to end on June 30, 2000. These individuals will be entitled to
severance payments under their severance agreements if they elect to take early
retirement. Accordingly, El Paso expects that a substantial number of Sonat
executive officers and other employees will likely terminate their employment
within the year following completion of the merger.
We cannot assure you that, if executive officers and other key employees of
either El Paso or Sonat leave the combined company, we will be able to find
adequate replacements.
WE CANNOT ASSURE YOU THAT OUR TWO COMPANIES WILL BE SUCCESSFULLY COMBINED INTO
A SINGLE ENTITY.
If we cannot successfully combine our operations we may experience a
material adverse effect on our business, financial condition or results of
operations. The merger involves the combining of two companies that have
previously operated separately. The combining of companies such as Sonat and El
Paso involves a number of risks, including:
- the diversion of management's attention to the combining of operations;
- difficulties in the combining of operations and systems, including plans
to update and test systems for "Year 2000" compliance;
- difficulties in the assimilation and retention of employees;
- challenges in keeping customers; and
- potential adverse short-term effects on operating results.
Among the factors considered by the boards of directors of each company in
approving the merger agreement were the opportunities for economies of scale and
scope and operating efficiencies that could result from the merger. Although we
expect the combined company to achieve significant annual savings in operating
costs as a result of the merger, we may not be able to maintain the levels of
operating efficiency that we each previously achieved or might achieve if we
remain separate. Because of difficulties
22
<PAGE> 31
in combining operations, we may not be able to achieve the cost savings and
other size related benefits that we hope to achieve after the merger.
In addition, because (1) Sonat's marketing operations are held through a
joint venture in which Sonat has a 65% interest and (2) its Florida pipeline is
held through a joint venture operated by a subsidiary of Enron Corp. in which
Sonat has a 50% interest, the combined company may not be able to effectively
integrate these operations with similar operations of El Paso to achieve cost
savings in these operations.
TRANSACTION RISKS
THE STRUCTURE OF THE MERGER WILL NOT BE KNOWN UNTIL AFTER THE EL PASO
STOCKHOLDERS' SPECIAL MEETING.
Because the structure of the merger will not be known until after the El
Paso special meeting, which we expect will be held on the same day as the Sonat
special meeting, Sonat stockholders will not know at the time they vote on the
merger agreement the structure of the merger and type of consideration they will
receive in exchange for shares of Sonat common stock.
SINCE THE MARKET PRICE OF EL PASO SHARES WILL VARY, SONAT STOCKHOLDERS CANNOT
BE SURE OF THE VALUE OF THE CONSIDERATION THEY WILL RECEIVE IN THE MERGER.
At the time the merger is completed, each share of Sonat common stock will
be converted into the right to receive one share of El Paso common stock. This
exchange ratio will not be adjusted in the event of any increase or decrease in
the price of the El Paso common stock or the Sonat common stock. As a result,
the value of the shares of El Paso common stock received by Sonat stockholders
in the merger will vary with fluctuations of the price of the El Paso common
stock. See "Comparative Per Share Market Price and Dividend Information." In
addition, the merger may not be completed until a significant period of time has
passed after the companies' special meetings. Because of this, at the time of
the Sonat special meeting, Sonat stockholders will not know the exact market
value of the shares of El Paso common stock that they will receive when the
merger is completed.
In addition, if the merger is completed under the alternative merger
structure, because the total value of the depositary shares to be issued will be
based on an implied price equal to the price per share of El Paso common stock
over the ten trading day period preceding the two trading days before the
special meeting and the implied price may be no greater than $44.50, the value
of the depositary shares Sonat stockholders receive on completion of the merger
may be less than the value of the shares of El Paso common stock they would have
received instead of those depositary shares if the merger had been completed as
an all-common stock transaction.
THERE IS NO CURRENT MARKET FOR THE DEPOSITARY SHARES AND THE DEPOSITARY SHARES
MAY TRADE AFTER COMPLETION OF THE MERGER AT LESS THAN $100 PER SHARE.
In the event that the merger agreement is not approved by El Paso
stockholders and the merger is completed under the alternative merger structure,
we will attempt to list the depositary shares on the New York Stock Exchange.
The New York Stock Exchange does not currently have a market for El Paso
depositary shares and there can be no assurance that such a trading market will
develop.
In accordance with the merger agreement, we will instruct our respective
financial advisors to agree on a dividend rate for the senior voting preferred
stock that they believe will cause the depositary shares, when fully distributed
after completion of the merger, to trade initially as nearly equal as possible
to $100 per share. We can provide no assurance that the trading price of the
depositary shares initially after completion of the merger or thereafter will be
at, above or below $100 per share.
Until the depositary shares are fully distributed and an orderly market
develops, the prices at which trading in any such shares occurs may fluctuate
significantly.
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PAYMENTS OF DIVIDENDS ON SENIOR VOTING PREFERRED STOCK WOULD REDUCE THE FUNDS
AVAILABLE TO THE COMBINED COMPANY TO FUND GROWTH AND OPERATIONS.
We currently estimate that, if we complete the alternative merger, dividend
payments in respect of the senior voting preferred stock would be between
approximately $256 million and $356 million annually based on the number of
shares of El Paso common stock, shares of Sonat common stock and Sonat options
outstanding as of March 5, 1999, and an assumed dividend rate of 8.75%. The
actual dividend rate will be set at a rate that our financial advisors believe
will cause the depositary shares, when fully distributed after completion of the
alternative merger, to trade initially at approximately $100 per share. Because
we will be using cash to pay these dividends, the amount of cash we would have
available for expansion opportunities and ongoing operations would be
significantly reduced.
THE COMPANIES COULD BE REQUIRED TO EFFECT SIGNIFICANT DIVESTITURES OR COMPLY
WITH OTHER REGULATORY REQUIREMENTS.
We cannot complete the merger until the waiting period under the HSR Act
has expired or terminated. We are obligated to use our "reasonable best efforts"
to take all action to ensure that the waiting period under the HSR Act and all
extensions of that period expire or are terminated and other required approvals
are obtained.
In addition, although we are not obligated to take actions that would
reasonably be likely to have a materially adverse affect on the combined company
or on El Paso's subsidiary, Tennessee Gas Pipeline Company, governmental
authorities could require the companies to effect significant divestitures as a
condition to approving the transaction or impose other conditions that would
affect subsequent operations of the combined company.
We are also required to obtain the approval of the FERC in connection with
the merger. We cannot assure you that these and any other required regulatory
approvals will be obtained, or if they are obtained, as to the terms, conditions
and timing of these approvals. These requirements for regulatory approvals could
delay completion of the merger for a significant period of time after the Sonat
and El Paso stockholders have approved the merger at the special meetings.
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
We have each made statements in this document and in documents that are
incorporated by reference into this document that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of El Paso, Sonat or the combined company. These
statements may relate to, but are not limited to, information or assumptions
about earnings per share, capital and other expenditures, dividends, financing
plans, capital structure, cash flow, pending legal proceedings and claims,
including environmental matters, future economic performance, operating income
improvements, cost savings, management's plans, goals and objectives for future
operations and growth and markets for the common stock of El Paso, Sonat and the
combined company. These forward-looking statements generally are accompanied by
words such as "intend," "anticipate," "believe," "estimate," "expect," "should"
or similar expressions. You should understand that these forward-looking
statements are necessarily estimates reflecting the best judgment of senior
management of Sonat and El Paso, not guarantees of future performance. They are
subject to a number of assumptions, risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that could cause actual results to
differ materially from estimates or projections contained in forward-looking
statements include, among other, the following:
- the risk that revenues may be affected by fluctuating energy prices;
- the risk that rates charged to customers may be reduced by governmental
authorities;
- the highly competitive nature of the natural gas transportation,
gathering, processing, storage and energy marketing industries;
- the risk of favorable customer contracts expiring or being renewed on
less attractive terms;
- the uncertainty concerning the future success of exploration and
production activities;
- the costs of environmental liabilities, regulations and litigation;
- the impact of operational hazards;
- the risk that required regulatory approvals for proposed pipeline,
storage and power generation projects may be delayed or may only be
granted on terms that are unacceptable or significantly less favorable
than anticipated;
- the risks associated with future weather conditions;
- the risk that Sonat's businesses may not be successfully integrated with
El Paso's businesses;
- the risk that we may not fully realize the benefits expected to result
from the merger;
- the impact of the loss of key employees; and
- the risk that other firms will further expand into markets in which El
Paso or Sonat operate.
These factors are more fully described in "Risk Factors." Other factors
that could cause actual results to differ materially from estimates and
projections contained in forward-looking statements are described in the
documents that we incorporated by reference into this document. In addition,
there can be no assurance that:
- we have correctly identified and assessed all of the factors affecting El
Paso's or Sonat's businesses;
- the publicly available and other information with respect to these
factors on which we have based our analysis is complete or correct;
- our analysis is correct; or
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- our strategies, which are based in part on this analysis, will be
successful.
Accordingly, you should not place undue reliance on forward-looking
statements, which speak only as of the date of this joint proxy
statement/prospectus, or, in the case of documents incorporated by reference,
the date of those documents.
All subsequent written and oral forward-looking statements attributable to
El Paso, Sonat, the combined company or any person acting on their behalf are
expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. Neither Sonat nor El Paso undertakes any obligation
to release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date of this joint proxy statement/prospectus
or to reflect the occurrence of unanticipated events.
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THE MERGER
We are furnishing this joint proxy statement/prospectus to stockholders of
El Paso and Sonat in connection with the solicitation of proxies by the El Paso
board and the Sonat board for use at their respective special stockholders'
meetings.
At El Paso's special meeting, which will be held on , 1999,
El Paso stockholders will be asked to approve and adopt the merger agreement,
including the issuance in the merger of shares of El Paso common stock to Sonat
stockholders and the amendment to El Paso's certificate of incorporation
described below.
At Sonat's special meeting, which will also be held on ,
1999, Sonat stockholders will be asked to approve and adopt the merger
agreement.
The merger agreement provides for the merger of Sonat into El Paso, with
Sonat stockholders receiving one share of El Paso common stock for each share of
Sonat common stock they own. In the merger, the certificate of incorporation of
El Paso will be amended with the effect that after the merger the authorized
capital stock of El Paso will increase from 275 million to 750 million shares of
common stock and from 25 million to 50 million shares of preferred stock. The
preferred stock will be issuable by El Paso after the merger in one or more
series, with each series having terms determined by El Paso's board. If El Paso
stockholders approve the merger agreement they will also be approving the
issuance of shares of El Paso common stock to Sonat stockholders in the merger
and the amendment to the El Paso certificate of incorporation.
To provide greater certainty of closing to Sonat's stockholders, the merger
agreement obligates El Paso to proceed with the merger regardless of the outcome
of the vote of El Paso stockholders on the merger agreement. If Sonat
stockholders approve the merger and El Paso stockholders do not approve the
merger agreement, the merger will be completed under an alternative structure
not requiring a vote of the El Paso stockholders. Under the alternative merger
structure, Sonat would merge with a newly-formed wholly owned subsidiary of El
Paso, and in the merger, El Paso will issue to Sonat stockholders the maximum
number of shares of common stock El Paso may issue under the rules of the New
York Stock Exchange without a vote of the El Paso stockholders, less the number
of shares reserved for issuance upon the exercise of Sonat options. Based on the
number of shares of El Paso common stock and Sonat options outstanding as of
March 5, 1999, this number would be approximately 18,726,781. El Paso would,
under the alternative merger structure, also issue to Sonat stockholders
depositary shares representing shares of a new series of senior voting preferred
stock, which will have a total liquidation preference of between approximately
$2.92 and $4.06 billion, depending on the trading value of the El Paso Common
Stock over the ten trading days preceding the second trading day before the
Sonat special meeting, and El Paso and Sonat would instruct their respective
financial advisors to agree on a dividend rate for the senior voting preferred
stock that they believe would cause the depositary shares, when fully
distributed after completion of the merger, to have an initial trading value as
nearly equal as possible to $100 per depositary share. Sonat stockholders are
expected to receive, for each share of Sonat common stock held by them, .17 of a
share of El Paso common stock and between approximately .266 and .369 of an El
Paso depositary share. Under the alternative merger structure, El Paso's
certificate of incorporation will not be amended.
We have attached a copy of the merger agreement as Annex A to this
document. The merger agreement is incorporated by reference into this document
and our description is qualified in its entirety by reference to the merger
agreement.
BACKGROUND OF THE MERGER
EL PASO BACKGROUND
Since acquiring Tenneco Inc.'s energy business in December 1996, El Paso
has focused upon expanding its business through internally generated growth and
strategic acquisitions and business combinations.
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Beginning in the second half of 1998, El Paso had discussions with a number
of energy companies concerning possible business combination transactions,
including transactions that would have expanded El Paso's unregulated natural
gas gathering, processing, power generation and energy marketing businesses.
These discussions did not result in any transactions. In the fourth quarter of
1998 and early January 1999, El Paso had discussions with three electric utility
companies regarding possible strategic business combinations. In December 1998,
one of these companies provided a non-binding indication of interest for a cash
acquisition of El Paso at a premium to El Paso's market price. In addition, in
December 1998, El Paso began discussions with a natural gas pipeline company
concerning a possible business combination.
At meetings in December 1998 and January 1999, the El Paso board reviewed
potential strategic alternatives for El Paso, including possible strategic
combinations with electric utility companies, the cash indication of interest
received by El Paso, El Paso's prospects on a stand-alone basis, and strategic
transactions within the natural gas industry, including the potential
transaction then under discussion with another natural gas pipeline company. The
El Paso board also considered the potential for a future combination with an
electric utility if El Paso did not pursue such a transaction at that time, and
the likelihood that El Paso's assets would retain, or have greater, strategic
value over time. The El Paso board also noted that electric utility stock prices
had declined substantially in December 1998 and January 1999. The El Paso board
reaffirmed that El Paso had not been and was not for sale and decided to
terminate discussions regarding any strategic combination with any electric
utility. The El Paso board directed management to focus on opportunities within
the natural gas industry, including continuing the discussions that were then in
progress with the natural gas pipeline company.
During January 1999, El Paso and that natural gas pipeline company
conducted mutual due diligence and engaged in negotiations concerning a possible
exchange ratio and other terms of a possible stock-for-stock merger transaction.
In late January, El Paso concluded that it could not reach an exchange ratio
within the range sought by the other company, and those discussions terminated.
SONAT BACKGROUND
Sonat has, from time to time, examined a number of strategic alternatives.
In the last two years it has also undertaken a variety of initiatives designed
to increase stockholder value, including the following:
- reduced costs aggressively at all business units;
- restructured its exploration and production business to improve return on
assets, to reduce costs further and to increase operating efficiencies;
- invested significant amounts of capital in its exploration and production
business, including, in particular, in the Gulf of Mexico;
- recruited new senior management for its exploration and production
business;
- announced and/or completed a number of extensions and expansions of its
natural gas pipeline business; and
- acquired or began development of two power generation projects in
Georgia.
Notwithstanding these measures, Sonat's board believed the company still
faced a number of challenges going forward, including the following:
- Sonat competes against a number of energy companies that are much larger
in size and geographical scope and possess greater capabilities and
financial resources.
- Although Sonat is now better positioned in exploration and production
than in the recent past, this business is inherently volatile and is
subject to a multitude of factors outside of its control.
- Without a significant presence in electric power generation, Sonat is
disadvantaged relative to several larger energy companies who have both
natural gas and power generation capability to compete successfully in
the converging energy markets.
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- Given Sonat's existing level of debt, it may not have the financial
resources to exploit fully the various investment opportunities available
to it.
- Because of the consolidation in the natural gas and electric industries,
Sonat's strategic alternatives become fewer with each merger among
natural gas and electric companies.
In addition, Sonat's financial results have shown considerable variability
in recent years. This variability is largely attributable to its exploration and
production business. Moreover, the company's capital expenditures have been
high, with exploration and production related capital expenditures accounting
for over 80% of the total over the past five years. At the same time, Sonat's
debt ratio has risen largely in response to exploration and production related
difficulties.
At a meeting of the Sonat board in December 1998, Sonat reviewed with
Merrill Lynch, Sonat's financial advisor, a variety of strategic alternatives.
The Sonat board identified three alternatives that, in its view, were
potentially attractive to Sonat and its stockholders: (1) remaining as a
stand-alone company in its existing businesses, (2) a spin-off of Sonat's
pipeline and marketing businesses with a subsequent merger of its remaining
exploration and production business with a publicly-held company, and (3) a sale
or merger of Sonat as a whole. Of these three alternatives, the Sonat board
believed that the sale or merger of the company as a whole would generate the
highest value to its stockholders. In connection with a possible sale or merger,
the Sonat board concluded that, from a negotiating standpoint, it would be
preferable for parties interested in entering into a business combination with
Sonat to initiate discussions with Sonat, rather than vice versa. As a result,
Sonat did not initiate a dialogue with potential merger candidates at that time.
TRANSACTION BACKGROUND
On January 29, 1999, William A. Wise, Chairman of the Board, President and
Chief Executive Officer of El Paso, telephoned Ronald L. Kuehn, Jr., Chairman of
the Board, President and Chief Executive Officer of Sonat, to propose a meeting.
In late January 1999, in addition to El Paso, another company had
independently contacted Sonat with an interest in a possible merger. With these
expressions of interest, Sonat made a decision to explore a possible business
combination. For disclosure and other business reasons, Sonat decided not to
pursue an open public auction. Instead, it initially decided to work with El
Paso and the other company. On February 3, 1999, Messrs. Kuehn and Wise met in
Houston, Texas. Also present at this meeting were Ralph Eads of Donaldson,
Lufkin & Jenrette, El Paso's financial advisor, and Sam Dodson of Merrill Lynch,
Sonat's financial advisor. Mr. Kuehn confirmed that Sonat was reviewing possible
strategic alternatives, and indicated that Sonat would be interested in
commencing discussions with El Paso.
In February 1999, three other companies contacted Sonat as to their
respective interests in a business combination with Sonat. Certain other
companies with lesser business fits also expressed interest, but it was decided
that discussions with these parties should be postponed until after the
positions were known of the five companies that had better business fits and had
already shown an interest in a combination with Sonat.
During February, following the execution of confidentiality agreements with
each of the five interested companies, including El Paso, financial forecasts
were exchanged and due diligence meetings were held with each of the companies.
On February 8, 1999, Mr. Kuehn telephoned Mr. Wise to arrange a meeting for
February 11, 1999. On February 11, 1999, Messrs. Wise, Kuehn, Eads and Richard
Gordon of Merrill Lynch and other members of senior management of Sonat and El
Paso met in Houston, Texas. At that meeting, Messrs. Wise and Kuehn affirmed
their mutual interest in exploring a possible transaction and discussed their
respective businesses and forecasts. Mr. Wise indicated that El Paso believed it
could proceed promptly with its review of Sonat and with documentation for a
transaction. Between February 5 and
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February 22, 1999, El Paso and Sonat and their financial advisors engaged in a
limited exchange of financial and other information.
On February 19, 1999, El Paso's board held a telephonic meeting at which
Mr. Wise informed the board of his prior discussions with Sonat and of the
status of El Paso's due diligence review. The board instructed Mr. Wise and the
other members of El Paso management to proceed with discussions with Sonat.
On February 22, 1999, Mr. Wise met with Mr. Kuehn in Houston. At that
meeting, Mr. Wise expressed El Paso's desire to engage with Sonat in an
accelerated process of due diligence and negotiation regarding a transaction.
Mr. Wise also indicated that El Paso would provide a written proposal to Sonat
later that week.
On February 23, 1999, Messrs. Kuehn and Wise spoke by telephone and agreed
to meet again on February 26, 1999 in Houston. At the regularly scheduled Sonat
board meeting on February 25, 1999, Mr. Kuehn updated the Sonat board on the
status of discussions with all of the interested parties, including El Paso.
Also, on that day, Mr. Wise telephoned Mr. Kuehn and indicated to Mr. Kuehn that
El Paso would consider a business combination with Sonat at an exchange ratio of
0.95 of an El Paso share for each Sonat share. Mr. Kuehn responded that Sonat
was seeking value higher than that resulting from the exchange ratio proposed by
Mr. Wise. In response to Sonat's desire for greater certainty that the merger
would be completed, Mr. Wise noted that in El Paso's 1996 acquisition of Tenneco
Inc.'s energy business, El Paso had satisfied Tenneco's need for certainty by
providing for an alternative merger involving the issuance of preferred stock
and not requiring a vote of El Paso stockholders, as a back up in the event El
Paso stockholders did not approve an all common stock transaction.
On February 26, 1999, El Paso submitted to Sonat a written proposal for a
transaction with a 0.95 exchange ratio and Messrs. Kuehn, Wise, Gordon and Eads
met in Houston. At that meeting, Mr. Wise confirmed to Mr. Kuehn El Paso's
proposal for a business combination between El Paso and Sonat at an exchange
ratio of 0.95 of an El Paso share for each Sonat share. At Sonat's request, Mr.
Wise reaffirmed El Paso's willingness to provide for an alternative merger
structure involving preferred stock, as a back up if El Paso's stockholders did
not approve an all common stock merger. Mr. Wise also indicated that El Paso
would expect Sonat to have significant representation on the combined company's
board of directors and proposed that Mr. Kuehn serve as non-executive chairman
after completion of the merger for a transition period to be specified. Mr.
Kuehn stated that an exchange ratio of less than one-to-one was not acceptable
to Sonat. Mr. Wise indicated that El Paso would consider increasing its proposed
exchange ratio to one-to-one. Mr. Kuehn stated that other parties had expressed
interest in a business combination with Sonat, and that the Sonat board would
meet on March 11, 1999 to consider proposals submitted by all of the parties and
review its strategic options. Mr. Wise requested that Sonat afford El Paso
access to more detailed due diligence information and proposed that El Paso
would submit a draft merger agreement to Sonat. After this discussion, Messrs.
Kuehn and Wise agreed to conduct mutual due diligence during the week of March
1, 1999 in Houston. Mr. Kuehn also agreed that Sonat's counsel would review El
Paso's draft merger agreement.
After the February 26, 1999 meeting, El Paso's counsel, Fried, Frank,
Harris, Shriver & Jacobson, contacted Sonat's counsel, Wachtell, Lipton, Rosen &
Katz. On the following day, February 27, 1999, Fried Frank distributed a draft
merger agreement and related transaction documents to Sonat and Wachtell Lipton.
During the week of March 1, 1999, representatives of El Paso, Sonat, Merrill
Lynch and Donaldson, Lufkin & Jenrette met in Houston to conduct mutual due
diligence. In addition, Wachtell Lipton submitted mark-ups of the draft
transaction documents to Fried Frank, and representatives of Fried Frank and
Wachtell Lipton engaged in discussions regarding the proposed merger agreement
and related documents.
On March 5, 1999, the other four parties submitted proposals to Sonat, one
of which was immediately dismissed on the basis of an unacceptably low value.
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Also on March 5, 1999, Mr. Gordon of Merrill Lynch advised Mr. Eads of
Donaldson, Lufkin & Jenrette that Mr. Kuehn would be in contact with Mr. Wise on
Monday, March 8, 1999. In addition, representatives of Fried Frank spoke with
representatives of Wachtell Lipton and indicated that Fried Frank would
circulate revised transaction documents to Sonat and Wachtell Lipton on March 6,
1999. On March 6, 1999, Mr. Wise telephoned Mr. Kuehn. Mr. Kuehn indicated that
Sonat had received a number of proposals, and that three of the proposals,
including El Paso's proposal, were comparable in many respects. Mr. Kuehn told
Mr. Wise he would telephone him on March 8, 1999 with further information.
On March 8, 1999, discussions took place between Messrs. Kuehn and Wise,
Messrs. Eads and Gordon, and Fried Frank and Wachtell Lipton. In these
conversations, the Sonat representatives indicated that, because El Paso had
completed its due diligence and had prepared transaction agreements that Sonat
believed could be finalized promptly, Sonat was prepared to proceed with
negotiations with El Paso to attempt to reach final agreement on a transaction.
On March 9, 1999, Mr. Wise met with Mr. Selim K. Zilkha and Mr. Michael
Zilkha, who, together with a trust of which Mr. Selim Zilkha is trustee, own
approximately 20.8% of Sonat's common stock. Mr. Kuehn was also present at the
meeting. At that meeting Mr. Wise discussed with the two Messrs. Zilkha the
benefits of a transaction between El Paso and Sonat. The parties also discussed
representation of the Zilkhas on the combined company's board, and Mr. Wise
agreed that El Paso would nominate Mr. Selim Zilkha as a director of El Paso
following the proposed merger for so long as the Zilkha family owned at least 5%
of El Paso's common stock. Also on March 9, 1999, representatives of Fried Frank
and Wachtell Lipton met to negotiate provisions of the transaction agreements,
including conditions to closing, regulatory matters, termination rights,
break-up fees and terms of the senior voting preferred stock.
On March 11 and 12, 1999, the Sonat Board met to discuss, among other
things, the proposed merger with El Paso, as well as the status of the other
proposals received by Sonat with respect to a potential business combination or
similar transaction. Representatives of Sonat's senior management and its legal
and financial advisors made presentations and reviewed, among other things, the
matters set forth under "-- Recommendation of the Board of Directors of Sonat;
Sonat's Reasons for the Merger." Sonat's financial advisor also presented
analyses of the terms of each of the four proposals considered by the Sonat
board, including the terms of the proposed El Paso merger based on a one-to-one
exchange ratio and the other items contained in the draft merger agreement.
Of the four proposals that the Sonat board considered, three constituted
stock-for-stock mergers, while one involved a two-step transaction in which only
Sonat's pipeline and energy services businesses were to be merged, leaving the
exploration and production business as a separate public company. Accordingly,
this proposal was not directly comparable to the three other proposals
(including the El Paso proposal). In reviewing the four proposals, the Sonat
board considered various factors, including, among others, the following:
- the notional value per Sonat share;
- the normalized value per Sonat share, based on a 30-trading day average;
- the board's subjective view as to the attractiveness of the combined
company;
- the board's view as to the downside risk associated with the securities
that would be received by the Sonat shareholders;
- the impact of the transaction on Sonat's dividend rate;
- the likelihood that the combined company would be party to a subsequent
business combination or similar transaction; and
- the risk that the transaction would not be completed.
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The Sonat board also considered the fact that El Paso had completed its due
diligence and had fully negotiated the transaction documents, while the other
interested parties had not.
The Sonat board concluded that a business combination with El Paso would
have the benefits set forth below in "Recommendation of the Board of Directors
of Sonat; Sonat's Reasons for the Merger", including providing Sonat's
stockholders with the highest notional and normalized value per share. In
addition, the Sonat board concluded that the El Paso merger would provide
Sonat's stockholders with an investment in a very attractive company with strong
growth prospects, and only moderate downside risk and a low degree of risk that
the transaction would not be completed.
On March 12, 1999, the El Paso board met in Houston to review the proposed
merger. Following presentations by El Paso's management, Donaldson, Lufkin &
Jenrette and Fried Frank, the El Paso board unanimously voted to approve the
merger agreement, the merger and the related agreements. On the same day, Fried
Frank and Wachtell Lipton negotiated the remaining issues relating to the merger
agreement and the terms of the depositary shares and senior voting preferred
stock that would be issued under the alternative merger structure.
On March 13, 1999, the Sonat board met telephonically to consider the
proposed merger with El Paso. Merrill Lynch, as Sonat's financial advisor,
rendered an oral opinion, which was subsequently confirmed in writing, that, as
of the date of that meeting and based upon and subject to the matters stated in
the written fairness opinion, the consideration to be received by Sonat
stockholders in the merger was fair to the stockholders from a financial point
of view. After considering the various factors relating to the four proposals
that had been discussed at the March 12 board meeting, the Sonat board concluded
that a merger with El Paso was preferable to any of the other proposals or
either of the two other alternatives identified and discussed at the December
1998 Sonat board meeting. The three proposals for stock for stock mergers fell
within a relatively narrow range of value, in each case higher than that
embodied in the proposal for a two-step transaction. The Sonat board concluded
that the company that would result from a combination with El Paso would be more
attractive, and more likely to be a party to a subsequent business combination
in which a premium would be paid to the combined company's stockholders, than
the combined company that would result from either of the other stock merger
proposals. After further discussion and consideration, the Sonat board approved
the merger agreement, the merger and all of the related transactions.
After the requisite approvals were obtained from the Sonat board and the El
Paso board, the merger agreement, the stock option agreements and the voting
agreements were executed on March 13, 1999. The execution of the merger
agreement and the related agreements was publicly announced by the parties on
March 15, 1999.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF EL PASO; EL PASO'S REASONS FOR THE
MERGER
El Paso's board of directors has unanimously approved the merger and the
merger agreement and believes that the merger is fair to and in the best
interests of El Paso and its stockholders and unanimously recommends that El
Paso stockholders vote FOR the adoption of the merger agreement. The El Paso
board believes the merger offers an excellent opportunity to create value for El
Paso and its stockholders for the following reasons, among others:
- the combined company will be the preeminent natural gas company in North
America and will rank among the leaders in all key sectors of the natural
gas industry, including interstate and intrastate natural gas
transmission, gas gathering and processing and energy marketing. The
combined company's interstate pipeline system will consist of over 40,000
miles of natural gas pipeline and is expected to carry approximately 25%
of the natural gas transported in the United States daily;
- the El Paso board believes that Sonat's assets and operations are highly
complementary with El Paso's, and that its pipeline systems occupy a
prominent position in the fastest growing natural gas markets in the
United States;
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- the merger furthers El Paso's strategy of growing its natural gas
pipeline, gathering and processing, energy marketing and power generation
businesses;
- the merger will enable the combined company to realize both corporate and
operational synergies. El Paso believes it should be able to realize
pre-tax cost savings of at least $60 million in 2000. These cost savings
are expected to be achieved principally by reductions in general and
administrative costs, including consolidation of offices and reductions
in staff. Based upon El Paso's experience in past business combinations,
including its acquisition of Tenneco Inc.'s energy business, El Paso
believes it could potentially achieve even greater synergies;
- the merger will create a larger, more competitive company that will have
advantages of scale and scope in many areas. The combined company's
pipeline system will have nationwide operations, serving the gas and
power markets in the northeast, midwest and mid-Atlantic currently served
by El Paso, as well as the high-growth gas and power markets of the
southeastern United States and Florida currently served by Sonat;
- the combination of Sonat's oil and gas exploration and production
business with El Paso's existing businesses should provide the combined
company with unique opportunities. Sonat's exploration and production
business can serve as an added supply source for the combined company's
pipeline and power generation businesses and has the potential to create
significant opportunities -- especially in the Gulf of Mexico -- for the
combined company's natural gas gathering and processing businesses;
- the merger will allow El Paso to acquire approximately 1.6 trillion cubic
feet equivalent of proved reserves at a perceived low point in the
commodity cycle. The combined company's ability to buy, sell and trade
natural gas, oil, electric power and other commodities through its
marketing businesses should be enhanced by the ownership of these
reserves;
- if the all common stock merger is completed, the combined company's
earnings per share in 2000 are expected to exceed the earnings per share
El Paso would have generated on a stand-alone basis in the absence of the
merger, assuming annual pre-tax cost savings of $60 million and
additional savings of $57 million associated with early vesting of
incentive compensation plans in accordance with their pre-existing terms;
and
- the combined company, as compared to El Paso on a stand-alone basis, is
expected to have a relatively greater amount of cash flow available to
cover its interest expense and relatively greater amount of cash flow as
compared to total indebtedness. This should enhance the combined
company's ability to obtain financing at lower rates of interest,
increasing its financial flexibility to pursue its growth strategy.
The El Paso board made its determination after careful consideration of,
and based on, a number of factors, including, among other things, the factors
described above and the following additional factors:
- the judgment, advice and analysis of El Paso's senior management,
including its favorable recommendation of the merger;
- presentations by and discussions with El Paso's senior management and
representatives of Fried, Frank, Harris, Shriver & Jacobson, El Paso's
outside counsel regarding the terms of the merger agreement, stock option
agreements and voting agreements;
- presentations by and discussions with Donaldson, Lufkin & Jenrette, El
Paso's financial advisor, regarding the financial terms of the merger
agreement, and the opinion of Donaldson, Lufkin & Jenrette described
below to the effect that, subject to the qualifications and limitations
contained in DLJ's written opinion, as of the date of the opinion, the
exchange ratio in the merger and the consideration to be paid by El Paso
under the alternative merger structure were fair to El Paso from a
financial point of view;
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- the long-term interests of El Paso and its stockholders, as well as the
effects of the proposed merger on El Paso's employees, customers,
creditors, suppliers and the communities in which it has operations to
the extent those effects will have an impact on El Paso and stockholder
value;
- information concerning the financial and operating performance and
condition, asset quality and long-term prospects of Sonat, El Paso and
the combined company;
- the El Paso board's understanding of current economic developments and
trends generally and developments and trends in the natural gas pipeline
and the oil and gas production and exploration industries in particular;
- the terms of the merger agreement, including:
- the conditions to closing,
- the circumstances in which Sonat will be required to pay a termination
fee and the size of the fee, and
- the limited circumstances in which El Paso will be required to pay a
termination fee;
- the granting of stock options under the stock option agreements and the
circumstances in which the options could be exercised and the other terms
and consequences of the options, including the effect exercise of the
options would likely have on the ability of the grantor to use pooling of
interests accounting for future business combination transactions;
- the ability of the parties to complete the merger, including the
antitrust and other regulatory requirements applicable to the
transaction, and the anticipated timing for receiving necessary
regulatory approvals;
- that the merger will be accomplished on a tax free basis to the
stockholders of Sonat for United States federal income tax purposes;
- that, unless the merger is completed under the alternative merger
structure, it is expected to be accounted for as a pooling of interests;
- the anticipated board of directors and management of the combined
company;
- the current and historical market prices and historic exchange ratios of
the common stock of each company;
- the potential effects of the alternative merger structure, including:
- that this feature was an important factor in the Sonat board's decision
to support the merger,
- the certainty of closing this structure provides,
- the potential ability of El Paso to exchange the senior voting preferred
stock in the future for common stock, subject to receipt of any required
approvals, and
- the board's judgment that, in light of the potential benefits of the
merger to El Paso stockholders, the alternative merger structure is
unlikely to be utilized; and
- the prospects for a future sale of, or other business combination
involving, the combined company after the merger.
The El Paso board also considered a number of potential countervailing
factors in its deliberations concerning the merger, including:
- the premium being received by Sonat stockholders, based on historical
market prices, and the potential effect of the public announcement of the
merger on the market price of El Paso's common stock in the short term;
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- the fact that a portion of Sonat's business is comprised of oil and gas
exploration and production and, although Sonat personnel who currently
operate that business are expected to remain with the combined company,
El Paso's senior management has limited experience with oil and gas
exploration and production;
- that El Paso's ownership of the oil and gas exploration and production
business may increase El Paso's exposure to fluctuations in oil and
natural gas prices;
- the risk that key employees of Sonat, including employees active in its
exploration and production business, may depart;
- the challenges and costs of combining the businesses of two major
corporations of this size, including:
- the combination, reduction and relocation of work forces, and
- the consolidation, relocation and elimination of offices;
- the risks that the companies will not be able to combine their businesses
without experiencing the loss of key employees or encountering other
difficulties, or that the companies would not realize the cost savings
expected from such integration;
- the interests of El Paso's and Sonat's management in the merger as
described in "Summary of Interests of Certain Persons in the Merger" on
page 12;
- the ability of Sonat, under the merger agreement, to consider an
unsolicited proposal for another acquisition transaction if the Sonat
board concludes it is superior to our proposed merger;
- the ability of the Sonat board under the merger agreement to accept a
more favorable proposal after giving El Paso five business days to
respond to the more favorable proposal and paying El Paso a termination
fee of $150 million and reimbursing up to $10 million of El Paso's
transaction expenses;
- the impact the alternative merger structure would have on potential
offers to purchase shares of El Paso common stock;
- the risk that regulators could impose conditions on the grant of
necessary approvals such as requiring the sale of a portion of the
combined company's business;
- the financial impact on the combined company of the issuance of senior
voting preferred stock under the alternative merger structure, including
El Paso's ability to pay dividends on the senior voting preferred stock
it would have to issue under this structure;
- the expectation that, if completed under the alternative merger
structure, the merger would be dilutive to the combined company's
earnings per share for at least three years;
- that, if completed under the alternative merger structure, the merger
would be accounted for as a purchase, which means the combined company
would be required to first record the assets and liabilities of Sonat at
their estimated fair value, then we would record "goodwill" to the extent
the value of the shares issued to Sonat stockholders in the merger
exceeds the fair value of Sonat's identified assets and liabilities. Any
increases to fair value or goodwill will result in decreases in earnings
in future periods; and
- Donaldson, Lufkin & Jenrette's opinion with respect to the fairness of
the consideration to be paid under the alternative merger structure is
limited to an alternative merger transaction in which the implied value
of the El Paso common stock, for purposes of calculating the number of
shares of senior voting preferred stock to be issued, does not exceed
$38.69 per share.
In the view of the El Paso board these potential countervailing factors did
not, individually or in the aggregate, outweigh the advantages of the merger.
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In reaching its decision to approve the merger agreement and the merger,
including a merger under the alternative merger structure, and to recommend that
El Paso stockholders vote to adopt the merger agreement, the El Paso board did
not view any single factor as determinative and did not find it necessary or
practicable to assign any relative or specific weights to the various factors
considered. Furthermore, individual directors may have given differing weights
to different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF SONAT; SONAT'S REASONS FOR THE
MERGER
Sonat's board of directors has unanimously approved the merger agreement
and the merger and believes that the merger is fair to and in the best interests
of Sonat and its stockholders and unanimously recommends that Sonat stockholders
vote FOR the adoption of the merger agreement.
The Sonat board believes that the merger will provide Sonat stockholders
with an investment in an attractive company with strong growth prospects that
will enhance stockholder value for Sonat's stockholders, for various reasons,
including the following:
- The combined company will constitute the premier natural gas company in
North America and will rank among the leaders in all key sectors of the
natural gas industry, including interstate and intrastate natural gas
transmission, gas gathering and processing and energy marketing;
- The combination of Sonat with El Paso will provide a complementary fit of
both companies' strengths and needs, including:
- with respect to El Paso, (1) its natural gas pipeline system, with
direct access to major suppliers and attractive markets and stable
earnings and cash flow, (2) its natural gas gathering and processing
business, (3) its growing presence in the Gulf of Mexico, and (4) its
portfolio of international energy projects and opportunities; and
- with respect to Sonat, (1) its natural gas pipeline system, with its
high quality and relatively fast growth rate, (2) its exploration and
production business, which can serve as an added supply source for the
combined company's power generation business and has the potential to
create significant opportunities for the combined company's natural
gas gathering and processing businesses, especially in the Gulf of
Mexico, and (3) its natural gas and electric power marketing and
electric generation businesses;
- The merger will allow the combined company the opportunity to realize
significant combination benefits;
- The combined company will have enhanced power generation development
investment opportunities;
- The merger will create a larger, more competitive company that will have
advantages of scale and scope in many areas;
- The combined company's size and enhanced financial strength should, among
other things, enable the combined company to participate in larger and
more profitable projects in the United States and internationally than
either company could on a stand-alone basis; and
- The corporate cultures and management philosophies of the two companies
are compatible.
The Sonat board made its determination after careful consideration of, and
based on, a number of factors, including, among other things, the reasons
described above and following additional factors:
- its review of other strategic alternatives, including contacts and
preliminary discussions Sonat's management had with third parties
regarding possible business combinations;
- the judgment, advice and analysis of Sonat's senior management, including
its favorable recommendation of the merger;
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- presentations by and discussions with Sonat's senior management, legal
and financial advisors, regarding the terms of the merger agreement,
stock option agreements and voting agreements;
- the opinion of Merrill Lynch described below to the effect that, as of
the date thereof and based upon and subject to the matters contained in
the written fairness opinion, the consideration to be received by Sonat
stockholders in the merger, including the alternative merger structure,
was fair to Sonat stockholders from a financial point of view;
- information concerning the financial and operating performance and
condition, business operations, debt and capital levels, asset quality
and long-term prospects of Sonat, El Paso and the combined company, and
each company's projected future financial performance as a separate
entity and on a combined basis;
- current industry, economic and market conditions and trends, including
the likelihood of continuing consolidation and increasing competition in
the natural gas, oil and gas exploration and production and electric
industries (and the corresponding decrease in the number of suitable
merger partners);
- the importance of market position, significant scale and scope and
financial resources to a company's ability to compete effectively in the
changing environment in the natural gas and electric industries;
- that the merger will be accomplished on a tax free basis to stockholders
of Sonat for United States federal income tax purposes;
- the anticipated composition of the board of directors and management of
the combined company;
- the terms of the merger agreement, including:
- the ability of each company under specified circumstances to consider
unsolicited alternative business combination proposals,
- the ability to terminate the merger agreement on the occurrence of
specified conditions, and
- the termination fees payable in specified circumstances;
- the granting of the stock options under the stock option agreements and
the circumstances in which the options could be exercised and the other
terms and consequences of the options, including the effect exercise of
the options would likely have on the ability of the grantor to use
pooling of interest, accounting for future business combinations;
- the ability of the parties to complete the merger, including, in
particular, the likelihood of obtaining regulatory approvals;
- the potential effects of the alternative merger structure, including:
- that this feature was an important factor in the Sonat board's
decision to support the merger,
- the certainty of closing that this structure provides,
- the potential ability of El Paso to exchange the senior voting
preferred stock in the future for El Paso common stock, subject to
receipt of any required approvals, and
- the board's judgment that, in light of the potential benefits of the
merger to El Paso's stockholders, the alternative merger structure is
unlikely to be utilized;
- the prospects for a future sale of or other business combination
involving the combined company after the merger;
- the anticipated positive effects of the merger on long-term value for
Sonat stockholders through their ownership of stock in a stronger, more
diversified company;
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- the interests of El Paso's and Sonat's management in the merger as
described in "Interests of Certain Persons in the Merger;" and
- the effects of the proposed merger on Sonat's employees, customers,
creditors, suppliers and the communities in which it has operations to
the extent those effects will have an impact on Sonat and stockholder
value.
The Sonat board also considered a number of potential countervailing
factors in its deliberations concerning the merger, including:
- the combined company would have significant regulated content;
- the combined company would be a larger, but not necessarily a more
profitable participant in the energy services industry;
- the combined company would still be smaller than many of its competitors,
particularly in respect of domestic power generation and international
project development; and
- the challenges and costs of combining the businesses of two major
corporations of this size.
In the view of the Sonat board, these potential countervailing factors did
not, individually or in the aggregate, outweigh the advantages of the merger.
The above factors are not intended to be exhaustive but are believed to
include all material factors considered by Sonat's board of directors. In
reaching its decision to approve the merger agreement and the merger, including
a merger under the alternative merger structure, and to recommend that Sonat
stockholders vote to adopt the merger agreement, the Sonat board did not view
any single factor as determinative and did not find it necessary or practicable
to assign any relative or specific weights to the various factors considered.
Furthermore, individual directors may have given differing weights to different
factors.
ACCOUNTING TREATMENT
We expect the merger to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of El Paso and Sonat will be carried forward to the books
of the combined company at their historical recorded amounts, subject to any
adjustments and reclassifications required to conform the accounting policies of
the two companies. In addition, results of operations of the combined company
will include results of El Paso and Sonat for the entire fiscal year in which
the merger occurs. The historical reported net income or loss of El Paso and
Sonat for prior periods will be combined and restated as net income or loss of
El Paso after addressing any accounting conformity issues. See "Financial
Information."
If the merger is completed under the alternative merger structure, it will
be accounted for as a purchase for accounting and financial reporting purposes.
Under this method of accounting, El Paso's historical results for periods before
the merger will remain unchanged. On the date of the merger, the combined
company will record Sonat's assets and liabilities on its books based on the
estimated fair values when the merger is completed.
DESCRIPTION OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material United States federal income
tax consequences of the merger. Our description is not a comprehensive
description of all of the tax consequences that may be relevant to you. For
example, we have not described tax consequences that arise from rules that apply
generally to all taxpayers or to some classes of taxpayers. We have also not
described tax consequences that are generally assumed to be known by investors.
Our description is based upon the Internal Revenue Code, the regulations of the
United States Treasury Department and court and administrative rulings and
decisions in effect on the date of this joint proxy statement/prospectus. These
laws may change, possibly retroactively, and any change could affect the
continuing validity of this discussion.
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We assume that stockholders hold their shares of Sonat common stock as a
capital asset and do not address the tax consequences that may be relevant to a
particular stockholder receiving special treatment under some United States
federal income tax laws. Stockholders receiving this special treatment include:
- banks;
- tax-exempt organizations;
- insurance companies;
- dealers in securities or foreign currencies;
- Sonat stockholders who received their Sonat common stock through the
exercise of employee stock options or otherwise as compensation;
- Sonat stockholders who are not U.S. persons; and
- Sonat stockholders who held Sonat common stock as part of a hedge,
straddle or conversion transaction.
We do not address any consequences arising under the laws of any state,
locality or foreign jurisdiction.
Neither El Paso nor Sonat has requested or will request an advance ruling
from the Internal Revenue Service as to the tax consequences of the merger. It
is a condition to the merger that each of Sonat and El Paso receive a tax
opinion from its tax counsel that the merger or the alternative merger as
applicable, qualifies as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code. The opinions will be based on customary
assumptions and factual representations and will assume that the merger or the
alternative merger structure, as applicable, will be completed according to the
terms of the merger agreement. Assuming that the merger, or the alternative
merger structure, as applicable, is a reorganization, neither El Paso nor Sonat
will recognize a tax gain or loss as a result. The following discussion of
United States federal income tax consequences of the merger and the alternative
merger assumes that each, if completed, will qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code for United States
federal income tax purposes.
Merger. If we complete the merger:
- no gain or loss will be recognized by the stockholders of Sonat who
exchange their Sonat common stock solely for El Paso common stock;
- the tax basis of the El Paso common stock received by Sonat stockholders
who exchange all of their Sonat common stock for El Paso common stock in
the merger will be the same as the tax basis of the Sonat common stock
surrendered in exchange; and
- the holding period of the El Paso common stock received will include the
holding period of shares of Sonat common stock surrendered in exchange.
Alternative Merger Structure. If we complete the merger under the
alternative merger structure, the consequences will generally be the same as
those described above, with the following qualifications:
- if a Sonat stockholder receives cash instead of a fractional share of El
Paso common stock or a fractional depositary share, the cash amount will
be treated as received in exchange for the fractional share; and gain or
loss will be recognized as a result of that exchange equal to the
difference between the cash amount received for the fractional share and
the portion of the holder's tax basis in shares of Sonat common stock
allocable to the fractional share; and
- the aggregate tax basis of the El Paso common stock and the depositary
shares received by Sonat stockholders in the merger will be the same as
the tax basis of the Sonat common stock exchanged, decreased by the basis
of any fractional share interest for which cash is received; the
aggregate tax
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basis will be allocated proportionally between the El Paso common stock
and the depositary shares received based on their relative fair market
values at the time the merger is completed.
In addition, former Sonat stockholders will not recognize gain or loss upon
receipt of El Paso common stock in exchange for depositary shares if the
exchange occurs as contemplated by the terms of the senior voting preferred
stock underlying the depositary shares. See "Description of Senior Cumulative
Exchangeable Preferred Stock and Depositary Shares." The tax basis of the shares
of El Paso common stock received in such an exchange will be the same as the tax
basis of the depositary shares exchanged and the holding period of the El Paso
common stock received will include the holding period of the depositary shares.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
EACH SONAT STOCKHOLDER WILL DEPEND ON THE FACTS OF THAT STOCKHOLDER'S SITUATION.
SONAT STOCKHOLDERS ARE ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS
AND THE EFFECT OF ANY PROPOSED CHANGE IN THE TAX LAWS.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Antitrust. Under the HSR Act, we cannot complete the merger until we have
given notification and furnished information relating to the operations of the
parties and the industries in which they operate to the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice and a
specified waiting period expires or is terminated. El Paso and Sonat both filed
notification and report forms under the HSR Act with the Federal Trade
Commission and the Antitrust Division of the United States Department of Justice
on April 2, 1999. Even after the waiting period expires or is terminated, the
Federal Trade Commission and the Antitrust Division retain the authority to
challenge the merger on antitrust grounds, before or after the merger is
completed. In addition, each state in which El Paso or Sonat operates may also
seek to review the merger. It is possible that some of these authorities or a
private party may seek to challenge the merger.
FERC Approval. We both currently operate subsidiary companies that are
engaged in the wholesale marketing of power and are considered to be "public
utilities" under the Federal Power Act for some purposes. Accordingly, under the
Federal Power Act, the FERC has the authority to review the proposed merger to
determine if it is in the public interest. On , 1999, we filed a joint
application with the FERC for approval of the merger.
In its consideration of prior applications, the FERC has considered the
effect of the proposed combination on the ability and incentive of the merged
companies to adversely affect competition in power markets. The FERC has, in
some cases, imposed conditions on its approval of a merger. Even if it approves
the merger, the FERC will have continuing jurisdiction over the combined
company's power marketing business to affect the rates, terms and conditions of
its service and to affect its dealings with affiliates.
Obligations to Obtain Regulatory Approvals. Under the merger agreement, we
have both agreed to use our "reasonable best efforts" to take all actions to
obtain all material regulatory and governmental approvals necessary to complete
the merger and to address concerns of regulators and governmental officials.
Addressing these concerns could require that we sell portions of our businesses
or restrict the dealings between our pipeline subsidiaries and our electric
power marketing subsidiary. Neither El Paso nor Sonat is required under the
merger agreement to sell any portion of its business or take any other action to
address concerns of regulators if the result would reasonably be expected to be
materially adverse to the business, financial condition or results of operations
of the combined company after the merger. El Paso is also not required to take
actions that would reasonably be expected to be materially adverse to Tennessee
Gas Pipeline Company, a subsidiary of El Paso.
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Injunctions. Our obligation to complete the merger is subject to the
condition that there be no law or injunction in effect that would prohibit the
completion of the merger. We have each agreed to use our "reasonable best
efforts" to have any such law or injunction lifted or vacated.
Other Regulatory Approvals. El Paso conducts business outside the United
States. Although the merger does not require notification to or approval of
regulatory authorities outside the United States, those regulatory authorities
could seek to challenge the merger. We do no expect the closing of the merger to
be delayed by any such challenge.
NO APPRAISAL RIGHTS
Both El Paso and Sonat are organized under Delaware law. Under Delaware
law, neither El Paso's nor Sonat's stockholders have a right to dissent and
receive the appraised value of their shares in connection with the merger, even
if the merger is completed under the alternative merger structure.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
This joint proxy statement/prospectus does not cover any resales of the El
Paso common stock to be received by Sonat stockholders in the merger, and no
person is authorized to make any use of this joint proxy statement/prospectus in
connection with any such resale.
All shares of El Paso common stock received by Sonat stockholders in the
merger will be freely transferable, except that shares of El Paso common stock
received by persons who are deemed to be "affiliates" of Sonat under the
Securities Act of 1933 at the time of El Paso's special meeting may resell those
shares only in transactions permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be affiliates of
Sonat for those purposes generally include individuals or entities that control,
are controlled by, or are under common control with, Sonat, and would not
include stockholders who are not executive officers, directors or significant
stockholders of Sonat.
The merger agreement requires Sonat not less than 45 days prior to the
closing date to deliver to El Paso a letter identifying all persons who may be,
as of the date the merger agreement is submitted for approval by Sonat
stockholders, affiliates of Sonat and use reasonable best efforts to cause each
person who is identified as an affiliate in the letter to deliver to El Paso and
Sonat, at least 30 days before the completion of the merger, an executed letter
agreement to the effect that the affiliate will not offer, sell or otherwise
dispose of any of the shares of El Paso common stock issued to that affiliate in
the merger or otherwise owned or acquired by that affiliate:
(1) for a period beginning 30 days prior to the completion of the
merger and continuing until results covering at least 30 days of
post-merger combined operations of El Paso and Sonat have been publicly
filed by El Paso; or
(2) in violation of the Securities Act.
The merger agreement also requires El Paso not less than 45 days prior to
the closing date to deliver to Sonat a letter identifying all persons who may
be, as of the date the merger agreement submitted for approval by El Paso's
stockholders, affiliates of El Paso and use reasonable best efforts to cause
each person who is identified as an affiliate in the letter described above to
deliver to Sonat and El Paso, at least 30 days prior to the merger, an executed
letter agreement from each affiliate of El Paso to the effect that the affiliate
will not offer, sell or otherwise dispose of any shares of El Paso common stock
owned or acquired by that affiliate during the period described in clause (1) of
the prior sentence.
The restrictions referred to in clause (1) above will not be applicable to
either Sonat or El Paso affiliates if the merger is completed under the
alternative merger structure.
In the merger agreement, El Paso has agreed to use reasonable best efforts
to make publicly available, within 30 days after the first month after the
completion of the merger in which there at least 30 days of
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post-merger combined operations of Sonat and El Paso, combined sales and net
income figures for the combined company.
AMENDMENT TO EL PASO'S BY-LAWS.
In accordance with the requirements of the merger agreement and in
connection with the merger or the alternative merger, El Paso's board intends to
amend El Paso's by-laws to require that any stockholder wishing to nominate
candidates for election as directors at El Paso's annual stockholders' meeting
or to bring other business before the meeting must notify El Paso between 120
and 90 days before the anniversary of the prior year's annual meeting. Under El
Paso's current by-laws stockholders must provide notice between 90 and 60 days
before the anniversary of the prior years annual meeting.
El Paso's board also intends, if the merger is completed, to amend El
Paso's by-laws to eliminate the rights of the Chairman currently provided for in
El Paso's by-laws and to provide that those rights be rights of the Chief
Executive Officer. This amendment is intended to allow William A. Wise, who is
currently the Chairman, President and Chief Executive Officer of El Paso and who
will be President and Chief Executive Officer of El Paso after completion of the
merger, to continue to have the rights and responsibilities his current position
has.
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OPINIONS OF FINANCIAL ADVISORS
OPINION OF FINANCIAL ADVISOR TO EL PASO
El Paso asked Donaldson, Lufkin & Jenrette (DLJ), in its role as financial
advisor to El Paso, to render an opinion to the El Paso board as to the fairness
to El Paso, from a financial point of view, of the exchange ratio in the merger,
and of the consideration to be paid by El Paso under the alternative merger
structure. On March 12, 1999, DLJ delivered to the El Paso board its oral
opinion to the effect that, as of such date, the exchange ratio and the
consideration to be paid by El Paso, in each case, was fair to El Paso from a
financial point of view. This opinion was subsequently confirmed in the written
DLJ opinion to the effect that, as of March 13, 1999, and based on and subject
to the assumptions, limitations and qualifications set forth in such opinion,
the exchange ratio and the consideration to be paid by El Paso, in each case,
was fair from a financial point of view.
The full text of the DLJ opinion is attached as Annex D to this joint proxy
statement/prospectus. The summary of the DLJ opinion set forth in this joint
proxy statement/prospectus is qualified in its entirety by reference to the full
text of the DLJ opinion. El Paso stockholders are urged to read the DLJ opinion
carefully and in its entirety for the procedures followed, assumptions made,
other matters considered and limits of the review by DLJ in connection with such
opinion.
The DLJ opinion was prepared for the El Paso board and was directed only to
the fairness to El Paso from a financial point of view, as of the date thereof,
of the exchange ratio in the merger and the consideration to be paid by El Paso
under the alternative merger structure. DLJ expressed no opinion in the DLJ
opinion as to the prices at which El Paso common stock would actually trade at
any time. The DLJ opinion did not address the relative merits of the merger or
the alternative merger, as the case may be, and the other business strategies
considered by the El Paso board nor did it address the El Paso board's decision
to proceed with the merger or the alternative merger, as the case may be. The
DLJ opinion did not constitute a recommendation to any El Paso stockholder as to
how such stockholder should vote on the merger.
El Paso selected DLJ as its financial advisor because DLJ is an
internationally recognized investment banking firm that has substantial
experience in the natural gas industry and is familiar with El Paso and its
businesses. DLJ was not retained as an advisor or agent to the stockholders of
El Paso or any other person. As part of its investment banking business, DLJ is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. El Paso did not impose any restrictions or limitations upon DLJ with
respect to the investigations made or the procedures followed by DLJ in
rendering the DLJ opinion.
In arriving at the DLJ opinion, DLJ reviewed the merger agreement and the
exhibits thereto, including the form of certificate of designation for the
Senior Cumulative Exchangeable Preferred Stock of El Paso, as well as financial
and other information that was publicly available or furnished to DLJ by El Paso
and Sonat, including information provided during discussions with their
respective managements. Included in the information provided during such
discussions were certain financial projections of El Paso prepared by the
management of El Paso and certain financial projections of Sonat prepared by the
management of Sonat. In addition, DLJ compared certain financial and securities
data of El Paso and Sonat with publicly available information concerning various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of El Paso common stock and Sonat
common stock, reviewed prices paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of rendering the DLJ opinion.
