UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 1-7179
SONAT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0647939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices)(Zip Code)
Registrant's telephone number: (205) 325-3800
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1)
has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past
90 days.
Yes X No _
Indicate the number of shares outstanding of each
of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE:
87,191,932 SHARES OUTSTANDING ON APRIL 30, 1994
<PAGE>
<TABLE>
SONAT INC. AND SUBSIDIARIES
INDEX
Page No.
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
March 31, 1994 and December 31, 1993 1
Condensed Consolidated Statements of Income--
Three Months Ended March 31, 1994 and 1993 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1994 and 1993 3
Notes to Condensed Consolidated Financial
Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 23
PART II. Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1994 1993
(Unaudited)
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,802 $ 10,822
Accounts and note receivable 286,422 256,925
Inventories 27,872 29,896
Gas supply realignment costs 46,419 59,862
Recoverable natural gas purchase contract
settlement costs 2,033 18,535
Gas imbalance receivables 28,620 43,867
Other 34,075 43,953
Total Current Assets 445,243 463,860
Investments in Unconsolidated Affiliates and Other 611,545 509,326
Plant, Property and Equipment 4,443,269 4,400,286
Less accumulated depreciation, depletion
and amortization 2,349,352 2,313,168
2,093,917 2,087,118
Deferred Charges:
Gas supply realignment costs 125,608 119,724
Other 31,573 33,969
157,181 153,693
$3,307,886 $3,213,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Unsecured notes and long-term debt due
within one year $ 209,959 $ 232,929
Accounts payable 208,528 193,383
Accrued income taxes 69,177 55,828
Accrued interest 49,089 49,853
Gas imbalance payables 31,360 59,144
Other 35,894 42,274
Total Current Liabilities 604,007 633,411
Long-Term Debt 800,090 741,161
Deferred Credits and Other:
Deferred income taxes 196,650 192,977
Reserves for regulatory matters 132,599 120,801
Other 182,284 162,432
511,533 476,210
Commitments and Contingencies
Stockholders' Equity:
Common stock, $1.00 par, 200,000,000 shares
authorized; 87,192,704 and 87,157,982 shares
outstanding at March 31, 1994 and
December 31, 1993, respectively 87,193 87,158
Other capital 39,000 36,074
Retained earnings 1,266,063 1,239,983
Total Stockholders' Equity 1,392,256 1,363,215
$3,307,886 $3,213,997
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1994 1993
(In Thousands, Except
Per-Share Amounts)
<S> <C> <C>
Operating Revenues $479,507 $496,913
Costs and Expenses:
Natural gas cost 213,575 210,033
Transition cost recovery and gas
purchase contract settlement costs 42,920 16,683
Operating and maintenance 38,410 86,521
General and administrative 31,025 39,606
Depreciation, depletion and amortization 66,294 52,707
Taxes, other than income 10,584 8,261
402,808 413,811
Operating Income 76,699 83,102
Other Income, Net:
Equity in earnings of unconsolidated affiliates 4,822 1,332
Other 4,451 2,778
9,273 4,110
Interest Income (Expense):
Interest income 1,921 29,569
Interest expense (21,429) (28,185)
Interest capitalized 1,615 1,011
(17,893) 2,395
Income before Extraordinary Item
and Income Taxes 68,079 89,607
Income Taxes 18,469 20,684
Income before Extraordinary Item 49,610 68,923
Extraordinary Loss, Net of Income
Tax Benefit of $1,972,000 - (3,829)
Net Income $ 49,610 $ 65,094
Earnings Per Share of Common Stock:
Earnings before extraordinary item $ .57 $ .80
Extraordinary loss - (.04)
Earnings Per Share $ .57 $ .76
Weighted Average Shares Outstanding 87,177 86,195
Dividends Paid Per Share $ .27 $ .25
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 49,610 $ 65,094
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 66,294 52,707
Deferred income taxes 2,794 1,640
Equity in (earnings) losses of unconsolidated
affiliates, less distributions (4,049) 779
(Gain) loss on sale of assets (594) 121
Reserves for regulatory matters 11,798 (3,718)
Gas supply realignment costs 7,559 -
Natural gas purchase contract settlement costs 16,502 16,683
Change in:
Accounts receivable (29,497) 45,721
Inventories 2,024 62,192
Accounts payable 15,145 (34,314)
Accrued interest and income taxes, net 12,673 3,770
Other current assets and liabilities (9,128) (41,289)
Other 31,616 21,731
Net cash provided by operating activities 172,747 191,117
Cash Flows from Investing Activities:
Plant, property and equipment additions (78,740) (103,740)
Net proceeds from disposal of assets 2,096 128
Advances to unconsolidated affiliates and other (100,325) (7,729)
Net cash used in investing activities (176,969) (111,341)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 835,000 220,000
Payments of long-term debt (776,195) (278,292)
Changes in short-term borrowings (22,846) 2,145
Net changes in debt 35,959 (56,147)
Dividends paid (23,530) (21,557)
Other 773 7,395
Net cash provided by (used in)
financing activities 13,202 (70,309)
Net Increase in Cash and Cash Equivalents 8,980 9,467
Cash and Cash Equivalents at Beginning of Period 10,822 58,007
Cash and Cash Equivalents at End of Period $ 19,802 $ 67,474
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 18,813 $ 18,017
Income taxes (refunds received), net 2,349 1,868
</TABLE>
See accompanying notes.<PAGE>
1. Basis of Presentation
The accompanying condensed consolidated financial
statements of Sonat Inc. (Sonat) and its subsidiaries
(the Company) have been prepared in accordance with
the instructions to Form 10-Q and include the
information and footnotes required by such instruc-
tions. In the opinion of management, all adjustments
including those of a normal recurring nature have been
made that are necessary for a fair presentation of the
results for the interim periods presented herein.
Certain amounts in the 1993 condensed consolidated
financial statements have been reclassified to conform
with the 1994 presentation.
2. Unconsolidated Affiliates
The following table presents the components of
equity in earnings of unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Company's Share of Reported Earnings (Loss):
Exploration and Production
Sonat/P Anadarko $ - $ 994
Other exploration and production affiliates 107 82
107 1,076
Natural Gas Transmission and Marketing
Citrus Corp. 317 (2,418)
Amortization of Citrus basis difference 347 524
Bear Creek Storage 2,281 2,420
Other natural gas transmission and
marketing affiliates (25) 16
2,920 542
Other
Sonat Offshore Drilling 1,695 -
Other affiliates 100 (286)
1,795 (286)
$4,822 $ 1,332
</TABLE>
Exploration and Production Affiliate - Sonat
Exploration Company (Sonat Exploration) had an initial
49 percent interest in Sonat/P Anadarko Limited
Partnership (Sonat/P), which acquired oil and gas
reserves in the Anadarko Basin of Oklahoma from
Louisiana Land and Exploration Company in the third
quarter of 1992. On October 4, 1993, Sonat Exploration
acquired the limited partnership interest of Prudential
Insurance Company in Sonat/P. For the first quarter of
1993, Sonat/P had revenues of $4.5 million and reported
earnings of $1.5 million.
Natural Gas Transmission and Marketing
Affiliates - Sonat owns 50 percent of Citrus Corp.
(Citrus), the parent of Florida Gas Transmission
Company. Southern Natural Gas Company (Southern) owns
50 percent of Bear Creek Storage Company (Bear Creek),
an underground gas storage company.
The following is summarized income statement
information for Citrus:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Revenues $103,484 $129,090
Natural Gas Cost 65,893 92,633
Operating Expenses 26,222 18,155
Depreciation 9,693 16,389
Other Expenses, Net 532 9,540
Income Taxes (Benefits) 511 (2,790)
Income (Loss) Reported $ 633 $ (4,837)
</TABLE>
In connection with the construction of the
Phase III expansion, the Company made net non-interest-
bearing advances to Citrus of $95.8 million during the
1994 period.
The following is summarized income statement
information for Bear Creek. No provision for income
taxes has been included since its income taxes are paid
directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Thousands)
<S> <C> <C>
Revenues $9,030 $9,691
Operating Expenses 1,278 1,511
Depreciation 1,350 1,350
Other Expenses, Net 1,839 1,990
Income Reported $4,563 $4,840
</TABLE>
Other Affiliate - On June 4, 1993, the initial
public offering (IPO) of Sonat Offshore Drilling Inc.'s
(Sonat Offshore) common stock was closed. The Company
retained ownership of 39.9 percent of Sonat Offshore's
outstanding shares. At March 31, 1994, the Company held
11.3 million shares of Sonat Offshore common stock. The
Company's investment in Sonat Offshore has been
accounted for on the equity method since June 5, 1993.