In rendering the DLJ opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by El Paso, Sonat, their
respective representatives, or that was otherwise reviewed by DLJ. In
particular, DLJ relied upon the estimates of the management of El Paso of the
operating synergies in the form of cost
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<PAGE> 52
savings achievable as a result of the merger or the alternative merger, as the
case may be, and upon DLJ's discussion of such synergies with the management of
El Paso. With respect to the financial projections supplied to DLJ, DLJ assumed
that they were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of El Paso and Sonat as to
the future operating and financial performance of El Paso and Sonat. In that
regard, El Paso's financial forecasts for the combined company in the case of
the alternative merger assumed, among other things, that El Paso would issue up
to $3.55 billion in a combination of new El Paso common stock and new debt to
retire the depositary shares to be issued as part of the consideration in the
alternative merger. DLJ did not assume responsibility for making any independent
evaluation of the assets or liabilities, or for making any independent
verification of the information reviewed by DLJ. DLJ relied as to all legal
matters, including that the merger or the alternative merger, as the case may
be, will be free of federal income tax consequences to El Paso, on advice of
counsel to El Paso. With the consent of the El Paso board, in arriving at its
opinion with respect to the consideration to be paid by El Paso in the
alternative merger, DLJ assumed that the average of the closing prices per share
of El Paso common stock over the ten trading days immediately preceding the
second trading day before the special meeting of the Sonat stockholders would be
no more than $38.69, which was the closing price per share of El Paso common
stock on March 11, 1999, and DLJ expressed no opinion at any greater price. DLJ
further assumed that the merger, unless completed under the alternative merger
structure, will be accounted for as a pooling of interests under generally
accepted accounting principles.
Further, in rendering its opinion, DLJ assumed that obtaining the necessary
regulatory and governmental approvals for the merger or the alternative merger,
as the case may be, would not significantly delay consummation of the merger or
the alternative merger, as the case may be, and that, in the course of obtaining
such approvals, no restriction would be imposed that would have a material
adverse effect on the contemplated benefits of the merger or the alternative
merger, as the case may be.
The DLJ opinion was necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of the DLJ opinion. The DLJ opinion states that, although
subsequent developments may affect the DLJ opinion, DLJ does not have any
obligation to update, revise or reaffirm its opinion.
The following is a summary of the presentation made by DLJ to the El Paso
board at its March 12, 1999 meeting in connection with rendering the DLJ
opinion. Unless otherwise specified, references to cost savings below assume
that El Paso will realize $60 million of annual pre-tax cost savings in 1999, on
a pro forma basis as if the merger or the alternative merger, as the case may
be, occurred on January 1, 1999, and $60 million, of pre-tax cost savings in
2000, with annual pre-tax savings expected to increase thereafter through 2003.
Relative Price Performance. DLJ examined the history of the daily closing
prices per share of El Paso common stock and Sonat common stock for the 2-year
period ended March 11, 1999. DLJ also reviewed the daily closing prices per
share of El Paso common stock and Sonat common stock during the 1-year period
ended March 11, 1999 in relation to each other and to a composite index
comprising selected publicly traded natural gas companies.
Discounted Cash Flow Analysis. DLJ performed a DCF analysis of Sonat and El
Paso using projections and assumptions provided by the management of Sonat and
El Paso, respectively, excluding anticipated cost savings. DCF is defined as
discounted cash flow. The DCF for Sonat's operations other than its exploration
and production operations was estimated using discount rates ranging from 8% to
10% and estimated terminal multiples in year 2003 of EBITDA ranging from 9.5x to
11.5x. EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization. For Sonat's exploration and production
operations, the present value of the future cash flows was estimated using
discount rates ranging from 8% to 12%, and such cash flows were risk adjusted
according to reserve and asset category. Reserve and asset category risks were
assigned weightings as follows: proved reserves, 85%-100% of present value;
probable reserves, 40% of present value; possible reserves, 10% of present
value; exploration acreage,
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<PAGE> 53
90% of estimated market value; and seismic library, 80% of estimated replacement
cost. For Sonat's exploration and production operations, DLJ assumed the
following commodity prices:
<TABLE>
<CAPTION>
1999 2000 2001 THEREAFTER
------ ------ ------ ----------------
<S> <C> <C> <C> <C>
Natural Gas (dollars per thousand
cubic feet)....................... $ 1.98 $ 2.20 $ 2.23 3% growth with a
$3.50 cap
Oil (dollars per barrel)............ $12.85 $14.82 $16.10 3% growth with a
$25.00 cap
</TABLE>
The DCF for El Paso was estimated using discount rates ranging from 8.5% to
10.5% and estimated terminal multiples in year 2003 of EBITDA ranging from 8.0x
to 10.0x. Based on 110.2 million shares of Sonat common stock outstanding,
calculated using the treasury stock method, this analysis yielded estimated per
share equity values for Sonat, ranging from approximately $29.43 to $42.26,
compared to a closing price per share of El Paso common stock on March 11, 1999
of $38.69. This analysis also yielded implied exchange ratios ranging from 0.91x
to 1.09x (obtained by comparing the highest estimated valuation of Sonat common
stock to the highest estimated valuation of El Paso common stock and the lowest
estimated valuation of Sonat common stock to the lowest estimated valuation of
El Paso common stock), compared to the proposed exchange ratio of 1.0x.
In addition, DLJ performed a DCF analysis of the combined company, giving
effect to anticipated cost savings and pre-tax equity plan adjustments of $43
million in 1999 and $57 million in 2000, and compared such valuation analysis to
the El Paso DCF analysis on a stand-alone basis. The DCF for the combined
company was estimated using discount rates ranging from 8.25% to 10.25% and
estimated terminal multiples in year 2003 of EBITDA ranging from 8.5x to 10.5x.
Based on a pro forma 233.7 million shares of El Paso common stock outstanding,
calculated using the treasury stock method, this analysis yielded estimated per
share equity values for the combined company ranging from approximately $34.41
to $51.69, representing estimated values ranging from 11% to 27% higher than the
estimated per share equity values for El Paso in the El Paso DCF analysis on a
stand-alone basis.
Comparable Public Trading Analysis. DLJ compared selected historical and
projected operating information (excluding anticipated cost savings), stock
market data and financial ratios for each of El Paso and Sonat to the same data
for selected publicly traded companies in the natural gas and exploration and
production industries. The natural gas companies were:
1. Enron Corp.;
2. The Williams Companies, Inc.;
3. The Coastal Corporation; and
4. Columbia Energy Group.
The exploration and production companies were:
1. Burlington Resources Inc.;
2. Enron Oil & Gas Company;
3. Apache Corporation; and
4. Noble Affiliates, Inc.
DLJ analyzed the enterprise value of each of the natural gas companies and
each of the exploration and production companies measured as a multiple of
selected financial data. Enterprise value was calculated as equity value plus
total debt plus the liquidation value of preferred stock, if any, plus the value
of minority interests, if any, minus cash and short-term investments. DLJ also
analyzed the stock price of each of the natural gas companies and each of the
exploration and production companies using the
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<PAGE> 54
stock prices as of March 11, 1999, measured as a multiple of selected financial
data. DLJ also reviewed stock market data and financial ratios for Consolidated
Natural Gas Company and K N Energy, Inc., but excluded this information from its
analysis because both Consolidated Natural Gas Company and K N Energy, Inc. had
previously announced business combinations.
In examining the natural gas companies, DLJ analyzed the enterprise value
of the companies as a multiple of projected 1998, 1999 and 2000 EBITDA. DLJ also
analyzed the stock price of the natural gas companies as a multiple of projected
1998, 1999 and 2000 EPS. EPS is defined as earnings per share of common stock.
All data relating to the natural gas companies was derived from publicly
available sources and from DLJ research. DLJ's analysis of the natural gas
companies yielded the following ranges:
<TABLE>
<CAPTION>
1998 EBITDA 1999 EBITDA 2000 EBITDA 1998 EPS 1999 EPS 2000 EPS
----------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
High.................. 15.3x 12.2x 11.5x 46.5x 34.5x 26.1x
Low................... 8.1x 7.5x 7.0x 15.9x 14.2x 12.9x
</TABLE>
In examining the exploration and production companies, DLJ analyzed the
enterprise value of the companies as a multiple of reserves and also analyzed
the stock price of the companies as a multiple of projected 1999 and 2000 CFPS.
CFPS is defined as cash flow per share of common stock. All data relating to the
exploration and production companies was derived from publicly available
sources, from DLJ research and from First Call estimates. DLJ's analysis of the
exploration and production companies yielded the following ranges:
<TABLE>
<CAPTION>
RESERVES 1999 CFPS 2000 CFPS
------------------------ --------- ---------
(IN DOLLARS PER THOUSAND
CUBIC FEET EQUIVALENT)
<S> <C> <C> <C>
High......................................... $1.06 8.9x 6.7x
Low.......................................... $0.64 5.6x 4.2x
</TABLE>
Based on the foregoing data and on projections for El Paso provided by the
management of El Paso and for Sonat provided by the management of Sonat,
excluding anticipated cost savings, this analysis yielded estimated per share
equity values for Sonat ranging from approximately $30.68 to $42.23, compared to
a closing price per share of El Paso common stock on March 11, 1999 of $38.69.
This analysis also yielded implied exchange ratios ranging from 1.01x to 1.08x
(obtained by comparing the highest estimated valuation of Sonat common stock to
the highest estimated valuation of El Paso common stock and the lowest estimated
valuation of Sonat common stock to the lowest estimated valuation of El Paso
common stock), compared to the proposed exchange ratio of 1.0x.
Comparable Transaction Analysis. DLJ reviewed seven selected acquisitions
and pending acquisitions involving natural gas companies:
1. El Paso Natural Gas Company (d/b/a El Paso Energy
Corporation)/Tenneco Inc.'s energy business;
2. Houston Industries Incorporated/NorAm Energy Corp.;
3. Duke Power Company/PanEnergy Corp.;
4. K N Energy, Inc./Midcon Corp. (subsidiary of Occidental Petroleum
Corporation);
5. CMS Energy Corporation/PanEnergy Corp.;
6. Sempra Energy/K N Energy, Inc.; and
7. Dominion Resources, Inc./Consolidated Natural Gas Company.
DLJ reviewed eight selected acquisitions involving exploration and
production companies:
1. Santa Fe Energy Resources, Inc./Snyder Oil Corporation;
2. Seagull Energy Corporation/Ocean Energy, Inc.;
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<PAGE> 55
3. Kerr-McGee Corporation/Oryx Energy Company;
4. Ocean Energy, Inc./United Meridian Corporation;
5. Sonat Inc./Zilkha Energy Company;
6. Burlington Resources, Inc./The Louisiana Land & Exploration
Company;
7. Noble Affiliates, Inc./Energy Development Corporation; and
8. Union Pacific Resources Company/Amax Oil and Gas.
In examining the natural gas transactions, DLJ analyzed, among other
things, the enterprise value of the acquired company implied by each of these
transactions as a multiple of LTM EBITDA and LTM EBIT. LTM is defined as last
reported twelve months. EBIT is defined as earnings before interest expense and
income taxes. DLJ also analyzed the equity value of the acquired company as a
multiple of net income. DLJ's analysis of the natural gas transactions yielded
the following ranges:
<TABLE>
<CAPTION>
LTM
LTM EBITDA LTM EBIT EARNINGS
---------- -------- --------
<S> <C> <C> <C>
High.......................................... 11.4x 17.1x 23.4x
Low........................................... 7.9x 11.9x 20.0x
</TABLE>
In examining the exploration and production transactions, DLJ analyzed,
among other things, the enterprise value of the acquired company implied by each
of these transactions as a multiple of LTM EBITDA and reserves, and the equity
value of the acquired company as a multiple of LTM CFFO. CFFO is defined as cash
flow from operations. DLJ's analysis of the exploration and production
transactions yielded the following ranges:
<TABLE>
<CAPTION>
LTM EBITDA LTM EBIT LTM CFFO
---------- -------- --------
(IN DOLLARS PER THOUSAND
CUBIC FEET EQUIVALENT)
<S> <C> <C> <C>
High.......................................... 9.1x $2.93 8.8x
Low........................................... 3.7x $0.81 3.4x
</TABLE>
Based on the foregoing data and on projections for Sonat provided by the
management of Sonat, excluding synergies, this analysis yielded estimated per
share equity values for Sonat ranging from approximately $34.50 to $44.89,
compared to a closing price per share of El Paso common stock on March 11, 1999
of $38.69. This analysis yielded implied exchange ratios ranging from 1.04x to
1.23x (obtained by comparing the highest estimated valuation of Sonat common
stock to the highest estimated valuation of El Paso common stock, and the lowest
estimated valuation of Sonat common stock to the lowest estimated valuation of
El Paso common stock), compared to the proposed exchange ratio for the all
common stock merger of 1.0x. The foregoing implied exchange ratios were obtained
using a range of estimated per share equity values for Sonat derived from the
comparable transaction analysis and a range of estimated per share equity values
of El Paso derived from the comparable public trading analysis.
Contribution Analysis. DLJ analyzed the relative contributions of El Paso
and Sonat to the pro forma combined company based on selected financial data,
assuming no anticipated cost savings. DLJ compared the relative contribution of
El Paso to certain financial data for the pro forma combined company, including
the following:
1. projected CFFO for each year from 1998 through 2003;
2. projected net income for each year from 1998 through 2003; and
3. projected book value as of December 31 of each year from 1998
through 2003.
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<PAGE> 56
In each case, the financial data for the pro forma combined company,
excluding anticipated cost savings, was determined by adding the financial data
for El Paso and Sonat. This analysis yielded implied exchange ratios ranging
from 0.48x to 1.05x, compared to the proposed exchange ratio of 1.0x.
Pro Forma Combined Accretion/Dilution Analysis -- Merger. Using the
projected earnings of El Paso for the years 1999 and 2000 and the projected
earnings of Sonat for the same years, DLJ compared the projected EPS and CFPS of
El Paso on a stand-alone basis to the projected pro forma EPS and CFPS of the
combined company after the merger. This analysis assumed pre-tax net equity plan
adjustments of $43 million in 1999 and $57 million in 2000 associated with early
vesting of certain incentive compensation plans in accordance with their
pre-existing terms.
This analysis showed that with anticipated cost savings, the merger would
be dilutive in 1999 and accretive in 2000 to holders of El Paso common stock and
that without anticipated cost savings, the merger would be dilutive to the EPS
of holders of El Paso common stock in both years. This analysis further showed
that both with and without anticipated cost savings, the merger would be
dilutive to the CFPS of holders of El Paso common stock through 2000.
Pro Forma Combined Accretion/Dilution Analysis -- Alternative Merger. Using
the projected earnings of El Paso for the years 1999 and 2000 and the projected
earnings of Sonat for the same years, DLJ compared the EPS and CFPS of El Paso
on a stand-alone basis to the projected pro forma EPS and CFPS of the combined
company after the alternative merger. This analysis assumed pre-tax net equity
plan adjustments of $43 million in 1999 and $57 million in 2000 associated with
early vesting of certain incentive compensation plans in accordance with their
pre-existing terms.
Taking into account El Paso's planned issuance of up to $3.55 billion in a
combination of new common stock and new debt to exchange shares of El Paso
common stock for senior voting preferred stock underlying the depositary shares,
and/or purchase in the open market the depositary shares, that would be issued
as part of the consideration in the alternative merger, which is referred to
below as the Recapitalization, this analysis showed that both with and without
anticipated cost savings, the alternative merger would be dilutive to the EPS of
holders of El Paso common stock through 2000. Assuming El Paso were to effect
the Recapitalization, this analysis showed that with anticipated cost savings,
the alternative merger would be accretive immediately to the CFPS of holders of
El Paso common stock, and that without anticipated cost savings, the alternative
merger would be dilutive to the CFPS of holders of El Paso common stock in 1999
and accretive in 2000.
Historical Exchange Ratio Analysis. DLJ reviewed the historical exchange
ratios implied by the daily closing prices per share of El Paso common stock to
those of Sonat common stock for the period beginning on March 11, 1998 and
ending on March 11, 1999. This analysis showed that the average historical
exchange ratios during the period ending on March 11, 1999 were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 11, 1999 IMPLIED HISTORICAL EXCHANGE RATIO
--------------------------- ---------------------------------
<S> <C>
1 year.................................................... 0.95x
6 months.................................................. 0.83x
3 months.................................................. 0.78x
2 months.................................................. 0.76x
1 month................................................... 0.72x
</TABLE>
This analysis also showed that on February 19, 1999, the last trading date
prior to the announcement of the Dominion Resources, Inc./Consolidated Natural
Gas Company and the Sempra Energy/ K N Energy, Inc. transactions, the exchange
ratio was 0.75x, and that for the 1-week and 1-day periods prior to March 11,
1999, the average historical exchange ratio was 0.70x.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ but describes, in summary form, the material
elements of the presentation made by DLJ to the El Paso board on March 12, 1999.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of these methods to
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<PAGE> 57
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the transaction and
to add to the total mix of information available. DLJ did not form a conclusion
as to whether any individual analysis, considered in isolation, supported or
failed to support an opinion as to fairness from a financial point of view.
Rather, in reaching its conclusion, DLJ considered the results of the analyses
in light of each other and ultimately reached its opinion based on the results
of all analyses taken as a whole. DLJ did not place any particular reliance or
weight on any individual analysis, but instead concluded that its analyses,
taken as a whole supported its determination. Accordingly, notwithstanding the
separate factors summarized above, DLJ has indicated to El Paso that it believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying its opinion. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement agreement dated March 13, 1999, El
Paso (1) has paid DLJ (a) a retainer fee of $250,000, (b) $2 million in
connection with the signing of the merger agreement and (c) $1 million in
connection with the delivery by DLJ of its opinion, and (2) will pay an
additional fee equal to twenty-two basis points (0.22%) of the aggregate value
of outstanding common stock of Sonat on the last date prior to the consummation
of the merger or the alternative merger, as the case may be, plus the amount of
any debt assumed, acquired, remaining outstanding, retired or defeased or
preferred stock redeemed or remaining outstanding in connection with the merger
or the alternative merger, as the case may be, upon consummation of the merger
or the alternative merger, as the case may be. The fee previously paid to DLJ as
described in clause (l) of the first sentence of this paragraph will be deducted
from any fee to which DLJ is entitled upon consummation of the merger, the
alternative merger or other business combination. El Paso has also agreed that
if the merger, the alternative merger or similar transaction is not consummated
and El Paso receives a termination fee, El Paso will pay DLJ the lesser of ten
percent (10%) of such termination fee and $7 million in cash upon El Paso's
receipt of the termination fee. Any fees previously paid to DLJ pursuant to the
engagement agreement will be deducted from any fee to which DLJ is entitled
pursuant to the preceding sentence. In addition, El Paso agreed to reimburse
DLJ, upon request by DLJ from time to time, for all out-of-pocket expenses
(including the reasonable fees and expenses of counsel) incurred by DLJ in
connection with its engagement thereunder and to indemnify DLJ and certain
related persons against certain liabilities in connection with its engagement,
including liabilities under United States federal securities laws. DLJ and El
Paso negotiated the terms of the fee arrangement.
In the ordinary course of business, DLJ and its affiliates may own or
actively trade the securities of El Paso and Sonat for their own accounts and
for the accounts of their customers and, accordingly, may at any time hold a
long or short position in El Paso or Sonat securities. DLJ, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for El Paso in the past, including (1)
acting as lead manager in a $150 million offering of El Paso common stock in
1997; (2) acting as lead manager in a $325 million offering of preferred
securities for a trust subsidiary of El Paso in 1998; (3) acting as lead manager
in a $900 million debt offering and a $400 million debt offering for Tennessee
Gas Pipeline Company, a subsidiary of El Paso, in 1997 and 1998, respectively;
(4) acting as financial advisor to El Paso in the sale of a 49% interest in
Viosca Knoll Gathering Company to Leviathan Gas Pipeline Partners, L.P. for $85
million expected to close in the second quarter of 1999; and (5) acting as
financial advisor to El Paso in the purchase of EnCap Investments L.C. for $52
million in 1999. DLJ has received usual and customary compensation for its past
services for El Paso.
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<PAGE> 58
OPINION OF FINANCIAL ADVISOR TO SONAT
Merrill Lynch has acted as financial advisor to Sonat in connection with
the merger and has assisted the Sonat Board in its examination of the fairness,
from a financial point of view to Sonat, of the consideration to be received by
Sonat stockholders in the merger or the alternative merger.
On March 13, 1999, Merrill Lynch delivered its oral opinion to the Sonat
board, subsequently confirmed in writing in the Merrill Lynch fairness opinion,
that, as of that date and based upon and subject to the matters stated in the
fairness opinion, the consideration to be received by Sonat stockholders in the
merger or the alternative merger was fair to such stockholders from a financial
point of view.
The full text of the Merrill Lynch fairness opinion, which sets forth the
assumptions made, matters considered and limitations on review undertaken, is
attached as Annex E and is incorporated by reference in this joint proxy
statement/prospectus. Merrill Lynch's opinion is directed to the Sonat board and
addresses only the fairness of the consideration from a financial point of view.
It does not address any other aspect of the merger or any related transaction
and does not constitute a recommendation to any holder of Sonat common stock as
to how the holder should vote at the Sonat special meeting. The summary of the
Merrill Lynch fairness opinion set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion.
In connection with its opinion, Merrill Lynch, among other things:
- Reviewed historical and publicly available business and financial
information relating to Sonat and El Paso that it deemed to be relevant;
- Reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of Sonat
and El Paso, furnished to it by Sonat and El Paso;
- Conducted discussions with members of senior management of Sonat and El
Paso concerning their respective businesses and prospects;
- Reviewed the historical market prices and trading activity for the common
stock of Sonat and El Paso and compared them with that of publicly traded
companies which it deemed to be reasonably similar to Sonat or El Paso,
respectively;
- Compared the results of operations of Sonat and El Paso with that of
companies which it deemed to be reasonably similar to Sonat or El Paso,
respectively;
- Compared the proposed financial terms of the merger with the financial
terms of other mergers and acquisitions which it believed to be relevant;
- Reviewed a draft of the merger agreement dated March 13, 1999; and
- Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as it
deemed necessary, including its assessment of general economic, market
and monetary conditions.
In connection with its review, Merrill Lynch did not assume any
responsibility for independent verification of any of the information provided
to or otherwise reviewed by it and assumed and relied upon the accuracy and
completeness of all such information. With respect to the financial forecasts,
Merrill Lynch assumed that such forecasts were reasonably prepared and reflect
the best currently available estimates and judgments of the managements of Sonat
and El Paso as to the future financial performance of Sonat and El Paso,
respectively. In addition, Merrill Lynch did not make an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of Sonat or
El Paso, nor was Merrill Lynch furnished with any such evaluations or
appraisals. Merrill Lynch further assumed that each of the merger and the
alternative merger will qualify as a tax free reorganization for United States
federal income tax purposes and the merger will be accounted for as a pooling of
interests and the alternative merger will be accounted for as a purchase under
generally accepted accounting principles. With respect to the estimates of
potential cost savings furnished by Sonat and El Paso, Merrill Lynch assumed
that such estimates have
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<PAGE> 59
been reasonably prepared and reflect the best currently available estimates and
judgments of the management of Sonat and El Paso as to the expected cost savings
of the merger. During the March 13, 1999 meeting with the Sonat board of
directors, Merrill Lynch advised the board of directors that it had assumed that
in the course of obtaining the necessary regulatory or other consents or
approvals (contractual or otherwise) for the merger, no restrictions, including
any divestiture requirements or amendments or modifications, would be imposed
that would have a material adverse effect on the contemplated benefits of the
merger.
In expressing its opinion with respect to the fairness of the consideration
to be received by the holders of the shares other than El Paso and its
affiliates in the alternative merger, Merrill Lynch has considered the benefit
bestowed on the Company and its stockholders by the existence of the alternative
merger in the event the stockholders of El Paso do not approve the merger.
Merrill Lynch's opinion was necessarily based on information available to
it and on market, economic and other conditions as they existed and could be
evaluated on the date of its opinion. Merrill Lynch did not address the merits
of the underlying decision by Sonat to engage in the merger. Merrill Lynch
expressed no opinion as to what the value of El Paso common stock actually would
be when issued to the holders of Sonat common stock pursuant to the merger or
the prices at which El Paso common stock would trade subsequent to the merger.
Although Merrill Lynch evaluated the consideration to be received by the holders
of Sonat common stock from a financial point of view, Merrill Lynch was not
requested to, and did not, recommend the specific consideration payable in the
merger.
In preparing its opinion for the Sonat board, Merrill Lynch performed a
variety of financial and comparative analyses, including those described below.
The summary of analyses performed by Merrill Lynch as set forth below is not a
complete description of the analyses underlying Merrill Lynch's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial or summary description. No company, business or transaction used in such
analyses as a comparison is identical to El Paso, Sonat or the merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather, it
involves complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities are not
appraisals and may not reflect the prices at which businesses, companies or
securities actually may be sold. Accordingly, these analyses and estimates are
inherently subject to substantial uncertainty.
In arriving at its opinion, Merrill Lynch made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create an incomplete view of the
processes underlying such analyses and its opinion. In its analyses, Merrill
Lynch made numerous assumptions with respect to El Paso, Sonat, industry
performance, and regulatory, general business, economic, market and financial
conditions, as well as other matters, many of which are beyond the control of El
Paso and Sonat, and involve the application of complex methodologies and
educated judgment.
The following is a summary of the material financial and comparative
analyses performed by Merrill Lynch in arriving at its March 13, 1999 opinion
and presented to the Sonat board. Merrill Lynch derived implied values per share
for Sonat common stock based upon the values suggested by these analyses, in
light of the judgment and experience of Merrill Lynch. The Merrill Lynch opinion
is based upon Merrill Lynch's consideration of the collective results of all
such analyses, together with the other factors referred to in its opinion
letter.
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Exchange ratio analysis. In the merger, each outstanding share of Sonat
common stock will be converted into the right to receive 1.00 shares of El Paso
common stock. Merrill Lynch compared this exchange ratio to each range of
implied exchange ratios set forth below, which were derived from the analyses
performed by Merrill Lynch, and noted that this exchange ratio was higher than,
or at the upper end of, the ranges of such implied exchange ratios.
<TABLE>
<CAPTION>
METHODOLOGY EXCHANGE RATIO
----------- --------------
<S> <C>
Contribution analysis....................................... 0.60-0.90
Comparable transaction analysis............................. 0.75-1.00
Comparable company trading analysis......................... 0.60-0.80
Discounted cash flow analysis............................... 0.75-0.90
Merger premium analysis..................................... 0.85-0.95
</TABLE>
The implied exchange ratios were computed using $38.625 as the price per
share of El Paso common stock, which was the closing price of the El Paso common
stock on March 10, 1999.
Contribution analysis. In order to determine an implied exchange ratio
range based upon a contribution analysis, Merrill Lynch calculated the
contribution of each of Sonat and El Paso to the net income to common
stockholders and a cash flow analysis of the pro forma combined company using
projections provided by the respective managements of Sonat and El Paso for the
twelve month periods ending December 31, 1999 and 2000.
<TABLE>
<CAPTION>
EXCHANGE
FINANCIAL MEASURE RATIO
----------------- -------------
<S> <C>
1999 net income............................................. 0.50
1999 EBITDA................................................. 0.75
1999 EBIT................................................... 0.36
2000 net income............................................. 0.73
2000 EBITDA................................................. 0.92
2000 EBIT................................................... 0.58
</TABLE>
Utilizing the contribution analysis, Merrill Lynch calculated an implied
exchange ratio range of 0.60 to 0.90.
Comparable transaction analysis. Merrill Lynch also reviewed publicly
available information relating to comparable merger and acquisition transactions
in respect of companies with primarily natural gas and energy services
operations. With respect to Sonat, Merrill Lynch examined multiples of the
consideration paid for the common equity and the value of the indebtedness
assumed in each of the transactions to, among other measures, such acquired
companies' EBITDA and EBIT, and examined multiples of the value of the common
equity in each of the transactions to net income.
The comparable transactions in the natural gas and energy services industry
that Merrill Lynch reviewed and the dates those transactions were completed were
the following:
- The Williams Companies, Inc.'s acquisition of Transco Energy Company
(December 1994);
- Texas Utilities Company's acquisition of ENSERCH Corporation (April
1996);
- El Paso Energy Corporation's acquisition of Tenneco Inc.'s energy
business (July 1996);
- Houston Industries Inc.'s acquisition of NorAm Energy Corp. (August
1996);
- Pacific Enterprises' acquisition of Enova Corporation (October 1996);
- Duke Power Co.'s acquisition of PanEnergy Corp. (November 1996);
- K N Energy, Inc.'s acquisition of MidCon Corp. (December 1997);
- TransCanada Pipelines Limited's acquisition of NOVA Corporation (January
1998);
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- CMS Energy Corporation's acquisition of Duke Energy's Panhandle Eastern
Pipeline Company and Trunkline Gas Company (November 1998);
- Sempra Energy's acquisition of K N Energy, Inc. (Pending); and
- Dominion Resources, Inc.'s acquisition of Consolidated Natural Gas
Company (Pending).
In order to determine an implied exchange ratio range based on an analysis
of comparable transactions, Merrill Lynch (1) compared the offer value (defined
to be the consideration paid for the common equity) in each of the comparable
transactions as a multiple of the then publicly available latest twelve months
("LTM") net income to common stockholders (the "Net Income Multiple") and (2)
compared the transaction value (defined to be the offer value plus the
liquidation value of preferred stock plus the principal amount of debt less
cash) for each of the comparable transactions as a multiple of the then publicly
available (a) LTM EBITDA (the "EBITDA Multiple") and (b) LTM EBIT (the "EBIT
Multiple"), to the corresponding multiples for the merger.
<TABLE>
<CAPTION>
FINANCIAL MEASURE EXCHANGE RATIO
----------------- --------------
<S> <C>
LTM net income.............................................. 0.72-0.89
LTM EBITDA.................................................. 0.89-0.97
LTM EBIT.................................................... 0.57-0.73
</TABLE>
Utilizing the comparable transactions analysis, Merrill Lynch calculated an
implied exchange ratio range of 0.75 to 1.00.
Because the reasons for, and circumstances surrounding, each of the
comparable transactions analyzed were so diverse and due to the inherent
differences between the operations and financial conditions of Sonat and the
selected companies, Merrill Lynch believes that a purely quantitative comparable
transaction analysis would not be dispositive in the context of the merger.
Merrill Lynch further believes that an appropriate use of a comparable
transaction analysis in this instance involves qualitative judgments concerning
the differences between the characteristics of these transactions and the merger
that would affect the value of the acquired companies and businesses and Sonat,
those judgments being reflected in Merrill Lynch's opinion.
Comparable company trading analysis. Using publicly available information,
Merrill Lynch compared selected historical stock, financial and operating ratios
for Sonat with corresponding data and ratios of similar publicly traded
companies. These companies were selected by Merrill Lynch based upon Merrill
Lynch's views as to the comparability of the financial and operating
characteristics of these companies to Sonat. With respect to these analyses,
Merrill Lynch made comparisons among the following companies: The Coastal
Corporation, Columbia Energy, Consolidated Natural Gas Company, Enron Corp., K N
Energy, Inc., Questar Corporation, and The Williams Companies, Inc.
In order to determine an implied exchange ratio range based upon an
analysis of comparable publicly traded companies, Merrill Lynch compared the
market value of Sonat common stock as a multiple of (1) estimated 1999 net
income and (2) estimated 2000 net income to the corresponding ratios for each of
the comparable companies. The earnings estimates were obtained from IBES and
First Call, two data services that monitor and publish a compilation of earnings
estimates produced by selected research analysts on companies of interest to
investors. Additionally, Merrill Lynch compared the market capitalization of
Sonat as a multiple of estimated 1999 EBITDA and estimated 2000 EBITDA to the
corresponding ratios for each of the comparable companies. Merrill Lynch
determined that the appropriate trading multiples for the comparable companies
were 15.0 to 17.0, 13.0 to 15.0, 7.5 to 8.5, and 7.0 to 7.5 for 1999 estimated
net income, 2000 estimated net income, 1999 estimated EBITDA and 2000 estimated
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EBITDA, respectively. These multiples were applied to Sonat's forecast of each
respective financial measure, providing the following implied exchange ratios:
<TABLE>
<CAPTION>
FINANCIAL MEASURE EXCHANGE RATIO
----------------- --------------
<S> <C>
1999 net income............................................. 0.41-0.46
1999 EBITDA................................................. 0.65-0.80
2000 net income............................................. 0.59-0.68
2000 EBITDA................................................. 0.79-0.88
</TABLE>
Using this analysis, Merrill Lynch calculated an implied exchange ratio of
0.60 to 0.80.
Because of the inherent differences among the operations of Sonat and the
selected comparable companies, Merrill Lynch believes that a purely quantitative
comparable company analysis would not be dispositive in the context of the
merger. Merrill Lynch further believes that an appropriate use of a comparable
company analysis in this instance involves qualitative judgments concerning
differences among the financial and operating characteristics of Sonat and the
selected comparable companies, which judgments are reflected in Merrill Lynch's
opinion.
Discounted cash flow analysis. In order to determine an implied exchange
ratio range based upon discounted cash flow analysis, Merrill Lynch performed
discounted cash flow analyses for each of Sonat and El Paso using projections
provided to Merrill Lynch by the respective managements of Sonat and El Paso and
calculated ranges of values per share for Sonat common stock and El Paso common
stock.
The Sonat and El Paso discounted cash flow analyses were based upon the sum
of the discounted cash flow analyses of each of the primary business segments of
the respective companies. Discount rates were applied to (1) each company's
respective projected free cash flows for the years 1999 through 2003, and (2)
their respective enterprise values in 2003 based upon a range of multiples times
projected 2003 EBITDA. In addition, the discounted cash flow analysis for
Sonat's oil and gas exploration and production segment was conducted based upon
projected production and related cash flows from existing proven reserves using
discount rates ranging from 8.0% to 15.0%. El Paso's international segment was
valued based on the value of equity invested in current projects and added to
the discounted cash flow values of the other three business segments.
<TABLE>
<CAPTION>
2003
EBITDA
BUSINESS SEGMENT DISCOUNT RATES MULTIPLES
---------------- -------------- -----------
<S> <C> <C>
Sonat
Pipeline................................................ 7.5%-8.5% 10.0x-11.0x
Energy Services......................................... 12.0%-14.0% 6.0x-7.0x
El Paso
Transmission............................................ 7.5%-8.5% 8.5x-9.5x
Field Services.......................................... 8.0%-10.0% 7.0x-8.0x
Energy Services......................................... 10.0%-14.0% 5.5x-6.5x
</TABLE>
Using a discounted cash flow analysis, Merrill Lynch calculated an implied
exchange ratio range of 0.75 to 0.90.
Merger premium analysis. In order to determine an implied exchange ratio
range based upon a merger premium analysis, Merrill Lynch examined premiums paid
for the target's equity over pre-announcement stock prices one day prior to
announcement, one week prior to announcement and four weeks prior to
announcement (1) in all United States public merger transactions with an
enterprise value in excess of $3.0 billion for the periods of 1994 to present,
1995 to present, 1996 to present, 1997 to present and 1998 to present; (2) in
all United States public merger transactions in which common stock was the form
of consideration and the enterprise value was in excess of $3.0 billion for the
periods of 1994 to present, 1995 to present, 1996 to present, 1997 to present
and 1998 to present; and (3) nine selected
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<PAGE> 63
natural gas company transactions. Based on this analysis, Merrill Lynch
calculated an implied exchange ratio of 0.85 to 0.95.
Because the reasons for, and circumstances surrounding, each of the
transactions analyzed were different, Merrill Lynch believes that a purely
quantitative merger premium analysis would not be dispositive in the context of
the merger. Merrill Lynch further believes that an appropriate use of a merger
premium analysis in this instance involves quantitative judgments concerning the
differences between the characteristics of these transactions and the merger
that would affect the value of the acquired companies and businesses and Sonat,
which judgments are reflected in Merrill Lynch's opinion.
Pro Forma Merger Analysis. Merrill Lynch analyzed certain pro forma effects
which could result from the merger, based on financial forecasts provided by
Sonat's management for Sonat's 1999, 2000, 2001, 2002 and 2003 fiscal years and
financial forecasts provided by El Paso's management for El Paso's 1999, 2000,
2001, 2002 and 2003 fiscal years. The management of Sonat advised Merrill Lynch
that the merger will be accounted for as a "pooling-of-interests" under United
States generally accepted accounting principles. Management of Sonat and El Paso
provided Merrill Lynch with projections of certain cost savings estimated to
result from the merger and to be retained by the stockholders of the combined
entity. This analysis indicated that the merger would be dilutive to the
forecasted earnings per share of El Paso for its 1999 and 2000 fiscal years, and
accretive for the full fiscal year ended December 31, 2001 after giving effect
to the merger.
Purchase Price Analysis and Stock Trading History. Merrill Lynch performed
analyses relating to the consideration to be received by the holders of Sonat
common stock assuming various prices for El Paso common stock. Merrill Lynch
also examined the history of trading prices and volume for Sonat common stock
and El Paso common stock and various historical information relating to the
Sonat common stock and El Paso common stock, respectively.
Other Factors and Analyses. In the course of preparing its opinion, Merrill
Lynch performed other analyses and reviewed other matters, including, among
other things:
- Historical and expected trading characteristics of Sonat common stock and
El Paso common stock;
- Financing considerations relating to the merger; and
- Pro forma operating results and capitalization of the combined company.
Merrill Lynch is an internationally recognized investment banking firm and,
as a part of its investment banking business, is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions. The Sonat board of directors selected Merrill Lynch as its
financial advisor because of Merrill Lynch's experience and expertise and
because it is familiar with Sonat and its businesses.
Sonat has agreed to pay Merrill Lynch for its financial advisory services
in connection with the merger a fee equal to 0.4% of the aggregate purchase
price, defined in Merrill Lynch's engagement letter as the amount equal to the
sum of (1) the aggregate fair market value of any securities issued and any
other non-cash consideration delivered and (2) any cash consideration paid to
Sonat and its stockholders in connection with a business combination covered by
the engagement letter.
This fee is payable as follows:
- A fee of $2,000,000, payable upon the execution of the merger agreement;
- A fee of $3,000,000, payable upon the approval of the merger agreement by
the holders of Sonat common stock; and
- Any remaining unpaid portion of the fee, payable on closing of the
merger.
Sonat has agreed that if the merger, the alternative merger or similar
transaction is not consummated and Sonat receives a termination fee, Sonat will
pay Merrill Lynch twenty percent (20%) of such
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termination fee, subject to a maximum of one-half of the fees to which Merrill
Lynch would have become entitled had the transaction closed. Sonat also has
agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of legal counsel, and to
indemnify Merrill Lynch against liabilities arising out of a business
combination contemplated by the engagement letter or to contribute to payments
Merrill Lynch may be required to make in respect of the liabilities for which
indemnification is contemplated but for which indemnification is unenforceable.
In the ordinary course of its business, Merrill Lynch and its affiliates
may actively trade the debt and equity securities of Sonat and El Paso for their
own accounts and for the accounts of customers and anticipate trading in the
securities of El Paso after the merger. Accordingly, Merrill Lynch and its
affiliates may at any time hold a long or short position in such securities.
Merrill Lynch has in the past provided financial advisory and/or financing
services to Sonat and El Paso, and may continue to do so and has received, and
may receive, fees for the rendering of those services.
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<PAGE> 65
MATERIAL TERMS OF THE MERGER AGREEMENT
In this section of the joint proxy statement/prospectus we describe the
material provisions of the merger agreement. We have attached a copy of the
merger agreement as Annex A to this joint proxy statement/prospectus and
incorporated the merger agreement into by reference. The summary of the merger
agreement we provide below is qualified in its entirety by reference to that
agreement. We encourage you to read the merger agreement because it is the legal
document that governs the merger.
THE MERGER
Under the terms and subject to the conditions set forth in the merger
agreement, Sonat will be merged with and into El Paso and El Paso will continue
as the surviving corporation.
THE ALTERNATIVE MERGER STRUCTURE
If the merger agreement is approved and adopted by the Sonat stockholders
and is not approved and adopted by El Paso stockholders, we will complete the
merger under an alternative structure not requiring a vote of the El Paso
stockholders. Under this structure, a wholly owned subsidiary of El Paso will
merge into Sonat, with Sonat continuing as a wholly owned subsidiary of El Paso
after the merger.
CLOSING; EFFECTIVE TIME
We will close the merger at 10:00 a.m., local time, on the first business
day after satisfaction or waiver of the conditions set forth in the merger
agreement, unless we agree to another time or date.
Subject to the provisions of the merger agreement, on the date of the
closing of the merger, we will file a certificate of merger and other
appropriate documents with the Secretary of State of Delaware in accordance with
the relevant provisions of Delaware law. The merger will become effective when
the certificate of merger is filed with the Secretary of State of Delaware, or
at such later time as we specify in the certificate of merger.
At the effective time of the merger, as part of the merger, El Paso's
certificate of incorporation will be amended to increase the number of shares of
authorized capital stock of El Paso from 275 million to 750 million shares of
common stock and from 25 million to 50 million shares of preferred stock. The
preferred stock will be issuable in one or more series. Each series will have
terms determined by El Paso's board when issued. Under the alternative merger
structure, El Paso's certificate of incorporation will not be amended.
As contemplated by the merger agreement, El Paso's board will amend the
by-laws of El Paso prior to the merger to provide that any stockholder wishing
to nominate candidates for election as directors at El Paso's annual
stockholder's meeting or to bring other business before the meeting must notify
El Paso between 120 and 90 days before the anniversary of the prior year's
annual meeting. El Paso's current by-laws require that stockholders provide
notice between 90 and 60 days before the anniversary of the prior year's annual
meeting.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the time of the merger, each outstanding share of Sonat common stock
will be automatically converted into the right to receive one validly issued,
fully paid and nonassessable share of El Paso common stock. Shares of Sonat
common stock to be canceled as described below will not be converted into shares
of El Paso common stock in the merger.
Each share of El Paso common stock Sonat stockholders receive in the
merger, including under the alternative merger structure, will have attached to
it one preferred stock purchase right issued under El Paso's shareholder rights
plan. These rights will permit their holders, other than the acquiring party, to
acquire securities of El Paso at a discount if a party acquires 15% or more of
El Paso's common stock without receiving the approval of the El Paso board prior
to the acquisition.
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Shares of El Paso common stock will remain issued and outstanding and will
not be converted in the merger.
CONSIDERATION TO BE RECEIVED UNDER THE ALTERNATIVE MERGER STRUCTURE
If the merger is completed under the alternative merger structure, at the
time of the merger, each outstanding share of Sonat common stock will be
automatically converted into the right to receive:
(1) a fraction of a validly issued, fully paid and non-assessable
share of El Paso common stock, including any associated preferred stock
purchase rights; and
(2) a fraction of a depositary share, each of which will represent a
1/50th interest in a share of a new series of senior voting preferred stock
of El Paso.
The fraction of a share of El Paso common stock that will be received in
exchange for each share of Sonat common stock will be determined by dividing:
- the maximum number of shares of common stock El Paso may issue as of the
date prior to the closing of the merger under the rules of the New York
Stock Exchange without approval of its stockholders, less the number of
shares of El Paso common stock to be reserved for issuance on the
exercise of outstanding Sonat stock options which will be converted into
the right to receive El Paso stock options in accordance with the merger
agreement; by
- the number of shares of Sonat common stock outstanding at the effective
time of the merger.
The fraction of a depositary share that will be received in exchange for
each share of Sonat common stock will be determined by dividing:
- the product of
(1) one minus the fraction of a share of El Paso common stock that will be
received for each share of Sonat common stock, and
(2) an implied price for a share of El Paso common stock equal to the
average of the closing prices of the El Paso common stock over the ten
trading days preceding the second trading day before the special
meeting of the Sonat stockholders, except that if the implied price is
greater than or equal to $44.50, for purposes of this calculation, it
will be assumed to be $44.50, and if it is less than or equal to
$32.00, it will be assumed to be $32.00,
- by $100.
Based on there being 120,989,489 shares of El Paso common stock,
110,047,818 shares of Sonat common stock and 5,471,115 Sonat options outstanding
on March 5, 1999, each share of Sonat common stock would be exchanged for .17 of
a share of El Paso common stock and between approximately .266 and .369 of an El
Paso depositary share. El Paso would under these circumstances issue a total of
approximately 18,726,781 shares of common stock and between approximately
29,200,000 and 40,600,000 depositary shares. The material terms of the El Paso
depositary shares are discussed under "Description of Senior Cumulative
Exchangeable Preferred Stock and Depositary Shares -- El Paso Depositary Shares"
beginning on page 87.
Shares of Sonat common stock to be canceled as described in the following
paragraph will not be converted in the alternative merger.
CANCELLATION OF SHARES
Any share of Sonat common stock owned by El Paso or held by Sonat as
treasury stock or owned by their respective subsidiaries will be automatically
canceled and retired in the merger and will cease to exist, and no securities of
El Paso or depositary shares or other consideration will be delivered in
exchange for those shares.
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PROCEDURES FOR SURRENDER OF CERTIFICATES; FRACTIONAL SHARES
As soon as reasonably practicable after the effective time of the merger,
BankBoston, N.A., El Paso's exchange agent for the merger, will send a letter of
transmittal to each former Sonat stockholder. The letter of transmittal will
contain instructions with respect to the surrender by Sonat stockholders of
their Sonat stock certificates. SONAT STOCKHOLDERS AND EL PASO STOCKHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Commencing immediately after the effective time of the merger, upon
surrender by the Sonat stockholders of their stock certificates representing
shares of Sonat common stock in accordance with the instructions in the letter
of transmittal, the Sonat stockholders will be entitled to receive stock
certificates representing shares of El Paso common stock (and, if applicable,
depositary receipts representing depositary shares) into which shares of Sonat
common stock represented by the Sonat stock certificates have been converted,
together with a cash payment in lieu of fractional shares and depositary shares,
if any.
After the merger, each certificate that previously represented shares of
Sonat common stock will represent only the right to receive the shares of El
Paso common stock (and, if applicable, depositary shares) into which shares of
Sonat common stock were converted in the merger, and the right to receive cash
in lieu of fractional shares of El Paso common stock and depositary shares, if
any, as described below.
Holders of certificates previously representing shares of Sonat common
stock will not be paid dividends or other distributions payable to holders of
record of the El Paso common stock (and, if applicable, depositary shares) as of
any date after the merger or cash in lieu of fractional shares, until their
certificates are surrendered to the exchange agent. When their certificates are
surrendered, any unpaid dividends and any cash in lieu of fractional shares of
El Paso common stock (and, if applicable depositary shares) payable as described
below will be paid without interest.
We will close Sonat's transfer books at the effective time of the merger
and no further transfers of shares of Sonat common stock will be recorded on its
transfer books. If a transfer of ownership of Sonat common stock that is not
registered in the records of Sonat's transfer agent has occurred, a certificate
representing the proper number of shares of El Paso common stock (and, if
applicable, depositary shares) will be issued to a person other than the person
in whose name the certificate so surrendered is registered, together with a cash
payment in lieu of fractional shares, if any, and payment of dividends or
distributions, if any, so long as the Sonat stock certificates are accompanied
by all documents required to evidence and effect the transfer and by evidence of
payment of any applicable stock transfer taxes.
No fractional share of El Paso common stock (and, if applicable, depositary
shares) will be issued to any Sonat stockholder upon surrender of certificates
previously representing Sonat common stock. Instead, the exchange agent will pay
to each of those stockholders an amount in cash determined by multiplying the
fractional share interest to which the holder would otherwise be entitled by the
average of the closing prices for the shares of El Paso common stock on the New
York Stock Exchange Composite Transaction Reporting System over the four trading
day period immediately preceding the closing date of the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains certain mutual representations and warranties
by each of El Paso and Sonat relating to, among other things:
- corporate organization, qualification, standing and power;
- subsidiaries;
- capitalization;
- authorization, execution, delivery, performance and enforceability of,
required consents, approvals, orders and authorizations of governmental
authorities relating to, and non-contravention of certain agreements as a
result of, the merger agreement;
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- documents filed by each of El Paso and Sonat with the SEC;
- absence of certain material changes or events with respect to Sonat since
September 30, 1998 and with respect to El Paso since December 31, 1998;
- litigation;
- compliance with applicable laws, permitting and licensing requirements;
- disclosure of liabilities;
- employee benefit matters;
- tax matters;
- board approval;
- required stockholder votes in connection with the merger;
- treatment of the merger as a pooling of interests for accounting
purposes, unless completed under the alternative merger structure;
- engagement of and payment of fees to brokers, investment bankers, finders
and financial advisors in connection with the merger agreement;
- opinions of financial advisors;
- restrictions on business activities;
- labor matters;
- environmental matters; and
- "Year 2000" readiness.
COVENANTS
Conduct of Business. In the merger agreement, we have each agreed that,
except as permitted or contemplated by the merger agreement or as consented to
by the other party, during the period from the date of the merger agreement to
the completion of the merger or the alternative merger, as the case may be, we
will each:
- conduct our businesses in the ordinary course consistent with past
practice;
- use reasonable best efforts to preserve our business organizations;
- use reasonable best efforts to keep available the services of our
officers and other employees; and
- use reasonable best efforts to maintain our existing relations and
goodwill with customers, suppliers, regulators, distributors, creditors,
lessors and others having business dealings with it.
However, neither party will be in breach of these obligations because one or
more of its officers and employees is no longer employed by that party.
The merger agreement prohibits each of us from taking any action outside of
the parameters specified in the merger agreement relating to the following
matters:
- amending its organizational documents;
- repurchasing shares of its capital;
- issuing, selling or pledging any bonds, debentures, notes or other
indebtedness having the right to vote together with holders of its common
stock;
- splitting, combining, subdividing, or reclassifying outstanding shares of
its capital stock;
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- entering into any agreement to sell, transfer or otherwise dispose of, or
purchase or otherwise acquire, in the aggregate a material amount of
assets or properties or material business by merger, consolidation,
transfer or acquisition of shares of capital stock or otherwise; except
that El Paso is permitted to enter into agreements to acquire and dispose
of assets of any business that generated in its most recently completed
fiscal year net revenue less than 25% of El Paso's consolidated net
revenues for 1998 or consolidated net income less than 25% of El Paso's
consolidated net income for 1998 or that has consolidated net assets less
than 25% of the consolidated net assets of El Paso;
- issuing, delivering, selling or encumbering any shares of capital stock
or options or other securities convertible into capital stock, except
that, if no vote of the stockholders of El Paso is required under the
rules of the New York Stock Exchange or applicable law, El Paso may issue
shares of stock in connection with an acquisition it is permitted to make
in accordance with the preceding paragraph;
- declaring or paying dividends, other than regular quarterly dividends;
- taking any action that, to the knowledge of Sonat or El Paso, would
prevent the merger from qualifying for pooling of interests accounting
treatment;
- taking any action which would prevent the merger or the alternative
merger, as the case may be, from being a tax free transaction under the
Internal Revenue Code;
- changing its accounting policies, practices or methods;
- taking any action to amend or modify its shareholder rights plan or
redeem the rights subject to that plan;
- taking any action to render inapplicable or to exempt any third party
from any provision of its certificate of incorporation or applicable
anti-takeover statutes;
- taking any action that would be reasonably likely to result in any of the
conditions to the merger not being satisfied or that would impair its
ability to complete the transactions contemplated by the merger
agreement;
- taking any action to cause its shares of common stock to cease to be
listed on the New York Stock Exchange;
- executing, establishing, adopting or amending, or accelerating rights or
benefits under, any agreement relating to severance or change in control,
any employee plan, any employment or consulting agreement with current or
former officers or directors or, in the case of Sonat only, any
collective bargaining agreement;
- increasing the compensation payable or to become payable to any of its
officers, directors or employees;
- granting any severance or termination pay to any of its officers or
directors;
- granting any stock options or other equity related awards; or
- releasing any third-party from any standstill agreement.
Coordination of Dividends. We will coordinate with each other regarding the
declaration and payment of dividends in respect of the El Paso common stock and
the Sonat common stock and the record dates and payment dates relating to those
dividends. El Paso's and Sonat's intention in that regard is that no holder of
El Paso common stock or Sonat common stock shall receive two dividends, or fail
to receive one dividend, for any single fiscal quarter with respect to its
shares, including shares of El Paso common stock that a holder receives in
exchange for shares of Sonat common stock in the merger.
No Solicitation. The merger agreement provides that we must terminate all
existing discussions or negotiations, if any, with respect to any "takeover
proposal," which we define below, and that we may not,
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and may not authorize or permit any of our subsidiaries or authorize any of our
officers, directors, employees or representatives to, directly or indirectly:
(1) solicit, initiate or encourage, or take any other action designed
to facilitate, any inquiries or the making of any takeover proposal; or
(2) participate in any discussions or negotiations regarding any
takeover proposal or provide any confidential information or data to any
person relating to any takeover proposal.
However, prior to our respective special meetings, in response to an unsolicited
"superior proposal," which we define on the next page, we may:
(1) furnish information with respect to ourselves or our subsidiaries
to any person making a superior proposal pursuant to a customary
confidentiality agreement; and
(2) participate in discussions or negotiations regarding the superior
proposal.
A "takeover proposal" is any inquiry, proposal or offer from any person
relating to any:
- direct or indirect acquisition or purchase of a business that constitutes
25% or more of the net revenues, net income or the assets of Sonat or El
Paso, as the case may be, and its subsidiaries, taken as a whole;
- direct or indirect acquisition or purchase of 25% or more of any class of
equity securities of Sonat or El Paso, as the case may be, or any of its
subsidiaries;
- tender offer or exchange offer that if completed would result in any
person beneficially owning 25% or more of any class of equity securities
of Sonat or El Paso, as the case may be, or any of its subsidiaries; or
- merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Sonat or El
Paso, as the case may be, or any of its subsidiaries that constitutes 25%
or more of the net revenues, net income or assets of Sonat or El Paso, as
the case may be, and its subsidiaries taken as a whole.
In addition, we must promptly advise the other orally and in writing of any
takeover proposal or any inquiry with respect to or that could reasonably be
expected to lead to any takeover proposal, the identity of the person making the
takeover proposal or inquiry and the material terms of the takeover proposal.
Except as expressly permitted by the merger agreement, neither the Sonat
board nor the El Paso board, nor any committee of either board, may:
- withdraw or modify, or propose to withdraw or modify, in a manner adverse
to the other party, the approval or recommendation by that board or that
committee, of the merger, the alternative merger, or the merger
agreement;
- approve any letter of intent, agreement in principle, acquisition
agreement or similar agreement (other than a confidentiality agreement in
connection with a superior proposal) relating to the takeover proposal;
or
- approve or recommend or propose to approve or recommend any takeover
proposal.
In response to a superior proposal which was not solicited by Sonat and
which did not result from a breach of any of the "non-solicitation" provisions
of the merger agreement, the Sonat board may terminate the merger agreement and
enter into an agreement with respect to any superior proposal, but only after
the fifth business day after delivery to El Paso of written notice advising that
the Sonat board has resolved to accept a superior proposal, specifying the
material terms and conditions of the superior proposal and identifying the
person making the superior proposal.
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A "superior proposal" is any proposal by a third party to directly or
indirectly acquire, including by means of a tender offer, exchange offer,
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, more than 50% of the combined voting power
of the then outstanding shares of Sonat common stock or El Paso common stock, as
the case may be, or 50% or more of the assets of Sonat and El Paso, as the case
may be, and its subsidiaries, taken together, and if (a) the proposal is
otherwise on terms which the relevant board determines in its good faith
judgment based in part on the advice of a financial advisor of nationally
recognized reputation, to be more favorable to that company's stockholders than
the El Paso-Sonat merger and for which financing, to the extent required, is
then committed or which, in the good faith judgment of the relevant board, is
reasonably capable of being obtained by that third party, and (b) the Sonat or
El Paso board, after considering those matters that it regards as relevant,
including an opinion of counsel, determines in good faith that, in light of the
proposal it is necessary to furnish information to the third party, participate
in negotiations with respect to the proposal or to withdraw or modify its
recommendation for the merger, and recommend the takeover proposal, as
applicable, or, in the case of Sonat only, to terminate the merger agreement, in
order to comply with its fiduciary duties to Sonat or El Paso, as the case may
be, and its stockholders under the applicable law.