The following is summarized income statement
information for Sonat Offshore:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994
(In Thousands)
<S> <C>
Revenues $66,107
Operating Expenses 53,715
Depreciation 5,818
Other (Income) Expenses, Net (69)
Income Taxes 2,396
Income Reported $ 4,247
</TABLE>
3. Long-Term Debt and Lines of Credit
During the first quarter of 1994, Sonat borrowed
$835 million and repaid $770 million under its revolving
credit agreement resulting in $200 million outstanding
at a rate of 3.84 percent at March 31, 1994.
4. Commitments and Contingencies
Rate Matters - Periodically, Southern and its
subsidiaries make general rate filings with the Federal
Energy Regulatory Commission (FERC) to provide for the
recovery of cost of service and a return on equity. The
FERC normally allows the filed rates to become
effective, subject to refund, until it rules on the
approved level of rates. Southern and its subsidiaries
provide reserves relating to such amounts collected
subject to refund, as appropriate, and make refunds upon
establishment of the final rates.
On September 1, 1989, Southern implemented new
rates, subject to refund, reflecting a general rate
decrease of $6 million. In January 1991 Southern
implemented new rates, subject to refund, that
restructured its rates consistent with a FERC policy
statement on rate design and increased its sales and
transportation rates by approximately $65 million
annually. These two proceedings have been consolidated
for hearing. On October 7, 1993, the presiding
administrative law judge certified to the FERC a
contested offer of settlement pertaining to the
consolidated rate cases that (1) resolved all
outstanding issues in the rate decrease proceeding,
(2) resolved the cost of service, throughput, billing
determinant and transportation discount issues in the
rate increase proceeding, and (3) provided a method to
resolve all other issues in the latter proceeding,
including the appropriate rate design. The rate design
issue will be resolved on briefs based on the existing
record in this proceeding. On December 16, 1993, the
FERC issued an order (December 16 Order) approving the
settlement, but with modifications. On
December 22, 1993, Southern filed a letter with the FERC
that outlined certain objections with respect to the
FERC's modifications to the terms and conditions of the
settlement. Southern advised the FERC that the
December 16 Order undercut the economic compromise
achieved in the settlement. Southern also filed a
request for rehearing of the December 16 Order. On
May 5, 1994, the FERC issued an order on rehearing
substantially reversing, in all material respects, the
modifications to which Southern objected.
On September 1, 1992, Southern implemented another
general rate change. The rates reflected the continuing
shift in the mix of throughput volumes away from sales
and toward transportation and a $5 million reduction in
annual revenues. On April 30, 1993, Southern submitted
a proposed settlement in the proceeding that, if
approved by the FERC, would resolve the throughput and
certain cost of service issues. The rate design issue
is consolidated with similar issues in Southern's rate
proceeding filed May 1, 1993, which is described below,
and will be resolved in that proceeding. On
June 4, 1993, the presiding administrative law judge
certified the settlement to the FERC. In another order
issued on December 16, 1993, the FERC also approved this
settlement, but with modifications. Southern objected
to these modifications and also requested rehearing of
this order. In another order on rehearing issued on
May 5, 1994, the FERC also substantially reversed these
modifications in all material respects.
On May 1, 1993, Southern implemented a general
rate change, subject to refund, that increased its sales
and transportation rates by approximately $57 million
annually. The filing is designed to recover increased
operating costs and to reflect the impact of competition
on both Southern's level and mix of services. A hearing
regarding various cost allocation and rate design issues
in this proceeding is set for November 29, 1994.
Sea Robin Pipeline Company (Sea Robin), a
subsidiary of Southern, has previously filed under the
provisions of Order No. 500 to recover $83.1 million in
gas purchase contract settlement payments from its
former pipeline sales customers, Koch Gateway Pipeline
Company, successor to United Gas Pipe Line Company
(Koch), and Southern. Those filings remain subject to
refund pending the outcome of any prudence challenges in
the proceedings. Although the eligibility issues have
been resolved, one party has reserved its rights to
challenge prudence until such time as certain take-or-
pay allocation issues are resolved with respect to the
flow-through of costs billed to Koch.