ADDITIONAL AGREEMENTS
Stock Options. All options to purchase shares of Sonat or El Paso common
stock outstanding upon the completion of the merger or the alternative merger,
under any stock option plan or other arrangement will remain outstanding
following the effective time of the merger or the alternative merger. Prior to
the effective time of the merger or the alternative merger, Sonat will take all
actions necessary with respect to each of its stock option plans or other
arrangements pursuant to which Sonat options will be outstanding immediately
prior to the effective time of the merger or the alternative merger, such that
at the time of the merger or the alternative merger each option will entitle the
holder of the option to purchase the number of shares of El Paso common stock
equal to the number of shares of Sonat common stock subject to the option
immediately prior to the effective time of the merger or the alternative merger.
The converted option will have an exercise price per share equal to the exercise
price for each share of Sonat common stock subject to the converted option. Upon
completion of the merger or the alternative merger, as the case may be, El Paso
will assume the obligations of Sonat under Sonat's stock option plans and
arrangements.
Treatment of Sonat Employee Benefit Plans. Following the merger or the
alternative merger, El Paso intends to provide substantially similar
compensation and employee benefits to Sonat employees who continue employment
after the merger or the alternate merger as it provides to similarly situated El
Paso employees except that no such Sonat employee will automatically become a
participant in El Paso's change in control severance plans as a result of the
merger. El Paso has also agreed to assume all of the Sonat employee benefit
plans and to honor Sonat's obligations under these plans, but El Paso has
retained the right to amend or terminate these plans as permitted by their terms
and by applicable law, subject to certain exceptions set forth in the merger
agreement (including its schedules). As a general rule, Sonat employees who
continue employment after the effective time of the merger or the alternate
merger will receive credit for pre-merger service for purposes of eligibility
and vesting (but not benefit accrual), but these employees will receive credit
for pre-merger service for purposes of cash balance pay credits under El Paso's
cash balance pension plan and for purposes of El Paso's extended illness bank,
paid time off programs and employee recognition awards. El Paso has also
specifically agreed not to amend the Sonat employee benefit plans through
December 31, 1999 in a manner that is adverse to the participants in these
plans.
Window Program. El Paso has agreed to establish a voluntary
reduction-in-force window program for Sonat employees who continue employment
after the merger or the alternate merger and who are at least age 50 and have at
least 10 years of service as of December 31, 1999. Payments and benefits to
employees who voluntarily terminate employment under the window program will
consist of a severance payment, an enhanced retirement benefit, continued
medical and dental coverage, retiree medical and life insurance
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coverage and outplacement services, subject in each case to the terms of the
merger agreement (including its schedules).
Executives, key officers, and key employees of Sonat who voluntarily
terminate employment under the window program will receive only certain of the
foregoing benefits and will receive severance benefits under their severance
agreements. Other Sonat employees (who do not have severance agreements) whose
employment is involuntarily terminated other than for cause within 12 months
following the effective time of the merger or the alternate merger will receive
the severance payment and continued medical and dental coverage.
El Paso and Sonat have also agreed to covenants about how participants in
Sonat's Retirement Plan will be transitioned from a final average pay formula to
a cash balance benefit formula and for the provision of retiree medical
coverages and benefits to participants in the window program and certain former
Sonat employees, subject in each case to the terms of the merger agreement
(including its schedules).
Insurance and Indemnification. For six years after the merger, El Paso will
maintain in effect Sonat's current directors' and officers' liability insurance
(or policies containing substantially similar coverage) covering acts or
omissions occurring prior to and as of the effective time of the merger. El Paso
and its subsidiaries will not, however, be required to pay, in total, an annual
premium for the insurance described in this paragraph in excess of 200% of the
current annual premium paid by Sonat for its existing coverage prior to merger.
However, if the annual premiums of that insurance coverage exceed that amount,
El Paso will be obligated to obtain a policy with the best coverage available
for a cost up to but not exceeding that amount.
From and after the completion of the merger, El Paso will, to the fullest
extent permitted under applicable law, indemnify each person who is, or has
been, an officer or director of Sonat or any of its subsidiaries against all
losses, damages and expenses, including reasonable attorneys' fees, in
connection with any lawsuit or investigation arising out of or pertaining to
acts or omissions, or alleged acts or omissions, by them in their capacities as
such, prior to the completion of the merger.
If the merger is completed, the indemnified parties will, for a period of
six years after the completion of the merger, be entitled to the benefit of the
provisions of El Paso's certificate of incorporation and by-laws relating to
indemnification, limitation of liability and advancement of expenses of officers
and directors of El Paso. If the merger is completed under the alternative
merger structure, the provisions of Sonat's certificate of incorporation and
by-laws in effect as of the date of the merger agreement affecting the
indemnified parties' rights to indemnification, limitation of liability and
advancement of expenses will survive the completion of the alternative merger
and will continue in full force and effect, without any amendment (unless
required by law), for a period of six years.
Fees and Expenses. Whether or not the merger is completed, we will each pay
our own costs and expenses incurred in connection with the merger and the merger
agreement subject to the expense reimbursement provisions described on page .
We will, however, split on a 50-50 basis the filing, printing and mailing fees
and expenses incurred in connection with any required federal or state
securities law filings or approvals, filings made pursuant to the HSR Act, and
other expenses not directly attributable to one of the parties.
New York Stock Exchange Listing. El Paso will promptly prepare and submit
to the New York Stock Exchange a listing application with respect to the shares
of El Paso common stock and depositary shares to be issued to Sonat stockholders
in the merger or the alternative merger, as applicable, and El Paso must use
reasonable best efforts to obtain approval for the listing of El Paso common
shares and depositary shares on the New York Stock Exchange, subject to official
notice of issuance.
Tax Treatment. We must both use reasonable best efforts to ensure that the
merger or the alternative merger, as applicable, qualifies as a tax free
reorganization under Section 368(a) of the Internal Revenue Code.
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Pooling of Interests. We have each agreed that, unless the merger is
completed under the alternative merger structure, during the period between the
date of the merger agreement and the effective time of the merger, we will use
our reasonable best efforts to cause the merger to be accounted for as a pooling
of interests and will not knowingly take any action that would cause that
accounting treatment not to be obtained.
Publicity. We have agreed to consult with one another and use our
reasonable best efforts to agree upon the text of any press release or public
statement relating to this transaction or required by any governmental entity or
regulatory body.
Reasonable Best Efforts. Subject to the terms of the merger agreement, each
party has agreed to use its reasonable best efforts to take or cause to be taken
all actions necessary or advisable under applicable law to complete the merger
or the alternative merger, as the case may be, including:
(i) preparing and filing as promptly as practicable all necessary
applications, notices and filings with all third parties and governmental
entities; and
(ii) taking all reasonable steps as may be necessary to obtain all
material consents, waivers, licenses and approvals.
We have also agreed to promptly supply additional information that may be
requested pursuant to the HSR Act and any other regulatory laws and to take all
other actions necessary to cause the expiration or termination of the applicable
waiting periods under the HSR Act as soon as practicable. We are not however
required to sell, hold separate or otherwise dispose of any of our assets or the
assets of our subsidiaries or to conduct our business in a specified manner as a
condition to obtaining any government approval or for any other reason if the
result would reasonably be expected to be materially adverse to the business,
financial condition or results of operations of the combined company after
giving effect to the merger. El Paso is also not required to take action that
would reasonably be expected to be materially adverse to Tennessee Gas Pipeline
Company, a subsidiary of El Paso.
El Paso Board of Directors; Certain Appointments. The El Paso board is
required under the merger agreement to increase its size from eight members to
15 members. El Paso will designate nine individuals to serve on the El Paso
board of directors after the merger, only one of whom will be an insider of El
Paso. Sonat will designate six individuals to serve on the El Paso board of
directors after the merger, only one of whom will be a former insider of Sonat.
William A. Wise, who is currently Chairman, President and Chief Executive
Officer and a director of El Paso, will serve as President and Chief Executive
Officer of El Paso after the merger, and Ronald L. Kuehn, Jr., currently Sonat's
Chairman, President and Chief Executive Officer, will be non-executive chairman
of the El Paso board of directors after the merger until December 31, 2000. At
that point, Mr. Wise will reassume the position of Chairman. El Paso agreed that
El Paso will nominate Selim K. Zilkha for election as a director of El Paso for
so long as the Zilkha family and trusts own at least 5% of the outstanding
shares of common stock of El Paso. If the alternative merger is completed, so
long as depositary shares are outstanding, each depositary share will be
considered, for purpose of determining whether Mr. Zilkha owns at least 5% of El
Paso's common stock, to represent the number of shares of El Paso common stock a
recipient of a depositary share would have received, instead of that depositary
share, had the all common stock merger been completed. Mr. Zilkha is currently a
director of Sonat, and his family and trust own approximately 20.8% of the
outstanding Sonat common stock.
Name; Headquarters. We have agreed that the combined company will continue
to be named "El Paso Energy Corporation" and its headquarters will continue to
be located in Houston, Texas. We have also agreed that the headquarters of
Sonat's subsidiary Southern Natural Gas Company and its subsidiaries that
operate natural gas pipelines will remain in Birmingham, Alabama.
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CONDITIONS TO THE COMPLETION OF THE MERGER
Our obligations to complete the merger are subject to the satisfaction or
waiver of various conditions on or before the date on which the merger is
completed, which include, in addition to other customary closing conditions, the
following:
(1) the Sonat stockholders having approved and adopted the merger
agreement;
(2) the waiting period under the HSR Act having expired or terminated;
(3) governmental and regulatory authorities including the FERC, having
issued to us all other approvals necessary to complete the transactions
without conditions that would be materially adverse to El Paso's or Sonat's
businesses, financial condition or results of operations unless the failure
to obtain the approvals would not reasonably be expected to have a material
adverse effect on Sonat or El Paso;
(4) no court having issued an order and no law having been enacted
that prevents the completion of the merger or makes the consummation of the
merger illegal;
(5) the shares of El Paso common stock and/or the depositary shares,
as applicable, issuable in the merger or the alternative merger having been
approved for listing on the New York Stock Exchange; and
(6) unless the merger is to be completed under the alternative merger
structure, Sonat having received and delivered to El Paso a letter from
Sonat's independent public accountants, dated the date the merger is
completed, stating that Sonat's independent public accountants concur with
Sonat management's conclusion that Sonat is eligible to participate in a
transaction accounted for as a pooling of interests, and El Paso having
received and delivered to Sonat a letter from El Paso's independent public
accountants dated the date the merger is completed, stating that El Paso's
independent public accountants concur with El Paso management's conclusion
that accounting for the merger as a pooling of interests is appropriate.
In addition, the obligations of each of us to effect the merger are subject
to the satisfaction or waiver of the following additional conditions:
(1) the representations and warranties made by the other in the merger
agreement being true and correct on the date of the merger agreement and on
the date of the merger, as if they were made on that date (unless they were
by their express provisions made as of a specific date, in which case they
need be true and correct only as of that specific date), unless their
failure to be true and correct would not reasonably be expected to have, in
the aggregate, a material adverse effect on the other party;
(2) the other party to the merger agreement having performed in all
material respects all obligations, agreements and covenants required to be
performed by it under the merger agreement on or before the date of the
merger; and
(3) our legal counsel having furnished us opinions that the merger
will constitute a tax free "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code.
TERMINATION
The merger agreement may be terminated;
- by mutual written consent of El Paso and Sonat;
- by either El Paso or Sonat:
(1) if we do not complete the merger on or before March 31, 2000,
except that a party may not terminate the agreement if its failure to
fulfill its obligations is the cause of the merger not being completed by
March 31, 2000;
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(2) if Sonat stockholders fail to adopt the merger agreement at Sonat's
special meeting;
(3) if a court issues a final non-appealable order, or a law is passed
that makes the merger illegal or permanently prohibits the completion of
the merger, unless the party seeking to terminate the merger agreement has
not used all reasonable best efforts to prevent the court order from being
issued or the law passed;
(4) if there has been a material breach by the other party of any of
the other's representations, warranties, covenants or agreements contained
in the merger agreement, which breach would result in the failure to
satisfy one or more of the conditions to the merger, and such breach is
incapable of being cured or, if capable of being cured, has not been cured
within 20 days after written notice was received by the party alleged to
be in breach; or
(5) if bargain purchase rights under the other party's shareholder's
rights plan are triggered and, assuming all of the bargain purchase rights
are exercised or exchanged for shares of the other party's common stock,
the triggering person would beneficially own 25% or more of the
outstanding shares of common stock of the other party;
- by El Paso, if the Sonat board or any of its committees (a) fails to
reaffirm its recommendation within 15 days of El Paso's request, (b)
withdraws or modifies in any manner adverse to El Paso its approval or
recommendation of the merger agreement, and the merger and the
alternative merger, or (c) approves or recommends any takeover proposal
or acquisition transaction involving Sonat; and
- by Sonat, if the Sonat board has entered into an agreement relating to a
superior proposal or Sonat has completed a superior proposal as set forth
in the first paragraph under "-- Covenants -- No Solicitation" above,
except that Sonat must have first complied with all of the requirements
set forth above in all of the paragraphs under "-- Covenants -- No
Solicitation" and "-- Additional Agreements -- Fees and Expenses" above,
including the payment of the $150 million termination fee to El Paso.
Sonat has agreed that it will pay El Paso a $150 million termination fee
and reimburse up to $10 million of El Paso's expenses incurred in connection
with the merger agreement if:
(1) (a) a takeover proposal is made to Sonat or its stockholders, and
the merger agreement is terminated because the merger is not completed by
March 31, 2000 or because the Sonat stockholders fail to approve the merger
agreement, and (b) within 12 months after the termination of the merger
agreement, Sonat enters into or completes a transaction relating to a
takeover proposal;
(2) El Paso terminates the merger agreement because the Sonat board or
any of its committees (a) fails to reaffirm its recommendation within 15
days of El Paso's request, (b) determines not to recommend that Sonat
stockholders vote to approve the merger agreement, or (c) approves or
recommends any takeover proposal or acquisition transaction involving
Sonat;
(3) El Paso terminates the merger agreement because the Sonat
shareholder rights plan is triggered as described above; or
(4) Sonat terminates the merger agreement to enter into a transaction
for a superior proposal.
Sonat will reimburse El Paso for up to $10 million of its expenses if the
Sonat stockholders fail to approve the merger agreement, even if no takeover
proposal had been previously made.
El Paso has agreed that it will pay Sonat a $150 million termination fee
and reimburse up to $10 million of Sonat's expenses incurred in connection with
the merger agreement if:
(1) (a) a takeover proposal is made to El Paso or its stockholders,
and the merger agreement is terminated because the merger is not completed
by March 31, 2000, and (b) within 12 months after the termination, El Paso
enters into or completes a transaction relating to a takeover proposal; or
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(2) Sonat terminates the merger agreement because the El Paso
shareholder rights plan is triggered as described above.
AMENDMENTS
We may amend the merger agreement at any time before or after stockholder
approval of the merger agreement. After stockholder approval of the merger
agreement, we may not make any amendment that, by law or in accordance with the
rules of any relevant stock exchange, requires further approval by either Sonat
stockholders or El Paso stockholders without the further approval of those
stockholders.
MATERIAL TERMS OF THE STOCK OPTION AGREEMENTS
As an inducement and condition to entering into the merger agreement, El
Paso and Sonat granted to each other options to purchase shares of their common
stock equal to approximately 19.9% of their currently outstanding shares. We
have attached the stock option agreements as Annexes B and C to this joint
proxy/prospectus and incorporate those agreements into this joint
proxy/prospectus by reference. We encourage you to read these agreements, which
may contain terms important to you. In this section of the joint proxy
statement/prospectus we describe the material provisions of the stock option
agreements. The description of the stock option agreements we provide below is
qualified in its entirety by reference to those agreements.
TERMS OF THE OPTIONS
Number of Shares and Exercise Price. Under the El Paso stock option
agreement, El Paso has granted to Sonat an option to purchase up to 24,349,638
shares of El Paso common stock at a price per share equal to $37.725. Under the
Sonat stock option agreement, Sonat has granted to El Paso an option to purchase
up to 21,899,515 shares of Sonat common stock at a price per share equal to
$27.238.
The number and type of securities subject to each option and their exercise
price will be adjusted to preserve the economic benefit of the options, if there
is any change in or distribution in respect of the granting party's common stock
by reason of a merger, recapitalization, stock dividend, split-up, combination,
exchange of shares or any similar event.
Exercise Rights. Each party holding an option may exercise its option in
the event that the merger agreement is terminated under circumstances which
entitle the option holder to receive a termination fee, as described above in
"Material Terms of the Merger Agreement" on page 57.
Expiration. To the extent an option has not been exercised, it will expire
upon the earliest of:
(1) completion of the merger, and
(2) nine months after the occurrence of one of the events entitling
the option holder to receive a termination fee as described in the previous
paragraph.
SUBSTITUTE OPTION
If the party that granted an option under a stock option agreement enters
into an agreement to:
(1) consolidate with or merge or permit its subsidiaries to
consolidate or merge into any person in a transaction in which it is not
the surviving corporation or in which its common stock represents less than
50% of the voting securities of the surviving corporation; or
(2) sell all or substantially all of its assets,
then the option will be converted into or exchanged for an option with identical
terms appropriately adjusted to acquire the number and class of shares or other
securities, cash or property that the option holder would have received if the
option had been exercised immediately prior to such consolidation, merger or
sale.
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EXCHANGE AT THE OPTION OF THE GRANTEE
Each option agreement provides that, if the party that granted an option
enters into any agreement providing that (x) all of its shares are to be
purchased for, or converted into the right to receive, cash or (y) with respect
to any merger, consolidation or sale of substantially all assets described in
"-- Substitute Option" above, the party is required to make a proper provision
in the agreement to provide that, if the option has not yet been exercised, then
upon the completion of any of these transactions, if the option is then
exercisable, the grantee will have the right, at its election, to receive in
exchange for the cancellation of the option an amount in cash equal to:
(1) the number of shares subject to the option, multiplied by
(2) the difference between the exercise price for the options and the
market value of those shares before the transaction is entered into or the
market value of the shares before the transaction is completed, whichever
is greater.
LIMITATION OF PROFIT
Each option holder's total profit under the applicable option agreement may
not exceed $175 million. The total profit under each option agreement is the sum
of:
(1) any termination fees received under the merger agreement, see
"Material Terms of the Merger Agreement" on page 57;
(2) any net cash proceeds from the exchange of the option pursuant to
the option agreements as described in "-- Exchange at the Option of the
Grantee;" and
(3) any net cash proceeds of the sale of the option shares to a third
party.
EFFECT OF STOCK OPTION AGREEMENTS
The stock option agreements are intended to increase the likelihood that
the merger will be consummated in accordance with the terms of the merger
agreement. The option agreements would have the effect of making an acquisition
or other combination of either company by or with a third party more costly
because of the need in any such transaction to acquire or otherwise provide for
the shares of the issuer's common stock purchased by the option holder by reason
of their exercise of the option. Moreover, following consultation with each of
their respective independent accountants, the management of El Paso and Sonat
believe that if an option becomes exercisable it is likely during the following
two years to preclude any other acquiror of the company that granted the option
from accounting for any such acquisition by using the pooling of interests
accounting method. Accordingly, the option agreements may discourage a third
party from proposing another transaction, including one that might be more
favorable to stockholders than the merger.
MATERIAL TERMS OF THE VOTING AGREEMENTS
As an inducement and condition to El Paso's willingness to enter into the
merger agreement, (1) Selim K. Zilkha, in his individual capacity and in his
capacity as trustee of the Selim K. Zilkha Trust, and Michael S. Zilkha and (2)
Ronald L. Kuehn, Jr. entered into separate voting agreements with El Paso. Under
these voting agreements, the Zilkhas, including the Zilkha Trust, have agreed to
vote 22,933,580 shares of Sonat common stock, representing approximately 20.8%
of the outstanding shares of Sonat common stock, and Mr. Kuehn has agreed to
vote 186,504 shares of Sonat common stock, including shares held through
employee plans and shares of restricted stock, representing less than 1% of the
outstanding shares of Sonat common stock, in favor of the merger agreement.
In addition, El Paso has agreed that the rights of the Zilkhas, including
the Zilkha Trust, set forth in the Registration Rights Agreement, dated as of
January 30, 1998, by and among Sonat, Selim K. Zilkha, Michael S. Zilkha, the
Selim K. Zilkha Trust and the SKZ (1996) Annuity Trust will continue in effect
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after the completion of the merger, and, after the completion of the merger, it
will comply with the obligations of Sonat thereunder as if it were Sonat.
MATERIAL TERMS OF THE KUEHN TERMINATION
AND CONSULTING AGREEMENT
Under the merger agreement, Sonat and El Paso have agreed that El Paso will
enter into a termination and consulting agreement with Ronald L. Kuehn, Jr.,
Chairman, President and Chief Executive Officer of Sonat. It is expected that
this agreement will be signed in connection with the completion of the merger or
the alternative merger.
In accordance with the termination and consulting agreement, Mr. Kuehn will
retire from his employment with Sonat as of the last day of the month in which
the merger or the alternative merger is completed. Mr. Kuehn will serve as a
member of El Paso's board of directors after the completion of the merger or the
alternative merger. Through December 31, 2000, Mr. Kuehn will serve as the
non-executive chairman of the board of El Paso and will receive a fee of $20,833
per month. In addition, during this time Mr. Kuehn will receive the perquisites
that were available to him prior to the merger or the alternative merger, as
well as non-cash compensation available to other members of the El Paso board of
directors. From the date of his termination and for the remainder of his life,
Mr. Kuehn will receive certain ancillary benefits made available to him prior to
the merger. These benefits will include the provision of office space and
related services and payment of life insurance premiums sufficient to provide a
death benefit equal to four times his base pay as in effect immediately prior to
his termination. He and his eligible dependents will also receive retiree
medical coverage.
Pursuant to the termination and consulting agreement, upon his termination
Mr. Kuehn will be deemed to have experienced an event entitling him to payments
and benefits under his Sonat severance agreement, as described in "Interests of
Certain Persons in the Merger."
THE SPECIAL MEETINGS
DATES, TIMES AND PLACES
El Paso. El Paso's special meeting will be held at , at
a.m., local time, on , 1999.
Sonat. Sonat's special meeting will be held at , at a.m.,
local time, on , 1999.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
El Paso. At El Paso's special meeting, holders of El Paso common stock are
being asked to adopt the merger agreement, including the issuance of one share
of El Paso common stock to Sonat stockholders for each share of Sonat common
stock owned by them and the amendment of El Paso's certificate of incorporation
to increase the authorized shares of capital stock of El Paso from 275 million
to 750 million shares of common stock and from 25 to 50 million shares of
preferred stock. See "The Merger" and "Material Terms of the Merger Agreement."
The El Paso board believes that the merger agreement and the transactions
contemplated by it are fair to and in the best interests of El Paso and its
stockholders and unanimously recommends that El Paso stockholders vote FOR the
adoption of the merger agreement.
Sonat. At Sonat's special meeting, holders of Sonat common stock are being
asked to adopt the merger agreement. See "The Merger" and "Material Terms of the
Merger Agreement."
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The Sonat board believes that the merger agreement and the transactions
contemplated by it are fair to and in the best interests of Sonat and its
stockholders and unanimously recommends that Sonat stockholders vote FOR the
adoption of the merger agreement.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
El Paso. Only holders of record of El Paso common stock at the close of
business on , 1999, the record date for El Paso's special meeting,
are entitled to notice of and to vote at El Paso's special meeting. On the
record date, approximately shares of El Paso common stock were issued
and outstanding and held by approximately holders of record. A
majority of the shares of El Paso common stock issued and outstanding and
entitled to vote on the record date must be represented in person or by proxy at
El Paso's special meeting in order for a quorum to be present for purposes of
transacting business at El Paso's special meeting. In the event that a quorum is
not present at El Paso's special meeting, it is expected that the meeting will
be adjourned or postponed to solicit additional proxies. Holders of record of El
Paso common stock on the record date are each entitled to one vote per share on
each matter to be considered at El Paso's special meeting.
Sonat. Only holders of record of Sonat common stock at the close of
business on , 1999, the record date for Sonat's special meeting, are
entitled to receive notice of and to vote at Sonat's special meeting. On the
record date, approximately shares of Sonat common stock were issued
and outstanding and held by approximately holders of record. A
majority of the shares of Sonat common stock issued and outstanding and entitled
to vote on the record date must be represented in person or by proxy at Sonat's
special meeting in order for a quorum to be present for purposes of transacting
business at Sonat's special meeting. In the event that a quorum is not present
at Sonat's special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of Sonat common stock
on the record date are each entitled to one vote per share on each matter to be
considered at Sonat's special meeting.
VOTES REQUIRED
El Paso. The adoption of the merger agreement requires the affirmative vote
of the holders of a majority of the shares of El Paso common stock outstanding
on the record date. AN ABSTENTION OR A BROKER NON-VOTE, WHICH WE DESCRIBE BELOW,
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
Sonat. The adoption of the merger agreement requires the affirmative vote
of a majority of the shares of Sonat common stock outstanding on the record
date. AN ABSTENTION OR A BROKER NON-VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.
SHARE OWNERSHIP OF MANAGEMENT
El Paso. At the close of business on the record date, directors and
executive officers of El Paso and their affiliates beneficially owned and were
entitled to vote approximately shares of El Paso common stock, which
represented approximately % of the shares of El Paso common stock outstanding
on that date. Each of those directors and executive officers has indicated his
or her present intention to vote, or cause to be voted, the El Paso common stock
owned by him or her FOR the proposal to adopt the merger agreement at El Paso's
special meeting.
Sonat. At the close of business on the record date, directors and executive
officers of Sonat and their affiliates beneficially owned and were entitled to
vote approximately shares of Sonat common stock, which represented
approximately % of the shares of Sonat common stock outstanding on that date.
Each of those directors and executive officers has indicated his or her present
intention to vote, or cause to be voted, the Sonat common stock owned by him or
her FOR the adoption of the merger agreement at Sonat's special meeting.
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<PAGE> 80
VOTING OF PROXIES
Submitting Proxies
El Paso and Sonat stockholders may submit their proxies by attending their
respective special meetings and voting their shares in person at the meetings,
or by completing the enclosed proxy card, signing and dating it and mailing it
in the enclosed postage-prepaid envelope. If a written proxy card is signed by a
stockholder and returned without instructions, the shares represented by the
proxy will be voted for the proposal presented at El Paso's special meeting or
for the proposal presented at Sonat's special meeting, as applicable.
El Paso stockholders may also submit their proxies by telephone or over the
Internet. The telephone and Internet voting procedures are designed to
authenticate votes cast by use of a personal identification number. These
procedures allow stockholders to appoint a proxy to vote their shares and to
confirm that their instructions have been properly recorded. Instructions for
voting by telephone and over the Internet are printed on the proxy card for
stockholders of record of El Paso.
El Paso and Sonat stockholders whose shares are held in "street name"
(i.e., in the name of a broker, bank or other record holder) must either direct
the record holder of their shares as to how to vote their shares or obtain a
proxy from the record holder to vote at their respective special meeting.
Under the applicable rules of the New York Stock Exchange, brokers who hold
shares in street names for customers who are the beneficial owners of those
shares are prohibited from giving a proxy to vote those customers' shares with
respect to the proposal(s) to be voted on at the special meetings in the absence
of specific instructions from the customer (i.e., broker non-votes).
Shares of El Paso common stock or Sonat common stock represented at the
applicable special meeting for which proxies have been received, but with
respect to which holders of shares have abstained on any matter, will be treated
as present at the applicable special meeting for purposes of determining the
presence or absence of a quorum for the transaction of all business. For El Paso
stockholders and Sonat stockholders, an abstention or a broker non-vote will
have the same effect as a vote against the proposal to adopt the merger
agreement.
If any other matters are properly presented at El Paso's special meeting,
in the case of El Paso stockholders, or at Sonat's special meeting, in the case
of the Sonat stockholders, for consideration, the persons named in the enclosed
form of proxy, and acting under it, will have discretion to vote or not vote on
those matters in accordance with their best judgment, unless authorization to
use that discretion is withheld. If a proposal to adjourn El Paso's special
meeting or Sonat's special meeting is properly presented, however, the persons
named in the enclosed form of proxy will not have discretion to vote in favor of
the adjournment proposal any shares that have been voted against the proposal to
be presented at the special meeting. Neither El Paso nor Sonat is aware of any
matters expected to be presented at its respective special meeting other than as
described in its respective notice of special meeting.
Revoking Proxies
El Paso and Sonat stockholders of record may revoke their proxies at any
time prior to the time their proxies are voted at El Paso's special meeting or
Sonat's special meeting, respectively. Proxies may be revoked by written notice,
including by facsimile, to the Corporate Secretary of El Paso or the Secretary
of Sonat, as applicable, by a later dated proxy signed and returned by mail or
by attending El Paso's special meeting or Sonat's special meeting, as
applicable, and by voting in person. Attendance at El Paso's special meeting or
Sonat's special meeting will not in and of itself constitute a revocation of a
proxy. El Paso stockholders of record may also revoke their proxies by a
later-dated proxy using the telephone voting
72
<PAGE> 81
procedures or the Internet voting procedures. Any written notice of a revocation
of a proxy must be sent so as to be delivered before the taking of the vote at
the applicable special meeting as follows:
FOR EL PASO STOCKHOLDERS, TO:
El Paso Energy Corporation
El Paso Energy Building
1001 Louisiana Street
Houston, Texas 77002
Telecopy: (713) 420-4099
Attention: Corporate Secretary
FOR SONAT STOCKHOLDERS, TO:
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35203
Telecopy: (205) 325-7653
Attention: Secretary
El Paso stockholders who require assistance in changing or revoking a proxy
should contact Georgeson & Company, Inc. and Sonat stockholders who require
assistance in changing or revoking a proxy should contact D.F. King & Co., Inc.
at their respective addresses and phone numbers provided in this joint proxy
statement/prospectus under the caption "Who Can Answer Your Questions" on page
3.
General Information
The cost of solicitation of proxies will be paid by El Paso for
solicitation of proxies from El Paso stockholders and by Sonat for solicitation
of proxies from Sonat stockholders. In addition to solicitation by mail, the
directors, officers and employees of El Paso and Sonat may also solicit proxies
from stockholders by telephone, telecopy, telegram, over the Internet or in
person. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries to send the proxy materials to beneficial
owners; and El Paso or Sonat, as the case may be, will, upon request, reimburse
those brokerage houses and custodians for their reasonable expenses in so doing.
El Paso has retained Georgeson & Company, Inc. to aid in the solicitation
of proxies and to verify certain records related to the solicitations. Georgeson
& Company, Inc. will receive a fee of $12,500 as compensation for its services
plus reimbursement for its related out-of-pocket expenses. El Paso has agreed to
indemnify Georgeson & Company, Inc. against certain liabilities arising out of
or in connection with its engagement.
Sonat has retained D.F. King & Co., Inc. to aid in the solicitation of
proxies and to verify certain records related to the solicitations. D.F. King &
Co., Inc. will receive a fee of $ as compensation for its services and
reimbursement for its related out-of-pocket expenses. Sonat has agreed to
indemnify D.F. King & Co., Inc. against certain liabilities arising out of or in
connection with its agreement.
Stockholders who submit proxy cards should not send in any stock
certificates with their proxy cards. A letter of transmittal with instructions
for the surrender of certificates representing shares of Sonat common stock will
be mailed by El Paso to former Sonat stockholders shortly after the merger is
completed. See "Material Terms of the Merger Agreement -- Procedures for
Surrender of Certificates; Fractional Shares."
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<PAGE> 82
FINANCIAL INFORMATION
If the El Paso stockholders approve the merger agreement, we will complete
the merger on an all common stock basis and expect to account for the merger
using the pooling of interests method of accounting in accordance with United
States generally accepted accounting principles. If the El Paso stockholders do
not approve the merger agreement, we will complete the merger under the
alternative merger structure and will account for the merger using the purchase
method of accounting in accordance with United States generally accepted
accounting principles. Therefore, the unaudited pro forma combined financial
information has been provided under both the pooling of interests and the
purchase methods of accounting.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved had
the merger or alternative merger been consummated as of the beginning of the
periods presented, nor are they necessarily indicative of the future operating
results or financial position of El Paso. The unaudited pro forma condensed
combined financial statements do not give effect to any operating efficiencies
or cost savings that may result from the integration of El Paso's and Sonat's
operations.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING
The following unaudited pro forma condensed combined financial statements
give effect to the merger using the pooling of interests method of accounting.
Under this accounting method, El Paso's and Sonat's balance sheets and income
statements are treated as if they had always been combined for accounting and
financial reporting purposes. These unaudited pro forma condensed combined
financial statements should be read in conjunction with the historical financial
statements and related notes of El Paso and Sonat which are incorporated by
reference in this joint proxy statement/prospectus. The historical financial
statements for Sonat include certain reclassifications to conform to El Paso's
presentation. These reclassifications have no impact on net income or total
stockholders' equity.
The unaudited pro forma condensed combined balance sheet as of December 31,
1998 assumes the merger had been completed on December 31, 1998. The unaudited
pro forma condensed combined income statements for the three years ended
December 31, 1998 assume the merger had been completed on January 1, 1996, the
beginning of the earliest period presented.
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<PAGE> 83
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
AS OF DECEMBER 31, 1998
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets............................... $ 1,209 $ 801 $ -- $ 2,010
Property, plant and equipment, net................. 7,341 2,696 -- 10,037
Other.............................................. 1,519 864 -- 2,383
------- ------ ----- -------
Total assets............................. $10,069 $4,361 $ -- $14,430
======= ====== ===== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities.......................... $ 2,162 $1,577 $ 135(a) $ 3,823
(51)(c)
------- ------ ----- -------
Long-term debt, less current maturities............ 2,552 1,099 -- 3,651
------- ------ ----- -------
Deferred income taxes.............................. 1,564 164 (22)(c) 1,706
------- ------ ----- -------
Other.............................................. 993 183 -- 1,176
------- ------ ----- -------
Company-obligated mandatorily redeemable
convertible preferred securities of El Paso
Energy Capital Trust I........................... 325 -- -- 325
------- ------ ----- -------
Minority interest.................................. 365 9 -- 374
------- ------ ----- -------
Stockholders' equity
Common stock..................................... 373 111 219(b) 703
Additional paid-in capital....................... 1,436 77 (279)(b) 1,234
Retained earnings................................ 460 1,210 (192)(a) 1,551
73(c)
Other............................................ (161) (69) 60(b) (113)
57(a)
------- ------ ----- -------
Total stockholders' equity............... 2,108 1,329 (62) 3,375
------- ------ ----- -------
Total liabilities and stockholders'
equity................................. $10,069 $4,361 $ -- $14,430
======= ====== ===== =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
75
<PAGE> 84
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
Accounting policy differences and intercompany balances between El Paso and
Sonat have been determined to be immaterial and, accordingly, the pro forma
condensed combined balance sheet has not been adjusted for those differences.
(a) Reflects the estimated costs associated with the merger of El Paso and
Sonat, which approximate $192 million. These costs consist primarily of
approximately (1) $142 million for costs of compensation related programs
under which certain benefits of El Paso and Sonat personnel accelerate and
vest as a result of the change in control associated with the merger and
(2) $50 million for estimated transaction costs, which include legal,
accounting, and financial advisory services.
(b) Reflects the exchange of one share of El Paso common stock for each share
of outstanding Sonat common stock, as provided in the merger agreement and
the cancellation of $60 million of Sonat treasury stock.
(c) Reflects the income tax consequences of estimated costs associated with the
merger at an effective income tax rate of 38%.
76
<PAGE> 85
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,782 $3,710 $-- $9,492
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 4,212 2,745 -- 6,957
Operation and maintenance........................ 707 281 -- 988
Depreciation, depletion and amortization......... 269 349 -- 618
Ceiling test charges............................. -- 1,035 -- 1,035
Other............................................ 88 63 -- 151
------ ------ --- ------
5,276 4,473 -- 9,749
------ ------ --- ------
Operating income (loss)............................ 506 (763) -- (257)
Interest and debt expense.......................... 267 137 -- 404
Other income, net.................................. (138) (67) -- (205)
------ ------ --- ------
Income (loss) before income taxes and minority
interest......................................... 377 (833) -- (456)
Income tax expense (benefit)....................... 127 (299) -- (172)
------ ------ --- ------
Income (loss) before minority interest............. 250 (534) -- (284)
Minority interest.................................. 25 (3) -- 22
------ ------ --- ------
Net income (loss).................................. $ 225 $ (531) $-- $ (306)
====== ====== === ======
Basic earnings (loss) per common share............. $ 1.94 $(1.35)
====== ======
Diluted earnings (loss) per common share........... $ 1.85 $(1.35)(a)
====== ======
Basic average common shares outstanding............ 116 110(b) 226
====== === ======
Diluted average common shares outstanding.......... 126 111(b) 237
====== === ======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
77
<PAGE> 86
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING THE COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,638 $4,372 $-- $10,010
------ ------ --- -------
Operating expenses
Cost of gas and other products................... 4,125 3,174 -- 7,299
Operation and maintenance........................ 664 385 -- 1,049
Depreciation, depletion and amortization......... 236 398 -- 634
Other............................................ 92 43 -- 135
------ ------ --- -------
5,117 4,000 -- 9,117
------ ------ --- -------
Operating income................................... 521 372 -- 893
Interest and debt expense.......................... 238 110 -- 348
Other income, net.................................. (57) (66) -- (123)
------ ------ --- -------
Income before income taxes and minority interest... 340 328 -- 668
Income tax expense................................. 129 107 -- 236
------ ------ --- -------
Income before minority interest.................... 211 221 -- 432
Minority interest.................................. 25 3 -- 28
------ ------ --- -------
Net income......................................... $ 186 $ 218 $-- $ 404
====== ====== === =======
Basic earnings per common share.................... $ 1.64 $ 1.80
====== =======
Diluted earnings per common share.................. $ 1.59 $ 1.76
====== =======
Basic average common shares outstanding............ 114 110(b) 224
====== === =======
Diluted average common shares outstanding.......... 117 112(b) 229
====== === =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
78
<PAGE> 87
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $3,012 $3,204 $-- $6,216
------ ------ --- ------
Operating expenses
Cost of gas and other products................... 2,277 2,039 -- 4,316
Operation and maintenance........................ 322 301 -- 623
Depreciation, depletion and amortization......... 101 384 -- 485
Employee separation and asset impairment
charge........................................ 99 -- -- 99
Other............................................ 43 48 -- 91
------ ------ --- ------
2,842 2,772 -- 5,614
------ ------ --- ------
Operating income................................... 170 432 -- 602
Interest and debt expense.......................... 110 101 -- 211
Other income, net.................................. (5) (53) -- (58)
------ ------ --- ------
Income before income taxes and minority interest... 65 384 -- 449
Income tax expense................................. 25 125 -- 150
------ ------ --- ------
Income before minority interest.................... 40 259 -- 299
Minority interest.................................. 2 3 -- 5
------ ------ --- ------
Net income......................................... $ 38 $ 256 $-- $ 294
====== ====== === ======
Basic earnings per common share.................... $ 0.53 $ 1.62
====== ======
Diluted earnings per common share.................. $ 0.52 $ 1.59
====== ======
Basic average common shares outstanding............ 72 110(b) 182
====== === ======
Diluted average common shares outstanding.......... 73 112(b) 185
====== === ======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
79
<PAGE> 88
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
REFLECTING COMPLETION OF THE MERGER ON AN ALL COMMON STOCK BASIS
(POOLING OF INTERESTS METHOD OF ACCOUNTING)
Accounting policy differences and intercompany transactions between El Paso
and Sonat have been determined to be immaterial and, accordingly, the pro forma
condensed combined statements of income have not been adjusted for those
differences.
(a) As required by the accounting rules, we have excluded additional dilutive
securities such as options in determining diluted earnings (loss) per
common share. If we had included those securities, we would have shown a
lower loss per common share.
(b) The basic and diluted common shares adjustments reflect the exchange of one
share of El Paso common stock for each share of Sonat common stock
contemplated by the merger agreement.
80
<PAGE> 89
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
The following unaudited pro forma condensed combined financial statements
give effect to the merger under the alternative merger structure using the
purchase method of accounting. These unaudited pro forma condensed combined
financial statements should be read in conjunction with the historical financial
statements and related notes of El Paso and Sonat which are incorporated by
reference into this joint proxy statement/prospectus. The historical financial
statements for Sonat include certain reclassifications to conform to El Paso's
presentation. These reclassifications have no impact on net income or total
stockholders' equity.
In accordance with the purchase method of accounting, we have reflected
Sonat's assets and liabilities on the following pro forma financial statements
based on their estimated fair value when the merger is completed. The total
value of the shares that would be issued to Sonat stockholders under the
alternative merger structure has been allocated to Sonat's assets and
liabilities on the following pro forma financial statements. These allocations
are preliminary and may require the completion of independent appraisals, which
have not yet been performed. These preliminary allocations will be revised when
we obtain additional information concerning the valuation of Sonat's assets and
liabilities. To the extent the total value of the shares issued in the merger
exceeds the fair value of Sonat's identified assets and liabilities, we will
record the excess as "goodwill" for accounting purposes.
The unaudited pro forma condensed combined balance sheet as of December 31,
1998 assumes the merger had been completed on December 31, 1998. The unaudited
pro forma condensed combined statement of income for the year ended December 31,
1998 assumes the merger had been completed on January 1, 1998.
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<PAGE> 90
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
AS OF DECEMBER 31, 1998
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total current assets................................ $ 1,209 $ 801 $ -- $ 2,010
Property, plant and equipment, net.................. 7,341 2,696 3,836(a) 13,431
(442)(b)
Other............................................... 1,519 864 -- 2,383
------- ------ ------- -------
Total assets.............................. $10,069 $4,361 $ 3,394 $17,824
======= ====== ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total current liabilities........................... $ 2,162 $1,577 $ 72(c) $ 3,784
(27)(e)
------- ------ ------- -------
Long-term debt, less current maturities............. 2,552 1,099 49(a) 3,700
------- ------ ------- -------
Deferred income taxes............................... 1,564 164 1,271(e) 2,999
------- ------ ------- -------
Other............................................... 993 183 -- 1,176
------- ------ ------- -------
Company-obligated mandatorily redeemable convertible
preferred securities of El Paso Energy Capital
Trust I........................................... 325 -- -- 325
------- ------ ------- -------
Mandatorily redeemable preferred stock.............. -- -- 3,014(f) 3,014
------- ------ ------- -------
Minority interest................................... 365 9 -- 374
------- ------ ------- -------
Stockholders' equity
Common stock...................................... 373 111 (111)(d) 429
56(f)
Additional paid-in capital........................ 1,436 77 (77)(d) 1,998
562(f)
Retained earnings................................. 460 1,210 (1,210)(d) 186
(442)(b)
168(e)
Other............................................. (161) (69) 69(d) (161)
------- ------ ------- -------
Total stockholders' equity................ 2,108 1,329 (985) 2,452
------- ------ ------- -------
Total liabilities and stockholders'
equity.................................. $10,069 $4,361 $ 3,394 $17,824
======= ====== ======= =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
82
<PAGE> 91
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
Accounting policy differences and intercompany balances between El Paso and
Sonat have been determined to be immaterial and, accordingly, the pro forma
condensed combined balance sheet has not been adjusted for those differences.
(a) Reflects the preliminary allocation of the total value of the shares issued
to Sonat stockholders under the alternative merger structure to Sonat's
assets and liabilities.
(b) Reflects the writedown of the purchase price allocated to proven reserves
as a result of applying the full cost ceiling limitations. This writedown
has not been considered in the proforma condensed combined statement of
income because it reflects a nonrecurring charge which would result
directly from the merger and which would be included in the income
statement during the period in which the merger is completed.
(c) Reflects the estimated costs associated with the merger of El Paso and
Sonat including approximately $22 million of compensation related costs
associated with certain benefits of Sonat personnel which accelerate and
vest as a result of the change in control associated with the merger and
$50 million for estimated transaction costs, which include legal,
accounting and financial advisory services.
(d) Reflects the elimination of the historical equity of Sonat.
(e) Reflects the income tax consequences of the pro forma adjustments at an
effective income tax rate of 38%.
(f) Reflects the issuance of approximately 18.7 million shares of El Paso
common stock assuming each share of El Paso common stock issued will have a
$33 value and the issuance of 30.1 million depositary shares representing
newly issued senior voting preferred stock having an aggregate liquidation
preference of $3.01 billion and an annual dividend rate of 8.75%. The
actual dividend rate will be set at a rate that our financial advisors
believe will cause the depositary shares, when fully distributed after
completion of the alternative merger, to trade initially at approximately
$100 per share, considering the pro forma capitalization and credit profile
of the combined company after completion of the alternative merger.
83
<PAGE> 92
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
EL PASO SONAT COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues................................. $5,782 $3,710 $ -- $9,492
------ ------ ----- ------
Operating expenses
Cost of gas and other products................... 4,212 2,745 -- 6,957
Operation and maintenance........................ 707 281 -- 988
Depreciation, depletion and amortization......... 269 349 75(a) 693
Ceiling test charges............................. -- 1,035 -- 1,035
Other............................................ 88 63 -- 151
------ ------ ----- ------
5,276 4,473 75 9,824
------ ------ ----- ------
Operating income (loss)............................ 506 (763) (75) (332)
Interest and debt expense.......................... 267 137 -- 404
Other income, net.................................. (138) (67) -- (205)
------ ------ ----- ------
Income (loss) before income taxes and minority
interest......................................... 377 (833) (75) (531)
Income tax expense (benefit)....................... 127 (299) (28)(b) (200)
------ ------ ----- ------
Income (loss) before minority interest............. 250 (534) (47) (331)
Minority interest.................................. 25 (3) -- 22
------ ------ ----- ------
Net income (loss) before preferred stock dividend
requirement...................................... 225 (531) (47) (353)
Preferred stock dividend requirement............... -- -- 264(c) 264
------ ------ ----- ------
Net income (loss) available to common
stockholders..................................... $ 225 $ (531) $(311) $ (617)
====== ====== ===== ======
Basic earnings (loss) per common share............. $ 1.94 $(4.57)
====== ======
Diluted earnings (loss) per common share........... $ 1.85 $(4.57)(d)
====== ======
Basic average common shares outstanding............ 116 19(d) 135
====== ===== ======
Diluted average common shares outstanding.......... 126 24(d) 150
====== ===== ======
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
REFLECTING COMPLETION OF THE MERGER UNDER THE ALTERNATIVE MERGER STRUCTURE
(PURCHASE METHOD OF ACCOUNTING)
Accounting policy differences and intercompany transactions between El Paso
and Sonat have been determined to be immaterial and, accordingly, the pro forma
condensed combined statement of income has not been adjusted for those
differences.
(a) Reflects depreciation expense related to the portion of the total value of
the shares issued to Sonat stockholders allocated to property, plant and
equipment based on an estimated life of 40 years, which approximates the
regulatory lives of Sonat's pipelines.
(b) Reflects the income tax consequences of the pro forma adjustment at an
effective income tax rate of 38%.
(c) Reflects an annual preferred stock dividend rate of 8.75% for senior voting
preferred stock which would be issued by El Paso pursuant to the
alternative merger structure. The actual dividend rate will be set at a
rate that our financial advisors believe will cause the depositary shares,
when fully distributed after completion of the alternative merger, to trade
initially at approximately $100 per share, considering the pro forma
capitalization and credit profile of the combined company after completion
of the alternative merger. Each percentage point change in the assumed
annual dividend rate would impact the senior voting preferred stock
dividend by approximately $30 million.
(d) The basic and diluted common shares adjustments reflect the issuance of
approximately 18.7 million and 24 million shares, respectively, of El Paso
common stock in connection with the alternative merger structure based on
an implied price for the El Paso common stock of $33 per share and the
issuance of 30.1 million shares of senior voting preferred stock having an
aggregate liquidation preference of $3.01 billion and an annual dividend
rate of 8.75%. As required by the accounting rules, we have excluded
additional dilutive securities such as options in determining diluted
earnings (loss) per common share. If we had included those securities, we
would have shown a lower loss per common share.
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
On , 1999, the record date for the special meetings, there
were approximately holders of record of El Paso common stock and
approximately holders of record of Sonat common stock.
Market Prices and Dividends
El Paso common stock is listed on the New York Stock Exchange under the
symbol "EPG" Sonat common stock is listed on the New York Stock Exchange under
the symbol "SNT."
The table below sets forth, for the periods indicated, the high and low
sale prices of El Paso common stock and Sonat common stock as reported on the
New York Stock Exchange Composite Transaction Tape, in each case based on
published financial sources, and the cash dividends declared on El Paso common
stock and Sonat common stock for the same periods.
El Paso's common stock prices and the cash dividend amounts in the
following table have been adjusted to reflect El Paso's payment of a stock
dividend in April 1998 of one share of common stock for each share of common
stock then outstanding.
<TABLE>
<CAPTION>
EL PASO COMMON STOCK SONAT COMMON STOCK
---------------------------- ----------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1997:
First Fiscal Quarter.............. $28.500 $24.438 $0.1825 $57.000 $45.500 $0.2700
Second Fiscal Quarter............. 30.313 27.125 0.1825 59.125 50.625 0.2700
Third Fiscal Quarter.............. 30.344 26.500 0.1825 54.250 45.375 0.2700
Fourth Fiscal Quarter............. 33.750 28.875 0.1825 51.313 42.250 0.2700
1998:
First Fiscal Quarter.............. 35.625 31.125 0.1913 45.625 38.875 0.2700
Second Fiscal Quarter............. 38.938 35.438 0.1913 44.813 36.000 0.2700
Third Fiscal Quarter.............. 38.625 24.688 0.1913 38.563 25.875 0.2700
Fourth Fiscal Quarter............. 36.813 30.125 0.1913 31.375 26.313 0.2700
1999:
First Fiscal Quarter.............. 39.375 30.688 0.2000 31.75 23.563 0.2700
</TABLE>
On March 12, 1999, the last full trading day prior to the public
announcement of the proposed merger, the closing prices of El Paso common stock
and Sonat common stock reported on the New York Stock Exchange Composite
Transaction Tape were $35.75 per share and $30.0625 per share, respectively. On
April 7, 1999, the most recent practicable date prior to the printing of this
joint proxy statement/ prospectus, the closing prices of El Paso common stock
and Sonat common stock reported on the New York Stock Exchange Composite
Transaction Tape were $32.0625 per share and $31.125 per share, respectively.
Stockholders should obtain current market quotations prior to making any
decision with respect to the merger.
Post-Merger Dividend Policy. Following the merger, El Paso expects to
continue to pay dividends on the El Paso common stock at the current rate of
$.20 per share per quarter, or $.80 per share per year. However, the payment of
dividends will be in the discretion of the El Paso board and will be determined
after consideration of various factors, including the earnings and financial
condition of El Paso and its subsidiaries.
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DESCRIPTION OF SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK
AND DEPOSITARY SHARES
In this section of the joint proxy statement/prospectus we describe the
material terms of the El Paso Senior Cumulative Exchangeable Preferred Stock,
which we have been referring to in this document as the senior voting preferred
stock, and the depositary shares that would be issued under the alternative
merger structure.
EL PASO SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK
Redemption and Exchange. The shares of the senior voting preferred stock
will mature 21 years after they are issued. On the maturity date, El Paso will
redeem for cash all outstanding shares of the senior voting preferred stock for
$5,000 per share, plus the amount of all dividends relating to prior periods
that El Paso has failed to pay. El Paso will have the right at any time to
require the holders of the senior voting preferred stock to exchange their
senior voting preferred stock for the number of shares of El Paso common stock
having an aggregate market value (as determined by the average closing prices
for El Paso common stock for the 20 trading days prior to publication of the
applicable notice of the exchange) of $5,000 per share. Whether the shares of
the senior voting preferred stock are redeemed or exchanged, holders will
receive upon any redemption or exchange a cash payment equal to the amount of
dividends which have accrued but remain unpaid.
Priority. The senior voting preferred stock will rank, with respect to
dividend rights and rights on liquidation, senior to all classes of common stock
of El Paso and each other class of capital stock or preferred stock of El Paso
unless the terms of any class of stock expressly provide that the class of stock
ranks on a parity with the senior voting preferred stock as to dividend rights
and rights on liquidation. After the shares of senior voting preferred stock are
issued, El Paso will not be permitted to issue any class of stock ranking senior
with respect to dividend rights and rights upon liquidation to the senior voting
preferred stock.
If El Paso at any time has not paid in full all previously scheduled
dividends on the senior voting preferred stock, until El Paso pays those
dividends in full, it will not be permitted to pay dividends or make other
distributions to holders of securities ranking junior to, or to holders of
securities ranking on a parity with, the El Paso senior voting preferred stock
with respect to dividends and rights on liquidation. During this period,
entities controlled by El Paso will also not be permitted to pay dividends or
make distributions to holders of, or redeem or repurchase, their securities.
Dividends. Dividends on the senior voting preferred stock will be
cumulative from the date of issuance and will be payable quarterly on the first
day of January, April, July and October in each year. El Paso will pay its first
dividend on the senior voting preferred stock on the first payment date after
the senior voting preferred stock is issued. The holders of the senior voting
preferred stock will be entitled to cumulative cash dividends only when, as and
if declared by the board of directors of El Paso and out of funds legally
available for that purpose. El Paso will not, however, pay interest on unpaid
dividends on the senior voting preferred stock. The dividend rate will be a
percentage, to be jointly determined by Merrill Lynch, Sonat's financial
advisor, and Donaldson, Lufkin & Jenrette, El Paso's financial advisor, that
those financial advisors believe would cause the trading price per depositary
share on a fully distributed basis after the completion of the merger to be as
nearly equal as possible to $100. If the financial advisors are unable to agree
on the rate, El Paso and Sonat will direct their financial advisors to jointly
select a nationally recognized investment bank to determine the rate.
Consolidations and Mergers. Upon any consolidation, merger or similar
business combination, pursuant to which the outstanding shares of El Paso common
stock are by operation of law exchanged for or changed, reclassified or
converted into stock of any other party or cash or other property paid by any
other party, the shares of senior voting preferred stock will be assumed by and
will become preferred stock of such party having, insofar as possible, the same
powers, preferences and relative, participating, optional or other special
rights, and the same qualifications, limitations or restrictions, that the
senior voting preferred stock had immediately prior to the transaction. If the
El Paso common stock is exchanged,
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changed, reclassified or converted into stock or cash or other property of any
other party, and that party is a subsidiary, directly or indirectly, of any
other entity, then the preferred stock will be assumed by and will become
preferred stock of the "ultimate parent entity," as that term is defined under
the rules to the HSR Act.
Liquidation Rights. Upon the liquidation of El Paso and before any
distribution of assets to holders of stock ranking junior to the senior voting
preferred stock, the holders of shares of the outstanding senior voting
preferred stock will be entitled to receive, out of the assets available for
distribution to holders of senior voting preferred stock, an amount per share
equal to $5,000 plus the amount of dividends which have accrued but remain
unpaid. If, upon a liquidation, assets of El Paso are insufficient to pay in
full the amounts described above as payable with respect to senior voting
preferred stock, the holders of senior voting preferred stock and any securities
that ranks on parity with the senior voting preferred stock for liquidation
purposes will share proportionately in any distribution of assets of El Paso,
first in proportion to their respective liquidation preferences until such
preferences are paid in full, and then in proportion to amounts of dividends
which remain unpaid. After payment in full of any liquidation preference and
accrued but unpaid dividends, the holders of senior voting preferred stock will
not be entitled to any further participation in any distribution of assets by El
Paso. For purposes of the senior voting preferred stock, neither the sale or
transfer of all or any part of the assets of El Paso, nor the merger or
consolidation of El Paso into or with any other corporation or a merger of any
other corporation with or into El Paso, will be considered a liquidation of El
Paso.
Voting. Holders of the senior voting preferred stock will be entitled to 50
votes per share on each matter submitted to a vote at any meeting of El Paso's
stockholders. Whenever dividends are in arrears for six or more dividend
periods, a default period will begin and will extend, until the time at which
all accrued and unpaid dividends on the senior voting preferred stock have been
paid in full. During each such default period, the holders of senior voting
preferred stock, voting separately as a class, are entitled to elect two
additional directors to El Paso's board of directors. The terms of any
additional directors so elected shall terminate upon the end of the default
period.
Transfer Agent and Registrar. The BankBoston, N.A. will serve as registrar
and transfer agent for the senior voting preferred stock and the depositary
shares.
Listing. Although application will be made to list the depository shares on
the New York Stock Exchange, no application has been made to list the shares of
senior voting preferred stock on the New York Stock Exchange or any other
national securities exchange. Upon the termination of the depositary agreement,
described below, El Paso may be required to cause the shares of senior voting
preferred stock to be so listed.
Reissuance. If shares of senior voting preferred stock are redeemed or
exchanged, the shares so reacquired shall, upon compliance with any statutory
requirements, assume the status of authorized but unissued shares of preferred
stock of El Paso but may not be reissued as senior voting preferred stock.
Other. For a description of provisions contained in El Paso's certificate
of incorporation which are intended to prevent certain takeover bids from being
completed without the approval of the El Paso board, see the sections entitled
"Fair Price Provisions" and "Shareholder Rights Plan" under "Comparison of
Stockholder Rights."
EL PASO DEPOSITARY SHARES
General. If the merger is completed under the alternative merger structure,
the senior voting preferred stock will be issued to a bank or trust company to
be selected by El Paso as depositary under a deposit agreement. Depositary
shares, each representing a 1/50th fractional interest in a whole share of
senior voting preferred stock, would then be issued to holders of Sonat common
stock under the alternative merger structure.
The depositary shares will be evidenced by depositary receipts issued
pursuant to the deposit agreement. The depositary shares will be subject to the
terms and conditions of the deposit agreement.
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The terms of the deposit agreement, if entered into between the depositary and
El Paso, may be different from those discussed below.
Withdrawal of El Paso Senior Voting Preferred Stock. Upon surrender of
depositary receipts at the principal office of the depositary, upon payment of a
sum sufficient for the payment of any tax or other governmental charge required
upon the surrender, and subject to the terms of the deposit agreement, each
holder of the depositary shares will be entitled to delivery of the number of
whole shares of senior voting preferred stock represented by such depositary
shares. Fractional shares of senior voting preferred stock will not be issued.
If the depositary receipts delivered by the holder evidence a number of
depositary shares in excess of the number of depositary shares representing the
number of whole shares of senior voting preferred stock to be withdrawn, the
depositary will deliver to the holder at the same time a new depositary receipt
evidencing such excess number of depositary shares. Holders of senior voting
preferred stock withdrawn in this manner will not be entitled to deposit the
shares under the deposit agreement or to receive depositary receipts evidencing
depositary shares after such a withdrawal. There is currently no market for the
senior voting preferred stock and it is not expected that an active trading
market for senior voting preferred stock will develop.
Redemption and Exchange of Depositary Shares. Subject to receipt of any
necessary third party approvals, El Paso may exchange the senior voting
preferred stock (and the depositary shares) at any time for shares of El Paso
common stock. The depositary shares are subject to redemption and exchange upon
the same terms and conditions, except that the amount of money or other property
received upon redemption or exchange of each depositary share will be equal to
1/50th of the amount of money or other property received upon redemption or
exchange of each share of senior voting preferred stock.
Dividends and Other Distributions. El Paso, on behalf of the depositary
(or, if El Paso determines otherwise, the depositary), will distribute all cash
dividends or other cash distributions in respect of the senior voting preferred
stock represented by the depositary shares to the record holders of depositary
receipts in proportion to the number of depositary shares owned by such holders
on the relevant record date, which will be the same date as the relevant record
date fixed by El Paso for the senior voting preferred stock.
In case of a distribution other than in cash, El Paso, on behalf of the
depositary (or, if El Paso determines otherwise, the depositary), will
distribute property to the record holders of depositary receipts entitled to it,
in proportion, as nearly as may be practicable, to the number of depositary
shares owned by such holders on the relevant record date, unless El Paso
determines that it is not feasible to make such distribution, in which case El
Paso on behalf of the depositary (or, if El Paso determines otherwise, the
depositary), may adopt any other method for such distribution as it deems
appropriate, including the sale of such property and distribution of the net
proceeds from such sale to such holders.
Procedures for Voting. Upon receipt of notice of any meeting at which the
holders of senior voting preferred stock represented by such holders' depositary
shares are entitled to vote, the depositary will, as soon as practicable, mail
the information contained in the notice of meeting to the record holders of
depositary receipts as of the record date for the meeting. Each record holder of
depositary receipts will be entitled to instruct the depositary as to the
exercise of voting rights with respect to the number of shares of senior voting
preferred stock represented by such holder's depositary shares. The depositary
will endeavor, insofar as practicable, to vote with respect to the number of
shares of senior voting preferred stock represented by the depositary shares in
accordance with such instructions, and El Paso intends to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so. The depositary will abstain from voting with respect to the senior voting
preferred stock to the extent that it does not receive specific written
instructions from the holders of depositary receipts.
Amendment and Termination of Deposit Agreement. The form of depositary
receipt evidencing the depositary shares and any provision of the deposit
agreement may at any time and from time to time be amended by agreement between
El Paso and the depositary. Every holder of an outstanding depositary share at
the time any such amendment becomes effective will be deemed, by continuing to
hold such depositary share, to consent and agree to the amendment and to be
bound by the deposit agreement as
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such agreement may be so amended. No such amendment may impair the right,
subject to the terms of the deposit agreement, of any owner of any depositary
shares to surrender the depositary receipt evidencing such depositary shares
with instructions to the depositary to deliver to the holder of senior voting
preferred stock represented by the depositary shares, except in order to comply
with mandatory provisions of applicable law.
The deposit agreement may be terminated by El Paso or the depositary only
if (a)(1) all outstanding depositary shares have been redeemed or (2) there has
been a final distribution in respect of the senior voting preferred stock in
connection with any liquidation of El Paso and the distribution has been made to
all holders of depositary shares; and (b) reasonable notice has been give to any
remaining holders of depositary shares. If the deposit agreement is terminated,
El Paso will use its best efforts to list the senior voting preferred stock on
the New York Stock Exchange or any other national securities exchange on which
the El Paso common stock is listed.
Miscellaneous. El Paso will deliver to the depositary all reports to
shareholders and other communications which El Paso is required to furnish to
the holders of senior voting preferred stock by law, by the rules of the New
York Stock Exchange or by the certificate of incorporation of El Paso or the
certificate of designation relating to the senior voting preferred stock. The
depositary will make available for inspection by holders of depositary shares at
the principal office of the depositary, and at such other places as it may deem
advisable, any reports and communications received from El Paso by the
depositary, as a holder of senior voting preferred stock, that are made
generally available to the holders of senior voting preferred stock. The
depositary will comply with all information reporting requirements applicable to
it under law in its capacity as depositary.
Neither the depositary nor El Paso will be subject to any liability under
the deposit agreement to holders of depositary receipts other than for
negligence, bad faith or willful misconduct. Neither the depositary nor El Paso
will be liable if it is prevented or delayed by law or any circumstance beyond
its control in performing its obligations under the deposit agreement. The
obligations of El Paso and the depositary under the deposit agreement will be
limited to performance in good faith of their obligations under that agreement,
and they will not be obligated to prosecute or defend any legal proceedings
relating to the depositary shares or the underlying senior voting preferred
stock unless satisfactory indemnification is furnished. El Paso and the
depositary may rely on written advice of counsel or accountants or information
provided by holders of depositary shares or persons believed to be competent to
give such information and on documents believed to be genuine and that have been
signed or presented by the proper party or parties.
Resignation and Removal of Depositary. The depositary may resign at any
time by delivering to El Paso notice of its election to do so. El Paso may at
any time, by notice, remove the depositary or may terminate the engagement of
the depositary with respect to any or all of its duties and obligations under
the deposit agreement. Any resignation, removal or termination will take effect
upon the appointment of a successor depositary and the successor's acceptance of
its appointment with respect to all the predecessor's duties and obligations so
terminated. The successor depositary must be appointed within 45 days after
delivery of the notice for resignation, removal or termination, or the
predecessor depositary may petition a court of competent jurisdiction to appoint
a successor.
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DIRECTORS OF EL PASO AFTER THE MERGER
The El Paso board of directors currently consists of eight members. As
called for by the merger or the alternative merger agreement, El Paso's board of
directors will take whatever action is necessary so that when the merger or the
alternative merger is completed the board of directors has 15 members, nine of
whom will be persons who will be designated by El Paso's current board of
directors and six of whom will be persons who will be designated by Sonat's
current board of directors.
Although the persons who will serve on El Paso's board of directors after
the merger or the alternative merger is completed have not been formally
designated, we anticipate that El Paso will designate all eight of the members
of its current board and Sonat will designate Selim K. Zilkha, Ronald L. Kuehn,
Jr. and four other members of Sonat's current board. El Paso will designate one
person who is not currently a member of its board to serve on the post-merger El
Paso board.
We have included biographical information for each of El Paso's and Sonat's
current board members in the section entitled "Information Regarding Sonat and
El Paso Directors."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Sonat and El Paso boards of
directors with respect to the merger agreement, stockholders of Sonat and El
Paso should be aware that certain directors and members of management of each
company have interests in the merger that are different from, or in addition to,
their interests as stockholders generally. The Sonat and El Paso boards of
directors were aware of these interests and considered them, among other
matters, in approving the merger agreement.
El Paso Directors. The merger agreement provides that six Sonat designees
designated by the Sonat board of directors prior to the effective time are to
become members of the El Paso board of directors at the time of the merger or
the alternative merger. Upon the appointment of Sonat's director designees, the
El Paso board will consist of the six Sonat designees and nine El Paso
designees, or 15 directors in all. Ronald L. Kuehn, Jr., who will become
non-executive chairman of the El Paso board at the end of the month in which the
merger or the alternative merger occurs, and Selim K. Zilkha will be two of the
Sonat designees. See "Directors of El Paso after the Merger" and "Material Terms
of the Kuehn Termination and Consulting Agreement." Mr. Kuehn will remain
chairman of the El Paso board through December 31, 2000, at which point the El
Paso board will appoint William A. Wise chairman to replace Mr. Kuehn.
Change in Control. Under the Sonat employee benefit plans, a change in
control will occur upon completion of the merger or the alternative merger.
Under the El Paso employee benefit plans, a change in control will occur upon
approval of the merger by the El Paso stockholders. If the alternative merger is
effected, there will be no change in control of El Paso under its employee
benefit plans.
Sonat Stock Options and Restricted Stock. All Sonat stock options granted
under its Executive Award Plan that are outstanding as of completion of the
merger or the alternative merger and held by then-current employees will become
fully vested upon the merger and will remain exercisable for the remainder of
their original term, and the restrictions on restricted stock granted under the
Executive Award Plan will lapse upon completion of the merger or the alternative
merger. Under the merger agreement, each outstanding Sonat stock option will be
converted into an option to purchase a number of shares of El Paso common stock.
Each share of outstanding Sonat restricted common stock will be converted into a
share of unrestricted El Paso common stock. The figures below assume that the
closing of the merger or the alternative merger will occur on September 1, 1999.
The number of vested Sonat stock options beneficially owned by the five
most highly compensated executive officers of Sonat for the year ended December
31, 1998 will increase as a result of the merger or the alternative merger from
1,042,100 stock options to 1,660,400 stock options, and, for all other
executives officers as a group, from 210,340 stock options to 330,100 stock
options.
The five most highly compensated executive officers of Sonat for the year
ended December 31, 1998 hold an aggregate of 141,900 shares of restricted stock
on which restrictions will lapse as a result of the
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the completion of the merger. All other executive officers as a group hold an
aggregate of 26,200 shares of restricted stock on which restrictions will lapse
as a result of the completion of the merger or the alternative merger.
El Paso Stock Options, Restricted Stock and Performance Units. El Paso has
issued stock options, restricted stock and performance units to its executive
officers under its 1995 and 1992 Omnibus Compensation Plans, 1995 Incentive
Compensation Plan, Strategic Stock Plan and Omnibus Plan for Management
Employees. Under the terms of these plans, on the date of El Paso's stockholders
approval of the merger, outstanding El Paso stock options will become fully
vested and exercisable, a pro rata portion of outstanding performance units will
become fully vested and will be paid at $150 per unit, and the restrictions on
outstanding El Paso restricted common stock will lapse. The figures below assume
that El Paso stockholder approval of the merger will occur on September 1, 1999.
The number of vested El Paso stock options beneficially owned by the five
most highly compensated executive officers of El Paso for the year ended
December 31, 1998 will increase as a result of the change in control of El Paso
from 2,361,432 stock options to 2,677,432 stock options. Some stock options have
an associated right to convert into shares of El Paso on certain dates in the
future; those conversion dates will be accelerated as a result of El Paso's
stockholders' approval of the merger. No El Paso stock options held by other
executive officers will vest as a result of El Paso's stockholders' approval of
the merger.
The five most highly compensated executive officers of El Paso for the year
ended December 31, 1998 hold an aggregate of 1,810,008 shares of restricted
stock on which restrictions will lapse as a result of El Paso's stockholders'
approval of the merger, and an aggregate of 18,875 unvested performance units
which will fully vest as a result of El Paso's stockholders' approval of the
merger. All other executives officers as a group hold an aggregate of 738,766
shares of restricted stock on which restrictions will lapse as a result of El
Paso's stockholders' approval of the merger, and an aggregate of 11,775 unvested
performance units which will fully vest as a result of El Paso's stockholders'
approval of the merger.
Sonat and El Paso Cash Bonuses. Sonat executive officers and El Paso
executive officers are eligible to receive performance-based cash bonuses under
Sonat's Performance Award Plan and Cash Bonus Plan, and El Paso's 1995 Incentive
Compensation Plan, respectively. Upon a change in control of Sonat and El Paso,
participants in these plans will be deemed to have earned a percentage of their
bonus opportunity, regardless of actual performance. For Sonat executive
officers, this percentage is 100% of bonus opportunity, and, for El Paso
executive officers, this percentage is either the percentage of base salary
established by the compensation committee or 60%, 80% or 100% of annual base
salary (depending on the level of the covered individual), whichever results in
the greater bonus. Payment of these bonuses will be made within 30 days
following the change in control of Sonat and El Paso, respectively. The
aggregate payment to be made to the five most highly compensated executive
officers of Sonat for the year ended December 31, 1998 is approximately
$2,312,500, and the aggregate payment to be made to all other executive officers
as a group is approximately $592,050. The aggregate payment to be made to the
five most highly compensated executive officers of El Paso for the year ended
December 31, 1998 is approximately $3,266,000, and the aggregate payment to be
made to all other executive officers as a group is approximately $1,685,000.
Sonat Non-Employee Director Compensation. Sonat has issued shares of
restricted Sonat common stock to its non-employee directors under its Restricted
Stock Plan for Directors. All restrictions on stock granted under this plan will
lapse upon completion of the merger or the alternative merger. Non-employee
directors of Sonat hold an aggregate of 17,600 shares of restricted stock
granted under the plan on which restrictions will lapse as a result of the
completion of the merger or the alternative merger. In addition, Sonat maintains
a Retirement Plan for Directors pursuant to which eligible non-employee
directors are paid retirement income when they cease to be directors of Sonat.
All non-employee directors of Sonat whose service ceases following the
completion of the merger or the alternative merger are eligible to receive the
benefits under the plan. Finally, the balance in a director's account in the
Director's Fees Deferral Plan will be distributed in a lump sum if the director
ceases to be a director within three years after the completion of the merger or
the alternative merger, regardless of any other elections the director may have
made regarding the timing and manner of payments of his or her account.
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Sonat Change in Control Severance Agreements. Sonat has in place change in
control severance agreements with each of its executive officers.
If the employment of an executive officer is terminated under circumstances
which entitle him or her to severance payments and benefits under the agreement,
he or she will be entitled to the following:
- a lump sum cash payment equal to three times the sum of his or her base
salary, annual incentive bonus and long term incentive award;
- if he or she is not eligible for early retirement on the date of
termination, a lump sum cash payment equal to the excess of the value of
a monthly early retirement benefit under the Sonat Retirement Plan (and,
if applicable, of a survivor's benefit under the plan) over the monthly
benefit otherwise payable to the executive officer;
- continued medical, dental, and life insurance and other welfare benefits
for a period of thirty-six months; and
- relocation reimbursement.
Terminations entitling an executive officer to the foregoing severance
payments and benefits consist of any termination by Sonat other than for cause
within three years following the completion of the merger, and termination by
the executive or key officer for good reason within this three-year period, and
termination for any reason within the 30-day period commencing on the first
anniversary of completion of the merger. For purposes of these agreements, good
reason consists of a reduction in compensation or benefits, forced relocation,
or a change in titles, duties, responsibilities (including reporting
responsibilities) or status. In addition, any Sonat executive officer who is a
party to a severance agreement, who is at least age 50 and has 10 years of
service as of December 31, 1999 and who participates in the voluntary
reduction-in-force window program to be offered to Sonat employees following the
merger will be deemed to have experienced an event constituting good reason,
thereby entitling each of them to terminate his or her employment and collect
severance payments and benefits under the severance agreement. Such an executive
officer will also be entitled under the window program to receive retiree
medical and life insurance coverage beginning at age 55, as well as outplacement
services.
If any payment made to an executive officer is subject to any excise tax
under Section 4999 of the Internal Revenue Code, a gross-up payment will be made
to place that person in the same net after-tax position as would have been the
case if no excise tax were imposed.
It is presently estimated, based upon certain assumptions and data
available as of a recent date, that, if the employment of the five most highly
compensated executive officers of Sonat was terminated immediately following the
merger or the alternative merger under circumstances entitling those persons to
severance benefits under Sonat's severance agreements, those persons would be
entitled to cash severance benefits under these agreements of approximately $37
million. It is also presently estimated that the cash severance benefits payable
to all other Sonat executive officers under Sonat's severance agreements upon a
like termination of employment would be approximately $14 million. The foregoing
figures include all cash payments, including estimated supplemental retirement
payments and estimated excise tax gross-up payments.
El Paso Key Executive Severance Protection Plan. El Paso maintains a Key
Executive Severance Protection Plan, in which all of its executive officers
(including all of its five most highly compensated executive officers)
participate.
If a covered individual's employment is terminated within two years
following El Paso stockholders' approval of the merger agreement under
circumstances which entitle him or her to severance payments and benefits under
the plan, he or she will be entitled to the following:
- a lump sum cash payment equal to three times the sum of his or her base
salary and bonus amount;
- continued medical, dental, life insurance and other welfare benefits for
a period of 18 months;
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- a lump sum pension supplement calculated by adding a number of years of
credited service under El Paso's supplemental benefits plan; and
- transfer to him or her of rights to any company car or club membership
then being provided.
Terminations entitling a covered individual to the foregoing severance
payments and benefits consist of any termination by El Paso other than for
cause, and termination by the covered individual for "Good Reason." For this
purpose, "Good Reason" consists of substantially the same elements as under the
Sonat severance agreements (but excluding the right to terminate employment
within the 30-day period commencing on the first anniversary of El Paso
stockholders' approval of the merger). Mr. Wise has waived any "Good Reason"
that he may have under the Key Executive Severance Protection Plan and under his
employment agreement in connection with El Paso stockholders' approval of the
merger (including by reason of his ceasing to serve as chairman of El Paso's
board of directors). In addition, Mr. Wise has waived his right under his
employment agreement to have his base salary automatically reinstated.
It is presently estimated, based upon certain assumptions and data
available as of a recent date, that, if the employment of the five most highly
compensated executive officers of El Paso is terminated immediately following El
Paso stockholders' approval of the merger under circumstances entitling those
persons to severance benefits under El Paso's severance plan, those persons
would be entitled to severance payments (for base salary and bonus) under El
Paso's severance plan of $16,743,000. (Mr. Wise would be entitled to severance
benefits under either the plan or his employment agreement, whichever is
greater, and the foregoing figure reflects the greater amount.) It is also
presently estimated that the severance payments (for base salary and bonus) to
all other El Paso executive officers under El Paso's severance plan upon a like
termination of employment would be $9,390,000.
Sonat Supplemental Benefit Plan and Deferred Compensation Plan. Under
Sonat's Supplemental Benefit Plan, upon the merger any executive officer whose
benefit under the Retirement Plan is not vested will vest in a supplemental
benefit equal to the benefit that would have been payable under the Retirement
Plan if the executive officer's service had been sufficient for vesting under
the Retirement Plan. In addition, under the Supplemental Benefit Plan and
Sonat's Deferred Compensation Plan, upon termination of a participant's
employment within three years after the merger or the alternative merger, the
participant's benefits will be paid out in a lump sum. Finally, under the
Deferred Compensation Plan, the remaining benefits of participants whose
employment terminated before the merger will be paid out in a lump sum at the
time of the merger or the alternative merger.
El Paso Supplemental Benefits Plan. Under El Paso's Supplemental Benefits
Plan, upon El Paso's stockholders' approval of the merger, any unvested
supplemental pension benefits accrued for executive officers, not vested will
become vested and payable when other benefits under that plan become payable.
El Paso Domestic Relocation Policy. Certain executive officers of El Paso
are covered by El Paso's former Domestic Relocation Policy. Under this policy,
if a covered individual's employment is terminated following El Paso
stockholders' approval of the merger and the individual would be entitled to
severance benefits under El Paso's Key Executive Severance Protection Plan, El
Paso is required to purchase his or her residence in Houston at a price equal to
the greater of the individual's investment (with any associated tax gross-ups)
or the fair market value of the residence.
William A. Wise Employment Agreement. Mr. Wise and El Paso are parties to
an employment agreement. Under this employment agreement, as amended, Mr. Wise
waived his base salary, but the agreement provides that Mr. Wise's salary will
re-commence following El Paso stockholders' approval of the merger. However, as
stated earlier, Mr. Wise has waived his right to have his base salary
automatically reinstated. The agreement also provides for the forgiveness of
principal and interest on a loan of approximately $1.6 million to Mr. Wise by El
Paso upon termination of his employment following El Paso stockholders' approval
of the merger, if such termination would entitle Mr. Wise to severance benefits
under El Paso's Key Executive Severance Protection Plan. In addition, Mr. Wise
is entitled under his
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employment agreement to a supplemental pension benefit, commencing when Mr.
Wise's benefits under El Paso's supplemental benefits plan commence.
Ronald L. Kuehn, Jr., Termination and Consulting Agreement. Under the
merger agreement, Sonat and El Paso have agreed that El Paso will enter into a
Termination and Consulting Agreement with Mr. Kuehn. See "Material Terms of the
Kuehn Termination and Consulting Agreement."
Insurance and Indemnification. Under the merger agreement, El Paso agreed
to provide certain continuing indemnification and insurance benefits for
officers, directors and employees of Sonat. See "Material Terms of the Merger
Agreement -- Additional Agreements -- Insurance and Indemnification."
Zilkha Registration Rights Agreement. Under the Zilkha voting agreement, El
Paso has agreed to assume the Zilkha family's existing registration rights. See
"Material Terms of the Voting Agreements."
Bear Creek Joint Venture. Subsidiaries of El Paso, and Sonat, are parties
to a joint venture agreement of Bear Creek Storage Company, dated September 1,
1981. Each party has a 50% interest in the joint venture. The joint venture uses
an underground natural gas storage facility located in Louisiana, to provide a
storage services to El Paso and Sonat and their customers.
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COMPARISON OF STOCKHOLDER RIGHTS
As a result of the merger, holders of shares of Sonat common stock will
become holders of shares of El Paso common stock and the rights of all such
former Sonat stockholders will be governed by the certificate of incorporation
of El Paso, the by-laws of El Paso and the Delaware General Corporation Law. The
rights of the holders of shares of Sonat common stock presently are governed by
the certificate of incorporation of Sonat, the by-laws of Sonat and the Delaware
General Corporation Law. Set forth on the following pages is a summary
comparison of material differences among the rights of Sonat stockholders under
the current certificate of incorporation and by-laws of Sonat (right column),
and the rights of stockholders of the combined company following the merger as
governed by the amended certificate of incorporation and by-laws of El Paso
(left column). These rights may be subject to change through amendment of the
certificate of incorporation or by-laws. In addition, please see the
"Description of Senior Cumulative Exchangeable Preferred Stock and Depositary
Shares" above for a description of the rights of holders of the senior voting
preferred stock to be issued in the alternative merger.
This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, the Delaware General Corporation Law,
as well as the certificates of incorporation and by-laws of each of Sonat and El
Paso, copies of which are on file with the SEC.
EL PASO SONAT
AUTHORIZED CAPITAL STOCK
<TABLE>
<S> <C>
275,000,000 shares of common stock, par value $3.00 400,000,000 shares of common stock, par value $1.00
per share. As a part of the merger, El Paso's per share.
certificate of incorporation will be amended to
provide for 750,000,000 shares of common stock.
25,000,000 shares of preferred stock, par value $.01 10,000,000 shares of the serial preference stock, par
per share. As a part of the merger, El Paso's value $1.00 per share.
certificate of incorporation will be amended to
provide for 50,000,000 shares of preferred stock.
2,750,000 shares of preferred stock designated Series 1,000,000 shares designated as Series A Participating
A Junior Participating Preferred Stock, par value Preference Stock, par value $1.00 per share.
$.01 per share. As a part of the merger, El Paso's
certificate of incorporation will be amended to
provide for 7,500,000 shares of Series A Junior
Participating Preferred Stock.
A new series of shares of senior voting preferred
stock designated Senior Cumulative Exchangeable
Preferred Stock will be issued if El Paso
stockholders do not approve the merger and the merger
agreement.
</TABLE>
VOTING RIGHTS
<TABLE>
<S> <C>
Each holder of any class or series of stock is Holders of common stock are entitled to one vote for
entitled to one vote for each share. each share held at all meetings of stockholders.
</TABLE>
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EL PASO SONAT
SIZE OF THE BOARD OF DIRECTORS
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<S> <C>
Should not be less than one. The board may fix the Should not be less than five nor more than 15 as
number of directors by a vote of a majority of the fixed by the resolution of the board of directors.
directors then in office. The board currently The board currently consists of 13 directors.
consists of eight directors. After the merger is
completed, the board will be comprised of 15 members.
See "Directors of El Paso After the Merger."
</TABLE>
ELECTION AND CLASSIFICATION OF THE BOARD OF DIRECTORS
<TABLE>
<S> <C>
Elected annually. The board of directors is classified into three
classes, with the term of office of one class
expiring each year. In case of any increase in the
number of directors, the number of directors in each
class shall be as nearby equal as possible. Each
director elected to a three-year term.
</TABLE>
REMOVAL OF DIRECTORS; FILLING VACANCIES
<TABLE>
<S> <C>
Any director may be removed, with or without cause, Any director or the entire board of directors may be
at any special meeting of the stockholders called for removed only for cause. Vacancies on the board may be
that purpose, and the vacancy in the board may be filled only by action of a majority of the directors.
filled by the stockholders at such a meeting.
Vacancies and newly created directorships may be
filled in the manner set forth in the Delaware
General Corporation Law.
</TABLE>
SPECIAL MEETINGS OF STOCKHOLDERS
<TABLE>
<S> <C>
Special meetings of the stockholders may be called Special meetings of stockholders may be called only
only by a majority of the board, the Chairman of the by a majority of the directors unless called by a
Board, the Chief Executive Officer, the President or "qualified holder" that complies with the notice
the Vice Chairman of the Board. requirements of the certificate of incorporation. A
qualified holder is a stockholder that has owned at
least 3% of the outstanding shares of common stock
for a period of six months prior to the request for
the meeting.
</TABLE>
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EL PASO SONAT
ADVANCE NOTICE PROVISION
<TABLE>
<S> <C>
For a stockholder to properly nominate persons for Same as El Paso before the contemplated amendment to
election as directors or to properly bring before an El Paso's by-laws.
annual stockholders meeting, the corporate secretary
must receive a written notice of such stockholder's
intent not earlier than the close of business on the
90th day and not later than the close of business of
the 60th day prior to the first anniversary of the
preceding year's annual meeting or if the date of the
annual meeting is more than 30 days before or more
than 60 days after such anniversary date, notice by
the stockholder to be timely must be so delivered not
earlier than the close of business on the 90th day
prior to such annual meeting and not later than the
close of business on the later of the 60th day prior
to such annual meeting or the 10th day following the
day on which public announcement of a meeting date is
first made by the company.
</TABLE>
<TABLE>
<S> <C>
Immediately before the merger, the El Paso board will
amend its by-laws to require that a stockholder's
proposal or nomination must be received by the
corporate secretary not earlier than the close of
business on the 120th day and not later than the
close of business of the 90th day prior to the first
anniversary of the preceding year's annual meeting.
</TABLE>
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EL PASO SONAT
INDEMNIFICATION OF DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
A director, officer, employee or agent will be Sonat's certificate of incorporation has a provision
indemnified to the full extent authorized by the substantially similar to El Paso's indemnification
Delaware General Corporation Law against all provision, except that Sonat's certificate of
liability incurred by such indemnitee in connection incorporation does not require a specific
with any actual or threatened action because of his authorization of the board in connection with a
or her position with respect to the company and such proceeding initiated by an indemnitee.
indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, employee or
agent; provided, however, that El Paso will indemnify
any such indemnitee seeking indemnification in
connection with a proceeding initiated by such
indemnitee only if such proceeding was authorized by
the board. The right to indemnification includes the
right to be paid by the company the expenses incurred
in defending any such proceeding in advance of its
final disposition.
El Paso may maintain insurance, at its expense, to
protect itself and any other person against any
liability whether or not the company would have the
power to indemnify such person against such liability
under Delaware General Corporation Law.
</TABLE>
AMENDMENT OF BY-LAWS
<TABLE>
<S> <C>
The by-laws of El Paso may be amended by the The by-laws of Sonat may be amended by the
affirmative vote of a majority of the entire board, affirmative vote of stockholders holding not less
subject to the right of stockholders to amend by- than 60% of voting stock or by the unanimous vote of
laws made or amended by the board, by the affirmative all members of the board at any meeting or by the
vote of a majority of the outstanding shares affirmative vote of a majority of the members of the
represented at a stockholder meeting and entitled to board if proper notice of the amendment has been
vote at such meeting. given prior to the meeting.
</TABLE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
<TABLE>
<S> <C>
The affirmative vote of holders of at least a The affirmative vote of holders of at least a
majority of shares of common stock is necessary to majority of shares of common stock is necessary to
amend the certificate of incorporation, except that amend the certificate of incorporation, except that
the affirmative vote of not less than 51% of all the provisions in the certificate of incorporation
shares entitled to vote in the election of directors, relating to the number and classification of
excluding the stock of any holder of 10% or more of directors, the filing of vacancies on the board, the
the company's common stock or the company's affiliate calling of special meetings by stockholders, the
(such holder is more fully described below in removal of directors for cause, and the prohibition
"-- Fair Price Provisions"), to amend (i) the "fair upon taking stockholder action by consent without a
price" provisions described below in "-- Fair Price meeting, in each case can only by amended with the
Provisions" and (ii) the provision prohibiting action affirmative vote of the holders of 60% of voting
by stockholders by written consent. stock.
</TABLE>
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EL PASO SONAT
BUSINESS COMBINATIONS
<TABLE>
<S> <C>
The certificate of incorporation does not address the The certificate of incorporation permits mergers and
vote required by stockholders of a surviving sales or exchanges of all or substantially all of the
corporation to approve a merger, unless the fair assets with another party that is not an owner of 10%
price provision described below is applicable. or more of Sonat's common stock, with the approval of
the holders of a majority of shares.
</TABLE>
FAIR PRICE PROVISIONS
<TABLE>
<S> <C>
The affirmative vote of not less than 51% of the A merger, sale or similar material transaction
holders of stock entitled to vote in the election of between the company or one of its subsidiaries and
directors, excluding the stock of any beneficial the owner of 10% or more of the outstanding voting
owner of 10% or more of the company's stock who is a securities requires the approval of the holders of
party to a merger or consolidation, is required for 80% of the voting stock and 67% of the voting stock
the adoption or authorization of a merger or owned by stockholders other than such 10% owner. This
consolidation, unless disinterested directors provision is not applicable to 10% stockholders who
determine by a two-thirds vote that: (i) the acquire their shares with the approval of
beneficial owner referred to above is the beneficial disinterested directors or who propose to effect the
owner of not less than 80% of all shares and has transaction at a price equal to the highest price at
declared its intention to vote in favor of or to which such party acquired its voting stock.
approve such merger or consolidation; or (ii)(A) the
fair market value of the consideration per share to
be received by the holders of each class or series of
stock in a merger or consolidation is equal to or
greater than the consideration per share paid by such
10% beneficial owner in acquiring the largest number
of shares of such class of stock previously acquired
and (B) the 10% beneficial owner shall not have
received the benefit (except proportionately as a
stockholder), of any loans, advances, guarantees,
pledges or other financial assistance provided by El
Paso.
</TABLE>
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EL PASO SONAT
STATE LAW TAKEOVER LEGISLATION
<TABLE>
<S> <C>
The company is subject to Section 203 of the Delaware The company is subject to Section 203 of the Delaware
General Corporation Law. Section 203 generally General Corporation Law.
prohibits a Delaware corporation from engaging in a
"Business Combination" (defined as a variety of
transactions, including mergers, asset sales,
issuance of stock and other transactions resulting in
a financial benefit to the interested stockholder)
with an "interested stockholder" (defined generally
as a person that is the beneficial owner of 15% or
more of a corporation's outstanding voting stock) for
a period of three years following the date that such
person became an interested stockholder unless
certain conditions are met.
</TABLE>
SHAREHOLDER RIGHTS PLANS
<TABLE>
<S> <C>
Rights are attached to all common stock certificates The provisions of the shareholder rights plan adopted
representing shares presently outstanding and the by Sonat are substantially similar to the shareholder
rights will be attached to any new common stock rights plan adopted by El Paso, except that under the
certificates representing shares then outstanding. Sonat's shareholder plan, each right may be exercised
One right will be issued with respect to each share to purchase from Sonat one one-hundredth of a share
of common stock issued pursuant to the merger of Series A Participating Preference Stock at a price
described in this merger agreement. Under certain of $120 per one one- hundredth of a share, subject to
conditions, each right may be exercised to purchase adjustment. The rights under the Sonat's shareholder
from El Paso one two-hundredth of a share of Series A rights plan will expire on February 3, 2006.
Junior Participating Preferred Stock at a price of
$75 per one two-hundredth of a share, subject to
adjustment.
In the event that El Paso is the surviving
corporation in a merger and El Paso's common stock is
not changed or exchanged, or in the event that a
person becomes the beneficial owner of securities
having 15% or more of the voting power of all then
outstanding voting securities of El Paso (unless
under certain circumstances deemed to be in the best
interests of El Paso and its stockholders by a
majority of the El Paso Board who are not officers of
El Paso), then each El Paso right not owned by such a
15% beneficial owner will entitle its holder to
receive upon exercise that number of shares of El
Paso common stock (or in certain circumstances other
equity securities of El Paso with at least the same
economic value as El Paso common stock) having a
market value of twice the right's then-current
exercise price. If, after the El Paso rights become
</TABLE>
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EL PASO SONAT
<TABLE>
<S> <C>
exercisable, El Paso is involved in a merger or other
business combination transaction in which the El Paso
common stock is exchanged or changed, or it sells 50%
or more of its assets or earning power, in either
case with or to a 15% beneficial owner or any other
person in which such 15% beneficial owner has an
interest or any person acting on behalf of or in
concert with such 15% beneficial owner, each El Paso
right will entitle the holder to purchase, at the
right's then-current exercise price, common stock of
the acquiring company having a value of twice the
exercise price of the right.
The purchase rights are exercisable only if, without
the prior consent of the board of directors, a person
or group becomes the beneficial owner of 15% or more
of the voting power of all outstanding voting
securities of El Paso or commences or announces a
tender or exchange offer which would result in any
person or group becoming such beneficial owner, or a
merger, consolidation or sale or any acquisition
which would result in a person becoming such a 15%
beneficial owner is reasonably expected to become
effective or consummated. The El Paso rights, which
have no voting rights, expire no later than July 7,
2002. The El Paso rights may be redeemed by El Paso
under certain circumstances prior to their expiration
date at a purchase price of $.01 per right.
</TABLE>
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WHERE YOU CAN FIND MORE INFORMATION
El Paso has filed with the SEC a registration statement under the
Securities Act of 1933 that registers the distribution to Sonat stockholders of
El Paso common stock and the depositary shares, including the underlying senior
voting preferred stock, to be issued in the merger. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about El Paso and Sonat. The rules and regulations of the SEC allow
us to omit some information included in the registration statement from this
joint proxy/prospectus.
In addition, we file reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. You may read and copy this
information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
Room 1024 Suite 1300 Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center Suite 1400
Washington, D.C. 20549 New York, New York 10048 500 West Madison Street
Chicago, Illinois
60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. The SEC also maintains an
Internet world wide web site that contains reports, proxy statements and other
information about issuers, including El Paso and Sonat, who file electronically
with the SEC. The address of that site is http://www.sec.gov. You can also
inspect reports, proxy statements and other information about each of us at the
offices of The New York Stock Exchange, Inc., located at 20 Broad Street, New
York, New York 10005.
The SEC allows us to "incorporate by reference" information into this
document. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this document, except
for any information that is superseded by information that is included directly
in this document.
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This document incorporates by reference the documents listed below that we
have previously filed with the SEC. They contain important information about our
companies and their financial condition. Some of these filings have been amended
by later filings, which are also listed.
<TABLE>
<CAPTION>
DESCRIPTION OR
EL PASO'S SEC FILINGS (FILE NO. 1-14365) PERIOD/AS OF DATE
---------------------------------------- -----------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1998
Current Report on Form 8-K, dated March 15, Discloses the entering into of the merger
1999 agreement and related matters
Registration Statement on Form 8-A, dated Contains a description of the El Paso common
August 3, 1998 stock
Registration Statement on Form 8-A/A, dated Contains a description of the El Paso
January 29, 1999 preferred stock purchase rights
Definitive Proxy Statement on Schedule 14A Definitive proxy statement relating to the
1999 annual meeting of El Paso's stockholders
(filed on March 11, 1999)
SONAT'S SEC FILINGS (FILE NO. 1-7179)
- ---------------------------------------------
Annual Report on Form 10-K Year ended December 31, 1998
Current Report on Form 8-K, dated January 8, Discloses selected restated financials
1999 relating to Sonat's adoption of the full cost
method of accounting for its exploration and
production business segment
Current Report on Form 8-K, dated March 3, Discloses (1) plans to form a joint venture
1999 to construct and operate a 175-mile pipeline
in South Carolina and North Carolina and (2)
an estimate of the expected first quarter
ceiling test charges under full cost
accounting
Current Report on Form 8-K, dated March 15, Discloses the entering into of the merger
1999 agreement and related matters
Registration Statement on Form 8-A, dated Contains a description of the Sonat
January 11, 1996 preference share purchase rights
Definitive Proxy Statement on Schedule 14A Definitive proxy statement relating to 1999
annual meeting of Sonat stockholders (filed
on March 23, 1999)
</TABLE>
We incorporate by reference additional documents that either company may
file with the SEC between the date of this document and the date of our special
meetings. These documents include periodic reports, including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
You can obtain any of the documents incorporated by reference in this
document through El Paso or Sonat, as the case may be, or from the SEC through
the SEC's web site at the address provided above. Documents incorporated by
reference are available from us without charge, excluding any exhibits to those
documents unless the exhibit is specifically incorporated by reference as an
exhibit in this document. You
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can obtain documents incorporated by reference in this document by requesting
them in writing or by telephone from the appropriate company at the following
addresses:
<TABLE>
<S> <C>
El Paso Energy Corporation Sonat Inc.
Office of Investor Relations Office of Investor Relations
El Paso Energy Building AmSouth-Sonat Tower
1001 Louisiana Street 1900 Fifth Avenue North
Houston, Texas 77002 Birmingham, Alabama 35203
Telephone No.: (713) 420-2131 Telephone No.: (205) 325-3898
</TABLE>
If you would like to request documents, please do so by [date], 1999 to
receive them before the special meetings. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE MERGER OF OUR COMPANIES THAT DIFFERS FROM, OR ADDS TO,
THE INFORMATION IN THIS DOCUMENT OR IN OUR DOCUMENTS THAT ARE PUBLICLY FILED
WITH THE SEC. THEREFORE, IF ANYONE DOES GIVE YOU DIFFERENT OR ADDITIONAL
INFORMATION, YOU SHOULD NOT RELY ON IT.
IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO EXCHANGE OR
SELL, OR TO ASK FOR OFFERS OF EXCHANGE OR BUY, THE SECURITIES OFFERED BY THIS
DOCUMENT OR TO ASK FOR PROXIES, OR IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO
DIRECT THESE ACTIVITIES, THEN THE OFFER PRESENTED BY THIS DOCUMENT DOES NOT
EXTEND TO YOU.
THE INFORMATION CONTAINED IN THIS DOCUMENT SPEAKS ONLY AS OF ITS DATE
UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
INFORMATION IN THIS DOCUMENT ABOUT EL PASO HAS BEEN SUPPLIED BY EL PASO, AND
INFORMATION ABOUT SONAT HAS BEEN SUPPLIED BY SONAT.
EXPERTS
The consolidated financial statements of El Paso as of December 31, 1998
and 1997, and for each of the years in the three-year period ended December 31,
1998 have been incorporated by reference in this document and in El Paso's Form
S-4 registration statement of which this document forms a part in reliance upon
the report of PricewaterhouseCoopers LLP, independent certified public
accountants, and upon the authority of that firm as experts in accounting and
auditing.
The consolidated financial statements of as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, appearing
in Sonat's Annual Report on Form 10-K for the year ended December 31, 1998, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference, which, as
to the year ended December 31, 1996, is based on the report of KPMG LLP,
independent auditors. The report of KPMG LLP refers to a change by Zilkha Energy
Company in accounting for oil and gas properties from the full cost method to
the successful efforts method. Such restated consolidated financial statements
are incorporated herein by reference in reliance upon such reports given upon
the authority of such firms as experts in accounting and auditing.
Information related to the estimated proved reserves attributable to
certain oil and gas properties of subsidiaries of Sonat as of December 31, 1998
and estimates of future net cash flows and present value of the reserves have
been incorporated by reference in this document and in El Paso's Form S-4
registration statement of which this document is a part in reliance on the
reserve report, dated March 10, 1999, prepared by Ryder Scott Company Petroleum
Engineers, independent petroleum engineers, and the reserve report, dated
January 14, 1999, prepared by William M. Cobb & Associates, Inc., independent
petroleum engineers.
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LEGAL MATTERS
Certain legal matters relating to the validity of the El Paso common stock
and the depositary shares offered by this joint proxy statement/prospectus, as
well as the senior voting preferred stock will be passed upon for El Paso by
Fried, Frank, Harris, Shriver & Jacobson, a partnership including professional
corporations.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP will be present at El Paso's
special meeting, and representatives of Ernst & Young LLP will be present at
Sonat's special meeting. In each case, these representatives will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
SUBMISSION OF STOCKHOLDER PROPOSALS
Stockholder proposals submitted for inclusion in the proxy statement for
the El Paso's 2000 annual meeting of stockholders must be mailed to the
Corporate Secretary, El Paso Energy Corporation, 1001 Louisiana Street, Houston,
Texas 77002, and must be received by the Corporate Secretary on or before
November 19, 1999. El Paso will consider only proposals meeting the requirements
of applicable SEC rules. Under the by-laws of the combined company, in order for
stockholder proposals that are not included in such proxy statement/prospectus
to be brought before the 2000 annual meeting of stockholders, such proposals
must be mailed to the Corporate Secretary at the above address and received not
less than 90 days nor more than 120 days prior to the scheduled date of such
annual meeting.
Due to the contemplated completion of the merger, Sonat does not currently
intend to hold a 2000 annual meeting of stockholders. In the event that a 2000
annual meeting of Sonat stockholders is held, any proposals of stockholders
intended to be presented at that meeting must have been received by the
Secretary of Sonat no later than November 24, 1999.
SEC rules set forth standards as to what stockholder proposals are required
to be included in a proxy statement for an annual meeting.
OTHER MATTERS
Under Sonat's and El Paso's respective by-laws, the business that may be
conducted at the Sonat special meeting or El Paso special meeting, as
applicable, is confined to those matters (1) set forth in the notice of special
meeting of stockholders that accompanies this joint proxy statement/prospectus
or (2) otherwise properly brought before the meeting by or at the direction of
the board of directors. Both Sonat and El Paso expect that the only matter that
will be properly brought before its respective meeting will be the proposal to
approve and adopt the merger agreement.
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INFORMATION REGARDING EL PASO AND SONAT DIRECTORS
EL PASO DIRECTORS
The El Paso board of directors currently consists of eight members.
Set forth below is biographical information with respect to the eight
individuals who currently comprise the El Paso board:
BYRON ALLUMBAUGH -- age 67, member of compensation committee of El Paso.
Mr. Allumbaugh has been retired since February 1, 1997. From February 1996 to
February 1997, Mr. Allumbaugh was Chairman of the Board of Ralphs Grocery
Company. He served as Chief Executive Officer of Ralphs Grocery Company from
June 1995 until February 1996. From 1976 to 1995, he served as Chairman of the
Board and Chief Executive Officer of Ralphs Grocery Company. He is a director of
CKE Restaurants, Inc. and Ultramar Diamond Shamrock Inc.
JUAN CARLOS BRANIFF -- age 41, member of audit committee of El Paso. Mr.
Braniff has served as the Deputy Chief Executive Officer of Service Banking at
BANCOMER since September 1994. He served as Executive Vice President of Capital
Investments and Mortgage Banking of BANCOMER from December 1991 to September
1994. For more than five years prior to that date he held several positions in
the real estate, corporate finance and brewing division of Valores Industriales,
S.A. -- Fomento Economico Mexicano, S.A. de C.V. ("FEMSA") and its affiliates.
He is a director of FEMSA, S.A. de C.V., Coca Cola FEMSA, S.A. de C.V. and Grupo
Financiero BANCOMER.
PETER T. FLAWN, PH.D. -- age 73, member of audit committee of El Paso. Dr.
Flawn has been retired since 1985. He was President ad interim of The University
of Texas at Austin from July 1, 1997 until April 15, 1998. For more than five
years prior to his retirement, Dr. Flawn was President of The University of
Texas at Austin and currently holds the title of President Emeritus. He is a
director of Harte-Hanks, Inc. and Hester Capital Management, L.L.C.
JAMES F. GIBBONS, PH.D. -- age 67, member compensation committee of El
Paso. Dr. Gibbons has been on the faculty of Stanford University since 1957 and
was Dean of the School of Engineering from September 1984 until June 1996.
Currently, he is Professor of Electrical Engineering and special counsel to the
President for Industry Relations at Stanford University. He is a director of
Centigram Communications Corporation, Cisco Systems, Inc., Lockheed Martin
Corporation and Raychem Corporation.
BEN F. LOVE -- age 74, chairman of compensation committee of El Paso. Since
December 1989, Mr. Love's principal occupation has been as a private investor.
For more than five years prior to that date, Mr. Love was Chairman of the Board
and Chief Executive Officer of Texas Commerce Bancshares, Inc. He is a director
of Mitchell Energy & Development Corp.
KENNETH L. SMALLEY -- age 69, chairman of audit committee of El Paso. Mr.
Smalley has been retired since February 1992. For more than five years prior to
that date, Mr. Smalley was a Senior Vice President of Phillips Petroleum Company
and President of Phillips 66 Natural Gas Company, a Phillips Petroleum Company
subsidiary. He is a director of El Paso Tennessee Pipeline Co.
MALCOLM WALLOP -- age 66, member of audit committee of El Paso. Since
January 1996, Mr. Wallop's principal occupation has been President of Frontiers
of Freedom Foundation and Western Strategy Group. For eighteen years prior to
that date, Mr. Wallop was a member of the United States Senate. He is a director
of Hubbell Inc., Sheridan State Bank and Leviathan Gas Pipeline Company, the
general partner of Leviathan Gas Pipeline Partners, L.P.
WILLIAM A. WISE -- age 53, Chairman, President and Chief Executive Officer
of El Paso. Mr. Wise has been Chairman of El Paso since January 1994 and Chief
Executive Officer of El Paso since 1990. Mr. Wise has been President of El Paso
from January 1990 until April 1996 and from July 1998 to present. He was
President and Chief Operating Officer of El Paso from April 1989 to December
1989. From March 1987 until April 1989, Mr. Wise was an Executive Vice President
of El Paso. He is a
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director of Battle Mountain Gold Company and is Chairman of the Board of El Paso
Tennessee Pipeline Co. and Leviathan Gas Pipeline Company, the general partner
of Leviathan Gas Pipeline Partners, L.P.
SONAT DIRECTORS
The Sonat board of directors currently consists of 13 members.
Set forth below is biographical information with respect to the 12
individuals who will comprise the Sonat board as of April 23, 1999:
RONALD L. KUEHN, JR. -- age 63, is President and Chief Executive Officer of
Sonat. He has served as a director of Sonat since 1981. Mr. Kuehn is also a
director of AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation,
The Dun & Bradstreet Corporation, Transocean Offshore Inc. and Union Carbide
Corporation, and a member of the Board of Trustees of Tuskegee University and
Southern Research Institute. During the past five years, Mr. Kuehn has served as
an executive officer of Sonat.
ROBERT J. LANIGAN -- age 70, is Chairman Emeritus of the board of directors
of Owens-Illinois, Inc., the principal business of which is the manufacture and
sale of packaging products. He has served as a Director of Sonat since 1983. He
is a director of Cognizant Corporation, Daimler-Chrysler Corporation, The Dun &
Bradstreet Corporation and Transocean Offshore Inc. During the past five years
prior to his appointment to his current position, Mr. Lanigan served as an
executive officer of Owens-Illinois, Inc.
MAX L. LUKENS -- age 50, is Chairman, President and Chief Executive Officer
of Baker Hughes Incorporated, the principal business of which is the provision
of products and services to the petroleum and continuous process industries. He
has served as a director of Sonat since 1995. He is a director of Baker Hughes
Incorporated and Transocean Offshore Inc. During the past five years, Mr. Lukens
has served as an executive officer of Baker Hughes Incorporated.
CHARLES MARSHALL -- age 69, is the former Vice Chairman of the Board of
American Telephone and Telegraph Company. He has served as a director of Sonat
since 1982. He is a Director of Ceridian Corporation, GATX Corporation, Hartmarx
Corporation and Sundstrand Corporation. Prior to his retirement, Mr. Marshall
served as an executive officer of American Telephone and Telegraph Company.
BENJAMIN F. PAYTON -- age 66, is President of Tuskegee University, a
position he has held during the past five years. He has served as a director of
Sonat since 1992. He is a director of AmSouth Bancorporation, Liberty
Corporation, Morrison's Health Care, Inc., Praxair, Inc. and Ruby Tuesday, Inc.
JOHN J. PHELAN, JR. -- age 67, is the former Chairman of the Board and
Chief Executive Officer of The New York Stock Exchange, Inc. From 1991 to 1993,
he was President of the International Federation of Stock Exchanges. Mr. Phelan
has served as a director of Sonat since 1990. He is also a director of Eastman
Kodak Company, Merrill Lynch & Co., Inc. and Metropolitan Life Insurance Company
and a Senior Advisor to The Boston Consulting Group.
JEROME J. RICHARDSON -- age 62, is Owner/Founder of the NFL Carolina
Panthers. He has served as a director of Sonat since 1991. Mr. Richardson is
also Chairman of the NFL Stadium Committee, a director of The NCAA Foundation
and a Trustee of Wofford College. During the past five years prior to his
retirement in May 1995, Mr. Richardson served as an executive officer of
Flagstar Companies, Inc. and Flagstar Corporation.
ADRIAN M. TOCKLIN -- age 47, is President and Chief Executive Officer of
Tocklin & Associates, Inc., an insurance management and consulting firm. She has
served as a director of Sonat since 1994. He is a director of CNA Surety Corp.
and First Insurance Company of Hawaii, and a Trustee of George Washington
University. During the past five years prior to her retirement in April 1998,
Ms. Tocklin served as an executive officer of CNA Insurance Companies and The
Continental Corporation.
JAMES B. WILLIAMS -- age 66, is Chairman of the Executive Committee of the
Board of Directors of SunTrust Banks, Inc. He has served as a director of Sonat
since 1987. He is a director of The Coca-Cola Company, Genuine Parts Company,
Georgia-Pacific Corporation, Rollins, Inc. and RPC, Inc. During the
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past five years prior to his retirement in March 1998, Mr. Williams served as
Chairman of the Board and Chief Executive Officer of SunTrust Banks, Inc.
JOE B. WYATT -- age 63, is Chancellor, Chief Executive Officer and Trustee
of Vanderbilt University, a position he has held during the past five years. He
has served as a director of Sonat since 1984. He is a director of Advanced
Network & Services, Inc., Ingram Micro, Inc., Reynolds Metals Company, The
Aerostructures Corporation and University Research Association.
MICHAEL S. ZILKHA -- age 44, is the former Executive Vice President of
Zilkha Energy Company. He served as an executive officer of Zilkha Energy from
July 1986 to January 1998. Mr. Zilkha was an editor at Atlantic Monthly Press
from 1985 to 1986, and from 1978 to 1985, he was President of ZE Records, an
independent record production company in New York.
SELIM K. ZILKHA -- age 71, is the former Chief Executive Officer of Zilkha
Energy Company. He served as the sole director and Chief Executive Officer of
Zilkha Energy from March 1984 until January 1998. Prior to such time, Mr. Zilkha
was a banker with Zilkha & Sons in the United States and Europe from 1947 to
1955 and in London from 1955 to 1960. In 1960, he founded Mothercare, PLC, a
retail chain catering to mothers-to-be, babies and small children in Great
Britain, Europe and the United States. Mr. Zilkha sold his interest in
Mothercare, PLC in January 1982.
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ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MARCH 13, 1999
BY AND BETWEEN
EL PASO ENERGY CORPORATION
AND
SONAT INC.