Southern is authorized to flow through to its
jurisdictional customers $38.1 million of the costs
allocated to it by Sea Robin as well as the
$32.7 million in Order No. 500 costs allocated to it by
Koch. Southern's flow-through of Koch and Sea Robin's
costs remains subject to refund pending the outcome of
any challenges to the costs or allocation of the costs
in those pipelines' Order No. 500 proceedings. The
Company does not believe that the outcome of any such
challenges will have a material adverse effect on its
financial position.
On July 2, 1993, the FERC issued an order
reaffirming its approval of the non-take-or-pay aspects
of a settlement filed by Koch in 1988, which included
Southern's phased abandonment of its contract demand
with Koch. The order rejected the take-or-pay aspects
of the settlement, including Koch's proposed Order
No. 528 allocation methodology. As a consequence,
various parties that had originally supported the
settlement began contesting it. Koch evidenced its
intention to honor the non-take-or-pay aspects of the
1988 settlement and induced several of the parties to
withdraw their judicial appeals of the July 2 order. On
April 29, 1994, Koch filed multiple settlements that
settled its outstanding take-or-pay issues with
substantially all of its customers, including Southern.
The Company cannot predict whether these settlements
will be approved by the FERC, but does not believe that
the final resolution of this matter will have a material
adverse effect on its financial position.
Gas Purchase Contracts - Gas purchase contract
settlement payments (other than the gas supply
realignment payments discussed below) made by Southern
and not previously recovered or expensed are included on
the Condensed Consolidated Balance Sheet at
March 31, 1994, in "Current Assets". Pursuant to a
final and nonappealable FERC order, Southern collected
these amounts from its customers over a five-year period
that ended on April 30, 1994. Southern currently is
incurring essentially no take-or-pay liabilities under
its gas purchase contracts. Southern regularly
evaluates its position relative to gas purchase contract
matters, including the likelihood of loss from asserted
or unasserted take-or-pay claims or above-market prices.
When a loss is probable and the amount can be reasonably
estimated, it is accrued.
Order No. 636 - In 1992 the FERC issued its Order
No. 636 (the Order). The Order required significant
changes in interstate natural gas pipeline services.
Interstate pipeline companies, including Southern, are
incurring certain costs (transition costs) as a result
of the Order, the principal one being costs related to
amendment or termination of existing gas purchase
contracts, which are referred to as gas supply
realignment (GSR) costs. The Order provided for the
recovery of 100 percent of the GSR costs and other
transition costs to the extent the pipeline can prove
that they are eligible, that is, incurred as a result of
customers' service choices in the implementation of the
Order, and were incurred prudently. The prudence review
will extend both to the prudence of the underlying gas
purchase contract, based on the circumstances that
existed at the time the contract was executed, and to
the prudence of the amendment or termination of the
contract. Numerous parties have appealed the Order to
the Circuit Courts of Appeal.
On September 3, 1993, the FERC generally approved
a compliance plan for Southern and directed Southern to
implement its restructured services pursuant to the
Order on November 1, 1993 (the September 3 order).
Pursuant to Southern's compliance plan, GSR costs that
are eligible for recovery include payments to reform or
terminate gas purchase contracts. Where Southern can
show that it can minimize transition costs by continuing
to purchase gas under the contract (i.e., it is more
economic to continue to perform), eligible GSR costs
would also include the difference between the contract
price and the higher of (a) the sales price for gas
purchased under the contract or (b) a price established
by an objective index of spot-market prices. Recovery
of these latter costs is permitted for an initial period
of two years.
Southern's compliance plan contains two mechanisms
pursuant to which Southern is permitted to recover
100 percent of its GSR costs. The first mechanism is a
monthly fixed charge designed to recover 90 percent of
the GSR costs from Southern's firm transportation
customers. The second mechanism is a volumetric charge
designed to collect the remaining 10 percent of such
costs from Southern's interruptible transportation
customers. These funding mechanisms will continue until
the GSR costs are fully recovered or funded. The FERC
also indicated that Southern could file to recover any
GSR costs not recovered through the volumetric charge
after a period of two years. In addition, Southern's
compliance plan provides for the recovery of other
transition costs as they are incurred and any remaining
transition costs may be recovered through a regular rate
filing. Southern's customers have generally opposed the
recovery of Southern's GSR costs based on both
eligibility and prudence grounds.