<PAGE> 119
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I................................................................... 8
Section 1.1 Organization of Merger Sub.................................. 8
Section 1.2 The Parent Merger and Alternative Merger.................... 8
Section 1.3 The Closing; Effective Time................................. 9
Section 1.4 Subsequent Actions.......................................... 9
Section 1.5 Certificate of Incorporation; By-laws; Directors and
Officers of the Surviving Corporation....................... 9
ARTICLE II.................................................................. 10
Section 2.1 Treatment of Common Stock................................... 10
Section 2.2 Cancellation of Excluded Shares............................. 12
Section 2.3 Conversion of Common Stock of Merger Sub.................... 12
Section 2.4 Exchange Agent; Exchange Procedures......................... 12
Section 2.5 Transfer Books; Lost, Stolen or Destroyed Certificates...... 13
Section 2.6 No Fractional Share Certificates; Termination of Exchange
Fund........................................................ 13
Section 2.7 Options..................................................... 14
Section 2.8 Appraisal Rights............................................ 15
Section 2.9 Dividends................................................... 15
Section 2.10 Certain Adjustments......................................... 15
ARTICLE III................................................................. 15
Section 3.1 Organization and Qualification; Subsidiaries................ 15
Section 3.2 Restated Certificate of Incorporation and By-laws........... 16
Section 3.3 Capitalization.............................................. 16
Section 3.4 Power and Authority; Authorization; Valid and Binding....... 16
Section 3.5 No Conflict; Required Filings and Consents.................. 17
Section 3.6 SEC Reports; Financial Statements........................... 17
Section 3.7 Absence of Certain Changes.................................. 18
Section 3.8 Litigation; Liabilities..................................... 19
Section 3.9 Compliance; Permits......................................... 19
Section 3.10 Employee Matters; ERISA..................................... 19
Section 3.11 Labor Matters............................................... 21
Section 3.12 Environmental Matters....................................... 21
Section 3.13 Board Action; Company Rights Agreement; Vote Required....... 23
Section 3.14 Opinion of Financial Advisor................................ 24
Section 3.15 Brokers..................................................... 24
Section 3.16 Tax Matters................................................. 24
Section 3.17 Public Utility Holding Company Act of 1935.................. 24
Section 3.18 Restrictions on Business Activities......................... 24
Section 3.19 Year 2000................................................... 24
Section 3.20 Accounting Matters.......................................... 25
ARTICLE IV.................................................................. 25
Section 4.1 Organization and Qualification; Subsidiaries................ 25
Section 4.2 Restated Certificate of Incorporation and By-laws of
Parent...................................................... 25
Section 4.3 Capitalization.............................................. 26
Section 4.4 Power and Authority; Authorization; Valid and Binding....... 26
Section 4.5 No Conflict; Required Filings and Consents.................. 27
Section 4.6 SEC Reports; Financial Statements........................... 27
Section 4.7 Absence of Certain Changes.................................. 28
Section 4.8 Litigation; Liabilities..................................... 28
</TABLE>
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<TABLE>
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<S> <C> <C>
Section 4.9 Compliance; Permits......................................... 29
Section 4.10 Employee Matters; ERISA..................................... 29
Section 4.11 Labor Matters............................................... 31
Section 4.12 Environmental Matters....................................... 31
Section 4.13 Board Action; Vote Required................................. 32
Section 4.14 Opinion of Financial Advisor................................ 32
Section 4.15 Brokers..................................................... 33
Section 4.16 Tax Matters................................................. 33
Section 4.17 Public Utility Holding Company Act of 1935.................. 33
Section 4.18 Restrictions on Business Activities......................... 33
Section 4.19 Year 2000................................................... 33
Section 4.20 Accounting Matters.......................................... 34
ARTICLE V................................................................... 34
Section 5.1 Interim Operations of the Company........................... 34
Section 5.2 Interim Operations of Parent................................ 35
Section 5.3 No Solicitation............................................. 37
ARTICLE VI.................................................................. 38
Section 6.1 Meetings of Stockholders.................................... 38
Section 6.2 Filings; Other Action....................................... 39
Section 6.3 Publicity................................................... 39
Section 6.4 Registration Statements..................................... 39
Section 6.5 Listing Application......................................... 40
Section 6.6 Further Action.............................................. 40
Section 6.7 Expenses.................................................... 40
Section 6.8 Access to Information....................................... 41
Section 6.9 Insurance; Indemnity........................................ 41
Section 6.10 Employee Benefit Plans...................................... 41
Section 6.11 Certain Appointments........................................ 43
Section 6.12 Affiliates.................................................. 43
Section 6.13 Pooling-of-Interests........................................ 43
Section 6.14 Certificate of Designation; Depositary Agreement............ 44
Section 6.15 Takeover Statutes........................................... 44
Section 6.16 Tax-Free Merger............................................. 44
Section 6.17 Name; Headquarters.......................................... 44
Section 6.18 Employment Matters.......................................... 44
Section 6.19 Section 16(b)............................................... 44
Section 6.20 Reasonable Best Efforts..................................... 44
ARTICLE VII................................................................. 46
Section 7.1 Conditions to Obligations of the Parties.................... 46
Section 7.2 Additional Conditions to Obligations of Parent.............. 47
Section 7.3 Additional Conditions to Obligations of the Company......... 47
ARTICLE VIII................................................................ 48
Section 8.1 Termination................................................. 48
Section 8.2 Effect of Termination....................................... 49
Section 8.3 Amendment................................................... 50
Section 8.4 Extension; Waiver........................................... 50
ARTICLE IX.................................................................. 50
Section 9.1 Non-Survival of Representations, Warranties and
Agreements.................................................. 50
Section 9.2 GOVERNING LAW............................................... 51
Section 9.3 Notices..................................................... 51
</TABLE>
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<TABLE>
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Section 9.4 Certain Definitions; Interpretation......................... 51
Section 9.5 Headings.................................................... 52
Section 9.6 Severability................................................ 52
Section 9.7 Assignment; Binding Effect; No Third Party Beneficiaries.... 53
Section 9.8 Enforcement................................................. 53
Section 9.9 Counterparts................................................ 53
Section 9.10 Entire Agreement............................................ 53
</TABLE>
EXHIBITS
Exhibit A-1 Form of Initial Certificate of Incorporation of Merger Sub
Exhibit A-2 Form of Initial By-laws of Merger Sub
Exhibit B-1 Form of Restated Certificate of Incorporation of Parent as of the
Effective Time in the event the Parent Merger is consummated
Exhibit B-2 Form of By-laws of Parent
Exhibit C Form of Restated Certificate of Incorporation of the Company as of
the Effective Time in the event the Alternative Merger is
consummated
Exhibit D Form of Depositary Agreement
Exhibit E Form of Certificate of Designation, Preferences and Rights of the
__% Senior Cumulative Exchangeable Preferred Stock of El Paso
Energy Corporation
Exhibit F Form of Affiliate Letter of the Company's Affiliates
Exhibit G Form of Affiliate Letter of Parent's Affiliates
Exhibit H Form of Termination and Consulting Agreement with Ronald L. Kuehn,
Jr.
[These Exhibits have been omitted from the joint proxy statement/prospectus and
are available upon request]
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
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<S> <C>
ACM......................................................... 23
Acquisition Agreement....................................... 37
Acquisition Transaction..................................... 38
Action...................................................... 41
affiliate................................................... 52
Agreement................................................... 7
Alternative Merger.......................................... 8
Alternative Merger Excluded Shares.......................... 11
Alternative Surviving Corporation........................... 8
Applicable Period........................................... 37
Applicable Transaction...................................... 8
Cap Amount.................................................. 41
Certificate of Designation.................................. 11
Closing..................................................... 9
Closing Date................................................ 9
Code........................................................ 7
Common Conversion Number.................................... 11
Company..................................................... 7
Company Certificate......................................... 10
Company Common Stock........................................ 7
Company Defined Benefit Plan................................ 20
Company Designees........................................... 43
Company Disclosure Letter................................... 15
Company Employee Plans...................................... 19
Company Equity Equivalent Security.......................... 16
Company ERISA Affiliate..................................... 20
Company Material Adverse Effect............................. 51
Company Options............................................. 14
Company Permits............................................. 19
Company Preferred Stock..................................... 16
Company Rights Agreement.................................... 16
Company SEC Reports......................................... 18
Company Stock Option Agreement.............................. 7
Company Termination Fee..................................... 49
Confidentiality Agreement................................... 23
control..................................................... 52
Depositary.................................................. 11
Depositary Agreement........................................ 11
Depositary Receipt.......................................... 11
Depositary Share............................................ 11
Depositary Share Conversion Number.......................... 11
DGCL........................................................ 8
DLJ......................................................... 32
DOJ......................................................... 45
Effective Time.............................................. 9
Environmental Costs......................................... 22
Environmental Laws.......................................... 23
Environmental Matter........................................ 22
Environmental Permits....................................... 21
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
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<S> <C>
ERISA....................................................... 19
Exchange Act................................................ 17
Exchange Agent.............................................. 12
Exchange Fund............................................... 12
Exchange Ratio.............................................. 10
FERC........................................................ 17
Form S-4.................................................... 39
GAAP........................................................ 7
Governmental Entity......................................... 17
Hazardous Substances........................................ 22
Holding Company Act......................................... 24
HSR Act..................................................... 17
Indemnified Party........................................... 41
IRS......................................................... 20
Joint Proxy Statement/Prospectus............................ 39
knowledge................................................... 52
Kuehn Voting Agreement...................................... 7
Major Company Stockholders.................................. 7
Merger...................................................... 8
Merger Sub.................................................. 8
Merrill Lynch............................................... 24
Newco....................................................... 8
Notice...................................................... 37
NYSE........................................................ 11
Parent...................................................... 7
Parent Certificates......................................... 12
Parent Common Stock......................................... 7
Parent Defined Benefit Plan................................. 30
Parent Designees............................................ 43
Parent Disclosure Letter.................................... 25
Parent Employee Plans....................................... 29
Parent Equity Equivalent Security........................... 26
Parent ERISA Affiliate...................................... 29
Parent Material Adverse Effect.............................. 52
Parent Meeting.............................................. 8
Parent Merger............................................... 8
Parent Merger Excluded Shares............................... 10
Parent Permits.............................................. 29
Parent Preferred Stock...................................... 11, 26
Parent Rights Agreement..................................... 26
Parent SEC Reports.......................................... 27
Parent Stock Option Agreement............................... 7
Parent Surviving Corporation................................ 8
Parent Termination Fee...................................... 50
Parent Trust Securities..................................... 26
PBGC........................................................ 20
PCBs........................................................ 23
Person...................................................... 52
Regulatory Law.............................................. 45
Representatives............................................. 37
Revised Merger.............................................. 9
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM PAGE NO.
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<S> <C>
SEC......................................................... 7
Securities Act.............................................. 17
Stock Option Agreements..................................... 7
Subsidiary.................................................. 52
Superior Proposal........................................... 38
Surviving Corporation....................................... 8
Takeover Proposal........................................... 37
Tax......................................................... 52
Termination Date............................................ 48
Voting Agreements........................................... 7
Zilkha Voting Agreement..................................... 7
</TABLE>
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of March 13,
1999 (this "Agreement"), by and between EL PASO ENERGY CORPORATION, a Delaware
corporation ("Parent"), and SONAT INC., a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent and the Company have
determined that a business combination between Parent and the Company is in the
best interests of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits and have approved the transactions provided for herein upon
the terms and subject to the conditions set forth in this Agreement;
WHEREAS, it is intended that the business combination between Parent and
the Company will qualify as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
WHEREAS, it is intended that the business combination between Parent and
the Company will be accounted for as a pooling of interests under United States
generally accepted accounting principles ("GAAP") and the applicable rules and
regulations of the Securities and Exchange Commission (the "SEC");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Parent's willingness to enter into this
Agreement, Parent and the Company are executing and delivering a Stock Option
Agreement, dated as of the date hereof (the "Company Stock Option Agreement"),
pursuant to which the Company is granting to Parent an option to purchase, under
certain circumstances, for a purchase price of $27.238 per share, up to
21,899,515 shares of common stock, par value $1.00 per share, of the Company
(together with the associated preference share purchase rights, the "Company
Common Stock");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the Company's willingness to enter into this
Agreement, Parent and the Company are executing and delivering a Stock Option
Agreement, dated as of the date hereof (the "Parent Stock Option Agreement", and
together with the Company Stock Option Agreement, the "Stock Option
Agreements"), pursuant to which Parent is granting to the Company an option to
purchase, under certain circumstances, for a purchase price of $37.725 per
share, up to 24,349,638 shares of common stock, par value $3.00 per share, of
Parent (together with the associated preferred stock purchase rights, the
"Parent Common Stock"); and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Parent's willingness to enter into this
Agreement, Parent and Selim K. Zilkha, in his individual capacity and in his
capacity as trustee of the Selim K. Zilkha Trust and Michael Zilkha (the "Major
Company Stockholders") are executing and delivering a Voting Agreement, dated as
of the date hereof (the "Zilkha Voting Agreement"), pursuant to which each of
the Major Company Stockholders is agreeing to vote all of his or its shares of
Company Common Stock in favor of the approval and adoption of this Agreement and
the transactions contemplated hereby; and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Parent's willingness to enter into this
Agreement, Parent and Ronald L. Kuehn, Jr. are executing and delivering a Voting
Agreement, dated as of the date hereof (the "Kuehn Voting Agreement," and
together with the Zilkha Voting Agreement, the "Voting Agreements"), pursuant to
which he is agreeing to vote all of his shares of Company Common Stock in favor
of the approval and adoption of this Agreement and the transactions contemplated
hereby.
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NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained in this Agreement, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
Section 1.1 Organization of Merger Sub. As promptly as practicable
following the execution of this Agreement, Parent shall (i) duly organize under
the laws of the State of Delaware a wholly owned subsidiary corporation ("Merger
Sub"), (ii) cause directors of Merger Sub to be duly elected or appointed, (iii)
cause the directors of Merger Sub to elect officers of Merger Sub, (iv) cause
the directors of Merger Sub to duly ratify and approve this Agreement and the
Alternative Merger (as defined in Section 1.2(b)) and cause the officers of
Merger Sub to duly execute and deliver on behalf of Merger Sub such
documentation as is necessary to make Merger Sub a party hereto, (v) in its
capacity as sole stockholder of Merger Sub, duly approve and adopt this
Agreement and the Alternative Merger in accordance with the Delaware General
Corporation Law (the "DGCL"), and (vi) cause the directors and officers of
Merger Sub to take such steps as are necessary for Merger Sub to perform its
obligations hereunder. The initial certificate of incorporation and bylaws of
Merger Sub shall be substantially in the forms of the certificate of
incorporation and bylaws set forth in Exhibit A-1 hereto and Exhibit A-2 hereto,
respectively.
Section 1.2 The Parent Merger and Alternative Merger. (a) Subject to
paragraph (b) of this Section 1.2, at the Effective Time (as defined in Section
1.3(b)) and subject to and upon the terms and conditions of this Agreement and
in accordance with the provisions of Section 251 of the DGCL, the Company shall
be merged with and into Parent (such merger, the "Parent Merger"), the separate
corporate existence of the Company shall cease, and Parent shall continue as the
surviving corporation (sometimes referred to herein as the "Parent Surviving
Corporation") in the Parent Merger. The effects and consequences of the Parent
Merger shall be as specified in this Agreement and in Section 259(a) of the
DGCL.
(b) Notwithstanding paragraph (a) of this Section 1.2, in the event that
this Agreement and the Parent Merger are not approved by the requisite vote of
the stockholders of Parent pursuant to the DGCL at a duly noticed and held
stockholders' meeting, including any adjournments or postponements thereof (a
"Parent Meeting"), at the Effective Time and subject to and upon the terms and
conditions of this Agreement and in accordance with the provisions of Section
251 of the DGCL, Merger Sub shall be merged with and into the Company (such
merger the "Alternative Merger") and the separate existence of Merger Sub shall
cease. The Company shall continue as the surviving corporation (the "Alternative
Surviving Corporation") in the Alternative Merger and, as of the Effective Time,
shall be a wholly-owned subsidiary of Parent. The effects and consequences of
the Alternative Merger shall be as specified in this Agreement and in Section
259(a) of the DGCL. The Parent Surviving Corporation shall, in the event the
Parent Merger is consummated, and the Alternative Surviving Corporation shall,
in the event the Alternative Merger is consummated, sometimes be referred to
herein as the "Surviving Corporation"; and the Parent Merger shall, in the event
the Parent Merger is consummated, and the Alternative Merger shall, in the event
the Alternative Merger is consummated, sometimes be referred to herein as the
"Merger." In the event that the approval of the stockholders of Parent
referenced in the first sentence of this paragraph (b) is obtained at a Parent
Meeting, each reference herein to the "Applicable Transaction" shall be deemed
to be a reference to the Parent Merger, and in the event that such approval of
the stockholders of Parent is not obtained at a Parent Meeting called to vote
with respect thereto, each reference herein to the "Applicable Transaction"
shall be deemed to be a reference to the Alternative Merger.
(c) Notwithstanding any other provision of this Agreement, the Company
agrees with Parent that, at the request of Parent at any time prior to the
effective date of the Form S-4 (as defined in Section 6.4), the form of the
business combination contemplated by this Agreement may be amended to substitute
for the Parent Merger a business combination in which Parent and the Company
will form a Delaware corporation, which will be half-owned by each of Parent and
the Company ("Newco") and will cause
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Newco to form two wholly owned subsidiaries, one of which will merge with and
into Parent and one of which will merge with and into the Company, and as a
result of which each outstanding share of Parent Common Stock and Company Common
Stock will be converted into the right to receive one share of common stock of
Newco (together with one associated preferred stock purchase right of Newco)
(the "Revised Merger"); provided that the Revised Merger will only be effected
if such transaction would reduce the transaction costs associated with the
consummation of the Parent Merger and would not adversely affect the holders of
Company Common Stock; and provided further that such amendment shall not affect
Parent's obligation to effect the Alternative Merger if required pursuant to
this Agreement. If the Revised Merger is being substituted for the Parent
Merger, the parties shall execute an appropriate amendment to this Agreement in
a form mutually acceptable to Parent and the Company to provide for the Revised
Merger.
Section 1.3 The Closing; Effective Time. (a) The closing of the Applicable
Transaction (the "Closing") shall take place (i) at the offices of Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, at
10:00 A.M. local time, on the first business day on which the last to be
satisfied or waived of the conditions set forth in Article VII (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the satisfaction or waiver of those conditions) shall be satisfied or waived
in accordance with this Agreement or (ii) at such other place, time and/or date
as Parent and the Company shall agree (the date of the Closing, the "Closing
Date").
(b) On the Closing Date, Parent and the Company shall cause a certificate
of merger with respect to the Applicable Transaction, meeting the requirements
of Section 251 of the DGCL, to be properly executed and filed with the Secretary
of State of the State of Delaware in accordance with the applicable provisions
of the DGCL. The Applicable Transaction shall become effective at the time at
which the certificate of merger with respect thereto shall be duly filed with
Secretary of State of the State of Delaware, or at such later time specified in
such certificate of merger as shall be agreed by Parent and the Company (the
time that the Applicable Transaction becomes effective, the "Effective Time").
Section 1.4 Subsequent Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise the
Surviving Corporation's right, title or interest in, to or under any of the
rights, properties, privileges, franchises or assets of either of its
constituent corporations acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger, or otherwise to carry out the
intent of this Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of either of the constituent corporations of the Merger, all such deeds,
bills of sale, assignments and assurances and to take and do, in the name and on
behalf of each of such corporations or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties, privileges,
franchises or assets in the Surviving Corporation or otherwise to carry out the
intent of this Agreement.
Section 1.5 Certificate of Incorporation; By-laws; Directors and Officers
of the Surviving Corporation. (a) Unless otherwise agreed by Parent and the
Company prior to the Closing, in the event the Parent Merger is consummated:
(i) At the Effective Time, the Restated Certificate of Incorporation
of Parent shall be amended to read in its entirety as set forth in Exhibit
B hereto. As so amended, such Restated Certificate of Incorporation shall
constitute at and after the Effective Time (until amended as provided by
applicable law and such Restated Certificate of Incorporation, as
applicable) the certificate of incorporation of the Parent Surviving
Corporation.
(ii) The By-laws of Parent shall be amended immediately prior to the
Effective Time to read in its entirety as set forth in Exhibit B-2 as so
amended, such By-laws shall constitute at and after the Effective Time
(until amended as provided by applicable law and the applicable certificate
of incorporation and bylaws) the By-laws of the Parent Surviving
Corporation.
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(iii) The officers of Parent immediately prior to the Effective Time
shall continue to serve in their respective offices of the Parent Surviving
Corporation from and after the Effective Time, until their successors are
elected or appointed and qualified or until their resignation or removal;
and
(iv) The directors of Parent Surviving Corporation as of the Effective
Time shall be determined in accordance with Section 6.11 hereof. The
directors of Parent Surviving Corporation determined in accordance with
Section 6.11 hereof shall be the directors of the Parent Surviving
Corporation from and after the Effective Time, until their successors are
elected or appointed and qualified or until their resignation or removal.
(b) Unless otherwise agreed by Parent and the Company prior to the Closing,
in the event the Alternative Merger is consummated:
(i) At the Effective Time, the Restated Certificate of Incorporation
of the Company shall be amended to read in its entirety as set forth in
Exhibit C hereto. As so amended, such Restated Certificate of Incorporation
shall constitute at and after the Effective Time (until amended as provided
by applicable law and such Restated Certificate of Incorporation, as
applicable) the certificate of incorporation of the Alternative Surviving
Corporation.
(ii) The By-laws of the Company in effect immediately prior to the
Effective Time shall constitute at and after the Effective Time (until
amended as provided by applicable law and the certificate of incorporation
and bylaws, as applicable) the By-laws of the Alternative Surviving
Corporation.
(iii) The officers of the Company immediately prior to the Effective
Time shall continue to serve in their respective offices of the Alternative
Surviving Corporation from and after the Effective Time, until their
successors are elected or appointed and qualified or until their
resignation or removal.
(iv) The directors of Merger Sub immediately prior to the Effective
Time shall be the directors of the Alternative Surviving Corporation from
and after the Effective Time, until their successors are elected or
appointed and qualified or until their resignation or removal.
(v) The By-laws of Parent shall be amended immediately prior to the
Effective Time to read in its entirety as set forth in Exhibit B-2.
ARTICLE II
Section 2.1 Treatment of Common Stock. (a) Subject to paragraph (b) of
this Section 2.1, at the Effective Time, without any action on the part of any
holder thereof (but subject to Sections 2.4, 2.5 and 2.6 of this Agreement), (i)
each share of Company Common Stock issued and outstanding immediately prior to
the Effective Time, and all rights in respect thereof, shall forthwith cease to
exist and (other than those shares held in the treasury of the Company, by
Parent or by any of their respective Subsidiaries (collectively, the "Parent
Merger Excluded Shares")) shall be converted into a right to receive one validly
issued, fully paid and nonassessable share of Parent Common Stock (the "Exchange
Ratio") and (ii) each issued and/or outstanding share of Parent Common Stock
shall remain issued and/or outstanding, as applicable, as one share of Parent
Common Stock. Subject to paragraph (b) of this Section 2.1 and except as
otherwise provided herein, each certificate (a "Company Certificate") that
immediately prior to the Effective Time represented issued and outstanding
shares of Company Common Stock (other than Parent Merger Excluded Shares) shall
evidence the right to receive Parent Common Stock on the basis set forth in this
paragraph (a) (subject to Sections 2.4, 2.5 and 2.6 of this Agreement).
(b) Notwithstanding paragraph (a) of this Section 2.1, in the event the
Alternative Merger is being consummated, at the Effective Time, without any
action on the part of any holder thereof (but subject to Sections 2.4, 2.5 and
2.6 of this Agreement), each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time, and all rights in respect
thereof, shall forthwith cease to exist and (other than those shares held in the
treasury of the Company, by Parent or by any of their
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respective Subsidiaries (collectively, the "Alternative Merger Excluded
Shares")) shall be converted into the right to receive: (1) that fraction of a
validly issued, fully paid and nonassessable share of Parent Common Stock
(including any associated fractional preferred stock purchase right) that is
equal to the Common Conversion Number and (2) that fraction of a validly issued,
fully paid and nonassessable Depositary Share that is equal to the Depositary
Share Conversion Number (each as defined below).
For purposes of this Agreement:
"Common Conversion Number" means the result obtained by dividing (x) (i)
the maximum number of shares of Parent Common Stock that may be issued by Parent
as of the date prior to the Closing Date without obtaining the approval of
stockholders of Parent pursuant to the rules and regulations of the New York
Stock Exchange (the "NYSE") minus (ii) the number of shares of Parent Common
Stock required pursuant to Section 2.7 to be reserved for issuance upon exercise
of Company Options (as defined in Section 2.7) outstanding immediately prior to
the Effective Time by (y) the number of shares of Company Common Stock
(excluding Alternative Merger Excluded Shares) outstanding immediately prior to
the Effective Time as certified to Parent by the principal registrar and
transfer agent of the Company.
"Depositary" means BankBoston, N.A. or such other depositary selected by
Parent that is reasonably acceptable to the Company.
"Depositary Agreement" means the Depositary Agreement between Parent and
the Depositary substantially in the form attached as Exhibit D hereto.
"Depositary Receipt" means a depositary receipt issued by the Depositary to
evidence a Depositary Share.
"Depositary Share" means a unit representing such fractional interest in a
whole share of Parent Preferred Stock that has a "Liquidation Preference" (as
set forth in the Certificate of Designation (as defined below)) equal to $100.
Each Depositary Share shall be evidenced by a Depositary Receipt issued to the
person entitled to such fractional interest and which shall entitle the holder
thereof, pursuant to the Depositary Agreement, to rights equivalent to those of
a holder of a whole share of Parent Preferred Stock (to the extent of such
fractional interest therein).
"Depositary Share Conversion Number" means the result obtained by dividing
(a) the product of (x) (i) the Exchange Ratio (ii) minus the Common Conversion
Number and (y) the Implied Price (as defined below) by (b) the "Liquidation
Preference" (as set forth in the Certificate of Designation) of such fractional
interest in a whole share of Parent Preferred Stock that is represented by each
Depositary Share. The "Implied Price" shall mean the average of the closing
prices of the shares of Parent Common Stock on the NYSE Composite Transaction
Reporting System as reported in The Wall Street Journal (but subject to
correction for typographical or other manifest errors in such reporting) over
the 10 trading day period immediately preceding the second trading day prior to
the date of the meeting of the Company's stockholders contemplated by Section
6.1; provided that the Implied Price shall in no event be less than $32.00, or
greater than $44.50.
"Parent Preferred Stock" means the series of voting preferred stock of
Parent to be designated as Cumulative Preferred Stock having the powers, rights,
designations and preferences and the qualifications, limitations and
restrictions described in the form of Certificate of Designation therefor
attached hereto as Exhibit E hereto (the "Certificate of Designation");
provided, however, that the Rate (as defined in the Certificate of Designation)
shall be such percentage, to be jointly determined by the financial advisors in
Sections 3.14 and 4.14 hereof, that such financial advisors believe would cause
the trading price per Depositary Share on a fully distributed basis after the
Effective Time to be as nearly equal as possible to the Liquidation Preference
(as set forth in the Certificate of Designation) of the fractional interest in a
whole share of Parent Preferred Stock that is represented by one Depositary
Share. In the event that such financial advisors are unable to agree on the
Rate, the parties shall direct the financial advisors identified in Sections
3.14 and 4.14 to jointly select a nationally recognized investment bank to
determine the Rate. The determination of such investment bank shall be binding
on the parties hereto.
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Notwithstanding paragraph (a) of this Section 2.1, in the event that the
Alternative Merger is consummated, except as otherwise provided herein, each
Company Certificate (other than Company Certificates representing Alternative
Merger Excluded Shares) shall evidence, commencing immediately after the
Effective Time, the right to receive shares of Parent Common Stock and
Depositary Shares on the basis set forth in this paragraph (b) (subject to
Sections 2.4, 2.5 and 2.6 of this Agreement).
Section 2.2 Cancellation of Excluded Shares. At the Effective Time,
without any action on the part of the holder thereof, in the event the Parent
Merger is consummated, each Parent Merger Excluded Share, and in the event the
Alternative Merger is consummated, each Alternative Merger Excluded Share, as
applicable, shall forthwith cease to be outstanding and shall be canceled and
retired, and no shares of stock or other securities of Parent, the Company or
the Surviving Corporation shall be issuable, and no payment or other
consideration shall be made or paid, in respect thereof.
Section 2.3 Conversion of Common Stock of Merger Sub. In the event the
Alternative Merger is consummated, at the Effective Time, without any action on
the part of the holder thereof, each share of common stock of Merger Sub that is
issued and outstanding immediately prior the Effective Time shall be converted
into one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation.
Section 2.4 Exchange Agent; Exchange Procedures. (a) Subject to the terms
and conditions of this Agreement, at or prior to the Effective Time, Parent
shall appoint BankBoston, N.A., or such other exchange agent selected by Parent
that is reasonably acceptable to the Company (the "Exchange Agent"), to effect
the exchange of shares of Company Common Stock for, in the event the Parent
Merger is consummated, shares of Parent Common Stock or, in the event the
Alternative Merger is consummated, shares of Parent Common Stock and Depositary
Shares, in each case in accordance with the provisions of this Article II. As
soon as reasonably practicable following the Effective Time, Parent shall
deposit, or cause to be deposited, with the Exchange Agent, for exchange in
accordance with this Article II, in the event the Parent Merger is consummated,
certificates representing shares of Parent Common Stock ("Parent Certificates"),
and in the event the Alternative Merger is consummated, Parent Certificates and
Depositary Receipts in amounts sufficient to allow the Exchange Agent to make
all deliveries of Parent Certificates and Depositary Receipts in exchange for
Company Certificates in connection with the Applicable Transaction, as
contemplated by this Section 2.4 and any cash payable in respect of fractional
shares in accordance with Section 2.6(a) hereof and any dividends or other
distributions payable in accordance with Section 2.4(a) (the "Exchange Fund").
(b) Parent shall instruct the Exchange Agent to mail to each record holder
of shares of Company Common Stock as soon as reasonably practicable after the
Effective Time (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to shares of Company Common Stock
shall pass, only upon the delivery of a Company Certificate or Company
Certificates representing such shares to the Exchange Agent, and which letter
shall otherwise be in such form and have such other provisions as Parent shall
reasonably specify, which form shall be reasonably acceptable to the Company)
and (ii) instructions for use in effecting the surrender of Company Certificates
for Parent Certificates (and, if applicable, Depositary Receipts) and cash in
lieu of fractional shares, if any. Commencing immediately after the Effective
Time, upon the surrender to the Exchange Agent of a Company Certificate,
together with a duly executed and completed letter of transmittal and all other
documents and other materials reasonably required by the Exchange Agent to be
delivered in connection therewith, the holder thereof shall be entitled to
receive a Parent Certificate or Parent Certificates representing the number of
whole shares of Parent Common Stock (and, if applicable, a Depositary Receipt or
Depositary Receipts representing whole Depositary Shares) into which the shares
of the Company Common Stock which immediately prior to the Effective Time were
represented by such Company Certificate so surrendered shall have been converted
in accordance with the provisions of Section 2.1, together with a cash payment
in lieu of fractional shares, if any, in accordance with Section 2.6(a). Unless
and until any Company Certificate is so surrendered, no dividends or other
distributions, if any, payable to the holders of record of shares of Parent
Common Stock (and, if applicable, to holders of record of Depositary Shares) as
of any date subsequent to the Effective Time
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shall be paid to the holder of such Company Certificate in respect thereof. Upon
the surrender of any Company Certificate, the record holder of the Parent
Certificate or Parent Certificates representing shares of Parent Common Stock
(and, if applicable, a Depositary Receipt or Depositary Receipts representing
Depositary Shares) issued in exchange therefor shall be entitled to receive, (i)
at the time of surrender, the amount of any dividends or other distributions in
respect of such shares of Parent Common Stock (and, if applicable, Depositary
Shares) having a record date after the Effective Time and a payment date prior
to the surrender date, and (ii) at the appropriate payment date, the amount of
dividends or other distributions in respect of such shares of Parent Common
Stock (and, if applicable, Depositary Shares) having a record date after the
Effective Time and a payment date subsequent to the date of such surrender. No
interest shall be payable in respect of the payment of dividends or
distributions pursuant to the immediately preceding sentence.
(c) The Parent, the Surviving Corporation and the Exchange Agent shall be
entitled to deduct and withhold from the shares of the Parent Common Stock (and,
if applicable, Depositary Shares) and cash in lieu of fractional shares
otherwise payable to any holder of shares of the Company Common Stock pursuant
to this Article II, and from any dividends or other distributions which such
holder is entitled to receive pursuant to Section 2.4(b), such amounts as
Parent, the Surviving Corporation and/or the Exchange Agent is required to
deduct or withhold therefrom under the Code and/or any applicable provision of
state, local or foreign law.
Section 2.5 Transfer Books; Lost, Stolen or Destroyed Certificates. (a)
The stock transfer books of the Company shall be closed at the Effective Time
and no transfer of any shares of Company Common Stock shall thereafter be
recorded on any of such stock transfer books. In the event of a transfer of
ownership of any shares of the Company Common Stock that is not registered in
the stock transfer records of the Company at the Effective Time, a Parent
Certificate or Parent Certificates representing the number of whole shares of
Parent Common Stock (and, if applicable, a Depositary Receipt or Depositary
Receipts representing whole Depositary Shares) into which such shares of the
Company Common Stock shall have been converted in the Applicable Transaction
shall be issued to the transferee together with a cash payment in lieu of
fractional shares, if any, in accordance with Section 2.6(a), and payment of
dividends or distributions, if any, in accordance with Section 2.4(b) only if
the Company Certificate or Company Certificates are surrendered as provided in
Section 2.4 (but subject to Section 2.5(b) hereof), accompanied by all documents
required to evidence and effect such transfer and evidence of payment of any
applicable stock transfer taxes.
(b) In the event any Company Certificate shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Company Certificate, upon the delivery of a duly executed affidavit of
that fact by the holder thereof, Parent Certificates in accordance with Section
2.4, cash in lieu of fractional shares, if any, in accordance with Section
2.6(a), and payment of dividends and distributions, if any, in accordance with
Section 2.4(b); provided, however, that Parent may, in its discretion, require
the owner of such lost, stolen or destroyed Company Certificate to deliver a
bond in such sum as Parent may reasonably direct as indemnity against any claim
that may be made against Parent, the Company, the Surviving Corporation or the
Exchange Agent with respect to that Company Certificate alleged to have been
lost, stolen or destroyed.
Section 2.6 No Fractional Share Certificates; Termination of Exchange
Fund. (a) No scrip or certificates for fractional shares of Parent Common Stock
(and, if applicable, fractional Depositary Shares) will be issued upon the
surrender for exchange of Company Certificates, and no fractional interest in a
share of Parent Common Stock (and, if applicable, in any fractional Depositary
Share) will entitle the holder thereof to vote or receive dividends or
distributions or any other rights of a stockholder of Parent, with respect to
any such fractional share interest. Each Person entitled to receive, but for
this Section 2.6(a), a fractional share of Parent Common Stock (and/or, if
applicable, fractional Depositary Shares) shall be entitled to receive an amount
of cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the average of the closing prices of the shares of
Parent Common Stock on the NYSE Composite Transaction Reporting System as
reported in The Wall Street
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Journal (but subject to correction for typographical or other manifest errors in
such reporting) over the four trading day period immediately preceding the
Closing Date.
(b) Any portion of the Exchange Fund which remains undistributed one year
after the Effective Time shall be delivered to Parent upon demand, and each
holder of shares of the Company Common Stock who has not theretofore surrendered
such holder's Company Certificates in accordance with the provisions of this
Article II shall thereafter look only to Parent for satisfaction of such
holder's claims for shares of Parent Common Stock (and, if applicable,
Depositary Shares), any cash in lieu of fractional shares of Parent Common Stock
(and, if applicable, fractional Depositary Shares) payable in accordance with
Section 2.6(a) and any dividends or distributions payable in accordance with
Section 2.4(b). Notwithstanding the foregoing, none of Parent, the Company, the
Surviving Corporation or the Exchange Agent shall be liable to any former holder
of shares of Company Common Stock for any shares or amounts properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
Section 2.7 Options. (a) All options to purchase shares of Company Common
Stock ("Company Options"), and all options to purchase shares of Parent Common
Stock ("Parent Options"), outstanding at the Effective Time under any stock
option plan or other arrangement of the Company shall remain outstanding
following the Effective Time. Prior to the Effective Time, the Company shall
take all action necessary with respect to each of its stock option plans or
other arrangements pursuant to which Company Options will be outstanding
immediately prior to the Effective Time such that as of the Effective Time (i)
each Company Option shall entitle the holder thereof to purchase such number of
shares of Parent Common Stock as is equal to the product of (x) the number of
shares of Company Common Stock subject to such option immediately prior to the
Effective Time and (y) the Exchange Ratio (whether or not the Applicable
Transaction is the Parent Merger) and (ii) the exercise price per share of
Parent Common Stock subject to any such Company Option as of and after the
Effective Time shall be equal to (x) the exercise price per share of the Company
Common Stock subject to such Company Option immediately prior to the Effective
Time divided by (y) the Exchange Ratio (whether or not the Applicable
Transaction is the Parent Merger). As of the Effective Time, Parent shall assume
all obligations of the Company in respect of outstanding Company Options.
(b) Notwithstanding the foregoing, the number of shares of Parent Common
Stock deliverable upon exercise of each Company Option at and after the
Effective Time as contemplated by paragraph (a) above shall be rounded, if
necessary, to the nearest whole share of Parent Common Stock, and the exercise
price with respect thereto shall be rounded, if necessary, to the nearest one
one-hundredth of a cent (it being understood that all options exercisable at the
same price and granted on the same date to the same individual shall be
aggregated for this purpose). Other than as provided in paragraph (a) above and
in the prior sentence of this paragraph (b), as of and after the Effective Time,
each Company Option shall be subject to the same terms and conditions as in
effect immediately prior to the Effective Time, but giving effect to the
Applicable Transaction.
(c) As soon as practicable after the Effective Time, Parent shall deliver
(i) to the holders of Company Options which become fully vested and exercisable
by virtue of the Applicable Transaction a notice stating that by virtue of the
Applicable Transaction and pursuant to the terms of the relevant Company
Employee Plan (as defined in Section 3.10(a)) such Company Options have become
fully vested and exercisable and (ii) to the holders of all Company Options a
notice stating that the agreements evidencing the grants of such Company Options
shall continue in effect on the same terms and conditions (subject to the
adjustments, if any, required by this Section 2.7 after giving effect to the
transactions contemplated hereby and the terms of the relevant Company Employee
Plan).
(d) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of Company Options and shall use reasonable best efforts to ensure that
such shares are listed on the NYSE upon issuance. As soon as practicable after
the Effective Time, Parent shall file with the SEC a registration statement on
Form S-8 of the SEC (if available) (or any successor or other appropriate form)
with respect to the shares of Parent Common
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Stock issuable upon the exercise of such options and shall use reasonable best
efforts to maintain the effectiveness of such registration statement, and to
maintain the current status of the prospectus or prospectuses contained therein,
until all such options have been exercised, expired or forfeited.
Section 2.8 Appraisal Rights. In accordance with Section 262 of the DGCL,
no appraisal rights shall be available to holders of shares of Parent Common
Stock or Company Common Stock in connection with the Parent Merger or the
Alternative Merger.
Section 2.9 Dividends. Parent and the Company shall coordinate with each
other the declaration of, and the setting of record dates and payment dates for,
dividends in respect of their respective shares of common stock so that, in
respect of any fiscal quarter, holders of shares of Company Common Stock do not
(i) receive dividends in respect of both (x) shares of Company Common Stock and
(y) any shares of Parent Common Stock received pursuant to the Applicable
Transaction in exchange therefor or (ii) fail to receive a dividend in respect
of both (x) shares of Company Common Stock and (y) shares of Parent Common Stock
received pursuant to the Applicable Transaction.
Section 2.10 Certain Adjustments. If between the date of this Agreement
and the Effective Time, whether or not permitted pursuant to the terms hereof,
the outstanding shares of Company Common Stock or Parent Common Stock shall be
changed into a different number of shares or other securities by reason of any
stock split, combination, merger, consolidation, reorganization or other
transaction, or any dividend payable in stock shall be declared thereon with a
record date within such period, the Exchange Ratio, the formula for calculating
the Common Conversion Number and the Depositary Share Conversion Number, as
applicable, and the form of securities issuable in the Applicable Transaction
shall be appropriately adjusted to provide the holders of shares of Company
Common Stock the same economic effect as contemplated by this Agreement prior to
such event.
ARTICLE III
Except as set forth in the corresponding sections or subsections of the
disclosure letter, dated the date of this Agreement, delivered by the Company to
Parent (the "Company Disclosure Letter"), the Company hereby represents and
warrants to Parent as follows:
Section 3.1 Organization and Qualification; Subsidiaries. (a) The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of the Subsidiaries of the Company is a
corporation or other business entity duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization, and each of the Company and its Subsidiaries has the requisite
corporate or similar organizational power and authority to own, operate or lease
its properties and to carry on its business as it is now being conducted, and is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned, operated or
leased or the nature of its activities makes such qualification necessary,
except as would not, in the aggregate, have, or reasonably be expected to have,
a Company Material Adverse Effect (as defined in Section 9.3).
(b) Except as disclosed in the Company SEC Reports (as defined in Section
3.6) filed prior to the date of this Agreement, and except as would not, in the
aggregate, have, or reasonably be expected to have, a Company Material Adverse
Effect, (i) all of the outstanding shares of capital stock and other equity
securities of the Subsidiaries of the Company are owned, directly or indirectly,
by the Company free and clear of all liens, pledges, security interests, or
other encumbrances, (ii) all of the outstanding shares of capital stock or other
equity securities of the Subsidiaries of the Company have been validly issued
and are fully paid and nonassessable, (iii) there are no subscriptions, options,
warrants, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) entitling any person to purchase or
otherwise acquire from the Company or any of its Subsidiaries at any time, or
upon the happening of any stated event, any shares of capital stock or other
equity securities of any of the Subsidiaries of the Company. There are no
outstanding obligations, contingent or otherwise, of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock
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or other equity securities, or any securities convertible, exchangeable or
exercisable for or into, shares of capital stock or other equity securities of
any Subsidiary of the Company.
Section 3.2 Restated Certificate of Incorporation and By-laws. The Company
has furnished or otherwise made available to Parent a complete and correct copy
of the Company's Restated Certificate of Incorporation and By-laws, in each case
as amended to the date of this Agreement. Such Restated Certificate of
Incorporation and By-laws and all similar organizational documents of the
Subsidiaries of the Company are in full force and effect. The Company is not in
violation of its Restated Certificate of Incorporation or By-laws and, except as
would not, in the aggregate, have, or reasonably be expected to have, a Company
Material Adverse Effect, none of the Subsidiaries of the Company is in violation
of any similar organizational documents of Subsidiaries of the Company.
Section 3.3 Capitalization. (a) The authorized capital stock of the
Company consists of 400,000,000 shares of Company Common Stock and 10,000,000
shares of Serial Preference Stock, par value $1.00 per share (the "Company
Preferred Stock"). 1,000,000 shares of Company Preferred Stock have been
designated "Series A Participating Preference Stock," and, other than as
contemplated or permitted hereby, no other shares of Company Preferred Stock are
subject to any designation. At the close of business on March 11, 1999,
110,047,818 shares of Company Common Stock were issued and outstanding. No
shares of Company Preferred Stock are issued and outstanding. 1,325,788 shares
of Company Common Stock, and no shares of Company Preferred Stock, are held by
the Company in its treasury. No shares of capital stock of the Company are held
by any of the Company's Subsidiaries. All of the issued and outstanding shares
of Company Common Stock are validly issued, fully paid, nonassessable and free
of preemptive rights. At the close of business on March 10, 1999, Company
Options exercisable for 3,434,775 shares of Company Common Stock, in the
aggregate, were outstanding. As of the date of this Agreement, other than (i)
the option granted pursuant to the Company Stock Option Agreement, (ii) the
preference share purchase rights (none of which are exercisable) issued pursuant
to the Rights Agreement (the "Company Rights Agreement"), dated as of January 8,
1996, as amended, between the Company and Chemical Mellon Shareholder Services,
L.L.C., as rights agent, and (iii) the Company Options, the Company did not have
outstanding any subscriptions, options, warrants, calls, commitments,
agreements, conversion rights or other rights of any character (contingent or
otherwise) entitling any person to purchase or otherwise acquire from the
Company or any of its Subsidiaries at any time, or upon the happening of any
stated event, any shares of the capital stock of the Company (each of the
foregoing, a "Company Equity Equivalent Security"). From the close of business
on March 10, 1999, no shares of Company Common Stock or Company Equity
Equivalent Securities (other than the option granted pursuant to the Stock
Option Agreement) have been issued, sold or otherwise transferred by the Company
(except (x) in connection with the exercise, conversion or exchange of
outstanding Company Equity Equivalent Securities and (y) as described in Section
5.1 of the Company Disclosure Letter).
(b) As of the date of this Agreement, there are no outstanding obligations,
contingent or otherwise, of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Company Common Stock or
any Company Equity Equivalent Securities (except in connection with the
exercise, conversion or exchange of outstanding Company Equity Equivalent
Securities). As of the date of this Agreement, there are no bonds, debentures,
notes or other indebtedness issued and outstanding having the right to vote
together with the Company's stockholders on any matter in respect of which the
Company's stockholders are entitled to vote.
Section 3.4 Power and Authority; Authorization; Valid and Binding. The
Company has the necessary corporate power and authority to execute and deliver
this Agreement and the Stock Option Agreements and to perform its obligations
hereunder and thereunder, as applicable, except that the consummation of the
Parent Merger or, if applicable, the Alternative Merger is subject to the
adoption of this Agreement by the Company's stockholders as set forth in Section
3.13(c). The execution and delivery of this Agreement and the Stock Option
Agreements by the Company and the performance by it of its obligations hereunder
and thereunder, as applicable, have been duly authorized by all necessary
corporate action on the part of the Company, except that the consummation of the
Parent Merger or, if applicable, the Alternative Merger is subject to the
adoption of this Agreement by the Company's stockholders as set
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forth in Section 3.13(c). This Agreement and the Stock Option Agreements have
been duly executed and delivered by the Company, and assuming the corporate
authority of, and the due authorization, execution and delivery by, Parent, each
of such agreements constitutes a legal, valid and binding obligation of the
Company enforceable against it in accordance with the terms hereof and thereof,
as applicable, subject to bankruptcy, insolvency, fraudulent transfer,
moratorium, reorganization and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Section 3.5 No Conflict; Required Filings and Consents. (a) The execution
and delivery by the Company of this Agreement and the Stock Option Agreements do
not and will not, and the performance by Company of its obligations hereunder
and thereunder do not and will not, (i) violate or conflict with the Restated
Certificate of Incorporation or By-laws of the Company, (ii) subject to
obtaining or making the notices, reports, filings, waivers, consents, approvals
or authorizations referred to in paragraph (b) below and to the adoption of this
Agreement by the stockholders of the Company as set forth in Section 3.13(c),
conflict with or violate any law, regulation, order, judgment or decree
applicable to the Company or any of its Subsidiaries or by which any of their
respective property is bound or affected, (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, impair the Company's or any of its Subsidiaries'
rights under or alter the rights or obligations of any other party to, give to
others any rights of termination, cancellation, vesting, modification,
alteration or acceleration of any obligation under, result in the creation of a
lien, claim or encumbrance on any of the properties or assets of the Company or
any of its Subsidiaries pursuant to, require the consent of any other party to,
or result in any obligation on the part of the Company or any of its
Subsidiaries to repurchase (with respect to a debenture, bond or note), pursuant
to any agreement, contract, instrument, debenture, bond, note, indenture,
permit, license or franchise to which the Company or any of its Subsidiaries is
a party or by which the Company, any of its Subsidiaries or any of their
respective property is bound or affected, except, in the case of clauses (ii)
and (iii) above, as would not, in the aggregate, have, or reasonably be expected
to have, a Company Material Adverse Effect.
(b) Except for (i) applicable filings required under the premerger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (ii)
required filings with and the approval of the Federal Energy Regulatory
Commission (the "FERC"), (iii) applicable filings and approvals under federal,
state, local or foreign regulatory laws, and applicable requirements of foreign,
state or local public utility or similar commissions or agencies, all of which
are set forth in the Company Disclosure Letter, (iv) the filing of a certificate
of merger with respect to the Applicable Transaction as required by the DGCL,
(v) filings with the SEC under the Securities Act of 1933, as amended, and the
rules and regulations thereunder (the "Securities Act"), and the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"Exchange Act"), (vi) applicable filings with the NYSE, and (vii) any filings
required or approvals necessary pursuant to any state securities or "blue sky"
laws, neither the Company nor any of its Subsidiaries is required to submit any
notice, report or other filing to any governmental or regulatory authority,
court, agency, commission or other governmental entity or any securities
exchange or other self-regulatory body, domestic or foreign ("Governmental
Entity"), and no waiver, consent, approval, order or authorization of any
Governmental Entity is required to be obtained by the Company or any of its
Subsidiaries, in connection with the execution, delivery or performance of this
Agreement except for such notices, reports, filings, waivers, consents,
approvals or authorizations that, if not made or obtained, would not, in the
aggregate, have, or reasonably be expected to have, a Company Material Adverse
Effect.
Section 3.6 SEC Reports; Financial Statements. (a) The Company has filed
all forms, reports, statements and other documents (including all annexes,
exhibits, schedules, amendments and supplements thereto) required to be filed by
it with the SEC since January 1, 1997, has delivered or made available to Parent
all forms, reports, statements, schedules and other documents (except for
preliminary materials) (including all annexes, exhibits, schedules, amendments
and supplements thereto) filed by it with the SEC since January 1, 1997 (such
forms, reports, statements, schedules and documents filed by the Company with
the SEC, including any such forms, reports, statements and other documents filed
by the Company
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with the SEC after the date of this Agreement and prior to the Closing Date, are
referred to herein, collectively, as the "Company SEC Reports"), and with
respect to the Company SEC Reports filed by the Company after the date of this
Agreement and prior to the Closing Date, will deliver or make available to
Parent all of such Company SEC Reports in the form filed with the SEC. As of
their respective filing dates, the Company SEC Reports (including all
information incorporated therein by reference) (i) complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as applicable, and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the consolidated balance sheets of the Company and its
Subsidiaries (including all related notes) included in the financial statements
contained in the Company SEC Reports (or incorporated therein by reference)
present fairly, in all material respects, the consolidated financial position of
the Company and its Subsidiaries as of the respective dates indicated, and each
of the consolidated statements of income, consolidated statements of cash flows
and consolidated statements of changes in stockholders' equity of the Company
and its Subsidiaries (including all related notes) contained in such financial
statements present fairly, in all material respects, the consolidated results of
operations, cash flows and changes in stockholders' equity of the Company and
its Subsidiaries for the respective periods indicated, in each case in
conformity with GAAP applied on a consistent basis throughout the periods
involved (except for changes in accounting principles disclosed in the notes
thereto) and the rules and regulations of the SEC, except that unaudited interim
financial statements are subject to normal and recurring year-end adjustments
and any other adjustments described therein and do not include certain notes and
other information which may be required by GAAP but which are not required under
the Exchange Act. The financial statements included in the Company SEC Reports
are in all material respects in accordance with the books and records of the
Company and its Subsidiaries.
(c) Notwithstanding the foregoing, no representation or warranty is being
made in this Section 3.6 with respect to information or statements (including
financial information and statements) that are provided by Parent and set forth
in any Company SEC Report filed after the date hereof or with respect to any
Parent SEC Reports (as defined in Section 4.6) incorporated therein by
reference.
Section 3.7 Absence of Certain Changes. Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement and as otherwise
contemplated or permitted hereby, since September 30, 1998 (a) the Company and
its Subsidiaries have conducted their respective businesses in all material
respects in the ordinary course of such businesses and there have not been any
changes to the condition (financial or otherwise), assets, liabilities, business
or results of operations of the Company and its Subsidiaries, or any other
developments with respect to the Company or any of its Subsidiaries, in each
case whether or not in the ordinary course of business, that, in the aggregate
with all other changes and developments, have had, or would reasonably be
expected to have, a Company Material Adverse Effect, and (b) there has not been
(i) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) in respect of any shares of
the capital stock or other equity securities, or any securities convertible,
exercisable or exchangeable for or into shares of capital stock or other equity
securities, of the Company or any of its Subsidiaries, other than (x) quarterly
cash dividends of $.27 per share in respect of the outstanding Company Common
Stock and (y) dividends and distributions by wholly owned Subsidiaries of the
Company; (ii) any change by the Company to its accounting policies, practices or
methods; (iii) other than in connection with the exercise, exchange or
conversion of Company Equity Equivalent Securities, any repurchase, redemption
or other acquisition of any shares of capital stock or other equity securities
or any securities convertible, exchangeable or exercisable for or into shares of
capital stock or other equity securities, of the Company or any of its
Subsidiaries; (iv) except as required by applicable law or pursuant to
contractual obligations existing as of September 30, 1998, (w) any execution,
establishment, adoption or amendment of, or acceleration of rights or benefits
under, any agreement relating to severance, any Company Employee Plan, any
employment or consulting agreement or any collective bargaining agreement, (x)
any increase in the compensation payable or to become payable to any officer,
director or employee of the Company or any of
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its Subsidiaries (except increases in the ordinary course of business), (y) any
grant of any severance or termination paid to any officer or director of the
Company, or (z) any grant of any stock options or other equity related awards
other than in the ordinary course consistent with past practice; or (v) any
agreement or commitment entered into with respect to the foregoing. The Company
has determined prior to the date of this Agreement all annual increases in the
ordinary course of business to the compensation of officers of the Company
contemplated to be made in calendar year 1999.
Section 3.8 Litigation; Liabilities. (a) Except as disclosed in the
Company SEC Reports filed prior to the date of this Agreement, there are no
civil, criminal or administrative actions, suits, claims, proceedings or
investigations pending or, to the knowledge of the Company, threatened, against
the Company or any of its Subsidiaries or any of their respective assets or
properties, except as would not, in the aggregate, have, or reasonably be
expected to have, a Company Material Adverse Effect.
(b) Except as set forth in the Company SEC Reports filed prior to the date
of this Agreement, neither the Company nor any of its Subsidiaries has or is
subject to any liabilities (absolute, accrued, contingent or otherwise), except
liabilities (a) adequately reflected on the unaudited consolidated balance sheet
of the Company and its Subsidiaries (including any related notes thereto) as of
September 30, 1998 included in the Company's Quarterly Report of Form 10-Q for
the quarter ended September 30, 1998, or (b) which, in the aggregate, would not
have, or reasonably be expected to have, a Company Material Adverse Effect.
Section 3.9 Compliance; Permits. (a) Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement, neither the Company nor
any of its Subsidiaries is in conflict with, or in default or violation of, (i)
any law, rule, regulation, order, judgment or decree applicable to the Company
or any of its Subsidiaries or by which its or any of their respective assets or
properties is bound or affected or (ii) any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise, easement, right-of-way
or other instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
its or any of their respective assets or properties is bound or affected, except
for such conflicts, defaults or violations which, in the aggregate, would not
have, or reasonably be expected to have, a Company Material Adverse Effect.
(b) Except as disclosed in the Company SEC Reports filed prior to the date
of this Agreement, the Company and its Subsidiaries hold all permits, licenses,
easements, rights-of-way, variances, exemptions, consents, certificates, orders
and approvals which are material to the operation of the businesses of the
Company and its Subsidiaries (collectively, the "Company Permits"), except where
the failure to hold such Company Permits, in the aggregate, would not have, or
reasonably be expected to have, a Company Material Adverse Effect. The Company
and its Subsidiaries are in compliance with the terms of the Company Permits,
except as described in the Company SEC Reports or where the failure to so
comply, in the aggregate, would not have, or reasonably be expected to have, a
Company Material Adverse Effect.
Section 3.10 Employee Matters; ERISA. (a) The Company Disclosure Letter
lists all employee pension benefit plans (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended, and the rules and
regulations promulgated thereunder ("ERISA")), all employee welfare benefit
plans (as defined in Section 3(1) of ERISA), all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other or similar material fringe or employee benefit plans, programs or
arrangements, all consulting agreements with former officers and directors of
the Company and all employment, termination, change-in-control or severance
agreements, in each case, pursuant to which the Company or any of its
Subsidiaries may have any liability that is material to the Company and its
Subsidiaries, taken as a whole (together, the "Company Employee Plans"),
excluding, however, employee benefit plans that are primarily subject to the
laws of any jurisdiction outside of the United States.
(b) Except as disclosed in the Company SEC Reports filed prior to the date
of this Agreement, no material liability under Title IV of ERISA has been or is
reasonably expected to be incurred by the Company or any Subsidiary of the
Company or any entity which is considered a single employer with the Company or
any Subsidiary of the Company under Section 4001(a)(15) of ERISA or Section 414
of the
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Code (a "Company ERISA Affiliate"), other than liabilities for premium payments
to the Pension Benefit Guaranty Corporation ("PBGC") and liabilities that have
previously been satisfied.
(c) Except as disclosed in the Company SEC Reports filed prior to the date
hereof, none of the Company Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person, other than health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA,
and none of the Company Employee Plans is a "multiemployer plan" as such term is
defined in Section 3(37) of ERISA. Except as set forth in the Company SEC
Reports filed prior to the date of this Agreement and except, in the aggregate,
as would not have, or reasonably be expected to have, a Company Material Adverse
Effect, (i) no party in interest or disqualified person (as defined in Section
3(14) of ERISA and Section 4975 of the Code) has at any time engaged in a
transaction with respect to any Company Employee Plan which could subject the
Company or any Company ERISA Affiliate, directly or indirectly, to any tax,
penalty or other liability for prohibited transactions under ERISA or Section
4975 of the Code; (ii) no fiduciary of any Company Employee Plan has breached
any of the responsibilities or obligations imposed upon fiduciaries under Title
I of ERISA; (iii) all Company Employee Plans have been established and
maintained substantially in accordance with their terms and have operated in
compliance with the requirements of applicable law, and the Company and its
Subsidiaries have performed all obligations required to be performed by them
under and are not in default under or in violation of any of the Company
Employee Plans; (iv) each Company Employee Plan which is intended to be
qualified under Section 401(a) of the Code is so qualified, is the subject of a
favorable determination letter from the Internal Revenue Service ("IRS"), and,
to the Company's knowledge, nothing has occurred which may reasonably be
expected to result in the revocation of such determination; (v) all
contributions required to be made with respect to any Company Employee Plan
pursuant to Section 412 of the Code and Section 302 of ERISA, or pursuant to the
terms of the Company Employee Plan or any collective bargaining agreement, have
been made on or before their due dates (including any extensions thereof); (vi)
with respect to each Company Employee Plan, no "reportable event" within the
meaning of Section 4043 of ERISA (excluding any such event for which the 30 day
notice requirement has been waived under the regulations to Section 4043 of
ERISA) has occurred for which there is any outstanding liability to the Company
or any Company ERISA Affiliate, nor would the execution, delivery or
consummation of the transactions contemplated hereby constitute a reportable
event for which the 30-day requirement has not been waived; and (vii) no Company
Employee Plan is under audit or investigation by the IRS, the Department of
Labor or the PBGC nor, to the knowledge of the Company, is any such audit or
investigation threatened.
(d) The Company Disclosure Letter sets forth a true and complete list of
each current or former employee, officer or director of the Company or any of
its Subsidiaries who holds (i) any Company Option as of the date of this
Agreement, together with the number of shares of Company Common Stock subject to
such option, the exercise price of such option, the vested and unvested portion
of such option, whether such option is intended to qualify as an incentive stock
option within the meaning of Section 422(b) of the Code, and the expiration date
of such option or (ii) any shares of Company Common Stock that are restricted
and the date(s) of lapse of such restrictions. In addition, the Company
Disclosure Letter sets forth, in the aggregate, the number of shares of Company
Common Stock underlying (i) all other outstanding rights under Company Employee
Plans (other than plans that are qualified plans under Section 401(a) of the
Code) to receive shares of Company Common Stock, to the extent that such shares
of Company Common Stock are not included in the number of shares set forth in
the third sentence of Section 3.3, and (ii) compensation based on the value of
shares of Company Common Stock.
(e) The PBGC has not notified the Company regarding the institution of
proceedings to terminate any Company Employee Plan that is subject to Title IV
of ERISA (each, a "Company Defined Benefit Plan"). The Company Defined Benefit
Plans have no accumulated or waived funding deficiencies within the meaning of
Section 412 of the Code nor have any extensions of any amortization period
within the meaning of Section 412 of the Code or 302 of ERISA been applied for
with respect thereto.
(f) To the knowledge of the Company, all employee benefit plans of the
Company and any of its Subsidiaries that are primarily subject to the laws of
any jurisdiction outside of the United States have
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been maintained in compliance with all applicable law (including, if they are
intended to qualify for special tax treatment, applicable tax laws), except for
noncompliance that would not individually or in the aggregate have a Company
Material Adverse Effect.
(g) The execution and delivery of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence of
any additional or subsequent events) (i) constitute an event under any Company
Employee Plan, trust or loan that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any current or former employee of the Company or any Subsidiary of the
Company, or (ii) result in the triggering or imposition of any restrictions or
limitations on the right of the Company or any Subsidiary of the Company to
amend or terminate any Company Employee Plan. No payment or benefit which is
required to be paid or distributed, prior to or after the Closing, by Parent,
the Company, the Parent Surviving Corporation or any of their respective
Subsidiaries under any Company Employee Plan or any other plan, program or
arrangement of the Company to any current or former employee of the Company or
any Subsidiary of the Company will be characterized as an "excess parachute
payment," within the meaning of Section 280G(b)(1) of the Code.
Section 3.11 Labor Matters. Except as set forth in the Company SEC Reports
filed prior to the date of this Agreement, (i) there are no controversies
pending or, to the knowledge of the Company, threatened, between the Company or
any of its Subsidiaries and any of their respective employees, which
controversies, in the aggregate, have had, or would reasonably be expected to
have, a Company Material Adverse Effect; (ii) neither the Company nor any of its
Subsidiaries is in breach of any material collective bargaining agreement or
other labor union contract applicable to persons employed by the Company or its
Subsidiaries which, in the aggregate, would have, or reasonably be expected to
have, a Company Material Adverse Effect, nor does the Company know of any
activities or proceedings of any labor union to organize any significant number
of such employees; and (iii) neither the Company nor any of its Subsidiaries is
in breach of any material collective bargaining agreement or other labor union
contract, nor does the Company have any knowledge of any strikes, slowdowns,
work stoppages, lockouts, or threats thereof, by or with respect to any
employees of the Company or any of its Subsidiaries except, in the aggregate, as
would not have, or reasonably be expected to have, a Company Material Adverse
Effect.
Section 3.12 Environmental Matters. Except as set forth in the Company SEC
Reports filed prior to the date of this Agreement and except for those matters,
in the aggregate, that would not have, or reasonably be expected to have, a
Company Material Adverse Effect:
(a) The Company and each of its Subsidiaries, and, to the knowledge of
the Company, their respective predecessors, if any, have been at all times
operated, and are, in full compliance in all material respects with all
applicable Environmental Laws, including all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules
and timetables contained in all applicable Environmental Laws.
(b) The Company and each of its Subsidiaries have obtained, are in
compliance with, and have made all appropriate filings for issuance or
renewal of, all material permits, licenses, authorizations, registrations
and other governmental consents required by applicable Environmental Laws
("Environmental Permits"), including, without limitation, those regulating
emissions, discharges or releases of Hazardous Substances, or the use,
storage, treatment, transportation, release, emission and disposal of raw
materials, by-products, wastes and other substances used or produced by or
otherwise relating to the business of the Company or any of its
Subsidiaries.
(c) All of the Company's and its Subsidiaries' owned or, to the
knowledge of the Company, leased real property is free of any Hazardous
Substances (except those authorized pursuant to and in accordance with
Environmental Permits held by the Company and its Subsidiaries) and free of
all contamination arising from, relating to or resulting from any release,
discharge or emission of Hazardous Substances.
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(d) There are no claims, notices, civil, criminal or administrative
actions, suits, hearings, investigations, inquiries or proceedings pending
or, to the knowledge of the Company, threatened against the Company or any
of its Subsidiaries that are based on or related to any Environmental
Matters or the failure to have any required Environmental Permits.
(e) There are no past or present conditions, events, circumstances,
facts, activities, practices, incidents, actions, omissions or plans: (1)
that is reasonably likely to give rise to any liability or other obligation
under any Environmental Laws that is reasonably likely to require the
Company or any of its Subsidiaries to incur any actual or potential
Environmental Costs, or (2) that is reasonably likely to form the basis of
any claim, action, suit, proceeding, hearing, investigation or inquiry
against or involving the Company or any of its Subsidiaries based on or
related to any Environmental Matter or that could require the Company or
any of its Subsidiaries to incur any Environmental Costs.
(f) There are no underground or aboveground storage tanks,
incinerators or surface impoundments at, on, or about, under or within any
real property owned, operated or controlled in whole or in part by the
Company or any of its Subsidiaries.
(g) Neither the Company nor any of its Subsidiaries has received any
notice (written or oral) or other communication that any of them is or may
be a potentially responsible person or otherwise liable in connection with
any waste disposal site allegedly containing any Hazardous Substances, or
other location used for the disposal of any Hazardous Substances, or notice
of any failure of the Company or any of its Subsidiaries to comply in any
material respect with any Environmental Law or the requirements of any
Environmental Permit.
(h) Neither the Company nor any of its Subsidiaries has used any waste
disposal site, or otherwise disposed of, transported, or arranged for the
transportation of, any Hazardous Substances to any place or location, or in
violation of any Environmental Laws.
(i) Neither the Company nor any of its Subsidiaries has been in
violation of any Environmental Laws, nor has it been requested or required
by any Governmental Entity to perform any investigatory or remedial
activity or other action in connection with any actual or alleged release
of Hazardous Substances or any other Environmental Matter.
For the purposes of this Agreement, the following terms shall have the
meanings indicated:
"Environmental Costs" means, without limitation, any actual or
potential cleanup costs, remediation, removal or other response costs
(which without limitation shall include costs to cause the representing
party or its Subsidiaries to come into compliance with Environmental Laws),
investigation costs (including without limitation fees of consultants,
counsel and other experts in connection with any environmental
investigation, testing, audits or studies), losses, liabilities or
obligations (including without limitation, liabilities or obligations under
any lease or other contract), payments, damages (including without
limitation any actual, punitive or consequential damages under any
statutory laws, common law cause of action or contractual obligations or
otherwise, including without limitation damages (a) to third parties for
personal injury or property damage, or (b) to natural resources), civil or
criminal fines or penalties, judgments and amounts paid in settlement
arising out of or relating to or resulting from any Environmental Matter.
"Environmental Matter" means any matter arising out of, relating to,
or resulting from pollution, contamination, protection of the environment,
human health or safety, health or safety of employees, sanitation, and any
matters relating to emissions, discharges, disseminations, releases or
threatened releases, of Hazardous Substances into the air (indoor and
outdoor), surface water, groundwater, soil, land surface or subsurface,
buildings, facilities, real or personal property or fixtures or otherwise
arising out of, relating to, or resulting from the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, handling,
release or threatened release of Hazardous Substances.
"Hazardous Substances" means any pollutants, contaminants, toxic or
hazardous or extremely hazardous substances, materials, wastes,
constituents, compounds, chemicals, natural or man-made
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elements or forces (including, without limitation, petroleum or any
by-products or fractions thereof, any form of natural gas, Bevill Amendment
materials, lead, asbestos and asbestos-containing materials ("ACM"),
building construction materials and debris, polychlorinated biphenyls
("PCBs") and PCB-containing equipment, radon and other radioactive
elements, ionizing radiation, electromagnetic field radiation and other
non-ionizing radiation, sonic forces and other natural forces, infectious,
carcinogenic, mutagenic, or etiologic agents, pesticides, defoliants,
explosives, flammables, corrosives and urea formaldehyde foam insulation)
that are regulated by, or may now or in the future form the basis of
liability under, any Environmental Laws.
"Environmental Laws" means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. sec.sec.
9601 et seq., the Emergency Planning and Community Right-to-Know Act of
1986, 42 U.S.C. sec.sec. 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. sec.sec. 6901 et seq., the Toxic Substances Control
Act, 15 U.S.C. sec.sec. 2601 et seq., the Federal Insecticide, Fungicide,
and Rodenticide Act, 7 U.S.C. sec.sec. 136 et seq., the Clean Air Act, 42
U.S.C. sec.sec. 7401 et. seq., the Clean Water Act (Federal Water Pollution
Control Act), 33 U.S.C. sec.sec. 1251 et seq., the Safe Drinking Water Act,
42 U.S.C. sec.sec. 300f et seq., the Occupational Safety and Health Act, 29
U.S.C. sec.sec. 641, et seq., the Hazardous Materials Transportation Act,
49 U.S.C. sec.sec. 1801, et seq., as any of the above statutes have been or
may be amended from time to time, all rules and regulations promulgated
pursuant to any of the above statutes, and any other foreign, federal,
state or local law, statute, ordinance, rule or regulation governing
Environmental Matters, as the same have been or may be amended from time to
time, including any common law cause of action providing any right or
remedy relating to Environmental Matters, all indemnity agreements and
other contractual obligations (including leases, asset purchase and merger
agreements) relating to environmental matters, and all applicable judicial
and administrative decisions, orders, and decrees relating to Environmental
Matters.
Section 3.13 Board Action; Company Rights Agreement; Vote Required. (a)
The Company's Board of Directors has unanimously approved (including, with
respect to Parent, Merger Sub and their respective affiliates and associates,
for purposes of Section 203 of the DGCL, Article SEVENTH of the Company's
Restated Certificate of Incorporation, the Capital Stock Agreement of Citrus
Corp. dated June 30, 1986 and paragraph 6 of the Confidentiality Agreement dated
February 5, 1999, between Parent and the Company (the "Confidentiality
Agreement") this Agreement, the Stock Option Agreements and the transactions
contemplated hereby and thereby (including the Voting Agreements), has
determined that the transactions contemplated hereby are fair to and in the best
interests of Company and its stockholders and has resolved to recommend to
stockholders that they vote in favor of approving and adopting this Agreement,
the Parent Merger and the Alternative Merger. No "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute applicable to
the Company will prevent or otherwise delay the consummation of transactions
contemplated hereby.
(b) The Board of Directors of the Company has taken all necessary actions
such that, (i) none of Parent, Merger Sub, the Surviving Corporation or any of
their affiliates shall become an "Acquiring Person" (as defined in the Company
Rights Agreement), and (ii) no "Distribution Date," "Shares Acquisition Date"
(each as defined in the Company Rights Agreement) or any event which would
entitle any holders of Rights (as defined in the Company Rights Agreement) to
purchase any shares of the Surviving Corporation, Merger Sub, the Company or
Parent or any of their respective affiliates pursuant to Section 13 of the
Company Rights Agreement, shall have occurred or shall occur, in each case by
reason of the execution, delivery or performance of this Agreement, the Stock
Option Agreements or the Voting Agreements or any announcement thereof.
(c) The affirmative vote of the holders of a majority of all outstanding
shares of Company Common Stock is necessary to approve and adopt this Agreement,
the Parent Merger and the Alternative Merger. Such vote is the only vote or
approval of holders of shares of any class or series of the Company's capital
stock required in connection with this Agreement, the Stock Option Agreements
and the transactions contemplated hereby and thereby.
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Section 3.14 Opinion of Financial Advisor. The Board of Directors of the
Company has received the written opinion of Merrill Lynch, Pierce Fenner & Smith
Incorporated ("Merrill Lynch"), dated as of the date of this Agreement, to the
effect that, subject to the qualifications and limitations contained therein, as
of the date of this Agreement, the consideration to be received by the holders
of shares of Company Common Stock (other than Parent and its affiliates) in the
Parent Merger or the Alternative Merger is fair to such holders from a financial
point of view.
Section 3.15 Brokers. Merrill Lynch is the only broker, finder, investment
banker or other person entitled to any brokerage, finder's, investment banking
or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company or any of its Subsidiaries. The Company has previously provided to
Parent a copy of the letter agreement, dated February 1, 1999, between Merrill
Lynch and the Company giving rise to a fee to Merrill Lynch.
Section 3.16 Tax Matters. (a) Except as would not, in the aggregate, have
or reasonably be expected to have, a Company Material Adverse Effect, the
Company and its Subsidiaries (i) have timely filed all federal, state and
foreign Tax returns required to be filed by any of them for Tax years ended
prior to the date of this Agreement or requests for extensions have been timely
filed and any such request has been granted and has not expired, and all such
returns are correct and complete and (ii) have paid or accrued in accordance
with GAAP all Taxes shown to be due and payable on such returns.
(b) There is no dispute or claim concerning any Tax liability of any of the
Company and its Subsidiaries claimed or raised by any authority in writing.
(c) No written claims that, in the aggregate, could reasonably be expected
to have a Company Material Adverse Effect have been made by an authority in a
jurisdiction where any of the Company and its Subsidiaries does not file Tax
returns that it is or may be subject to Taxation by that jurisdiction.
(d) None of the Company and its Subsidiaries has waived any statute of
limitations in respect of income Taxes or agreed to any extension of time with
respect to an income Tax assessment or deficiency.
(e) Neither the Company nor any of its Subsidiaries has taken or agreed to
take any action, nor does the Company have any knowledge of any fact or
circumstance with respect to the Company or its Subsidiaries, which would
prevent the Parent Merger or the Alternative Merger from qualifying as a
"reorganization" within the meaning of Section 368 of the Code.
Section 3.17 Public Utility Holding Company Act of 1935. The Company is
not a "holding company," a "subsidiary company" of a "holding company," or an
"affiliate of a holding company," or a "public utility company" as such terms
are defined in the Public Utility Holding Company Act of 1935, as amended, and
rules and regulations thereunder (the "Holding Company Act").
Section 3.18 Restrictions on Business Activities. Except for this
Agreement or as set forth in the Company SEC Reports filed prior to the date of
this Agreement, there is no judgment, injunction, order or decree or material
agreement (including, without limitation, agreements containing provisions
restricting the Company or any of its Subsidiaries from entering or engaging in
any line of business, agreements containing geographic restrictions on the
Company's or any of its Subsidiaries' ability to operate their respective
businesses and agreements containing rights of first refusal, rights of first
offer, exclusivity, "requirements" or similar provisions) binding upon the
Company or any of its Subsidiaries which has or would reasonably be expected to
have the effect of materially prohibiting or impairing the conduct of the
businesses of the Company or any of its Subsidiaries or, to the Company's
knowledge, after the Effective Time, Parent or any of its Subsidiaries, taken
together.
Section 3.19 Year 2000. Except as set forth in the Company SEC Reports
filed prior to the date of this Agreement, the systems operated or used by the
Company or any of its Subsidiaries are capable of providing or are being adapted
to provide uninterrupted millennium functionality on or after January 1, 2000 to
share, record, process and present data in substantially the same manner and
with the same functionality as such systems share, record, process and present
such data on or before December 31,
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1999, except, in the aggregate, as would not have, or reasonably be expected to
have, a Company Material Adverse Effect. The costs of the adaptations referred
to in the prior sentence, in the aggregate, will not have a Company Material
Adverse Effect.
Section 3.20 Accounting Matters. Neither the Company nor any of its
Subsidiaries has taken or agreed to take action, nor does the Company have any
knowledge of any fact or circumstance with respect to the Company or its
Subsidiaries, which would prevent the business combination to be effected
pursuant to the Parent Merger from being accounted for as a pooling-of-interests
under GAAP or the rules and regulations of the SEC. Ernst & Young LLP ("E&Y")
has advised the Company that it is not aware as of the date of this Agreement of
any reason why E&Y would be unable to deliver at the Closing the letter referred
to in the second sentence of Section 6.13(b).
ARTICLE IV
Except as set forth in the corresponding sections or subsections of the
disclosure letter, dated the date of this Agreement, delivered by Parent to the
Company (the "Parent Disclosure Letter"), Parent hereby represents and warrants
to the Company as follows:
Section 4.1 Organization and Qualification; Subsidiaries. (a) Parent
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of the Subsidiaries of Parent
is a corporation or other business entity duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
organization, and each of Parent and its Subsidiaries has the requisite
corporate or similar organizational power and authority to own, operate or
lease its properties and to carry on its business as it is now being
conducted, and is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned, operated or leased or the nature of its activities makes
such qualification necessary, except as would not, in the aggregate, have,
or reasonably be expected to have, a Parent Material Adverse Effect (as
defined in Section 9.3).
(b) Except as disclosed in the Parent SEC Reports (as defined in
Section 4.6) filed prior to the date hereof, and except as would not, in
the aggregate, have, or reasonably be expected to have, a Parent Material
Adverse Effect, (i) all of the outstanding shares of capital stock and
other equity securities) of the Subsidiaries of Parent are owned, directly
or indirectly, by Parent free and clear of all liens, pledges, security
interests, or other encumbrances, (ii) all of the outstanding shares of
capital stock or other equity securities of the Subsidiaries of Parent have
been validly issued and are fully paid and nonassessable, (iii) there are
no subscriptions, options, warrants, calls, commitments, agreements,
conversion rights or other rights of any character (contingent or
otherwise) entitling any person to purchase or otherwise acquire from
Parent or any of its Subsidiaries at any time, or upon the happening of any
stated event, any shares of capital stock or other equity securities of any
of the Subsidiaries of Parent and there are no outstanding obligations,
contingent or otherwise, of Parent or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock or
other equity securities, or any securities convertible, exchangeable or
exercisable for or into shares of capital stock or other equity securities,
of any Subsidiary of Parent. There are no outstanding obligations,
contingent or otherwise, of Parent or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock or
other equity securities, or any securities convertible, exchangeable or
exercisable for or into, shares of capital stock or other equity securities
of any Subsidiary of Parent.
Section 4.2 Restated Certificate of Incorporation and By-laws of
Parent. Parent has furnished or otherwise made available to the Company a
complete and correct copy of Parent's Restated Certificate of Incorporation
and By-laws, in each case as amended to the date of this Agreement. Such
Restated Certificate of Incorporation and By-laws of Parent and all similar
organizational documents of Subsidiaries of Parent are in full force and
effect. Parent is not in violation of its Restated Certificate of
Incorporation or By-laws and, except as would not, in the aggregate, have,
or
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reasonably be expected to have, a Parent material Adverse Effect, none of
the Subsidiaries of Parent is in violation of any similar organizational
documents of Subsidiaries of Parent.
Section 4.3 Capitalization. (a) The authorized capital stock of
Parent consists of 275,000,000 shares of Parent Common Stock and 25,000,000
shares of serial Preferred Stock, par value $.01 per share (the "Parent
Preferred Stock"). 2,750,000 shares of the Parent Preferred Stock have been
designated as "Series A Junior Participating Preferred Stock" and, other
than as contemplated or permitted hereby, no other shares of Parent
Preferred Stock are subject to any designation. At the close of business on
March 12, 1999, 122,359,989 shares of Parent Common Stock (including
1,360,000 shares held in Parent's Benefit Protection Trust), and no shares
of Parent Preferred Stock, were issued and outstanding. 2,869,162 shares of
Parent Common Stock and no Shares of Parent Preferred Stock are held by
Parent in its treasury. No shares of capital stock of Parent are held by
any of Parent's Subsidiaries. All of the issued and outstanding shares of
Parent Common Stock are validly issued, fully paid, nonassessable and free
of preemptive rights. At the close of business on March 12, 1999, 9,610,855
Parent Options, exercisable for 9,610,855 shares of Parent Common Stock, in
the aggregate, were outstanding. As of the date of this Agreement, other
than (i) the options granted pursuant to the Parent Stock Option Agreement,
(ii) the preferred stock purchase rights (none of which are exercisable)
issued pursuant to the Amended and Restated Shareholder Rights Agreement
(the "Parent Rights Agreement"), effective January 20, 1999, between the
Parent and BankBoston, N.A., as rights agent, (iii) the 6,500,000 4 3/4%
Trust Convertible Preferred Securities of El Paso Energy Capital Trust I
(the "Parent Trust Securities") (and the underlying 4 3/4% Subordinated
Convertible Debentures due 2028 of Parent in the aggregate principal amount
of $325 million) outstanding and (iv) the Parent Options, the Parent does
not have outstanding any subscriptions, options, warrants, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) entitling any person to purchase or otherwise
acquire from Parent or any of its Subsidiaries at any time, or upon the
happening of any stated event, any shares of the capital stock of Parent
(each of the foregoing, a "Parent Equity Equivalent Security"). From the
close of business on March 12, 1999 through the date of this Agreement, no
shares of Parent Common Stock have been issued, sold or otherwise
transferred by Parent (except in connection with the exercise, conversion
or exchange of outstanding Parent Equity Equivalent Securities).
(b) As of the date of this Agreement, there are no outstanding
obligations, contingent or otherwise, of Parent or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of Parent Common
Stock or any Parent Equity Equivalent Securities (except in connection with
the exercise, conversion or exchange of outstanding Parent Equity
Equivalent Securities). As of the date of this Agreement, there are no
bonds, debentures, notes or other indebtedness issued and outstanding
having the right to vote together with Parent's stockholders on any matter
in respect of which the Parent's stockholders are entitled to vote.
Section 4.4 Power and Authority; Authorization; Valid and
Binding. Parent has the necessary corporate power and authority to execute
and deliver this Agreement and the Stock Option Agreements and to perform
its obligations hereunder and thereunder, as applicable, except that the
consummation of Parent Merger is subject to the approval of the
stockholders of Parent as set forth in Section 4.13(c). The execution and
delivery of this Agreement and the Stock Option Agreements by Parent, and
the performance by it of its obligations hereunder and thereunder, as
applicable, have been duly authorized by all necessary corporate action on
the part of Parent, except that the consummation of Parent Merger is
subject to the approval of the stockholders of Parent as set forth in
Section 4.13(c). This Agreement and the Stock Option Agreements have been
duly executed and delivered by Parent, and assuming the corporate authority
of, and the due authorization, execution and delivery by, the Company, each
of such agreements constitutes a legal, valid and binding obligation of
Parent enforceable against Parent in accordance with the terms hereof or
thereof, as applicable, subject to bankruptcy, insolvency, fraudulent
transfer, moratorium, reorganization and
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similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
Section 4.5 No Conflict; Required Filings and Consents. (a) The
execution and delivery by Parent of this Agreement and the Stock Option
Agreements do not and will not, and the performance by Parent of its
obligations hereunder and thereunder do not and will not, (i) violate or
conflict with the Restated Certificate of Incorporation or By-laws of
Parent, (ii) subject to obtaining or making the notices, reports, filings,
waivers, consents, approvals or authorizations referred to in paragraph (b)
below and to the adoption of this Agreement by Parent's stockholders as set
forth in Section 4.13(c) in connection with a Parent Merger, conflict with
or violate any law, regulation, order, judgment or decree applicable to
Parent or any of its Subsidiaries or by which any of their respective
property is bound or affected, (iii) result in any breach of or constitute
a default (or an event which with notice or lapse of time or both would
become a default) under, impair Parent's or any of its Subsidiaries' rights
under or alter the rights or obligations of any other party to, give to
others any rights of termination, cancellation, vesting, modification,
alteration or acceleration of any obligation under, result in the creation
of a lien, claim or encumbrance on any of the properties or assets of
Parent or any of its Subsidiaries pursuant to, require the consent of any
other party to, or result in any obligation on the part of Parent or any of
its Subsidiaries to repurchase (with respect to a debenture, bond or note),
pursuant to any agreement, contract, instrument, debenture, bond, note,
indenture, permit, license or franchise to which Parent or any of its
Subsidiaries is a party or by which Parent, any of its Subsidiaries or any
of their respective property is bound or affected, except, in the case of
clauses (ii) and (iii) above, as would not, in the aggregate, have, or
reasonably be expected to have, a Parent Material Adverse Effect.
(b) Except for (i) applicable filings required under the premerger
notification requirements of the HSR Act, (ii) required filings with and
approvals of the FERC, (iii) applicable filings and approvals under
federal, state, local or foreign regulatory laws, and applicable
requirements of foreign, state or local public utility or similar
commissions or agencies, all of which are set forth in the Parent
Disclosure Letter, (iv) the filing of a certificate of merger with respect
to the Applicable Transaction as required by the DGCL, (v) filings with the
SEC under the Securities Act and the Exchange Act, (vi) applicable filings
with the NYSE, and (vii) any filings required or approvals necessary
pursuant to any state securities or "blue sky" laws, neither Parent nor any
of its Subsidiaries is required to submit any notice, report or other
filing to any Governmental Entity, and no waiver, consent, approval, order
or authorization of any Governmental Entity is required to be obtained by
Parent or any of its Subsidiaries, in connection with the execution,
delivery or performance of this Agreement except for such notices, reports,
filings, waivers, consents, approvals or authorizations that, if not made
or obtained, would not, in the aggregate, have, or reasonably be expected
to have, a Parent Material Adverse Effect.
Section 4.6 SEC Reports; Financial Statements. (a) Parent (with
respect to the period prior to August 1, 1998, for purposes of this Section
4.6, all references to the "Parent" shall be deemed to refer to El Paso
Natural Gas Company) has filed all forms, reports, statements, schedules
and other documents (including all annexes, exhibits, schedules, amendments
and supplements thereto) required to be filed by it with the SEC since
January 1, 1997, has delivered or made available to the Company all forms,
reports, statements, schedules and other documents (except for preliminary
materials) (including all annexes, exhibits, schedules, amendments and
supplements thereto) filed by it with the SEC since January 1, 1997 (such
forms, reports, statements, schedules and documents filed by Parent with
the SEC, including any such forms, reports, statements, schedules and other
documents filed by Parent with the SEC after the date of this Agreement and
prior to the Closing Date, are referred to herein, collectively, as the
"Parent SEC Reports"), and with respect to the Parent SEC Reports filed by
Parent after the date of this Agreement and prior to the Closing Date, will
deliver or make available to the Company all of such Parent SEC Reports in
the form filed with the SEC. As of their respective filing dates, the
Parent SEC Reports (including all information incorporated therein by
reference) (i) complied as to form in all material respects with the
requirements of the Securities Act
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or the Exchange Act, as applicable, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated balance sheets of Parent and its
Subsidiaries (including all related notes) included in the financial
statements contained in the Parent SEC Reports (or incorporated therein by
reference) present fairly, in all material respects, the consolidated
financial position of Parent and its Subsidiaries as of the respective
dates indicated, and each of the consolidated statements of income,
consolidated statements of cash flows and consolidated statements of
changes in stockholders' equity of Parent and its Subsidiaries (including
all related notes) contained in such financial statements present fairly,
in all material respects, the consolidated results of operations, cash
flows and changes in stockholders' equity of Parent and its Subsidiaries
for the respective periods indicated, in each case in conformity with GAAP
applied on a consistent basis throughout the periods involved (except for
changes in accounting principles disclosed in the notes thereto) and the
rules and regulations of the SEC, except that unaudited interim financial
statements are subject to normal and recurring year-end adjustments and any
other adjustments described therein and do not include certain notes and
other information which may be required by GAAP but which are not required
under the Exchange Act. The financial statements included in the Parent SEC
Reports are in all material respects in accordance with the books and
records of Parent and its Subsidiaries.
(c) Notwithstanding the foregoing, no representation or warranty is
being made in this Section 4.6 with respect to information or statements
(including financial information and statements) that are provided by the
Company and set forth in any Parent SEC Report filed after the date hereof
or with respect to any Company SEC Reports incorporated therein by
reference.
Section 4.7 Absence of Certain Changes. Except as disclosed in the
Parent SEC Reports filed prior to the date of this Agreement and as
otherwise contemplated or permitted hereby, since December 31, 1998, (a)
Parent and its Subsidiaries have conducted their respective businesses in
all material respects in the ordinary course of such businesses and there
have not been any changes to the condition (financial or otherwise),
assets, liabilities, business or results of operations of Parent and its
Subsidiaries, or any other developments with respect to Parent or any of
its Subsidiaries, in each case whether or not in the ordinary course of
business, that, in the aggregate with all other changes and developments,
have had, or would reasonably be expected to have, a Parent Material
Adverse Effect, and (b) there has not been (i) any declaration, setting
aside or payment of any dividend or other distribution (whether in cash,
stock or property) in respect of any shares of the capital stock or other
equity securities, or any securities convertible, exercisable or
exchangeable for or into shares of capital stock or other equity
securities, of Parent or any of its Subsidiaries, other than (x) regular
quarterly cash dividends of $.20 per share in respect of the outstanding
Parent Common Stock and (y) dividends and distributions by wholly owned
Subsidiaries of Parent; (ii) any change by Parent to its accounting
policies, practices or methods; (iii) other than in connection with the
exercise, exchange or conversion of Parent Equity Equivalent Securities,
any repurchase, redemption or other acquisition of any shares of capital
stock or other equity securities or any securities convertible,
exchangeable or exercisable for or into shares of capital stock or other
equity securities, of Parent or any of its Subsidiaries; or (iv) except as
required by applicable law or pursuant to contractual obligations existing
as of September 30, 1998, (w) any execution, establishment, adoption or
amendment of, or acceleration of rights or benefits under, any agreement
relating to severance, any Parent Employee Plan, any employment or
consulting agreement or any collective bargaining agreement, (x) any
increase in the compensation payable or to become payable to any officer,
director or employee of Parent or any of its Subsidiaries (except increases
in the ordinary course of business), (y) any grant of any severance or
termination paid to any officer or director of Parent, or (z) any grant of
any stock options or other equity related awards other than in the ordinary
course consistent with past practice; or (v) any agreement or commitment
entered into with respect to the foregoing.
Section 4.8 Litigation; Liabilities. (a) Except as disclosed in the
Parent SEC Reports filed prior to the date of this Agreement, there are no
civil, criminal or administrative actions, suits, claims,
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proceedings, or investigations pending or, to the knowledge of Parent,
threatened, against Parent or any of its Subsidiaries or any of their
respective properties, except as would not, in the aggregate, have, or
reasonably be expected to have, a Parent Material Adverse Effect.
(b) Except as set forth in the Parent SEC Reports filed prior to the
date of this Agreement, neither Parent nor any of its Subsidiaries has or
is subject to any liabilities (absolute, accrued, contingent or otherwise),
except liabilities (a) adequately reflected on the unaudited consolidated
balance sheet of Parent and its Subsidiaries (including any related notes
thereto) as of December 31, 1998 included in Parent's Annual Report of Form
10-K for the quarter ended December 31, 1998, or (b) which, in the
aggregate, would not have, or reasonably be expected to have, a Parent
Material Adverse Effect.
Section 4.9 Compliance; Permits. (a) Except as disclosed in the
Parent SEC Reports filed prior to the date of this Agreement, neither
Parent nor any of its Subsidiaries is in conflict with, or in default or
violation of, (i) any law, rule, regulation, order, judgment or decree
applicable to Parent or any of its subsidiaries or by which its or any of
their respective assets or properties is bound or affected or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise, easement, right-of-way or other instrument or obligation
to which Parent or any of its Subsidiaries is a party or by which Parent or
any of its Subsidiaries or its or any of their respective assets or
properties is bound or affected, except for such conflicts, defaults or
violations which, in the aggregate, would not have, or reasonably be
expected to have, a Parent Material Adverse Effect.
(b) Except as disclosed in the Parent SEC Reports filed prior to the
date of this Agreement, Parent and its Subsidiaries hold all permits,
licenses, easements, rights-of-way, variances, exemptions, consents,
certificates, orders and approvals which are material to the operation of
the businesses of Parent and its Subsidiaries (collectively, the "Parent
Permits"), except where the failure to hold such Parent Permits, in the
aggregate, would not have, or reasonably be expected to have, a Parent
Material Adverse Effect. Parent and its Subsidiaries are in compliance with
the terms of the Parent Permits, except as described in the Parent SEC
Reports filed prior to the date hereof or where the failure to so comply,
in the aggregate, would not have, or reasonably be expected to have, a
Parent Material Adverse Effect.
Section 4.10 Employee Matters; ERISA. (a) The Parent Disclosure
Letter lists all employee pension benefit plans (as defined in Section 3(2)
of ERISA), all employee welfare benefit plans (as defined in Section 3(1)
of ERISA), all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other or similar
material fringe or employee benefit plans, programs or arrangements, all
consulting agreements with former officers and directors of Parent and all
employment, termination, change-in-control or severance agreements, in each
case, pursuant to which Parent or any of its Subsidiaries may have any
liability material to Parent and its Subsidiaries, taken as a whole
(together, the "Parent Employee Plans"), excluding, however, employee
benefit plans that are primarily subject to the laws of any jurisdiction
outside the United States.
(b) Except as disclosed in the Parent SEC Reports filed prior to the
date hereof, no material liability under Title IV of ERISA has been or is
reasonably expected to be incurred by the Parent or any Subsidiary of the
Parent or any entity which is considered a single employer with the Parent
or any Subsidiary of the Parent under Section 4001(a)(15) of ERISA or
Section 414 of the Code (a "Parent ERISA Affiliate"), other than
liabilities for premium payments to the PBGC and liabilities that have
previously been satisfied.
(c) Except as disclosed in the Parent SEC Reports filed prior to the
date of this Agreement, none of the Parent Employee Plans promises or
provides retiree medical or other retiree welfare benefits to any person,
other than health continuation coverage as required by Section 4980B of the
Code or Part 6 of Title I of ERISA, and none of the Parent Employee Plans
is a "multiemployer plan" as such term is defined in Section 3(37) of
ERISA. Except as set forth in the Parent SEC Reports filed prior to the
date of this Agreement and except, in the aggregate, as would not have, or
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reasonably be expected to have, a Parent Material Adverse Effect, (i) no
party in interest or disqualified person (as defined in Section 3(14) of
ERISA and Section 4975 of the Code) has at any time engaged in a
transaction with respect to any Parent Employee Plan which could subject
Parent or any Parent ERISA Affiliate, directly or indirectly, to any tax,
penalty or other liability for prohibited transactions under ERISA or
Section 4975 of the Code; (ii) no fiduciary of any Parent Employee Plan has
breached any of the responsibilities or obligations imposed upon
fiduciaries under Title I of ERISA; (iii) all Parent Employee Plans have
been established and maintained substantially in accordance with their
terms and have operated in compliance with the requirements of applicable
law, and Parent and its Subsidiaries have performed all obligations
required to be performed by them under and are not in default under or in
violation of any of Parent Employee Plans; (iv) each Parent Employee Plan
which is intended to be qualified under Section 401(a) of the Code is so
qualified, is the subject of a favorable determination letter from the IRS,
and, to Parent's knowledge, nothing has occurred which may reasonably be
expected to result in the revocation of such determination; (v) all
contributions required to be made with respect to any Parent Employee Plan
pursuant to Section 412 of the Code and Section 302 of ERISA, or pursuant
to the terms of Parent Employee Plan or any collective bargaining
agreement, have been made on or before their due dates (including any
extensions thereof); (vi) with respect to each Parent Employee Plan, no
"reportable event" within the meaning of Section 4043 of ERISA (excluding
any such event for which the 30 day notice requirement has been waived
under the regulations to Section 4043 of ERISA) has occurred for which
there is any outstanding liability to Parent or any Parent ERISA Affiliate,
nor would the execution, delivery or consummation of the transactions
contemplated hereby constitute a reportable event for which the 30-day
requirement has not been waived; and (vii) no Parent Employee Plan is under
audit or investigation by the IRS, the Department of Labor or the PBGC nor,
to the knowledge of Parent, is any such audit or investigation threatened.
(d) The Parent Disclosure Letter sets forth a true and complete list
of each current or former officer or director of Parent or any of its
Subsidiaries who holds (i) any Parent Option as of the date of this
Agreement, together with the number of shares of Parent Common Stock
subject to such option, the exercise price of such option, the vested and
unvested portion of such option, whether such option is intended to qualify
as an incentive stock option within the meaning of Section 422(b) of the
Code, and the expiration date of such option; or (ii) any shares of Parent
Common Stock that are restricted and the date(s) of lapse of such
restrictions. The Parent Disclosure Letter also sets forth the number of
options outstanding as of the date hereof and the different exercise prices
and expiration dates for such options. In addition, the Parent Disclosure
Letter sets forth, in the aggregate, the number of shares of Parent Common
Stock underlying (i) all other outstanding rights under Parent Employee
Plans (other than plans that are qualified plans under Section 401(a) of
the Code) to receive shares of Parent Common Stock, to the extent that such
shares of Parent Common Stock are not included in the number of shares set
forth in the second sentence of Section 4.3, and (ii) compensation based on
the value of shares of Parent Common Stock.
(e) The PBGC has not notified Parent regarding the institution of
proceedings to terminate any Parent Employee Plan that is subject to Title
IV of ERISA (each, a "Parent Defined Benefit Plan"). The Parent Defined
Benefit Plans have no accumulated or waived funding deficiencies within the
meaning of Section 412 of the Code nor have any extensions of any
amortization period within the meaning of Section 412 of the Code or 302 of
ERISA been applied for with respect thereto.
(f) To the knowledge of Parent, all employee benefit plans of Parent
and any of its Subsidiaries that are primarily subject to the laws of any
jurisdiction outside of the United States have been maintained in
compliance with all applicable law (including, if they are intended to
qualify for special tax treatment, applicable tax laws), except for
noncompliance that would not individually or in the aggregate have a Parent
Material Adverse Effect.
(g) The execution and delivery of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (i) constitute an event
under any Parent Employee Plan, trust or loan that will or may result in
any
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payment (whether of severance pay or otherwise), acceleration, forgiveness
of indebtedness, vesting, distribution, increase in benefits or obligation
to fund benefits with respect to any current or former employee of Parent
or any Subsidiary of Parent, or (ii) result in the triggering or imposition
of any restrictions or limitations on the right of the Parent or any
Subsidiary of Parent to amend or terminate any Parent Employee Plan. No
payment or benefit which is required to be paid or distributed, prior to or
after the Closing, by Parent, the Company, the Parent Surviving Corporation
or any of their respective Subsidiaries under any Parent Employee Plan or
any other plan, program or arrangement of Parent to any current or former
employee of Parent or any Subsidiary of Parent will be characterized as an
"excess parachute payment," within the meaning of Section 280G(b)(1) of the
Code.
Section 4.11 Labor Matters. Except as set forth in the Parent SEC
Reports filed prior to the date of this Agreement, (i) there are no
controversies pending or, to the knowledge of Parent, threatened, between
Parent or any of its Subsidiaries and any of their respective employees,
which controversies, in the aggregate, have had, or would reasonably be
expected to have, a Parent Material Adverse Effect; (ii) neither Parent nor
any of its Subsidiaries is in breach of any material collective bargaining
agreement or other labor union contract applicable to persons employed by
Parent or its Subsidiaries which, in the aggregate, would have, or
reasonably be expected to have, a Parent Material Adverse Effect, nor does
Parent know of any activities or proceedings of any labor union to organize
any significant number of such employees; and (iii) neither Parent nor any
of its Subsidiaries is in breach of any material collective bargaining
agreement or other labor union contract, nor does Parent have any knowledge
of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by
or with respect to any employees of Parent or any of its Subsidiaries
except, in the aggregate, as would not have, or reasonably be expected to
have, a Parent Material Adverse Effect.
Section 4.12 Environmental Matters. Except as set forth in the Parent
SEC Reports filed prior to the date of this Agreement and except for those
matters, in the aggregate, that would not have, or reasonably be expected
to have, a Parent Material Adverse Effect:
(a) Parent and each of its Subsidiaries, and, to the knowledge of
Parent, their respective predecessors, if any, have been at all times
operated, and are, in full compliance in all material respects with all
applicable Environmental Laws, including all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in all applicable Environmental Laws.
(b) Parent and each of its Subsidiaries have obtained, are in
compliance with, and have made all appropriate filings for issuance or
renewal of, all material Environmental Permits, including, without
limitation, those regulating emissions, discharges, or releases of
Hazardous Substances, or the use, storage, treatment, transportation,
release, emission and disposal of raw materials, by-products, wastes and
other substances used or produced by or otherwise relating to the
business of Parent or any of its Subsidiaries.
(c) All of Parent's and its Subsidiaries' owned or, to the
knowledge of Parent, leased real property is free of any Hazardous
Substances (except those authorized pursuant to and in accordance with
Environmental Permits held by Parent and its Subsidiaries) and free of
all contamination arising from, relating to, or resulting from any
release, discharge or emission of Hazardous Substances.
(d) There are no claims, notices, civil, criminal or administrative
actions, suits, hearings, investigations, inquiries or proceedings
pending or, to the knowledge of Parent, threatened against Parent or any
of its Subsidiaries that are based on or related to any Environmental
Matters or the failure to have any required Environmental Permits.
(e) There are no past or present conditions, events, circumstances,
facts, activities, practices, incidents, actions, omissions or plans:
(1) that is reasonably likely to give rise to any liability or other
obligation under any Environmental Laws that may require Parent or any
of its Subsidiaries to incur any actual or potential Environmental
Costs, or (2) that is reasonably likely
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to form the basis of any claim, action, suit, proceeding, hearing,
investigation or inquiry against or involving Parent or any of its
Subsidiaries based on or related to any Environmental Matter or that
could require Parent or any of its Subsidiaries to incur any
Environmental Costs.
(f) There are no underground or aboveground storage tanks,
incinerators or surface impoundments at, on, or about, under or within
any real property owned, operated or controlled in whole or in part by
Parent or any of its Subsidiaries.
(g) Neither Parent nor any of its Subsidiaries has received any
notice (written or oral) or other communication that any of them is or
may be a potentially responsible person or otherwise liable in
connection with any waste disposal site allegedly containing any
Hazardous Substances, or other location used for the disposal of any
Hazardous Substances, or notice of any failure of Parent or any of its
Subsidiaries to comply in any material respect with any Environmental
Law or the requirements of any Environmental Permit.
(h) Neither Parent nor any of its Subsidiaries has used any waste
disposal site, or otherwise disposed of, transported, or arranged for
the transportation of, any Hazardous Substances to any place or
location, or in violation of any Environmental Laws.
(i) Neither Parent nor any of its Subsidiaries has been in
violation of any Environmental Laws, nor has it been requested or
required by any Governmental Entity to perform any investigatory or
remedial activity or other action in connection with any actual or
alleged release of Hazardous Substances or any other Environmental
Matter.
Section 4.13 Board Action; Vote Required. (a) Parent's Board of
Directors has unanimously approved (including, with respect to the Company
and its affiliates and associates, for purposes of Section 203 of the DGCL,
Article 12 of Parent's Restated Certificate of Incorporation and paragraph
6 of the Confidentiality Agreement) this Agreement, the Stock Option
Agreements, the Voting Agreements and the transactions contemplated hereby
and thereby, has adopted a resolution in accordance with Section 151 of the
DGCL providing for the issuance, in the event the Alternative Merger is
consummated, of shares of Parent Preferred Stock having the powers, rights,
designations and preferences and the qualifications, limitations and
restrictions described in the Certificate of Designation, has determined
that the transactions contemplated hereby and, in the event the Alternative
Merger is consummated, the issuance of shares of Parent Common Stock,
Parent Preferred Stock and the Depositary Shares pursuant thereto are fair
to and in the best interests of Parent and its stockholders and has
resolved to recommend to its stockholders that they vote in favor of this
Agreement and the Parent Merger. No "fair price," "moratorium," "control
share acquisition" or other similar anti-takeover statute applicable to
Parent will prevent or otherwise delay the consummation of the transaction
as contemplated hereby.
(b) The Board of Directors of Parent has taken all necessary actions
such that, (i) none of the Company or any of its affiliates shall become an
"Acquiring Person" (each as defined in the Parent Rights Agreement), and
(ii) no "Distribution Date," "Stock Acquisition Date" or "Triggering Event"
(each as defined in the Parent Rights Agreement) shall have occurred or
shall occur, in each case by reason of the execution, delivery or
performance of this Agreement or the Stock Option Agreements or any
announcement thereof.
(c) The affirmative vote of the holders of a majority of all
outstanding shares of Parent Common Stock is necessary to approve and adopt
this Agreement and the Parent Merger. Such vote is the only vote or
approval of holders of shares of any class or series of Parent's capital
stock required in connection with this Agreement, the Stock Option
Agreements, the Voting Agreements and the transactions contemplated hereby
and thereby. No vote of the holders of shares of Parent Common Stock is
necessary in connection with the Alternative Merger.
Section 4.14 Opinion of Financial Advisor. The Board of Directors of
Parent has received the written opinion of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), dated as of the date of this Agreement, to
the effect that, subject to the qualifications and limitations contained
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therein, as of the date of this Agreement, the Exchange Ratio pursuant to
the Parent Merger and the consideration to be paid by Parent in the
Alternative Merger, as the case may be, in each case is fair to Parent from
a financial point of view.
Section 4.15 Brokers. DLJ is the only broker, finder or investment
banker or other person entitled to any brokerage, finder's, investment
banking or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Parent or any of its Subsidiaries. Parent has previously
provided to the Company a copy of the letter agreement between DLJ and
Parent giving rise to a fee to DLJ.
Section 4.16 Tax Matters. (a) Except as would not, in the aggregate,
have or reasonably be expected to have a Parent Material Adverse Effect,
Parent and its Subsidiaries (i) have timely filed all federal, state and
foreign Tax returns required to be filed by any of them for Tax years ended
prior to the date of this Agreement or requests for extensions have been
timely filed and any such request has been granted and has not expired, and
all such returns are correct and complete and (ii) have paid or accrued in
accordance with GAAP all Taxes shown to be due and payable on such returns.
(b) There is no dispute or claim concerning any Tax liability of any
of Parent and its Subsidiaries claimed or raised by any authority in
writing.
(c) No written claims that, in the aggregate, could reasonably be
expected to have a Parent Material Adverse Effect have been made by an
authority in a jurisdiction where any of Parent and its Subsidiaries does
not file Tax returns that it is or may be subject to Taxation by that
jurisdiction.
(d) None of Parent and its Subsidiaries has waived any statute of
limitations in respect of income Taxes or agreed to any extension of time
with respect to an income Tax assessment or deficiency.
(e) Neither Parent nor any of its Subsidiaries has taken or agreed to
take any action, nor does Parent have any knowledge of any fact or
circumstance with respect to Parent or its Subsidiaries, which would
prevent Parent Merger or the Alternative Merger from qualifying as a
"reorganization" within the meaning of Section 368 of the Code.
Section 4.17 Public Utility Holding Company Act of 1935. Parent is
not a "holding company," a "subsidiary company" of a "holding company," an
"affiliate of a holding company," or a "public utility company," as such
terms are defined in the Holding Company Act.
Section 4.18 Restrictions on Business Activities. Except for this
Agreement or as set forth in Parent SEC Reports filed prior to the date of
this Agreement, there is no judgment, injunction, order or decree or
material agreement (including, without limitation, agreements containing
provisions restricting Parent or any of its Subsidiaries from entering or
engaging in any line of business, agreements containing geographic
restrictions on Parent's or any of its Subsidiaries' ability to operate
their respective businesses and agreements containing rights of first
refusal, rights of first offer, exclusivity, "requirements" or similar
provisions) binding upon Parent or any of its Subsidiaries which has or
would reasonably be expected to have the effect of materially prohibiting
or impairing the conduct of the business of Parent or any of its
Subsidiaries or, to the knowledge of Parent, after the Effective Time,
Parent or any of its Subsidiaries, taken together.
Section 4.19 Year 2000. Except as set forth in the Parent SEC Reports
filed prior to the date of this Agreement, the systems operated or used by
Parent or any of its Subsidiaries are capable of providing or are being
adapted to provide uninterrupted millennium functionality on or after
January 1, 2000 to share, record, process and present data in substantially
the same manner and with the same functionality as such systems share,
record, process and present such data falling on or before December 31,
1999, except, in the aggregate, as would not have, or reasonably be
expected to have, a Parent Material Adverse Effect. The costs of the
adaptations referred to in the prior sentence, in the aggregate, will not
have a Parent Material Adverse Effect.
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Section 4.20 Accounting Matters. Neither Parent nor any of its
Subsidiaries has taken or agreed to take any action, nor does Parent have
any knowledge of any fact or circumstance with respect to Parent or its
Subsidiaries, which would prevent the business combination to be effected
pursuant to the Parent Merger from being accounted for as a
pooling-of-interests under GAAP or the rules and regulations of the SEC.
PricewaterhouseCoopers LLP ("PWC") has advised Parent that it is not aware
as of the date of this Agreement of any reason why PWC would be unable to
deliver at the Closing the letter referred to in the second sentence of
Section 6.13(a).
ARTICLE V
Section 5.1 Interim Operations of the Company. Between the date of this
Agreement and the Effective Time, the Company shall, and shall cause each of its
Subsidiaries to (unless Parent shall otherwise approve in writing or except as
otherwise contemplated by this Agreement or disclosed in the Company Disclosure
Letter):
(i) conduct its business in all material respects in the ordinary
course consistent with past practice and, to the extent consistent
therewith, use reasonable best efforts to (x) preserve intact its business
organization, (y) keep available the services of its officers and employees
and (z) maintain its existing relations and goodwill with customers,
suppliers, regulators, distributors, creditors, lessors and others having
business dealings with it; provided that the failure of any officer or
employee of the Company or its Subsidiaries to remain an officer or
employee of the Company or its Subsidiaries shall not constitute a breach
of this covenant;
(ii) not (A) amend the Restated Certificate of Incorporation or
By-laws of the Company; (B) split, combine, subdivide or reclassify its
outstanding shares of capital stock or other equity securities; (C)
declare, set aside or pay any dividend or distribution payable in cash,
stock or property in respect of any of its shares of capital stock or other
equity securities, or securities convertible into, exercisable for or
exchangeable for, any of its shares of capital stock or other equity
securities, other than (x) quarterly cash dividends of $.27 per share in
respect of the outstanding shares of Company Common Stock, declared, set
aside and paid at such times during the quarter as is consistent with past
practice, and (y) dividends and distributions by wholly owned Subsidiaries
of the Company; (D) repurchase, redeem or otherwise acquire or permit any
of its Subsidiaries to purchase, redeem or otherwise acquire, any shares of
its capital stock or other equity securities, or securities convertible
into, exercisable for or exchangeable for, any of its shares of capital
stock or other equity securities (it being understood that this clause (D)
shall not prohibit the exercise, exchange or conversion of Company Equity
Equivalent Securities); or (E) enter into any agreement or letter of
intent, agreement in principle or similar arrangement to sell, transfer or
otherwise dispose of, or purchase or otherwise acquire, in the aggregate, a
material amount of assets or properties or any material business by merger,
consolidation, transfer or acquisition of shares of capital stock or
otherwise;
(iii) not take any action that to the knowledge of the Company would
prevent the business combination to be effected pursuant to the Parent
Merger from qualifying for pooling of interests accounting treatment under
GAAP and the rules and regulations of the SEC or would prevent the business
combination to be effected pursuant to the Parent Merger or the Alternative
Merger, as applicable, from qualifying as a "reorganization" within the
meaning of Section 368 of the Code;
(iv) except as required by applicable law or pursuant to contractual
obligations in effect as of the date of this Agreement, not (A) execute,
establish, adopt or amend, or accelerate rights or benefits under, any
agreement relating to severance or change-in-control, any Company Employee
Plan, any employment or consulting agreement with current or former
officers or directors or any collective bargaining agreement, (B) increase
the compensation payable or to become payable to any of its officers,
directors or employees (except for increases in the ordinary course of
business consistent with past practices), (C) grant any severance or
termination pay to any officer or director of the Company, or (D) grant any
stock options or other equity related awards;
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(v) not issue, deliver, grant, sell, pledge or otherwise dispose of
shares of any class of its capital stock, other equity securities, or any
securities convertible, exercisable or exchangeable for or into, any such
shares or other equity securities, except upon the exercise, exchange or
conversion of Company Equity Equivalent Securities;
(vi) not change its accounting policies, practices or methods except
as required by GAAP or by the rules and regulations of the SEC;
(vii) not (x) take any action to amend the Company Rights Agreement,
(y) redeem the rights subject to the Company Rights Agreement, or (z) take
any action to render inapplicable, or to exempt any third party from, any
provision of the Restated Certificate of Incorporation of the Company or
any statute referred to in Section 6.15;
(viii) not take any action that would be reasonably likely to result
in any of the conditions set forth in Article VII of this Agreement not
being satisfied or that would impair the ability of the Company to
consummate the transactions contemplated hereby in accordance with the
terms hereof or delay such consummation;
(ix) not take any action to cause the shares of Company Common Stock
to cease to be listed on the NYSE;
(x) not waive any of its rights under, or release any other party from
such other party's obligation under, or amend any provision of any
standstill agreement;
(xi) not issue, deliver, grant, sell, pledge or otherwise dispose of
any bonds, debentures, notes or other indebtedness, in each case having the
right to vote together with the Company's stockholders on any matter; and
(xii) not enter into any commitments or agreements to do any of the
foregoing.
Section 5.2 Interim Operations of Parent. Between the date of this
Agreement and the Effective Time, Parent shall, and shall cause each of its
Subsidiaries to (unless the Company shall otherwise approve in writing or
except as otherwise expressly contemplated by this Agreement or disclosed
in the Parent Disclosure Letter):
(i) conduct its business in all material respects in the ordinary
course and, to the extent consistent therewith, use reasonable best
efforts to (x) preserve intact its business organization, (y) keep
available the services of its officers and employees and (z) maintain
its existing relations and goodwill with customers, suppliers,
regulators, distributors, creditors, lessors, and others having business
dealings with it; provided that the failure of any officer or employee
of Parent or its Subsidiaries to remain an officer or employee of Parent
or its Subsidiaries shall not constitute a breach of this covenant.
(ii) not (A) amend the Restated Certificate of Incorporation or
By-laws of Parent; (B) split, combine, subdivide or reclassify its
outstanding shares of capital stock or other equity securities; (C)
declare, set aside or pay any dividend or distribution payable in cash,
stock or property in respect of any of its shares of capital stock or
other equity securities, or securities convertible into, exercisable for
or exchangeable for, any of its shares of capital stock or other equity
securities, other than (x) quarterly cash dividends of $.20 per share in
respect of the outstanding shares of Parent Common Stock, declared, set
aside and paid at such times during the quarter as is consistent with
past practice, and (y) dividends and distributions by wholly owned
Subsidiaries of Parent; (D) repurchase, redeem or otherwise acquire or
permit any of its Subsidiaries to purchase, redeem or otherwise acquire,
any shares of its capital stock or other equity securities, or
securities convertible into, exercisable for or exchangeable for, any of
its shares of capital stock or other equity securities (it being
understood that this clause (D) shall not prohibit the exercise,
exchange or conversion of Parent Equity Equivalent Securities); or (E)
enter into any agreement, letter of intent, agreement in principle or
similar agreement to sell, transfer or otherwise dispose of, or purchase
or otherwise acquire assets of any business that
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generated net revenues or net income in the most recently completed
fiscal year constituting, or is comprised of net assets having a book
value equal to, 25% or more of the consolidated net revenue or net
income of Parent for its most recently completed fiscal year, or the
consolidated net assets of Parent, as applicable, by merger,
consolidation, transfer or acquisition of shares of capital stock or
otherwise;
(iii) not take any action that to the knowledge of Parent would
prevent the business combination to be effected pursuant to the Parent
Merger from qualifying for pooling of interests accounting treatment
under GAAP and the rules and regulations of the SEC or would prevent the
business combination to be effected pursuant to the Parent Merger or the
Alternative Merger, as applicable, from qualifying as a "reorganization"
within the meaning of Section 368 of the Code;
(iv) except as required by applicable law or pursuant to
contractual obligations in effect as of the date of this Agreement, not
(A) execute, establish, adopt or amend, or accelerate rights or benefits
under, any agreement relating to severance or change-in-control or any
Parent Employee Plan (provided that Parent and its Subsidiaries shall be
permitted hereunder to (i) enter into or amend consulting, employment
and collective bargaining agreements and (ii) to amend its Key Executive
Severance Protection Plan and Employee Severance Protection Plan to
exclude the employees of the Company and its Subsidiaries from
participating therein following the Effective Time), (B) increase the
compensation payable to any of its officers, directors or employees
(except for increases in the ordinary course consistent with past
practices), (C) grant any severance or termination pay to an officer or
director of Parent, or (D) grant any stock options or other equity
related awards;
(v) not issue, deliver, grant, sell, pledge or otherwise dispose of
shares of any class of its capital stock, other equity securities, or
any securities convertible, exercisable or exchangeable for or into, any
such shares as other equity securities, except (x) upon the exercise,
exchange or conversion of Parent Equity Equivalent Securities, and (y)
in connection with a purchase or acquisition permitted under Section 5.2
(ii)(E), provided that the issuance, delivery, grant, sale, pledge or
other disposition does not require the approval of the stockholders of
Parent under the rules of the NYSE or applicable law;
(vi) not change its accounting policies, practices or methods
except as required by GAAP or by the rules and regulations of the SEC;
(vii) not (x) take any action to amend the Parent Rights Agreement,
(y) redeem the rights subject to the Parent Rights Agreement or (z) take
any action to render inapplicable, or to exempt any third party from,
any provision of the Restated Certificate of Incorporation of Parent or
any statute referred to in Section 6.15.
(viii) not take any action to cause the shares of Parent Common
Stock to cease to be listed on the NYSE;
(ix) not take any action that would be reasonably likely to result
in any of the conditions set forth in Article VII hereof not being
satisfied or that would impair the ability of Parent to consummate the
transactions contemplated hereby in accordance with the terms hereof or
delay such consummation;
(x) not waive any of its rights under, or release any other party
from such other party's obligations under, or amend any provision of,
any standstill agreement;
(xi) not issue, deliver, grant, sell, pledge or otherwise dispose
of any bonds, debentures, notes or other indebtedness, in each case
having the right to vote together with Parent's stockholders on any
matter; and
(xii) not enter into any commitments or agreements to do any of the
foregoing.
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Section 5.3 No Solicitation. (a) Neither the Company nor Parent
shall, nor shall either permit its respective Subsidiaries to, or authorize
any of its officers, directors, employees, accountants, counsel, investment
bankers, financial advisors and other representatives ("Representatives")
to, (i) directly or indirectly, initiate, solicit or encourage, or take any
action to facilitate the making of any Takeover Proposal (defined below),
or (ii) directly or indirectly engage in negotiations or provide any
confidential information or data to any person relating to any Takeover
Proposal; provided, however, that at any time prior to the date of the
Company's stockholders' meeting contemplated by Section 6.1 (the
"Applicable Period"), in the case of the Company, or at any time prior to
the date of Parent's stockholders' meeting contemplated by Section 6.1, in
the case of Parent, the Company or Parent, as applicable, may, in response
to a Superior Proposal (as defined below) which was not solicited by it and
which did not otherwise result from a breach of this Section 5.3(a), and
subject to providing prior written notice of its decision to take such
action to the other party (the "Notice") and compliance with Section 5.3(c)
following delivery of the Notice (x) furnish information with respect to
the Company or Parent, as applicable, and/or its Subsidiaries to any person
making a Superior Proposal pursuant to a customary confidentiality
agreement (as determined by such party after consultation with its outside
counsel) and (y) participate in discussions or negotiations regarding such
Superior Proposal.
(b) (i) Neither the Board of Directors of the Company nor any
committee thereof shall (x) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Parent, the approval or recommendation by
the Board of Directors of the Company or any such committee of the Parent
Merger, the Alternative Merger or this Agreement, (y) approve any letter of
intent, agreement in principle, acquisition agreement or similar agreement
(other than a confidentiality agreement in connection with a Superior
Proposal which is entered into by such party in accordance with Section
5.3(a)) relating to any Takeover Proposal (each, an "Acquisition
Agreement"), or (z) approve or recommend, or propose to approve or
recommend, any Takeover Proposal. Notwithstanding the foregoing, in
response to a Superior Proposal which was not solicited by the Company and
which did not otherwise result from a breach of Section 5.3(a), the Board
of Directors for the Company may (subject to this sentence) terminate this
Agreement (and concurrently with or after such termination, if it so
chooses, cause the Company to enter into any Acquisition Agreement with
respect to any Superior Proposal), but only at a time that is during the
Applicable Period and is after the fifth business day following Parent's
receipt of written notice advising Parent that the Board of Directors of
the Company has resolved to accept a Superior Proposal (subject to such
termination), specifying the material terms and conditions of such Superior
Proposal and identifying the person making such Superior Proposal.
(ii) Neither the Board of Directors of Parent nor any committee
thereof shall (x) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to the Company, the approval by the Board of Directors of
Parent of this Agreement and the transactions contemplated hereby or the
recommendation by the Board of Directors of the Parent Merger, (y) approve
any Acquisition Agreement or (z) approve or recommend, or propose to
approve or recommend, any Takeover Proposal.
(c) Each party promptly shall advise the other party orally and in
writing of any Takeover Proposal or any inquiry with respect to or that
could reasonably be expected to lead to any Takeover Proposal, the identity
of the person making any such Takeover Proposal or inquiry and the material
terms of any such Takeover Proposal or inquiry. Such party shall keep the
other party fully informed of the status and material terms of any such
Takeover Proposal or inquiry.
(d) The Company and Parent shall each immediately cease and cause to
be terminated all existing discussions and negotiations, if any, with any
other persons conducted heretofore with respect to any Takeover Proposal.
For purposes of this Agreement, a "Takeover Proposal" with respect to
the Company or Parent, as applicable, means any inquiry, proposal or offer
from any person relating to (i) any direct or
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indirect acquisition or purchase of a business that constitutes 25% or more
of the net revenues, net income or the assets of the Company or Parent, as
applicable, and its Subsidiaries, taken as a whole, or 25% or more of any
class of equity securities of the Company or Parent, as applicable, or any
of its Subsidiaries, (ii) any tender offer or exchange offer that if
consummated would result in any person beneficially owning 25% or more of
any class of equity securities of the Company or Parent, as applicable, or
any of its Subsidiaries, or (iii) any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company or Parent, as applicable, or any of its
Subsidiaries that constitutes 25% or more of the net revenues, net income
or the assets of the Company or Parent, as applicable, and its Subsidiaries
taken as a whole, in each case other than the transactions contemplated by
this Agreement, the Stock Option Agreements and the Voting Agreements and
transactions permitted under Sections 5.1 or 5.2, as applicable. Each of
the transactions referred to in clauses (i) -- (iii) of the foregoing
definition of Takeover Proposal, other than the transactions contemplated
by this Agreement or by the Stock Option Agreements and the Voting
Agreements and transactions permitted under Sections 5.1 or 5.2, as
applicable, is referred to herein as an "Acquisition Transaction."
For purposes of this Agreement, a "Superior Proposal" with respect to
the Company or Parent, as applicable, means any proposal made by a third
party to acquire, directly or indirectly, including pursuant to a tender
offer, exchange offer merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction, for
consideration consisting of cash and/or securities, more than 50% of the
combined voting power of the shares of Company Common Stock or Parent
Common Stock, as applicable, then outstanding or at least 50% of the assets
of the Company or Parent, as applicable, and its Subsidiaries, taken
together, and if (x) the proposal is otherwise on terms which the Board of
Directors of the Company or Parent, as applicable, determines in its good
faith judgment (based on the advice of a financial advisor of nationally
recognized reputation and such other matters as the Board of Directors of
the Company or Parent, as applicable, deems relevant) to be more favorable
to the Company's stockholders or Parent's stockholders, as applicable, than
the Parent Merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Board of Directors of
the Company or Parent, as applicable, is reasonably capable of being
obtained by such third party and (y) such Board of Directors, after
considering such matters as such Board of Directors deems relevant
(including the written opinion of outside counsel), determines in good
faith that, in the case of the Company and Parent, furnishing information
to the third party, participating in discussions or negotiations with
respect to the Superior Proposal or withdrawing or modifying its
recommendation or recommending a Takeover Proposal, as applicable, or, in
the case of the Company only, terminating this Agreement, is required for
the Board of Directors of the Company or Parent, as applicable, to comply
with its fiduciary duties to the Company or Parent, as applicable, and its
stockholders under applicable law.
(e) Nothing contained in this Agreement shall prohibit the Company
from taking and disclosing to its stockholders a position contemplated by
Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act.
ARTICLE VI
Section 6.1 Meetings of Stockholders. Each of Parent and the Company will
take all action necessary in accordance with applicable law and its articles or
certificate of incorporation, as applicable, and bylaws to call, give notice of,
convene and hold a meeting of its stockholders as promptly as practicable to
consider and vote upon the approval and adoption of this Agreement, the Parent
Merger and the Alternative Merger in the case of the Company, or the approval
and adoption of this Agreement and the Parent Merger, in the case of Parent. The
Board of Directors of each such party shall recommend that its stockholders vote
in favor of the approval and adoption of this Agreement, the Parent Merger and
the Alternative Merger, in the case of the Company, or the approval and adoption
of this Agreement and the Parent Merger, in the case of Parent, and such
recommendations shall be included in the Joint Proxy
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Statement/Prospectus (as defined in Section 6.4); provided, however, that
nothing contained in Section 5.3(b) or this Section 6.1 shall require the Board
of Directors of either party to make any recommendation or refrain from making
any recommendation with respect to a Superior Proposal, which such Board of
Directors, after considering such matters as such Board of Directors deems
relevant (including the written advice of outside counsel), determines in good
faith would result in a breach of its fiduciary duty under applicable law. Each
of such parties shall take all lawful action necessary or advisable to solicit
the approval of its respective stockholders including, without limitation,
timely mailing to its stockholders the Joint Proxy Statement/Prospectus as
promptly as practicable after the Form S-4 (as defined in Section 6.4) shall be
declared effective. The parties shall coordinate and cooperate with respect to
the timing of such meetings and shall, unless otherwise agreed, hold such
meetings on the same day.
Section 6.2 Filings; Other Action. (a) Subject to the terms and conditions
herein provided, each of the Company and Parent shall (i) cooperate with the
other in (x) determining which other notices, reports or filings are required to
be made prior to the Effective Time with, and which other waivers, consents,
approvals or authorizations are required to be obtained prior to the Effective
Time in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby; and (y) timely making all
such notices, reports or filings and timely seeking all such waivers, consents,
approvals or authorizations; and (ii) furnish the other party with such
necessary information regarding itself and its Subsidiaries and reasonable
assistance as such other party and its affiliates may reasonably request in
connection with their preparation of necessary notices, reports or filings, or
submissions of information to any Governmental Entity.
(b) Each of Parent and the Company shall give prompt notice to the other
party of the following:
(x) the occurrence of or failure to occur of any event the occurrence
or failure to occur of which would be likely to result in (i) any condition
set forth in Article VII being incapable of being satisfied or (ii) a
Company Material Adverse Effect or a Parent Material Adverse Effect, as
applicable;
(y) any failure of such party to comply in any material respect with
any of its covenants or agreements hereunder; and
(z) such party becoming aware that statements relating to such party
or any of its Subsidiaries set forth in the Joint Proxy
Statement/Prospectus or the Form S-4 contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make such statements therein, in light of
the circumstance under which they were made, not misleading.
Notwithstanding the foregoing, the delivery of any notice pursuant to this
Section 6.2(b) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 6.3 Publicity. The parties agree that the initial press release
with respect to this Agreement and the transactions contemplated hereby shall be
a joint press release (to include such text as the parties may mutually agree).
Thereafter, subject to their respective legal obligations (including
requirements of securities exchanges and other similar regulatory bodies),
Parent and the Company shall consult with each other and use their reasonable
best efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any public statement or
disclosure required by any Governmental Entity, securities exchange or other
similar regulatory body with respect thereto.
Section 6.4 Registration Statements. The parties shall cooperate and
promptly prepare, and Parent shall file with the SEC as soon as practicable a
registration statement on Form S-4 (the "Form S-4") under the Securities Act,
with respect to the shares of Parent Common Stock issuable in the Parent Merger
and the shares of Parent Common Stock and the Depositary Shares issuable in the
Alternative Merger, a portion of which Form S-4 shall also serve as the joint
proxy statement with respect to the meetings of the stockholders of each of
Parent and the Company in connection with this Agreement and the transactions
contemplated hereby and a prospectus with respect to the shares of Parent Common
Stock and Depositary Shares issuable pursuant to the transactions contemplated
hereby (the "Joint Proxy
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Statement/Prospectus"). The parties will cause the Joint Proxy
Statement/Prospectus and the Form S-4 to comply as to form in all material
respects with the applicable provisions of the Securities Act and the Exchange
Act. The parties agree to use reasonable best efforts and shall cooperate to
have the Form S-4 declared effective by the SEC as promptly as practicable and
to keep the Form S-4 effective as long as is necessary to consummate the
Applicable Transaction and Parent shall use reasonable best efforts to obtain,
prior to the effective date of the Form S-4, all necessary state securities law
or "blue sky" permits or approvals required in connection with the issuance of
shares of Parent Common Stock and Depositary Shares pursuant to the transactions
contemplated hereby (provided that Parent shall not be required to qualify to do
business in any jurisdiction in which it is not now so qualified). Each of
Parent and the Company agrees that the information provided by it for inclusion
in the Form S-4 and the Joint Proxy Statement/Prospectus and each amendment or
supplement thereto, at the time of mailing thereof to stockholders, at the time
of the respective meetings of the stockholders of the parties, and at the time
it is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Each party will advise the other promptly
after it receives notice thereof of the time when the Form S-4 has or is to
become effective or when any supplement or amendment has been filed, the
issuance of any stop order, or any request by the SEC for amendment of the Joint
Proxy Statement/Prospectus or the Form S-4. The parties will provide each other
with reasonable opportunity to review and comment on any amendments or
supplements to the Form S-4 and/or the Joint Proxy Statement/Prospectus prior to
filing such amendments or supplements with the SEC, and further agree that each
party will be provided with such number of copies of all filings made with the
SEC as such party or Parent (if applicable) shall reasonably request. No filings
of the Form S-4 or the Joint Proxy Statement/Prospectus (or any amendments or
supplements to either of them) shall be made without the approval of both
parties (which consent shall not be unreasonably withheld).
Section 6.5 Listing Application. Parent shall promptly prepare and submit
to the NYSE a listing application with respect to the shares of Parent Common
Stock and Depositary Shares issuable in the transactions contemplated hereby,
and Parent shall use reasonable best efforts to obtain, prior to the Effective
Time, approval for the listing of such shares of Parent Common Stock and
Depositary Shares on the NYSE, subject to official notice of issuance.
Section 6.6 Further Action. Each of the parties shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, use reasonable best efforts
to perform such further acts and execute such documents as may be reasonably
required to effect the transactions contemplated hereby. Each of the parties
will comply in all material respects with all applicable laws and with all
applicable rules and regulations of any Governmental Entity in connection with
its execution, delivery and performance of this Agreement and the Stock Option
Agreements and the transactions contemplated hereby and thereby. Each of the
parties agrees to use reasonable best efforts to obtain in a timely manner all
necessary waivers, consents, approvals, orders, authorizations and opinions, to
effect all necessary registrations and to make all notices, reports and filings,
and use reasonable best efforts to take, or cause to be taken, all other actions
and to do, or cause to be done, all other things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated hereby.
Section 6.7 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby, including the Parent Merger and the Alternative Merger,
shall be paid by the party hereto incurring such costs or expenses except as
expressly provided herein and except that (a) the filing fees in respect of
filings made pursuant to the HSR Act, (b) filing fees in connection with the
filing of the Form S-4 and Proxy Statement/Prospectus with the SEC, (c) all
filing fees in connection with any filing, permits or approvals made or obtained
under applicable state securities and "blue sky" laws, (d) all printing, mailing
and related expenses incurred in connection with the printing and mailing of the
Proxy Statement/Prospectus and (e) all other expenses not directly attributable
to any one of the parties, shall be shared equally by Parent and the Company.
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Section 6.8 Access to Information. (a) From the date of this Agreement to
the Effective Time, each of Parent and the Company shall, and shall cause its
respective Subsidiaries, and its and their Representatives to, afford the
Representatives of the other party reasonable access at reasonable times upon
reasonable notice to each of the party's and its Subsidiaries' officers,
employees, auditors, counsel, agents, properties, offices and other facilities
and to all of their respective books and records, and shall furnish the other
party with all financial, operating and other data and information as such other
party may reasonably request, in each case only to the extent, in the judgment
of counsel to such party, permitted by law, including antitrust law.
(b) Each of Parent and the Company agrees that all information so received
from the other party shall be deemed received pursuant to the Confidentiality
Agreement, and that party shall, and shall cause its affiliates and each of its
and their Representatives to, comply with the provisions of the applicable
Confidentiality Agreement with respect to such information, and the provisions
of the Confidentiality Agreement are hereby incorporated herein by reference
with the same effect as if fully set forth in this Agreement.
Section 6.9 Insurance; Indemnity. (a) The Surviving Corporation shall,
and, if applicable, Parent shall cause the Surviving Corporation to, maintain in
effect for not less than six years after the Effective Time the current
directors' and officers' insurance policies (or policies containing
substantially similar coverage) of the Company with respect to acts or failures
to act prior to or as of the Effective Time (other than to the extent the
available limit of any such insurance policy may be reduced or exhausted by
reason of the payment of claims thereunder); provided, however, that in order to
maintain or procure such coverage, neither Parent nor the Surviving Corporation,
as applicable, shall be required to pay, in the aggregate, an annual premium in
excess of 200% of the current annual premium paid by Parent or the Company for
its existing coverage (the "Cap Amount"); and provided, further, that if
equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of the Cap Amount, the Parent and the Surviving
Corporation shall only be required to obtain as much coverage as can be obtained
by paying, in the aggregate, an annual premium equal to the Cap Amount. From and
after the Effective Time, the Surviving Corporation shall, and, if applicable,
Parent shall cause the Surviving Corporation to, indemnify and hold harmless,
and provide advancement of expenses to, to the fullest extent permitted under
applicable law, each person who is a current or former officer or director of
the Company or Subsidiaries (each, an "Indemnified Party") against all losses,
claims, damages, liabilities, costs or expenses (including reasonable attorneys'
fees), judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such, which acts or omissions occurred prior to the Effective
Time. In the event of any such claim, action, suit, proceeding or investigation
(an "Action"), the indemnifying party shall control the defense of such Action
with counsel selected by it; provided, however, that the Indemnified Party shall
be permitted to participate in the defense of such Action through counsel
selected by it at the Indemnified Party's expense.
(b) Parent agrees that, in the event the Alternative Merger is consummated,
the provisions of the Company Restated Certificate of Incorporation and By-laws
in effect as of the date of this Agreement affecting the Indemnified Parties'
rights to indemnification, limitation of liability and advancement of expenses
shall survive the consummation of the Alternative Merger and shall continue in
full force and effect, without any amendment thereto (unless required by DGCL or
federal law), for a period of six years from the Effective Time. Parent agrees
that, in the event the Parent Merger is consummated the Indemnified Parties
shall for a period of six years after the Effective Time, be entitled to the
benefit of the provisions of Parent's Restated Certificate of Incorporation and
By-laws relating to indemnification, limitation of liability and advancement of
expenses of officers and directors of Parent.
(c) The provisions of this Section 6.9 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
Section 6.10 Employee Benefit Plans. (a) From and after the Effective
Time, subject to applicable law, the Parent Surviving Corporation shall assume
and honor the obligations of the Company and its
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Subsidiaries under all existing Company Employee Plans and shall perform the
obligations of the Company and its Subsidiaries under such Company Employee
Plans in the same manner and to the same extent that the Company and its
Subsidiaries would have been required to perform thereunder; provided, however,
that, except as otherwise explicitly provided, nothing herein shall be construed
to prevent, on or following the Effective Time, (i) the termination of
employment of any individual who immediately prior to the Effective Time was an
employee of the Company or any of its Subsidiaries (such employees, the "Company
Employees") or (ii) the amendment and termination of any Company Employee Plan
to the extent permitted by the terms thereof and applicable law.
(b) Following the Effective Time, subject to applicable law, the Parent
Surviving Corporation intends to, or intends to cause one or more of its
Subsidiaries to, provide compensation and employee benefits to the Company
Employees which will be substantially similar, in the aggregate, to the
compensation and employee benefits that the Parent Surviving Corporation
provides to similarly situated employees other than the Company Employees (the
employees other than the Company Employees, the "Parent Employees") (excluding,
however, participation in the El Paso Energy Corporation Key Executive Severance
Protection Plan and the El Paso Energy Corporation Employee Severance Protection
Plan), including without limitation participation in the El Paso Energy
Corporation Employee Stock Purchase Plan (so long as such plan has been approved
by stockholders of Parent prior to the Effective Time and is in effect with
respect to the Parent Employees).
(c) To the extent that any employee benefit plan is made available to
Company Employees on or following the Effective Time, the Parent Surviving
Corporation shall, or shall cause one of its Subsidiaries to, grant Company
Employees credit for all service with the Company and its Subsidiaries prior to
the Effective Time for purposes of eligibility and vesting (but not benefit
accrual), to the extent that service of Parent Employees is recognized for any
such purpose. Notwithstanding the foregoing sentence, credit for service with
the Company and its Subsidiaries shall be given for the purposes of cash balance
pay credit, the Extended Illness Bank, Paid Time Off, and employee recognition
awards; provided, further, that the foregoing sentence shall not be applied to
service if its application would cause such plan to violate ERISA or the Code.
In addition, and without limiting the generality of the foregoing: (i) each
Company Employee shall be immediately eligible to participate, without any
waiting time, in any and all Parent Employee Plans, or any other employee
benefit plans sponsored by the Parent Surviving Corporation and its Subsidiaries
(such plans, collectively, the "New Plans") to the extent coverage under such
plan replaces coverage under a comparable Company Employee Plan in which such
employee participates immediately before or at any time after the Effective Time
(such plans, collectively, the "Old Plans"); and (ii) for purposes of each New
Plan providing medical, dental, pharmaceutical, vision and/or disability
benefits to any Company Employee, the Parent Surviving Corporation shall cause
all pre-existing condition exclusions and actively-at-work requirements of such
New Plan to be waived for such employee and his or her covered dependents, and
the Parent Surviving Corporation shall cause any eligible expenses incurred by
such employee and his or her covered dependents during the portion of the plan
year of the Old Plan ending on the date such employee's participation in the
corresponding New Plan begins to be taken into account under such New Plan for
purposes of satisfying all deductible, coinsurance and maximum out-of-pocket
requirements applicable to such employee and his or her covered dependents for
the applicable plan year as if such amounts had been paid in accordance with
such New Plan.
(d) Without limiting the generality of the foregoing, Parent and the
Company agree to the matters set forth on Section 6.10 of the Parent Disclosure
Letter, and the Parent Surviving Corporation shall comply therewith.
(e) (i) No written communication shall be made to Company Employees
regarding the compensation and employee benefits to be provided at and following
the Effective Time without the express consent of Parent, which consent shall
not be unreasonably withheld; and (ii) the Company shall cause no oral
communication to be made regarding compensation and employee benefits that (x)
establishes obligations of Parent or the Parent Surviving Corporation or any of
their Subsidiaries other than as set forth herein or (y) increases any such
obligations.
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Section 6.11 Certain Appointments. The Board of Directors of Parent shall
take such action as is necessary so that as of the Effective Time it has 15
members, 9 of whom are persons designated by the Board of Directors of Parent
prior to the Effective Time (no more than one such person being an insider of
Parent) (the "Parent Designees") and 6 of whom are persons designated by the
Board of Directors of the Company prior to the Effective Time (no more than one
such person being an insider of the Company and no more than one such person
being a Major Company Stockholder) ("Company Designees"). If any Company
Designee or Parent Designee is over the age of 68 at the Effective Time, Parent
shall waive any age limitation applicable to members of the Board of Directors,
with respect to such Company Designee or Parent Designee, as applicable. After
the Effective Time, Parent will not discriminate between Company Designees and
Parent Designees in making any determination with respect to the waiver of the
age limitation applicable to members of the Board of Directors, it being
understood that such determinations are made on a case-by-case basis and it
being further understood that Parent waives such age limitation for Selim K.
Zilkha. Notwithstanding anything set forth in this Section 6.11, Selim K. Zilkha
shall be nominated by the Parent's Board of Directors (or nominating committee
or other committee performing similar functions) for election to serve as a
director of Parent for so long as Selim K. Zilkha and members of his immediate
family and trusts therefor own at least 5% of the then outstanding shares of the
Parent Common Stock; provided, however, that, in the event the Alternative
Merger is consummated, and so long as Depositary Shares or shares of Parent
Preferred Stock remain outstanding, then, solely for purposes of determining
whether Selim K. Zilkha and members of his immediate family and trusts therefor
continue to own at least 5% of the then outstanding shares of Parent Common
Stock, each Depositary Share shall be deemed to constitute a number of shares of
Parent Common Stock equal to the result obtained by dividing (x) $100 by (y) the
Implied Price and each share of Parent Preferred Stock not represented by
Depositary Shares shall be deemed to constitute a number of shares of Parent
Common Stock equal to the result obtained by dividing (x) $5,000 by (y) the
Implied Price. As of and from the Effective Time through December 31, 2000,
Ronald L. Kuehn, Jr. shall be the Non-Executive Chairman of the Parent's Board
of Directors and thereupon the Parent's Board of Directors shall appoint William
A. Wise Chairman of the Parent's Board of Directors to replace Ronald L. Kuehn,
Jr.
Section 6.12 Affiliates. (a) Not less than 45 days prior to the Closing
Date, each of Parent and the Company (i) shall have delivered to the other party
a letter identifying all Persons who, in the opinion of the party delivering
such letter, may be, as of the date this Agreement is submitted for approval by
such party's shareholders, its "affiliates" for purposes of SEC Accounting
Series Release 135 and/or, in the case of the Company, for purposes of Rule 145
under the Securities Act, and (ii) shall use its reasonable best efforts to
cause each Person who is identified as an "affiliate" of it in such letter to
deliver, as promptly as practicable but in no event later than 30 days prior to
the Closing (or such later date as the parties may agree), a signed agreement,
in the case of affiliates of the Company, to the Company and Parent
substantially in the form attached as Exhibit F hereto, and in the case of
affiliates of Parent, to Parent and the Company substantially in the form
attached as Exhibit G hereto. Each of Parent and the Company shall, after the
date hereof and prior to the Closing, notify the other party from time to time
after the delivery of the letter described in the prior sentence of any Person
not identified in such letter who then is, or may be, such an "affiliate" and
use reasonable best efforts to cause each additional Person who is identified as
an "affiliate" to execute a signed agreement as set forth in this Section
6.12(a).
(b) Parent shall use its reasonable best efforts to publish or cause to be
published no later than 30 days after the end of the first month after the
Effective Time (which month may be the month in which the Effective Time occurs)
in which there are at least 30 days of post-Merger combined operations, combined
sales and net income figures as contemplated by and in accordance with the terms
of SEC Accounting Series Release No. 135.
Section 6.13 Pooling-of-Interests. (a) Parent shall use reasonable best
efforts to cause to be delivered to the Company two letters from PWC, one dated
the date on which the Form S-4 shall become effective and one dated the Closing
Date, each addressed to Parent and the Company, in form and substance reasonably
satisfactory to the Company and customary in scope and substance for comfort
letters delivered by independent public accountants in connection with
registration statements similar to
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the Form S-4. If the Parent Merger is being consummated, Parent shall use
reasonable best efforts to cause to be delivered to the Company a letter from
PWC, dated as of the Closing Date, stating that PWC concurs with Parent's
management's conclusion that accounting for the Parent Merger as a pooling-of-
interests under Opinion 16 of the Accounting Principles Board is appropriate if
the Parent Merger is closed and consummated in accordance with the terms hereof.
(b) The Company shall use reasonable best efforts to cause to be delivered
to Parent two letters from E&Y, one dated the date on which the Form S-4 shall
become effective and one dated the Closing Date, each addressed to the Company
and Parent, in form and substance reasonably satisfactory to Parent and
customary in scope and substance for comfort letters delivered by independent
public accountants in connection with registration statement similar to the Form
S-4. If the Parent Merger is being consummated, the Company shall use reasonable
best efforts to cause to be delivered to Parent a letter from E&Y, dated as of
the Closing Date, stating that E&Y concurs with the Company's management's
conclusion that the Company is eligible to participate in a transaction
accounted for as a pooling-of-interests under Opinion 16 of the Accounting
Principles Board.
(c) Each of the parties will use reasonable best efforts to cause the
Parent Merger to be accounted for as a "pooling-of-interests" in accordance with
GAAP and the rules and regulations of the SEC, and each party agrees that it
will not take any action that it knows, or could reasonably expect, will cause
such accounting treatment not to be obtained.
Section 6.14 Certificate of Designation; Depositary Agreement. If the
Depositary Shares are required to be issued in the Merger, prior to or as of the
Effective Time, Parent shall file with the Secretary of State of the State of
Delaware a Certificate of Designation in the form of Exhibit E hereto (as
revised in accordance with Section 2.1(b) and shall enter into the Depositary
Agreement with the Depositary.
Section 6.15 Takeover Statutes. If any "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute or regulation
is or may become applicable to the transactions contemplated hereby, each of the
parties hereto and its Board of Directors shall grant such approvals and take
all such actions as are legally permissible so that the transactions
contemplated hereby may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any such statute or regulation on the transactions contemplated hereby.
Section 6.16 Tax-Free Merger. Each of the parties will use reasonable best
efforts to cause the Applicable Transaction to qualify as a tax-free
"reorganization" under Section 368 of the Code.
Section 6.17 Name; Headquarters. After the Effective Time, the name of
Parent shall be "El Paso Energy Corporation" and the headquarters of Parent
shall continue to be located in Houston, Texas. The headquarters of the
Company's Subsidiary, Southern Natural Gas Company and the entities that as of
the date hereof are (x) Subsidiaries thereof and (y) operate natural gas
pipelines shall continue to be located in Birmingham, Alabama, after the
Effective Time.
Section 6.18 Employment Matters. (a) Parent shall or, if Section 1.2(c)
applies, shall cause Newco, to offer to enter into a termination and consulting
agreement with Ronald L. Kuehn, Jr., to become effective as of the Effective
Time, which shall be in the form of Exhibit G to this Agreement.
Section 6.19 Section 16(b). Parent shall take all such steps as may be
required to cause the transactions contemplated hereby and any other
dispositions of equity securities of the Company (including derivative
securities) or acquisitions of Parent equity securities (including derivative
securities) in connection with this Agreement by each individual who (a) is a
director or officer of the Company or (b) at the Effective Time, will become a
director or officer of Parent, to be exempt under Rule 16b-3 promulgated under
the Exchange Act.
Section 6.20 Reasonable Best Efforts. (a) Subject to the terms and
conditions of this Agreement, each party will use its reasonable best efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate
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the Applicable Transaction and the other transactions contemplated by this
Agreement as soon as practicable after the date hereof, including (i) preparing
and filing as promptly as practicable all documentation to effect all necessary
applications, notices, petitions, filings, tax ruling requests and other
documents and to obtain as promptly as practicable all consents, waivers,
licenses, orders, registrations, approvals, permits, tax rulings and
authorizations necessary or advisable to be obtained from any third party and/or
any Governmental Entity in order to consummate the Applicable Transaction or any
of the other transactions contemplated by this Agreement and (ii) taking all
reasonable steps as may be necessary to obtain all such material consents,
waivers, licenses, registrations, permits, authorizations, tax rulings, orders
and approvals. In furtherance and not in limitation of the foregoing, each party
hereto agrees to make an appropriate filing of a Notification and Report Form
pursuant to the HSR Act and any other Regulatory Law (as defined below) with
respect to the transactions contemplated hereby as promptly as practicable after
the date hereof and to supply as promptly as practicable any additional
information and documentary material that may be requested pursuant to the HSR
Act and any other Regulatory Law and to take all other actions necessary to
cause the expiration or termination of the applicable waiting periods under the
HSR Act as soon as practicable. Nothing in this Section 6.20 shall require any
of Parent and its Subsidiaries or the Company and its Subsidiaries to sell, hold
separate or otherwise dispose of or conduct their business in a specified
manner, or agree to sell, hold separate or otherwise dispose of or conduct their
business in a specified manner, or permit the sale, holding separate or other
disposition of, any assets of Parent, the Company or their respective
Subsidiaries or the conduct of their business in a specified manner, whether as
a condition to obtaining any approval from a Governmental Entity or any other
Person or for any other reason, if such sales, holdings separate of assets or
other dispositions or the conduct of their business in a specified manner,
individually or in the aggregate, is not conditioned on the Closing or would,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, assets, results of operations or condition
(financial or otherwise) of Parent and its Subsidiaries (including the Surviving
Corporation and its Subsidiaries, taken together, after giving effect to the
Applicable Transaction; it being understood, moreover, that Parent and its
Subsidiaries shall not be obligated pursuant to this Agreement to take any
action that would reasonably likely have a material adverse effect on or with
respect to Tennessee Gas Pipeline Company.
(b) Each of Parent and the Company shall, in connection with the efforts
referenced in Section 6.20(a) to obtain all requisite material approvals and
authorizations for the transactions contemplated by this Agreement under the HSR
Act or any other Regulatory Law, use its reasonable best efforts to (i)
cooperate in all respects with each other in connection with any filing or
submission and in connection with any investigation or other inquiry, including
any proceeding initiated by a party, (ii) promptly inform the other party of any
communication received by such party from, or given by such party to, the
Antitrust Division of the Department of Justice (the "DOJ") or any other
Governmental Entity and of any material communication received or given in
connection with any proceeding by a private party, in each case regarding any of
the transactions contemplated hereby, and (iii) permit the other party to review
any communication given by it to, and consult with each other in advance of any
meeting or conference with, the DOJ or any such other Governmental Entity or, in
connection with any proceeding by a private party, with any other Person, and to
the extent permitted by the DOJ or such other applicable Governmental Entity or
other Person, give the other party the opportunity to attend and participate in
such meetings and conferences. For purposes of this Agreement, "Regulatory Law"
means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the
Federal Trade Commission Act, as amended, and all other federal, state and
foreign, if any, statutes, rules, regulations, orders, decrees, administrative
and judicial doctrines and other laws that are designed or intended to prohibit,
restrict or regulate actions having the purpose or effect of monopolization or
restraint of trade or lessening of the competition.
(c) Subject to the terms and conditions of this Agreement, in furtherance
and not in limitation of the covenants of the parties contained in Sections
6.20(a) and 6.20(b), if any administrative or judicial action or proceeding,
including and proceeding by a private party, is instituted (or threatened to be
instituted) challenging any transaction contemplated by this Agreement as
violative of any Regulatory Law, each of
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Parent and the Company shall cooperate in all respects with each other and use
its respective reasonable best efforts to contest and resist any such action or
proceeding and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by this Agreement. Notwithstanding
the foregoing or any other provision of this Agreement, nothing in this Section
6.20 shall limit a party's right to terminate this Agreement pursuant to Article
VIII.
(d) If any objections are asserted with respect to the transactions
contemplated hereby under any Regulatory Law or if any suit is instituted by any
Governmental Entity or any private party challenging any of the transactions
contemplated hereby as violative of any Regulatory Law, each of Parent and the
Company shall use reasonable best efforts to resolve any such objections or
challenge as such Governmental Entity or private party may have to such
transactions under such Regulatory Law so as to permit consummation of the
transactions contemplated by this Agreement.
ARTICLE VII
Section 7.1 Conditions to Obligations of the Parties. The respective
obligation of each of the parties hereto to consummate the transactions
contemplated hereby shall be subject to the satisfaction of each of the
following conditions:
(a) Stockholders' Approval. This Agreement, Parent Merger and the
Alternative Merger shall have been approved and adopted by the requisite
vote of the stockholders of the Company in accordance with the Restated
Certificate of Incorporation of the Company and DGCL.
(b) Legality. No statute, rule, regulation or other law and no order,
decree or injunction shall have been enacted, issued, promulgated, entered
or issued by any Governmental Entity of competent jurisdiction which is in
effect and has the effect of making the consummation of the Applicable
Transaction illegal or prevents or prohibits consummation of the
transactions contemplated hereby. Each party agrees that, in the event that
any such order, decree or injunction shall be entered or issued, it shall
use all reasonable best efforts to cause such order, decree or injunction
to be lifted or vacated.
(c) HSR Act. The waiting period (or any extension thereof) under the
HSR Act applicable to transactions contemplated hereby shall have expired
or been terminated.
(d) Regulatory Consents. All waivers, consents, approvals, orders and
authorizations of, and notices, reports and filings with, Governmental
Entities necessary for the consummation of the transactions contemplated
hereby (other than those matters addressed in Section 7.1(c)) shall have
been obtained or made and shall be in full force and effect without the
imposition of any terms, conditions, restrictions or limitations, except
for the imposition of any terms, conditions, restrictions and limitations
in respect of, and failures to have obtained or made, or failures to be in
full force and effect of, such waivers, consents, approvals, orders,
authorizations, notices, reports or filings which, in the aggregate, would
not have, or reasonably be expected to have, a Parent Material Adverse
Effect or a Company Material Adverse Effect.
(e) Form S-4 Effective; State Securities Approvals. The Form S-4 shall
have become effective, and no stop order suspending the effectiveness of
the Form S-4 shall then be in effect and no proceeding for that purpose
shall have been initiated or, to the knowledge of Parent or the Company,
threatened, and all material necessary approvals and permits under state
securities or "blue sky" laws relating to the issuance of shares of Parent
Common Stock, in the event the Parent Merger is being consummated, or
Parent Common Stock and Depositary Shares, in the event of the Alternative
Merger is being consummated, shall have been obtained.
(f) NYSE Listing. The shares of Parent Common Stock, in the event the
Parent Merger is being consummated, or Parent Common Stock and Depositary
Shares, in the event the Alternative Merger is being consummated, to be
issued pursuant to the Parent Merger or the Alternative Merger,
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as applicable, shall have been duly approved for listing on the NYSE,
subject to official notice of issuance.
(g) Pooling Letters. In the event the Parent Merger is being
consummated, the Company shall have received and delivered to Parent and
Parent's independent public accountants, a letter from E&Y, dated as of the
Closing Date, stating that E&Y concurs with the Company's management's
conclusion that the Company is eligible to participate in a transaction
with Parent accounted for as a pooling-of-interests under Opinion 16 of the
Accounting Principles Board, and Parent shall have received and delivered
to the Company and the Company's independent public accountants, a letter
from PWC, dated as of the Closing Date, stating that PWC concurs with
Parent's management's conclusion that accounting for the Parent Merger as a
pooling-of-interests under Opinion 16 of the Accounting Principles Board is
appropriate if the Parent Merger is closed and consummated in accordance
with the terms hereof.
Section 7.2 Additional Conditions to Obligations of Parent. The
obligations of Parent to consummate the transactions contemplated hereby shall
also be subject to the satisfaction or waiver of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct when
made and as of the Closing Date as if made on and as of such date (provided
that such representations and warranties which are by their express
provisions made as of a specific date need be true and correct only as of
such specific date), except to the extent that any failures of such
representations and warranties to be so true and correct, in the aggregate,
would not have, or reasonably be expected to have, a Company Material
Adverse Effect (disregarding for these purposes any materiality
qualifications therein contained).
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Effective Time, except that the Company shall have performed
or complied in all respects with the covenants and agreements contained in
Section 5.1(ii).
(c) Certificate. Parent shall have received a certificate of an
executive officer of the Company that the conditions set forth in
paragraphs (a) and (b) above have been satisfied.
(d) Tax Opinions. Parent shall have received an opinion of Fried,
Frank, Harris, Shriver & Jacobson, dated as of the Closing Date, in form
and substance reasonably satisfactory to it, substantially to the effect
that, on the basis of the facts and assumptions described in the opinion,
the Applicable Transaction constitutes a tax-free reorganization under
Section 368 of the Code. In rendering such opinion, counsel may require and
rely upon representations and warranties and covenants, including those
contained herein, or in certificates of officers of Parent, the Company and
others.
Section 7.3 Additional Conditions to Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated hereby
shall also be subject to the satisfaction or waiver of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of Parent contained in this Agreement shall be true and correct when made,
and as of the Closing Date as if made on and as of such date (provided that
such representations and warranties which are expressly made as of a
specific date need be true and correct only as of such specific date),
except to the extent that any failures of such representations and
warranties to be so true and correct, in the aggregate, would not have, or
reasonably be expected to have, a Parent Material Adverse Effect
(disregarding for these purposes any materiality qualifiers therein
contained).
(b) Agreements and Covenants. Each of Parent and Merger Sub shall have
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied
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with by it on or prior to the Effective Time, except that Parent shall have
performed or complied in all respects with the covenants contained in
Section 5.2(ii).
(c) Certificate. The Company shall have received a certificate of an
executive officer of Parent that the conditions set forth in the paragraphs
(a) and (b) above have been satisfied.
(d) Tax Opinion. The Company shall have received the opinion of
Wachtell, Lipton, Rosen & Katz, dated as of the Closing Date, in form and
substance reasonably satisfactory to it, substantially to the effect that,
on the basis of the facts and assumptions described in the opinion, the
Applicable Transaction constitutes a tax-free reorganization under Section
368 of the Code. In rendering such opinion, counsel may require and rely
upon representations and covenants including those contained in this
Agreement or in certificates of officers of the parties and others.
ARTICLE VIII
Section 8.1 Termination. This Agreement may be terminated at any time
before the Effective Time, whether before or after this Agreement, the Parent
Merger and the Alternative Merger have been approved and adopted by the
stockholders of the Company or this Agreement and the Parent Merger have been
approved and adopted by the stockholders of Parent, as follows:
(a) by mutual written consent of each of Parent and the Company;
(b) by Parent or the Company, if the Effective Time shall not have
occurred on or before March 31, 2000 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section
8.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date;
(c) by Parent or the Company, if a Governmental Entity shall have
issued an order, decree or injunction or taken any other action (in each
case, which the terminating party has used reasonable best efforts to
resist, resolve or lift, as applicable, in accordance with Section 6.20)
having the effect of making the transactions contemplated hereby illegal or
permanently prohibiting the consummation thereof, and such order, decree or
injunction shall have become final and nonappealable (but only if such
party shall have used all reasonable best efforts to cause such order,
decree or injunction to be lifted or vacated in accordance with Section
6.20);
(d) by either Company or Parent, if there shall have been a material
breach by the other of any of the other's representations, warranties,
covenants or agreements contained in this Agreement, which breach would
result in the failure to satisfy one or more of the conditions set forth in
Section 7.2(a) or (b) (in the case of a breach by the Company) or Section
7.3(a) or (b) (in the case of a breach by Parent), and such breach shall be
incapable of being cured or, if capable of being cured, shall not have been
cured within 20 days after written notice thereof shall have been received
by the party alleged to be in breach;
(e) by Parent, if the Board of Directors of the Company or any
committee of the Board of Directors of the Company, whether or not
permitted pursuant to the terms hereof, (w) shall fail to reaffirm its
approval or recommendation of this Agreement, the Parent Merger and the
Alternative Merger within 15 days after a request by Parent (provided that
Parent make such request only once with respect to any Takeover Proposal),
(x) shall withdraw or modify in any manner adverse to Parent its approval
or recommendation of this Agreement, the Parent Merger and the Alternative
Merger, (y) shall approve or recommend any Takeover Proposal or Acquisition
Transaction involving the Company or (z) shall resolve to take any of the
actions specified in clause (w), (x) or (y) above;
(f) by either Parent or the Company, if the required approval and
adoption of this Agreement, the Parent Merger and the Alternative Merger by
the stockholders of the Company shall not have
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been obtained at a duly held stockholders meeting called for the purpose of
obtaining such approval, including any adjournments or postponements
thereof;
(g) by the Company, in accordance with Section 5.3(b); provided,
however, in order for the termination of this Agreement pursuant to this
Section (g) to be deemed effective, the Company shall have complied with
all provisions contained in Sections 5.3(a), (b) and (c), including the
notice provisions therein, and with applicable requirements of Section 8.2,
including the payment of the Company Termination Fee;
(h) by Parent, if a Share Acquisition Date shall have occurred
pursuant to the Company Rights Agreement and, assuming all of the rights
issued pursuant thereto shall have been exercised or exchanged for shares
of Company Common Stock, the Acquiring Person (as defined in the Company
Rights Agreement) would beneficially own (within the meaning of the Parents
Rights Agreement) 25% or more of the outstanding shares of Company Common
Stock; or
(i) by the Company, if a Stock Acquisition Date shall have occurred
pursuant to the Parent Rights Agreement and, assuming all of the rights
issued pursuant thereto shall have been exercised or exchanged for shares
of Parent Common Stock, the Acquiring Person (as defined in the Parent
Rights Agreement) would beneficially own (within the meaning of the Company
Rights Agreement) 25% or more of the outstanding shares of Parent Common
Stock.
Section 8.2 Effect of Termination. (a) (i) In the event that (x) (1) any
person shall have made a Takeover Proposal to the Company or to its stockholders
after the date hereof and thereafter this Agreement is terminated (i) by either
party pursuant to Section 8.1(b) or (ii) by either party pursuant to Section
8.1(f) and (2) within 12 months after the termination of this Agreement any
Acquisition Transaction involving the Company shall have been consummated or any
Acquisition Agreement with respect to an Acquisition Transaction involving the
Company shall have been entered into, (y) this Agreement is terminated by Parent
pursuant to Section 8.1(e) or Section 8.1(h) or (z) this Agreement is terminated
by the Company pursuant to Section 8.1(g), then, in any such case, the Company
shall in no event later than (i) the date an Acquisition Agreement is entered
into with respect to such Acquisition Transaction involving the Company, or if
no such agreement is entered into, upon the date of consummation of such
Acquisition Transaction involving the Company, in the case of a termination
described in clause (x), (ii) two days after such termination, in the case of a
termination described in the clause (y) or (iii) concurrently with such
termination, in the case of a termination described in clause (z), pay Parent a
fee of $150 million (the "Company Termination Fee"), which amount shall be
payable by wire transfer of same day funds to a bank account designated by
Parent.
(ii) In the event that (x) any person shall have made a Takeover Proposal
to the Company or its stockholders and thereafter this Agreement is terminated
by either party pursuant to Section 8.1(b) and within 12 months after such
termination any Acquisition Transaction involving the Company shall have been
consummated or any Acquisition Agreement with respect to an Acquisition
Transaction involving the Company shall have been entered into, or (y) this
Agreement is terminated by Parent pursuant to Section 8.1(e) or Section 8.1(h),
by either party pursuant to Section 8.1(f) or by the Company pursuant to Section
8.1(g), after any such termination, the Company shall reimburse Parent, promptly
after being requested to do so by Parent, for all out-of-pocket costs and
expenses incurred by Parent in connection with this Agreement and the
transactions contemplated hereby, including, without limitation, reasonable fees
and expenses of accountants, attorneys and financial advisors and reasonable
fees and expenses otherwise allocated to the Parent pursuant to Section 6.7, up
to an aggregate of $10 million.
(b)(i) In the event that (x) (1) any person shall have made a Takeover
Proposal to Parent or to its stockholders and thereafter this Agreement is
terminated by either party pursuant to Section 8.1(b) and (2) within 12 months
after the termination of this Agreement any Acquisition Transaction involving
Parent shall have been consummated or any Acquisition Agreement with respect to
an Acquisition Transaction involving Parent shall have been entered into, or (y)
this Agreement is terminated by the Company pursuant to Section 8.1(i), then, in
any such case, Parent shall in no event later than (i) the date an Acquisition
Agreement is entered into with respect to such Acquisition Transaction involving
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Parent, or if no such agreement is entered into, upon the date of consummation
of such Acquisition Transaction involving Parent in the case of a termination
described in clause (x), or (ii) two days after such termination, in the case of
a termination described in the clause (y), pay the Company a fee of $150 million
(the "Parent Termination Fee"), which amount shall be payable by wire transfer
of same day funds to a bank account designated by the Company.
(ii) In the event that (x) any person shall have made a Takeover Proposal
to Parent or its stockholders and thereafter this Agreement is terminated by
either party pursuant to Section 8.1(b) and within 12 months after such
termination any Acquisition Transaction involving Parent shall have been
consummated or any Acquisition Agreement with respect to an Acquisition
Transaction involving Parent shall have been entered into, (y) this Agreement is
terminated by the Company pursuant to Section 8.1(i), after any such
termination, Parent shall reimburse the Company, promptly after being requested
to do so by the Company, for all out-of-pocket costs and expenses incurred by
the Company in connection with this Agreement and the transactions contemplated
hereby, including, without limitation, reasonable fees and expenses of
accountants, attorneys and financial advisors and reasonable fees and expenses
otherwise allocated to the Company pursuant to Section 6.7, up to an aggregate
of $10 million.
(c) Each of the parties acknowledges that the agreements contained in this
Section 8.2 are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, the parties would not enter into
this Agreement; accordingly, if either party fails to promptly pay the amount
due from it pursuant to this Section 8.2, and in order to obtain such payment
the other party commences a suit which results in a judgment for the fees and
expenses set forth in this Section 8.2, the other party shall pay to the party
bringing such suit its costs and expenses (including reasonable attorneys' fees)
in connection with such suit.
(d) In the event of termination of this Agreement pursuant to this Article
VIII, this Agreement (other than as set forth in Section 9.1) shall become void
and of no effect with no liability (other than as set forth in this Section 8.2)
on the part of any party hereto; provided, however, no such termination shall
relieve any party hereto from any liability for damages resulting from any
willful or intentional breach of this Agreement.
Section 8.3 Amendment. This Agreement may be amended by the parties hereto
pursuant to action of their respective Boards of Directors, at any time before
or after approval of the matters and transactions contemplated hereby by the
stockholders of Parent and the Company and prior to the Effective Time, but
after such approvals, no such amendment shall be made which, by law or in
accordance with the rules of any relevant stock exchange, requires further
approval by such stockholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time,
any party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties of the other parties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions for such party's benefit
contained herein. Any agreement to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by a duly authorized
officer of the party to be bound thereby. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE IX
Section 9.1 Non-Survival of Representations, Warranties and Agreements.
The representations, warranties, covenants and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.1, as the case may be, except that (a) the agreements set
forth in Sections 6.9 and 6.10 and such other agreements to be performed in
whole or in part after the
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Effective Time shall survive the Effective Time, and (b) the agreements set
forth in Sections 6.7, 6.8(b), 8.2 and 8.3 and this Article IX shall survive
termination indefinitely.
Section 9.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS CONFLICT OF LAWS RULES OR PRINCIPLES.
Section 9.3 Notices. All notices or other communications under this
Agreement shall be in writing and shall be deemed given (a) on the date of
delivery, if delivered in person or by telecopy or facsimile (upon confirmation
of receipt), (b) on the first business day following the date of dispatch, if
delivered by a recognized next-day courier service, or (c) on the seventh
business day following the date of mailing, if delivered by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
William A. Smith, Esq.
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35203
Telecopy No: (205) 325-7444
With a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Seth Kaplan, Esq.
Telecopy No.: (212) 403-2000
If to Parent:
Britton White, Jr., Esq.
El Paso Energy Corporation
1001 Louisiana
Houston, Texas 77002
Telecopy No: (713) 420-4993
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Gary P. Cooperstein, Esq.
Warren de Wied, Esq.
Telecopy No.: (212) 859-4000
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
Section 9.4 Certain Definitions; Interpretation. (a) For purposes of this
Agreement, the following terms shall have the following meanings:
(i) "Company Material Adverse Effect" means any changes in or effects
that in the aggregate together with all other changes and effects (x) are
materially adverse to the business, assets, liabilities, results of
operations or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole, or (y) will prevent the Company's
consummating the transactions contemplated hereby or materially delay the
Company's ability to consummate the transactions contemplated hereby,
provided that, in determining whether a Company Material Adverse Effect has
occurred, changes or effects relating to the natural gas pipeline industry
and/or the oil and gas exploration and production industry and/or any other
industry in which the Company or its
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Subsidiaries are engaged generally or to United States or global economic
conditions or financial markets in general, shall not be considered.
(ii) "Parent Material Adverse Effect" means any changes in or effects
that in the aggregate together with all other changes and effects (x) are
materially adverse to the business, assets, liabilities, results of
operations or condition (financial or otherwise) of Parent and its
Subsidiaries taken as a whole or (y) will prevent Parent's consummating the
transactions contemplated hereby or materially delay Parent's ability to
consummate the transactions contemplated hereby, provided that, in
determining whether a Parent Material Adverse Effect has occurred, changes
or effects relating to the natural gas pipeline industry and/or the oil and
gas exploration and production industry and/or any other industry in which
Parent or its Subsidiaries are engaged generally or to United States or
global economic conditions or financial markets in general, shall not be
considered.
(iii) "affiliate" of a Person means (for all purposes other than
Section 6.12 in which Section "affiliate" shall have the meaning designated
therein) a Person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person.
(iv) "control" (including the terms "controlled by" and "under common
control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of stock, as trustee or executor, by contract
or credit arrangement or otherwise.
(v) "knowledge" of any party shall mean the actual knowledge of the
executive officers of that party.
(vi) "Person" and "person" means an individual, corporation,
partnership, limited liability company, association, trust, unincorporated
organization, entity or group (as defined in the Exchange Act).
(vii) "Subsidiary," of a Person means any corporation or other legal
entity of which such Person (either alone or through or together with any
other Subsidiary or Subsidiaries) is the general partner or managing entity
or of which 50% or more of the capital stock or other equity interests the
holders of which are generally entitled to vote for the election of the
board of directors or others performing similar functions of such
corporation or other legal entity is directly or indirectly owned or
controlled by such Person (either alone or through or together with any
other Subsidiary or Subsidiaries).
(viii) "Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A of the Code), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or
other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not, and including any liability for
the Taxes of any Person under Treas. Reg. sec. 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or successor,
by contract, or otherwise.
(b) When a reference is made in this Agreement to Articles, Sections,
Disclosure Letters or Exhibits, such reference is to an Article or a Section of,
or an Exhibit to, this Agreement, unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be understood to be followed by the words "without
limitation."
Section 9.5 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.6 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this
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Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Upon a determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the maximum extent possible.
Section 9.7 Assignment; Binding Effect; No Third Party Beneficiaries.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of Parent and the Company. Subject
to the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
except for Section 6.9 (Insurance; Indemnity), nothing in this Agreement,
express or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
Section 9.8 ENFORCEMENT. THE PARTIES HERETO AGREE THAT IRREPARABLE DAMAGE
WOULD OCCUR IN THE EVENT THAT ANY OF THE PROVISIONS OF THIS AGREEMENT WERE NOT
PERFORMED IN ACCORDANCE WITH THEIR SPECIFIC TERMS OR WERE OTHERWISE BREACHED. IT
IS ACCORDINGLY AGREED THAT, SUBJECT TO THE NEXT SENTENCE HEREOF, THE PARTIES
SHALL BE ENTITLED TO AN INJUNCTION OR INJUNCTIONS TO PREVENT BREACHES OF THIS
AGREEMENT AND TO ENFORCE SPECIFICALLY THE TERMS AND PROVISIONS HEREOF IN ANY
COURT OF THE UNITED STATES OR ANY STATE HAVING JURISDICTION, THIS BEING IN
ADDITION TO ANY OTHER REMEDY TO WHICH THEY ARE ENTITLED AT LAW OR IN EQUITY.
EACH OF THE PARTIES HERETO (I) CONSENTS TO SUBMIT ITSELF TO THE PERSONAL
JURISDICTION OF ANY FEDERAL COURT LOCATED IN THE STATE OF DELAWARE OR ANY
DELAWARE STATE COURT IN THE EVENT ANY DISPUTE ARISES OUT OF THIS AGREEMENT OR
ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (II) AGREES THAT IT
SHALL NOT ATTEMPT TO DENY OR DEFEAT SUCH PERSONAL JURISDICTION BY MOTION OR
OTHER REQUEST FOR LEAVE FROM ANY SUCH COURT, AND (III) AGREES THAT IT SHALL NOT
BRING ANY ACTION RELATING TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT IN ANY COURT OTHER THAN A FEDERAL COURT SITTING
IN THE STATE OF DELAWARE OR A DELAWARE STATE COURT.
Section 9.9 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof, each signed by less than all, but together signed by all of the parties
hereto.
Section 9.10 Entire Agreement. This Agreement, the Confidentiality
Agreement and the Stock Option Agreements constitute the entire agreement
between the parties hereto and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
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IN WITNESS WHEREOF, the Company and Parent have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first written above.
SONAT INC.
By: /s/ RONALD L. KUEHN, JR.
----------------------------------
Name: Ronald L. Kuehn, Jr.
Title: Chairman, President and
Chief Executive Officer
EL PASO ENERGY CORPORATION
By:
/s/ BRITTON WHITE JR.
----------------------------------
Name: Britton White Jr.
Title: Executive Vice President
A-54
<PAGE> 173
ANNEX B
AMENDED AND RESTATED
STOCK OPTION AGREEMENT
AMENDED AND RESTATED STOCK OPTION AGREEMENT, dated as of March 13, 1999
(this "Agreement"), by and between SONAT INC., a Delaware corporation (the
"Company"), and EL PASO ENERGY CORPORATION, a Delaware corporation ("Parent").
RECITALS
A. The Company and Parent have entered into an Agreement and Plan of
Reorganization and Merger, dated as of the date hereof (the "Merger Agreement"),
providing for, among other things, a business combination between Parent and the
Company.
B. As a condition and inducement to Parent's willingness to enter into the
Merger Agreement, Parent has requested that the Company agree, and the Company
has agreed, to grant Parent the option contemplated hereby.
C. Capitalized terms not defined herein shall have the meanings set forth
in the Merger Agreement.
D. This Agreement and the Merger Agreement are being entered into
simultaneously.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
Company and Parent agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth
herein, the Company hereby grants to Parent an irrevocable option (the
"Option") to purchase up to 21,899,515 (as adjusted as set forth herein)
shares (the "Option Shares") of the Company's Common Stock, par value $1.00
per share ("Company Stock"), at a purchase price of $27.238 (as adjusted as
set forth herein) per Option Share (the "Purchase Price").
2. Exercise of Option. (a) Parent may exercise the Option, in whole or
in part, at any time or from time to time after the occurrence of any event
as a result of which Parent is entitled to receive the Company Termination
Fee pursuant to Section 8.2 of the Merger Agreement and the Merger
Agreement is being or has been terminated (an "Exercise Event"); provided,
however, that except as provided in the last sentence of this Section 2(a),
the Option shall terminate and be of no further force and effect upon the
earliest to occur of (A) the Effective Time and (B) nine months after the
first occurrence of an Exercise Event. Notwithstanding the termination of
the Option, Parent shall be entitled to purchase the Option Shares if it
has exercised the Option in accordance with the terms hereof prior to the
termination of the Option and the termination of the Option shall not
affect any rights hereunder which by their terms do not terminate or expire
prior to or as of such termination.
(b) Notice of Exercise. In the event that Parent wishes to exercise
the Option, it shall send to the Company a written notice (the date of each
such notice being herein referred to as a "Notice Date") to that effect,
which notice also specifies a date not earlier than three business days nor
later than 30 business days from the Notice Date for the closing of such
purchase (an "Option Closing Date"); provided, however, that (i) if the
closing of a purchase and sale pursuant to the Option (an "Option Closing")
cannot be consummated by reason of any applicable judgment, decree, order,
law or regulation, the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which such restriction on
consummation has expired or been terminated and (ii) without limiting the
foregoing, if prior notification to or approval of any regulatory authority
is required in connection with such purchase, Parent and the Company shall
promptly file the required notice or application for approval and shall
cooperate in the expeditious filing of such notice or application, and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which, as the case may be, (A) any required
notification period has expired
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<PAGE> 174
or been terminated or (B) any required approval has been obtained, and in
either event, any requisite waiting period has expired or been terminated.
Each of Parent and the Company agrees to use commercially reasonable
efforts to cooperate with and provide information to the other, for the
purpose of any required notice or application for approval. Any exercise of
the Option shall be deemed to occur on the Notice Date relating thereto.
The place of any Option Closing shall be at the offices of Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York, and the
time of the Option Closing shall be 10:00 a.m. (Eastern Time) on the
applicable Option Closing Date.
3. Payment and Delivery of Certificates. (a) At any Option Closing,
Parent shall pay to the Company in immediately available funds by wire
transfer to a bank account designated in writing by the Company an amount
equal to the Purchase Price multiplied by the number of Option Shares for
which the Option is being exercised; provided, that failure or refusal of
the Company to designate a bank account shall not preclude Parent from
exercising the Option, in whole or in part.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), the Company shall
deliver to Parent a certificate or certificates representing the Option
Shares to be purchased at such Option Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever. If at the time of issuance of the Option Shares pursuant to the
exercise of the Option hereunder, the Company shall not have redeemed the
rights issued pursuant to the Company Rights Agreement (the "Company
Rights"), or shall have issued any similar securities, then each Option
Share issued pursuant to such exercise shall be accompanied by a
corresponding Company Right or new rights with terms substantially the same
as and at least as favorable to Parent as are provided under the Company
Rights Agreement or any similar agreement then in effect.
(c) Restrictive Legend. Certificates for the Option Shares delivered
at any Option Closing shall have typed or printed thereon a restrictive
legend which shall read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
It is understood and agreed that the foregoing legend shall be removed by
delivery of substitute certificate(s) without such legend upon the sale of
the Option Shares pursuant to a registered public offering or Rule 144
under the Securities Act or any other sale as a result of which such legend
is no longer required.
4. Adjustment upon Changes in Capitalization, Etc. (a) In the event of
any change in Company Stock by reason of a stock dividend, split-up,
merger, recapitalization, combination, exchange of shares or similar
transaction, the type and number of shares or securities subject to the
Option, and the Purchase Price therefor, shall be adjusted appropriately,
and proper provision shall be made in the agreements governing such
transaction, so that Parent shall receive upon exercise of the Option the
number and class of shares or other securities or property that Parent
would have received in respect of Company Stock if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event that the Company enters into an
agreement (i) to consolidate with or merge into any person, other than
Parent or one of its subsidiaries, and the Company shall not be the
continuing or surviving corporation in such consolidation or merger, (ii)
to permit any person, other than Parent or one of its subsidiaries, to
merge into or consolidate with the Company and the Company shall be the
continuing or surviving corporation, but in connection with such merger or
consolidation, the shares of Company Stock outstanding immediately prior to
the consummation of such merger or consolidation
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<PAGE> 175
shall be changed into or exchanged for stock or other securities of the
Company or any other person or cash or any other property, or the shares of
Company Stock outstanding immediately prior to the consummation of such
merger or consolidation shall, after such merger or consolidation,
represent less than 50% of the outstanding voting securities of the merged
or consolidated company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Parent or one of
its subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set
forth herein, be converted into, or exchanged for, an option with identical
terms appropriately adjusted to acquire the number and class of shares or
other securities, cash or property that Parent would have received in
respect of Company Stock if the Option had been exercised immediately prior
to such consolidation, merger, sale or transfer, or the record date
therefor, as applicable.
(c) If, prior to the termination of the Option in accordance with
Section 2, the Company enters into any agreement (x) pursuant to which all
outstanding shares of Company Stock are to be purchased for, or converted
into the right to receive in whole or in part (other than in respect of
fractional shares) cash or (y) with respect to any transaction described in
clauses (i), (ii) and (iii) of paragraph (b) (each of (x) and (y), a
"Transaction"), and, in the case of each of clauses (x) and (y), the Option
is then exercisable, the Company covenants that proper provision shall be
made in such agreement to provide that, if the Option shall not theretofore
have been exercised, then upon the consummation of the Transaction (which
in the case of a Transaction involving a tender offer shall be when shares
of Company Stock are accepted for payment), Parent shall have the right, at
its election, by not less than two business days' prior written notice to
the Company, to receive in exchange for the cancellation of the Option an
amount in cash equal to the Spread. For purposes of this Agreement, the
term "Spread" means the number of Option Shares multiplied by the excess of
(A) the higher of the closing sales price per share of Company Stock on the
principal securities exchange or quotation system on which the Company
Stock is then listed or traded, as reported by The Wall Street Journal, on
the day (i) the average of the closing prices of the shares of Company
Stock as reported by The Wall Street Journal over the ten-trading day
period beginning on the trading day immediately following the announcement
of such agreement or (ii) the average of the closing prices of the shares
of Company Stock as reported by The Wall Street Journal over the ten-
trading day period ending on the trading day immediately prior to the
consummation of such Transaction, over (B) the Purchase Price.
Notwithstanding the foregoing, the amount of the Spread, when added to any
Company Termination Fee paid or payable to Parent, shall not exceed $175
million.
(d) Following exercise of the Option by Parent, in the event that
Parent sells, pledges or otherwise disposes of (including, without
limitation, by merger or exchange) any of the Option Shares (a "Sale"),
then:
(i) any Company Termination Fee due and payable by the Company
following such time shall be reduced by an amount, if any, equal to the
excess of (1) the total of (A) the Company Termination Fee and (B) the
excess of (w) the aggregate amounts received (whether in cash,
securities or otherwise) by Parent in all such Sales, over (x) the
aggregate Purchase Price of the Option Shares sold in such Sales (such
excess in this sub-clause (B) being the "Offset Amounts") over (2) $175
million; and
(ii) if the Company has paid to Parent the Company Termination Fee
prior to the Sale, then Parent shall immediately remit to the Company,
as additional Purchase Price for the Option Shares, the excess, if any,
of (y) the total of the Termination Fee and the Offset Amounts of all
Sales over (z) $175 million.
(e) Notwithstanding anything to the contrary in this Agreement or the
Merger Agreement, in no event shall the aggregate of any Company
Termination Fee, all Offset Amounts and the Spread exceed $175 million.
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<PAGE> 176
5. Covenants of the Company and Parent. (a) The Company covenants (i)
to maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Company Stock so that the Option may be
fully exercised without additional authorization of Company Stock after
giving effect to all other options, warrants, convertible securities and
other rights of third parties to purchase shares of Company Stock; (ii) not
to seek to avoid the observance or performance of any of the covenants,
agreements or conditions to be observed or performed hereunder by the
Company and not to take any action which would cause any of its
representations or warranties not to be true; and (iii) not to engage in
any action or omit to take any action which would have the effect of
preventing or disabling the Company from delivering the Option Shares to
the Parent upon exercise of the Option or otherwise performing its
obligations under this Agreement.
(b) Parent covenants not to sell, assign, transfer or otherwise
dispose of the Option, any part thereof, or any of its other rights
hereunder to any third party without the prior written consent of the
Company which consent shall not be unreasonably withheld or delayed. Parent
may offer or sell Option Shares only pursuant to a registration under the
Securities Act or an exemption therefrom.
6. Listing. If Company Stock or any other securities to be acquired
upon exercise of the Option are then listed on the NYSE (or any other
national securities exchange or national securities quotation system), the
Company, upon the request of Parent, shall promptly file an application to
list the shares of Company Stock or other securities to be acquired upon
exercise of the Option on the NYSE (and any such other national securities
exchange or national securities quotation system) and shall use reasonable
best efforts to obtain approval of such listing as promptly as practicable.
7. Loss or Mutilation. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation
of this Agreement, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and
cancellation of this Agreement, if mutilated, the Company shall execute and
deliver a new Agreement of like tenor and date. Any such new Agreement
executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not the Agreement so
lost, stolen, destroyed, or mutilated shall at any time be enforceable by
anyone.
8. Registration Rights. The Company shall, if requested by Parent at
any time and from time to time within two years after the date of first
exercise of the Option, as expeditiously as possible prepare and file up to
two registration statements under the Securities Act if such registration
is necessary in order to permit the sale or other disposition of any or all
securities that have been acquired by exercise by Parent of the Option, in
accordance with the intended method of sale or other disposition stated by
Parent, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision; and the Company shall use
commercially reasonable efforts to qualify such securities under any
applicable state securities laws. Parent agrees to use reasonable best
efforts to cause, and to cause any underwriters of any sale or other
disposition to cause, any sale or other disposition pursuant to such
registration statement to be effected on a widely distributed basis. The
Company shall use reasonable best efforts to cause each such registration
statement to become effective, to obtain all consents or waivers of other
parties which are required therefor, and to keep such registration
statement effective for such period not in excess of 90 calendar days from
the day such registration statement first becomes effective as may be
reasonably necessary to effect such sale or other disposition. The
obligations of the Company to file a registration statement and to maintain
its effectiveness may be suspended for one or more periods of time not
exceeding 90 calendar days in the aggregate with respect to any
registration statement if the Board of Directors of the Company shall have
determined that the filing of such registration statement or the
maintenance of its effectiveness would require disclosure of nonpublic
information that would materially and adversely affect the Company or would
interfere with a planned merger, sale of material assets, recapitalization
or other significant corporate action (other than the issuance of equity
securities). Any registration statement prepared and filed under this
Section, and any sale covered thereby, shall be at the Company's expense
except for underwriting discounts or commissions and brokers' fees, which
shall be borne solely by Parent. Parent shall provide in writing all
information reasonably requested by the
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<PAGE> 177
Company for inclusion in any registration statement to be filed hereunder.
If, during the time periods referred to in the first sentence of this
Section, the Company effects a registration under the Securities Act of the
Company's equity securities for its own account or for any other of its
stockholders (other than on Form S-4 or Form S-8, or any successor form),
it shall allow Parent the right to participate in such registration;
provided that, if the managing underwriters of such offering advise the
Company that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering on a commercially reasonable basis, priority shall be given to the
securities intended to be included therein by the Company for its own
account and, thereafter, the Company shall include the securities requested
to be included therein by Parent pro rata with the securities intended to
be included therein by other stockholders of the Company. In connection
with any registration pursuant to this Section, Parent and the Company
shall provide each other and any underwriter of the offering with customary
representations, warranties, covenants, indemnification, and contribution
in connection with such registration.
9. Miscellaneous.
(a) Fees and Expenses. Except as otherwise provided in the Merger
Agreement, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be borne by the
party incurring such expenses.
(b) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
ITS CONFLICT OF LAWS RULES OR PRINCIPLES.
(d) Notices. All notices or other communications under this Agreement
shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, AL 35203
Attention: William A. Smith, Esq.
Telecopy No.: (205) 325-7444
With a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Seth Kaplan, Esq.
Telecopy No.: (212) 403-2000
If to Parent:
El Paso Energy Corporation
1001 Louisiana Street
Houston, TX 77002
Attention: Britton White, Jr., Esq.
Telecopy No.: (713) 420-4993
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<PAGE> 178
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Gary P. Cooperstein, Esq.
Warren de Wied, Esq.
Telecopy No.: (212) 859-4000
or to such other address as any party may have furnished to the other
parties in writing in accordance with this Section.
(e) Assignment; Binding Effect; No Third Party Beneficiaries. Neither
this Agreement nor any of the rights, interests or obligations hereunder
shall be sold, assigned, disposed of or otherwise transferred by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this
Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
(f) Further Assurances. In the event of any exercise of the Option by
Parent, the Company and Parent shall execute and deliver all such documents
and instruments and take all such further action that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
(g) Survival. All the Company's representations, warranties and
covenants contained herein shall survive each Option Closing.
(h) ENFORCEMENT. THE PARTIES HERETO AGREE THAT IRREPARABLE DAMAGE
WOULD OCCUR IN THE EVENT THAT ANY OF THE PROVISIONS OF THIS AGREEMENT WERE
NOT PERFORMED IN ACCORDANCE WITH THEIR SPECIFIC TERMS OR WERE OTHERWISE
BREACHED. IT IS ACCORDINGLY AGREED THAT SUBJECT TO THE NEXT SENTENCE, THE
PARTIES SHALL BE ENTITLED TO AN INJUNCTION OR INJUNCTIONS TO PREVENT
BREACHES OF THIS AGREEMENT AND TO ENFORCE SPECIFICALLY THE TERMS AND
PROVISIONS HEREOF IN ANY COURT OF THE UNITED STATES OR ANY STATE HAVING
JURISDICTION, THIS BEING IN ADDITION TO ANY OTHER REMEDY TO WHICH THEY ARE
ENTITLED AT LAW OR IN EQUITY. EACH OF THE PARTIES HERETO (I) CONSENTS TO
SUBMIT ITSELF TO THE PERSONAL JURISDICTION OF ANY FEDERAL COURT LOCATED IN
THE STATE OF DELAWARE OR ANY DELAWARE STATE COURT IN THE EVENT ANY DISPUTE
ARISES OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT, (II) AGREES THAT IT SHALL NOT ATTEMPT TO DENY OR DEFEAT
SUCH PERSONAL JURISDICTION BY MOTION OR OTHER REQUEST FOR LEAVE FROM ANY
SUCH COURT, AND (III) AGREES THAT IT SHALL NOT BRING ANY ACTION RELATING TO
THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN
ANY COURT OTHER THAN A FEDERAL COURT SITTING IN THE STATE OF DELAWARE OR A
DELAWARE STATE COURT.
(i) Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute
one and the same instrument. Each counterpart may consist of a number of
copies hereof each signed by less than all, but together signed by all of
the parties hereto.
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<PAGE> 179
IN WITNESS WHEREOF, the Company and Parent have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first written above.
SONAT INC.
By: /s/ RONALD L. KUEHN, JR.
----------------------------------
Name: Ronald L. Kuehn, Jr.
Title: Chairman, President and
Chief Executive Officer
EL PASO ENERGY CORPORATION
By:
/s/ BRITTON WHITE JR.
----------------------------------
Name: Britton White Jr.
Title: Executive Vice President
B-7
<PAGE> 180
ANNEX C
AMENDED AND RESTATED
STOCK OPTION AGREEMENT
AMENDED AND RESTATED STOCK OPTION AGREEMENT, dated as of March 13, 1999
(this "Agreement"), by and between SONAT INC., a Delaware corporation (the
"Company"), and EL PASO ENERGY CORPORATION, a Delaware corporation ("Parent").
RECITALS
A. The Company and Parent have entered into an Agreement and Plan of
Reorganization and Merger, dated as of the date hereof (the "Merger Agreement"),
providing for, among other things, a business combination between Parent and the
Company.
B. As a condition and inducement to the Company's willingness to enter into
the Merger Agreement, the Company has requested that Parent agree, and Parent
has agreed, to grant the Company the option contemplated hereby.
C. Capitalized terms not defined herein shall have the meanings set forth
in the Merger Agreement.
D. This Agreement and the Merger Agreement are being entered into
simultaneously.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
Company and Parent agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth
herein, Parent hereby grants to the Company an irrevocable option (the
"Option") to purchase up to 24,349,638 (as adjusted as set forth herein)
shares (the "Option Shares") of Parent's Common Stock, par value $3.00 per
share ("Parent Stock"), at a purchase price of $37.725 (as adjusted as set
forth herein) per Option Share (the "Purchase Price").
2. Exercise of Option. (a) The Company may exercise the Option, in
whole or in part, at any time or from time to time after the occurrence of
any event as a result of which the Company is entitled to receive the
Parent Termination Fee pursuant to Section 8.2 of the Merger Agreement if
the Merger Agreement is being or has been terminated (an "Exercise Event");
provided, however, that except as provided in the last sentence of this
Section 2(a), the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Time and (B) nine
months after the first occurrence of an Exercise Event. Notwithstanding the
termination of the Option, the Company shall be entitled to purchase the
Option Shares if it has exercised the Option in accordance with the terms
hereof prior to the termination of the Option and the termination of the
Option shall not affect any rights hereunder which by their terms do not
terminate or expire prior to or as of such termination.
(b) Notice of Exercise. In the event that the Company wishes to
exercise the Option, it shall send to Parent a written notice (the date of
each such notice being herein referred to as a "Notice Date") to that
effect, which notice also specifies a date not earlier than three business
days nor later than 30 business days from the Notice Date for the closing
of such purchase (an "Option Closing Date"); provided, however, that (i) if
the closing of a purchase and sale pursuant to the Option (an "Option
Closing") cannot be consummated by reason of any applicable judgment,
decree, order, law or regulation, the period of time that otherwise would
run pursuant to this sentence shall run instead from the date on which such
restriction on consummation has expired or been terminated and (ii) without
limiting the foregoing, if prior notification to or approval of any
regulatory authority is required in connection with such purchase, Parent
and the Company shall promptly file the required notice or application for
approval and shall cooperate in the expeditious filing of such notice or
application, and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which, as the case may be,
(A) any required notification period has expired or been terminated or (B)
any required approval has been obtained, and in either event, any requisite
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<PAGE> 181
waiting period has expired or been terminated. Each of Parent and the
Company agrees to use commercially reasonable efforts to cooperate with and
provide information to the other, for the purpose of any required notice or
application for approval. Any exercise of the Option shall be deemed to
occur on the Notice Date relating thereto. The place of any Option Closing
shall be at the offices of Fried, Frank, Harris, Shriver & Jacobson, One
New York Plaza, New York, New York, and the time of the Option Closing
shall be 10:00 a.m. (Eastern Time) on the applicable Option Closing Date.
3. Payment and Delivery of Certificates. (a) At any Option Closing,
the Company shall pay to Parent in immediately available funds by wire
transfer to a bank account designated in writing by Parent an amount equal
to the Purchase Price multiplied by the number of Option Shares for which
the Option is being exercised; provided, that failure or refusal of Parent
to designate a bank account shall not preclude the Company from exercising
the Option, in whole or in part.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), Parent shall
deliver to the Company a certificate or certificates representing the
Option Shares to be purchased at such Option Closing, which Option Shares
shall be free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever. If at the time of issuance of the Option Shares
pursuant to the exercise of the Option hereunder Parent shall not have
redeemed the rights issued pursuant to the Parent Rights Agreement (the
"Parent Rights"), or shall have issued any similar securities, then each
Option Share issued pursuant to such exercise shall be accompanied by a
corresponding Parent Right or new rights with terms substantially the same
as and at least as favorable to the Company as are provided under the
Parent Rights Agreement or any similar agreement then in effect.
(c) Restrictive Legend. Certificates for the Option Shares delivered
at any Option Closing shall have typed or printed thereon a restrictive
legend which shall read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
It is understood and agreed that the foregoing legend shall be removed by
delivery of substitute certificate(s) without such legend upon the sale of
the Option Shares pursuant to a registered public offering or Rule 144
under the Securities Act or any other sale as a result of which such legend
is no longer required.
4. Adjustment upon Changes in Capitalization, Etc. (a) In the event of
any change in Parent Stock by reason of a stock dividend, split-up, merger,
recapitalization, combination, exchange of shares or similar transaction,
the type and number of shares or securities subject to the Option, and the
Purchase Price therefor, shall be adjusted appropriately, and proper
provision shall be made in the agreements governing such transaction, so
that the Company shall receive upon exercise of the Option the number and
class of shares or other securities or property that the Company would have
received in respect of Parent Stock if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event that Parent enters into an
agreement (i) to consolidate with or merge into any person, other than the
Company or one of its subsidiaries, and Parent shall not be the continuing
or surviving corporation in such consolidation or merger, (ii) to permit
any person, other than the Company or one of its subsidiaries, to merge
into or consolidate with Parent and Parent shall be the continuing or
surviving corporation, but in connection with such merger or consolidation,
the shares of Parent Stock outstanding immediately prior to the
consummation of such merger or consolidation shall be changed into or
exchanged for stock or other securities of Parent or any other person or
cash or any other
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property, or the shares of Parent Stock outstanding immediately prior to
the consummation of such merger or consolidation shall, after such merger
or consolidation, represent less than 50% of the outstanding voting
securities of the merged or consolidated company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person,
other than the Company or one of its subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provision
so that the Option shall, upon the consummation of any such transaction and
upon the terms and conditions set forth herein, be converted into, or
exchanged for, an option with identical terms appropriately adjusted to
acquire the number and class of shares or other securities, cash or
property that the Company would have received in respect of Parent Stock if
the Option had been exercised immediately prior to such consolidation,
merger, sale or transfer, or the record date therefor, as applicable.
(c) If, prior to the termination of the Option in accordance with
Section 2, Parent enters into any agreement (x) pursuant to which all
outstanding shares of Parent Stock are to be purchased for, or converted
into the right to receive in whole or in part (other than in respect of
fractional shares) cash or (y) with respect to any transaction described in
clauses (i), (ii) and (iii) of paragraph (b) (each of (x) and (y), a
"Transaction"), and, in the case of each of clauses (x) and (y), the Option
is then exercisable, Parent covenants that proper provision shall be made
in such agreement to provide that, if the Option shall not theretofore have
been exercised, then upon the consummation of the Transaction (which in the
case of a Transaction involving a tender offer shall be when shares of
Parent Stock are accepted for payment), the Company shall have the right,
at its election, by not less than two business days' prior written notice
to Parent, to receive in exchange for the cancellation of the Option an
amount in cash equal to the Spread. For purposes of this Agreement, the
term "Spread" means the number of Option Shares multiplied by the excess of
(A) the higher of the closing sales price per share of Parent Stock on the
principal securities exchange or quotation system on which the Parent Stock
is then listed or traded, as reported by The Wall Street Journal, on the
day (i) the average of the closing prices of the shares of Parent Stock as
reported by The Wall Street Journal over the ten-trading day period
beginning on the trading day immediately following the announcement of such
agreement or (ii) the average of the closing prices of the shares of Parent
Stock as reported by The Wall Street Journal over the ten-trading day
period ending on the trading day immediately prior to the consummation of
such Transaction, over (B) the Purchase Price. Notwithstanding the
foregoing, the amount of the Spread, when added to any Parent Termination
Fee paid or payable to the Company, shall not exceed $175 million.
(d) Following exercise of the Option by the Company, in the event that
the Company sells, pledges or otherwise disposes of (including, without
limitation, by merger or exchange) any of the Option Shares (a "Sale"),
then:
(i) any Parent Termination Fee due and payable by Parent following
such time shall be reduced by an amount, if any, equal to the excess of
(1) the total of (A) the Parent Termination Fee and (B) the excess of
(w) the aggregate amounts received (whether in cash, securities or
otherwise) by the Company in all such Sales, over (x) the aggregate
Purchase Price of the Option Shares sold in such Sales (such excess in
this sub-clause (B) being the "Offset Amounts") over (2) $175 million;
and
(ii) if Parent has paid to the Company the Parent Termination Fee
prior to the Sale, then the Company shall immediately remit to Parent,
as additional Purchase Price for the Option Shares, the excess, if any,
of (y) the total of the Parent Termination Fee and the Offset Amounts of
all Sales over (z) $175 million.
(e) Notwithstanding anything to the contrary in this Agreement or the
Merger Agreement, in no event shall the aggregate of any Parent Termination
Fee, all Offset Amounts and the Spread exceed $175 million.
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5. Covenants of the Company and Parent. (a) Parent covenants (i) to
maintain, free from preemptive rights, sufficient authorized but unissued
or treasury shares of Parent Stock so that the Option may be fully
exercised without additional authorization of Parent Stock after giving
effect to all other options, warrants, convertible securities and other
rights of third parties to purchase shares of Parent Stock; (ii) not to
seek to avoid the observance or performance of any of the covenants,
agreements or conditions to be observed or performed hereunder by Parent
and not to take any action which would cause any of its representations or
warranties not to be true; and (iii) not to engage in any action or omit to
take any action which would have the effect of preventing or disabling
Parent from delivering the Option Shares to the Company upon exercise of
the Option or otherwise performing its obligations under this Agreement.
(b) The Company covenants not to sell, assign, transfer or otherwise
dispose of the Option, any part thereof, or any of its other rights
hereunder to any third party without the prior written consent of Parent
which consent shall not be unreasonably withheld or delayed. The Company
may offer or sell Option Shares only pursuant to a registration under the
Securities Act or an exemption therefrom.
6. Listing. If Parent Stock or any other securities to be acquired
upon exercise of the Option are then listed on the NYSE (or any other
national securities exchange or national securities quotation system),
Parent, upon the request of the Company, shall promptly file an application
to list the shares of Parent Stock or other securities to be acquired upon
exercise of the Option on the NYSE (and any such other national securities
exchange or national securities quotation system) and shall use reasonable
best efforts to obtain approval of such listing as promptly as practicable.
7. Loss or Mutilation. Upon receipt by Parent of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Parent shall execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Parent,
whether or not the Agreement so lost, stolen, destroyed, or mutilated shall
at any time be enforceable by anyone.
8. Registration Rights. Parent shall, if requested by the Company at
any time and from time to time within two years after the date of first
exercise of the Option, as expeditiously as possible prepare and file up to
two registration statements under the Securities Act if such registration
is necessary in order to permit the sale or other disposition of any or all
securities that have been acquired by exercise by the Company of the
Option, in accordance with the intended method of sale or other disposition
stated by the Company, including a "shelf" registration statement under
Rule 415 under the Securities Act or any successor provision; and Parent
shall use reasonable best efforts to qualify such securities under any
applicable state securities laws. The Company agrees to use reasonable best
efforts to cause, and to cause any underwriters of any sale or other
disposition to cause, any sale or other disposition pursuant to such
registration statement to be effected on a widely distributed basis. Parent
shall use reasonable best efforts to cause each such registration statement
to become effective, to obtain all consents or waivers of other parties
which are required therefor, and to keep such registration statement
effective for such period not in excess of 90 calendar days from the day
such registration statement first becomes effective as may be reasonably
necessary to effect such sale or other disposition. The obligations of the
Parent to file a registration statement and to maintain its effectiveness
may be suspended for one or more periods of time not exceeding 90 calendar
days in the aggregate with respect to any registration statement if the
Board of Directors of Parent shall have determined that the filing of such
registration statement or the maintenance of its effectiveness would
require disclosure of nonpublic information that would materially and
adversely affect Parent or would interfere with a planned merger, sale of
material assets, recapitalization or other significant corporate action
(other than the issuance of equity securities). Any registration statement
prepared and filed under this Section, and any sale covered thereby, shall
be at Parent's expense except for underwriting discounts or commissions and
brokers' fees, which shall be borne solely by the Company. The Company
shall provide in writing all information reasonably requested by Parent for
inclusion in any
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registration statement to be filed hereunder. If, during the time periods
referred to in the first sentence of this Section, Parent effects a
registration under the Securities Act of Parent's equity securities for its
own account or for any other of its stockholders (other than on Form S-4 or
Form S-8, or any successor form), it shall allow the Company the right to
participate in such registration; provided that, if the managing
underwriters of such offering advise Parent that in their opinion the
number of securities requested to be included in such registration exceeds
the number which can be sold in such offering on a commercially reasonable
basis, priority shall be given to the securities intended to be included
therein by Parent for its own account and, thereafter, Parent shall include
the securities requested to be included therein by the Company pro rata
with the securities intended to be included therein by other stockholders
of Parent. In connection with any registration pursuant to this Section,
Parent and the Company shall provide each other and any underwriter of the
offering with customary representations, warranties, covenants,
indemnification and contribution in connection with such registration.
9. Miscellaneous.
(a) Fees and Expenses. Except as otherwise provided in the Merger
Agreement, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be borne by the
party incurring such expenses.
(b) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
ITS CONFLICT OF LAWS RULES OR PRINCIPLES.
(d) Notices. All notices or other communications under this Agreement
shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, AL 35203
Attention: William A. Smith, Esq.
Telecopy No.: (205) 325-7444
With a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Seth Kaplan, Esq.
Telecopy No.: (212) 403-2000
If to Parent:
El Paso Energy Corporation
1001 Louisiana Street
Houston, TX 77002
Telecopy No: (713) 420-4993
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With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Gary P. Cooperstein, Esq.
Warren de Wied, Esq.
Telecopy No.: (212) 859-4000
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
(e) Assignment; Binding Effect; No Third Party Beneficiaries. Neither
this Agreement nor any of the rights, interests or obligations hereunder
shall be sold, assigned, disposed of or otherwise transferred by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this
Agreement, express or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
(f) Further Assurances. In the event of any exercise of the Option by
the Company, the Company and Parent shall execute and deliver all such
documents and instruments and take all such further action that may be
reasonably necessary in order to consummate the transactions provided for
by such exercise.
(g) Survival. All Parent's representations, warranties and covenants
contained herein shall survive each Option Closing.
(h) ENFORCEMENT. THE PARTIES HERETO AGREE THAT IRREPARABLE DAMAGE
WOULD OCCUR IN THE EVENT THAT ANY OF THE PROVISIONS OF THIS AGREEMENT WERE
NOT PERFORMED IN ACCORDANCE WITH THEIR SPECIFIC TERMS OR WERE OTHERWISE
BREACHED. IT IS ACCORDINGLY AGREED THAT SUBJECT TO THE NEXT SENTENCE, THE
PARTIES SHALL BE ENTITLED TO AN INJUNCTION OR INJUNCTIONS TO PREVENT
BREACHES OF THIS AGREEMENT AND TO ENFORCE SPECIFICALLY THE TERMS AND
PROVISIONS HEREOF IN ANY COURT OF THE UNITED STATES OR ANY STATE HAVING
JURISDICTION, THIS BEING IN ADDITION TO ANY OTHER REMEDY TO WHICH THEY ARE
ENTITLED AT LAW OR IN EQUITY. EACH OF THE PARTIES HERETO (I) CONSENTS TO
SUBMIT ITSELF TO THE PERSONAL JURISDICTION OF ANY FEDERAL COURT LOCATED IN
THE STATE OF DELAWARE OR ANY DELAWARE STATE COURT IN THE EVENT ANY DISPUTE
ARISES OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT, (II) AGREES THAT IT SHALL NOT ATTEMPT TO DENY OR DEFEAT
SUCH PERSONAL JURISDICTION BY MOTION OR OTHER REQUEST FOR LEAVE FROM ANY
SUCH COURT, AND (III) AGREES THAT IT SHALL NOT BRING ANY ACTION RELATING TO
THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN
ANY COURT OTHER THAN A FEDERAL COURT SITTING IN THE STATE OF DELAWARE OR A
DELAWARE STATE COURT.
(i) Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute
one and the same instrument. Each counterpart may consist of a number of
copies hereof each signed by less than all, but together signed by all of
the parties hereto.
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IN WITNESS WHEREOF, the Company and Parent have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first written above.
SONAT INC.
By: /s/ RONALD L. KUEHN, JR.
----------------------------------
Name: Ronald L. Kuehn, Jr.
Title: Chairman, President and
Chief Executive Officer
EL PASO ENERGY CORPORATION
By:
/s/ BRITTON WHITE JR.
----------------------------------
Name: Britton White Jr.
Title: Executive Vice President
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[DLJ Letterhead]
ANNEX D
March 13, 1999
Board of Directors
El Paso Energy Corporation
1001 Louisiana
Houston, TX 77002
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to El Paso Energy Corporation (the "Company") of (i) the Exchange Ratio
pursuant to the Parent Merger (each as defined below) and (ii) the Consideration
to be paid by the Company pursuant to the Alternative Merger (each as defined
below), in each case, pursuant to the terms of the Agreement and Plan of Merger,
dated as of March 13, 1999 (the "Agreement"), by and between the Company and
Sonat Inc. ("Sonat"). Capitalized terms used and not defined herein shall have
the meanings set forth in the Agreement.
Pursuant to the Agreement, if the Agreement and the Parent Merger are
approved (the "Company Stockholders' Approval") by the holders of a majority of
the outstanding shares of common stock of the Company, par value $3.00 per share
(the "Company Common Stock), (i) Sonat will be merged with and into the Company
(the "Parent Merger"), subject to certain conditions, and (ii) each issued and
outstanding share of common stock of Sonat, par value $1.00 per share (the
"Sonat Common Stock"), other than those shares held in the treasury of Sonat, by
the Company or by any of their respective subsidiaries, will be converted, on
the terms and conditions set forth in the Agreement, into the right to receive
one (1) share of Company Common Stock (the "Exchange Ratio").
If, however, the Company Stockholders' Approval is not obtained, (i) a
wholly owned subsidiary of the Company will be merged with and into Sonat (the
"Alternative Merger"), subject to certain conditions, and (ii) each share of
Sonat Common Stock, other than those shares held in the treasury of Sonat, by
the Company or by any of their respective subsidiaries, will be converted, on
the terms and conditions set forth in the Agreement, into the right to receive a
combination of a fraction of a share of Company Common Stock and a fraction of a
Depositary Share (collectively, the "Consideration").
In arriving at our opinion, we have reviewed the Agreement, dated as of
March 13, 1999, and the exhibits thereto, including the Form of Certificate of
Designation for the Senior Cumulative Exchangeable Preferred Stock of the
Company. We also have reviewed financial and other information that was publicly
available or furnished to us by the Company and Sonat including information
provided during discussions with their respective managements. Included in the
information provided during discussions with the respective managements were
certain financial projections of Sonat for the period beginning January 1, 1999
and ending December 31, 2003 prepared by the management of the Sonat and certain
financial projections of the Company for the period beginning January 1, 1999
and ending December 31, 2003 prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the Company
and Sonat with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of each of the
Sonat Common Stock and the Company Common Stock, reviewed prices paid in certain
other business combinations and conducted such other financial studies, analyses
and investigations as we deemed appropriate for purposes of this opinion.
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<PAGE> 188
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Sonat or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Parent Merger or the
Alternative Merger, as the case may be, and upon our discussion of such
synergies with the management of the Company. With respect to the financial
projections supplied to us, we have assumed that they have been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of the Company and Sonat as to the future operating
and financial performance of the Company and Sonat. In that regard, the
Company's financial forecasts for the combined company in the case of the
Alternative Merger assume, among other things, that the Company will issue up to
$3.55 billion in a combination of new Company Common Stock and new debt to
redeem or purchase in the open market the Parent Preferred Stock underlying the
Depositary Shares. We have not assumed any responsibility for making any
independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by us. We have
relied as to all legal matters, including that the Parent Merger or the
Alternative Merger, as the case may be, will be free of federal tax to the
Company, on advice of counsel to the Company. With your consent, in arriving at
our opinion with respect to the Consideration to be paid by the Company in the
Alternative Merger, we have assumed that the Implied Price for the Company
Common Stock will be no greater than $38.69, which was the closing price per
share of Company Common Stock on March 11, 1999, and we express no opinion at
any greater price. We have also assumed that the Parent Merger will be accounted
for as a pooling of interests under generally accepted accounting principles.
In rendering our opinion, we have also assumed that obtaining the necessary
regulatory and governmental approvals for the Parent Merger or the Alternative
Merger, as the case may be, will not significantly delay consummation of the
Parent Merger or the Alternative Merger, as the case may be, and that, in the
course of obtaining such approvals, no restriction will be imposed that will
have a material adverse effect on the contemplated benefits of the Parent Merger
or the Alternative Merger, as the case may be.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which the Company's securities will actually trade at any time. Our opinion
does not address the relative merits of the Parent Merger or the Alternative
Merger and the other business strategies being considered by the Company's Board
of Directors, nor does it address the Board's decision to proceed with the
Parent Merger or the Alternative Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Parent Merger.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past and has been compensated
for such services.
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<PAGE> 189
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that (i) the Exchange Ratio pursuant to the Parent Merger and
(ii) the Consideration to be paid by the Company pursuant to the Alternative
Merger, in each case, pursuant to the Agreement, is fair to the Company from a
financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ RALPH EADS
--------------------------------------
Name: Ralph Eads
Title: Managing Director
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<PAGE> 190
ANNEX E
<TABLE>
<S> <C>
Investment Banking
Corporate and Institutional
Client Group
[MERRILL LOGO] One Houston Center
1221 McKinney
Suite 2700
Houston, Texas 77010
713 759 2500
FAX 713 759 2580
</TABLE>
March 13, 1999
Board of Directors
Sonat Inc.
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35203
Gentlemen:
Sonat Inc. (the "Company") and El Paso Energy Corporation ("El Paso")
propose to enter into an agreement (the "Agreement") pursuant to which the
Company will be merged with and into El Paso in a transaction (the "Merger") in
which each outstanding share of the Company's stock, par value $1.00 per share
(the "Shares"), will be converted into the right to receive 1.000 shares of the
common stock of El Paso (the "El Paso Shares"); provided that, if the
stockholders of El Paso do not approve the Merger, the Company would merge (the
"Alternative Merger") with a wholly-owned subsidiary of El Paso (the "Merger
Sub") and the Shares will be converted into a right to receive a combination of
El Paso Shares and preferred stock of El Paso as set forth in the Agreement. The
consideration to be received in the Merger or the Alternative Merger is referred
to herein as the "Consideration". The Merger is expected to be considered by the
stockholders of the Company and El Paso at special stockholders' meetings and
consummated following such meetings.
You have asked us whether, in our opinion, the Consideration to be received
by the holders of the Shares other than El Paso and its affiliates is fair to
such stockholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December 31,
1997 and the Company's Form 10-Q and the related unaudited financial
information for the quarterly periods ending March 31, 1998, June 30,
1998 and September 30, 1998;
(2) Reviewed El Paso's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31, 1997 and El
Paso's Form 10-Q and the related unaudited financial information for
the quarterly periods ending March 31, 1998, June 30, 1998 and
September 30, 1998;
(3) Reviewed the draft forms of the Company's Annual Report and Form 10-K
for the period ended December 31, 1998, and the draft form of El
Paso's and Form 10-K for the period ended December 31, 1998;
(4) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of the
Company and El Paso, furnished to us by the Company and El Paso;
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<PAGE> 191
(5) Conducted discussions with members of senior management of the Company
and El Paso concerning their respective businesses and prospects;
(6) Reviewed the historical market prices and trading activity for the
Shares and El Paso Shares and compared them with that of certain
publicly traded companies which we deemed to be reasonably similar to
the Company and El Paso, respectively;
(7) Compared the results of operations of the Company and El Paso with
that of certain companies which we deemed to be reasonably similar to
the Company and El Paso, respectively;
(8) Compared the proposed financial terms of the transactions contemplated
by the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(9) Reviewed a draft of the Agreement dated March 13, 1999; and
(10) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us by
the Company and El Paso, discussed with or reviewed by or for us, or publicly
available, and we have not assumed responsibility for independently verifying
such information or undertaken an independent evaluation or appraisal of any of
the assets or liabilities, contingent or otherwise, of the Company or El Paso,
nor have we been furnished any such evaluation or appraisal. In addition, we
have not assumed any obligation to conduct, nor have we conducted any physical
inspection of the properties or facilities of the Company or El Paso. With
respect to the financial forecast information of the Company and El Paso,
including, without limitation, financial forecasts, evaluation of contingencies
and projections regarding, among other things, future economic conditions
pertaining to the Company, and the synergies and cost savings that may result
from the Merger ("Merger Benefits"), furnished to or discussed with us by the
Company and El Paso, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates, allocations and judgements of
the senior management of the Company and El Paso as to the expected future
financial performance of the Company, El Paso or the combined entity, as the
case may be, and the Merger Benefits. We express no opinion as to such financial
forecast information or the Merger Benefits or the assumptions upon which they
were based. We have further assumed that each of the Merger and the Alternative
Merger will qualify as a tax-free reorganization for U.S. federal income tax
purposes and the Merger will be accounted for as a pooling-of-interests and the
Alternative Merger will be accounted for as a purchase under generally accepted
accounting principles. We have also assumed that the final form of the Agreement
will be substantially similar to the last drafts reviewed by us.
OUR OPINION IS NECESSARILY BASED UPON MARKET, ECONOMIC AND OTHER CONDITIONS
AS THEY EXIST AND CAN BE EVALUATED ON THE DATE HEREOF.
WE ARE ACTING AS FINANCIAL ADVISOR TO THE COMPANY IN CONNECTION WITH THE
MERGER AND WILL RECEIVE A FEE FROM THE COMPANY FOR OUR SERVICES, A SIGNIFICANT
PORTION OF WHICH IS CONTINGENT UPON THE CONSUMMATION OF THE MERGER. IN ADDITION,
THE COMPANY HAS AGREED TO INDEMNIFY US FOR CERTAIN LIABILITIES ARISING OUT OF
OUR ENGAGEMENT. WE HAVE, IN THE PAST, PROVIDED FINANCIAL ADVISORY AND FINANCING
SERVICES TO EL PASO AND/OR ITS AFFILIATES AND TO THE COMPANY AND/OR ITS
AFFILIATES AND HAVE RECEIVED FEES FOR THE RENDERING OF SUCH SERVICES. IN
ADDITION, IN THE ORDINARY COURSE OF OUR BUSINESS, WE MAY ACTIVELY TRADE THE
COMPANY COMMON STOCK AND OTHER SECURITIES OF THE COMPANY, AS WELL AS THE EL PASO
COMMON STOCK AND OTHER SECURITIES OF EL PASO, FOR OUR OWN ACCOUNT AND FOR THE
ACCOUNTS OF CUSTOMERS AND, ACCORDINGLY, MAY AT ANY TIME HOLD A LONG OR SHORT
POSITION IN SUCH SECURITIES.
THIS OPINION IS FOR THE USE AND BENEFIT OF THE BOARD OF DIRECTORS OF THE
COMPANY. OUR OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY
THE COMPANY TO ENGAGE IN THE MERGER, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE PROPOSED MERGER.
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<PAGE> 192
WE ARE NOT EXPRESSING ANY OPINION HEREIN AS TO THE PRICES AT WHICH THE
COMPANY COMMON STOCK WILL TRADE FOLLOWING THE CONSUMMATION OF THE MERGER.
In expressing our opinion with respect to the fairness of the Consideration
to be received by the holders of the Shares other than El Paso and its
affiliates pursuant to the Alternative Merger, we have considered the benefit
bestowed on the Company and its stockholders by the existence of the Alternative
Merger in the event the stockholders of El Paso do not approve the Merger.
On the basis of, and subject to the foregoing, we are of the opinion that
the Consideration to be received by the holders of the Shares other than El Paso
and its affiliates is fair to such stockholders from a financial point of view.
Very truly yours,
/s/ MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
--------------------------------------
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
E-3
<PAGE> 193
PART II
ITEM 20. INDEMNIFICATION DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits, proceedings whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statue requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statue provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, by-laws, disinterested director vote, stockholder vote, agreement, or
otherwise.
Article X of the by-laws of El Paso requires indemnification to the full
extent permitted under Delaware law as from time to time in effect. Subject to
any restrictions imposed by Delaware law, the by-laws of El Paso provide an
unconditional right to indemnification for all expense, liability, and loss
(including attorney's fees, judgments, fines, ERISA excise taxes, or penalties
and amounts paid in settlement) actually and reasonably incurred or suffered by
any person in connection with any actual or threatened proceeding (including, to
the extent permitted by law, any derivative action) by reason of the fact that
such person is or was serving as a director or officer or employee of El Paso,
such person or is or was serving at the request of El Paso as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to an
employee benefit plan. The by-laws of El Paso also provide that El Paso may, by
action of its board of directors, provide indemnification to its agents with the
same scope and effect as the foregoing indemnification of directors and
officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) payment of unlawful dividends or unlawful
stock purchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
Article 10 of El Paso's restated certificate of incorporation, as amended,
provides that to the full extent that the DGCL, as it now exists or may
hereafter be amended, permits the limitation or elimination of the liability of
directors, a director of El Paso shall not be liable to El Paso or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any amendment to or repeal of such Article 10 shall not adversely affect any
right or protection of a director of El Paso for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
El Paso maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of El Paso and its
subsidiaries, of certain losses of such persons (other than matters uninsurable
under law) arising from claims, including claims arising under the Securities
Act of 1933, as amended ("Securities Act") for acts or omissions by such persons
while acting as directors or officers of El Paso and/or its subsidiaries, as the
case may be.
II-1
<PAGE> 194
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of March 13, 1999, by and between Sonat Inc. and El
Paso Energy Corporation (included in the Joint Proxy
Statement/Prospectus as Annex A).
3.1 -- Restated Certificate of Incorporation of El Paso Energy
Corporation dated July 16, 1998; Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of El Paso Energy
Corporation, dated July 16, 1998, as amended (Exhibit 3.1
to El Paso Energy Corporation's Form 8-K, filed August 3,
1998, File No. 1-14365).
3.2 -- By-laws of El Paso Energy Corporation, as amended, dated
October 21, 1998 (Exhibit 3.B to El Paso Energy
Corporation's Form 10-Q, filed November 12, 1998, File
No. 1-14365).
*3.3 -- Form of Restated Certificate of Incorporation of El Paso
Energy Corporation to be adopted in connection with the
merger described herein.
*3.4 -- Form of By-laws of El Paso Energy Corporation.
*4.1 -- Amended and Restated Shareholders Rights Agreement
between El Paso Energy Corporation and BankBoston, N.A.,
dated January 20, 1999 (Exhibit 1 to El Paso Energy
Corporation's Registration Statement on Form 8-A/A
Amendment No. 1 filed January 29, 1999, File No.
1-14365).
*4.2 -- Form of Certificate of Designation of the Senior
Cumulative Exchangeable Preferred Stock of El Paso Energy
Corporation.
*4.3 -- Specimen Certificate for the Senior Cumulative
Exchangeable Preferred Stock.
*4.4 -- Form of Deposit Agreement.
**5.1 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson
regarding the legality of the shares being issued in the
Merger.
10.1 -- Amended and Restated Stock Option Agreement, dated as of
March 13, 1999, by and between Sonat Inc. and El Paso
Energy Corporation (Sonat as Issuer) (included in the
Joint Proxy Statement/Prospectus as Annex B).
10.2 -- Amended and Restated Stock Option Agreement, dated as of
March 13, 1999, by and between Sonat Inc. and El Paso
Energy Corporation (El Paso as Issuer) (included in the
Joint Proxy Statement/Prospectus as Annex C).
*10.3 -- Voting Agreement, dated March 13, 1999, by and between
Selim K. Zilkha in his individual capacity and in his
capacity of trustee of the Selim K. Zilkha Trust, Michael
Zilkha and El Paso Energy Corporation.
*10.4 -- Voting Agreement, dated March 13, 1999, by and between
Ronald L. Kuehn, Jr. and El Paso Energy Corporation.
*10.5 -- Form of Termination and Consulting Agreement between
Ronald L. Kuehn, Jr. and El Paso Energy Corporation.
*12.1 -- Ratio of earnings to combined fixed charges and preferred
stock dividends.
23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of Ernst & Young LLP.
*23.3 -- Consent of KPMG LLP.
23.4 -- Consent of William M. Cobb & Associates, Inc.
</TABLE>
II-2
<PAGE> 195
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.5 -- Consent of Ryder Scott Company Petroleum Engineers.
*23.6 -- Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
*23.7 -- Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
*24 -- Power of Attorney of directors of Registrant.
*99.1 -- Consents of Selim K. Zilkha and Ronald L. Kuehn, Jr.
**99.2 -- Form of Proxy of El Paso Energy Corporation.
**99.3 -- Form of Proxy of Sonat Inc.
</TABLE>
- ---------------
* Previously filed as an exhibit to the Registration Statement on Form S-4
filed April 7, 1999.
** To be filed by amendment.
All supporting schedules have been omitted because they are not required or
the information required to be set forth therein is included in the consolidated
financial statements or in the notes thereto.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b)
under the Securities Act, if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this Registration
Statement; provided, however, that the undertakings set forth in
paragraphs (1)(i) and (ii) above do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned Registrant hereby undertakes, that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration
II-3
<PAGE> 196
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(C) The undersigned Registrant hereby undertakes:
(1) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Exchange Act; and, where interim financial information
required to be presented by Article 3 of Regulation S-X are not set forth
in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(E) The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(F) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(G) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-4
<PAGE> 197
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on April 8, 1999.
EL PASO ENERGY CORPORATION
By: /s/ H. BRENT AUSTIN
----------------------------------
H. Brent Austin
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates as indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, April 8, 1999
- ----------------------------------------------------- President, Chief Executive
William A. Wise Officer and Director
/s/ H. BRENT AUSTIN Executive Vice President and April 8, 1999
- ----------------------------------------------------- Chief Financial Officer
H. Brent Austin
* Vice President and Controller April 8, 1999
- ----------------------------------------------------- (Chief Accounting Officer)
Jeffrey I. Beason
* Director April 8, 1999
- -----------------------------------------------------
Byron Allumbaugh
* Director April 8, 1999
- -----------------------------------------------------
Juan Carlos Braniff
* Director April 8, 1999
- -----------------------------------------------------
Peter T. Flawn
* Director April 8, 1999
- -----------------------------------------------------
James F. Gibbons
* Director April 8, 1999
- -----------------------------------------------------
Ben F. Love
* Director April 8, 1999
- -----------------------------------------------------
Kenneth L. Smalley
* Director April 8, 1999
- -----------------------------------------------------
Malcolm Wallop
*By: /s/ H. BRENT AUSTIN
------------------------------------------------
H. Brent Austin
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 198
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated
as of March 13, 1999, by and between Sonat Inc. and El
Paso Energy Corporation (included in the Joint Proxy
Statement/Prospectus as Annex A).
3.1 -- Restated Certificate of Incorporation of El Paso Energy
Corporation dated July 16, 1998; Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of El Paso Energy
Corporation, dated July 16, 1998, as amended (Exhibit 3.1
to El Paso Energy Corporation's Form 8-K, filed August 3,
1998, File No. 1-14365).
3.2 -- By-laws of El Paso Energy Corporation, as amended, dated
October 21, 1998 (Exhibit 3.B to El Paso Energy
Corporation's Form 10-Q, filed November 12, 1998, File
No. 1-14365).
*3.3 -- Form of Restated Certificate of Incorporation of El Paso
Energy Corporation to be adopted in connection with the
merger described herein.
*3.4 -- Form of By-laws of El Paso Energy Corporation.
*4.1 -- Amended and Restated Shareholders Rights Agreement
between El Paso Energy Corporation and BankBoston, N.A.,
dated January 20, 1999 (Exhibit 1 to El Paso Energy
Corporation's Registration Statement on Form 8-A/A
Amendment No. 1 filed January 29, 1999, File No.
1-14365).
*4.2 -- Form of Certificate of Designation of the Senior
Cumulative Exchangeable Preferred Stock of El Paso Energy
Corporation.
*4.3 -- Specimen Certificate for the Senior Cumulative
Exchangeable Preferred Stock.
*4.4 -- Form of Deposit Agreement.
**5.1 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson
regarding the legality of the shares being issued in the
Merger.
10.1 -- Amended and Restated Stock Option Agreement, dated as of
March 13, 1999, by and between Sonat Inc. and El Paso
Energy Corporation (Sonat as Issuer) (included in the
Joint Proxy Statement/Prospectus as Annex B).
10.2 -- Amended and Restated Stock Option Agreement, dated as of
March 13, 1999, by and between Sonat Inc. and El Paso
Energy Corporation (El Paso as Issuer) (included in the
Joint Proxy Statement/Prospectus as Annex C).
*10.3 -- Voting Agreement, dated March 13, 1999, by and between
Selim K. Zilkha in his individual capacity and in his
capacity of trustee of the Selim K. Zilkha Trust, Michael
Zilkha and El Paso Energy Corporation.
*10.4 -- Voting Agreement, dated March 13, 1999, by and between
Ronald L. Kuehn, Jr. and El Paso Energy Corporation.
*10.5 -- Form of Termination and Consulting Agreement between
Ronald L. Kuehn, Jr. and El Paso Energy Corporation.
*12.1 -- Ratio of earnings to combined fixed charges and preferred
stock dividends.
23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of Ernst & Young LLP.
*23.3 -- Consent of KPMG LLP.
23.4 -- Consent of William M. Cobb & Associates, Inc.
23.5 -- Consent of Ryder Scott Company Petroleum Engineers.
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*23.6 -- Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
*23.7 -- Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
*24 -- Power of Attorney of directors of Registrant.
*99.1 -- Consents of Selim K. Zilkha and Ronald L. Kuehn, Jr.
**99.2 -- Form of Proxy of El Paso Energy Corporation.
**99.3 -- Form of Proxy of Sonat Inc.
</TABLE>
- ---------------
* Previously filed as an exhibit to the Registration Statement on Form S-4
filed April 7, 1999.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
of El Paso Energy Corporation (the "Company") on Amendment No. 1 to Form S-4
(File No. 333-75781) of our report dated March 9, 1999, on our audits of the
consolidated financial statements and the financial statement schedule of the
Company as of December 31, 1998 and 1997, and for the years ended December 31,
1998, 1997 and 1996, which report is included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. We also consent to the
reference to our firm under the heading "Experts" in this Registration
Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Houston, Texas
April 8, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
As independent petroleum engineers, we hereby consent to the incorporation
by reference in the Joint Proxy Statement/Prospectus constituting part of this
Registration Statement on Form S-4 of El Paso Energy Corporation of our report
in the Sonat Inc. Annual Report on Form 10-K for the year ended December 31,
1998. We also consent to all references to our firm in such Joint Proxy
Statement/Prospectus.
/s/ WILLIAM M. COBB
William M. Cobb & Associates, Inc.
Houston, Texas
April 8, 1999
<PAGE> 1
EXHIBIT 23.5
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
As independent petroleum engineers, we hereby consent to the incorporation
by reference in the Joint Proxy Statement/Prospectus constituting part of this
Registration Statement on Form S-4 of El Paso Energy Corporation of our report
in the Sonat Inc. Annual Report on Form 10-K for the year ended December 31,
1998. We also consent to all references to our firm in such Joint Proxy
Statement/Prospectus.
/s/ RIDER SCOTT COMPANY
PETROLEUM ENGINEERS
------------------------
RIDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
April 8, 1999