The September 3 order rejected the argument of
certain customers that a 1988 take-or-pay recovery
settlement bars Southern from recovering GSR costs under
gas purchase contracts executed before March 31, 1989,
which comprise most of Southern's GSR costs. Those
customers subsequently filed motions urging the FERC to
reverse its ruling on that issue. On December 16, 1993,
the FERC affirmed its September 3 ruling with respect to
the 1988 take-or-pay recovery settlement (the
December 16 order). The FERC's finding that the 1988
settlement is not a bar in general to the recovery as
GSR costs of payments made to amend or to terminate
these contracts does not prevent an eligibility
challenge to specific payments, however, on the theory
that they are actually take-or-pay costs that would have
been unavoidable regardless of the Order. The
December 16 order generally approved Southern's
restructuring tariff submitted pursuant to the
September 3 order. Various parties have filed motions
urging the FERC to modify the December 16 order and have
sought judicial review of the September 3 order.
During 1993 Southern reached agreements to reduce
significantly the price payable under a number of high
cost gas purchase contracts in exchange for payments of
approximately $114 million. On December 1, 1993,
Southern filed with the FERC to recover such costs and
approximately $3 million of prefiling interest (the
December 1 filing). On December 30, 1993, the FERC
accepted such filing to become effective
January 1, 1994, subject to refund, and subject to a
determination through a hearing before an administrative
law judge that such costs were prudently incurred and
eligible under the Order. Southern's customers are
opposing its recovery of the GSR costs in this
proceeding based on both eligibility and prudence
grounds. The December 30 order rejected arguments of
various parties that, as a matter of law, a pipeline's
payments to affiliates, in this case Southern's payment
to a subsidiary of Sonat Exploration that represented
approximately $34 million of the December 1 filing, may
not be recovered under the Order. The December 30 order
may be appealed, however, and the payment is still
subject to challenge on both eligibility and prudence
grounds.
In December 1993 Southern reached agreement to
reduce the price under another contract in exchange for
payments having a present value of approximately
$52 million, which is included in "Deferred Credits and
Other" in the Consolidated Balance Sheet. Payments will
be made in equal monthly installments over an eight-year
period ending December 31, 2001. On February 14, 1994,
Southern made a rate filing to recover those costs as
well as approximately $3 million of other settlement
costs and prefiling interest. In an order issued on
March 16, 1994, the FERC accepted such filing to become
effective on April 1, 1994, subject to refund, and
subject to a hearing before an administrative law judge
that such costs were prudently incurred and eligible
under the Order. In its order the FERC directed that
the monthly installment payments be recovered over the
eight-year period during which they will be incurred.
Southern's customers are opposing, on grounds of both
eligibility and prudence, its recovery of the GSR costs
in this proceeding, which has been consolidated with the
proceeding on the December 1 filing.
Southern has also incurred approximately
$26.2 million of GSR costs, plus prefiling interest,
from November 1, 1993, through March 31, 1994, from
continuing to purchase gas under contracts that are in
excess of current market prices. On March 1, 1994,
Southern made a rate filing to recover $17.5 million of
these costs that had been incurred through
January 31, 1994. In an order issued on March 31, 1994,
the FERC accepted such filing to become effective on
April 1, 1994, subject to refund, and subject to a
hearing before an administrative law judge that such
costs were prudently incurred and eligible under the
Order. Southern's customers are opposing, on grounds of
both eligibility and prudence, its recovery of the GSR
costs in this proceeding as well, which has also been
consolidated with the proceeding on the December 1
filing.
Southern plans to make additional rate filings
quarterly to recover its "price differential" costs and
any other GSR costs. The total GSR costs of $172
million, net of recoveries, accrued through
March 31, 1994, are included in current and long-term
gas supply realignment costs in the Condensed
Consolidated Balance Sheet.
Administrative Law Judge Ruling Concerning
Recoverability of Investment in Offshore Gas Supply
Facilities - In an initial decision issued on
May 2, 1994, an administrative law judge ruled, in a
rate case Southern had filed before the FERC, that
Southern could not include in its rates the
approximately $45 million cost of certain pipeline
facilities placed in service by Southern in 1992 to
connect to its interstate pipeline system extensive new
gas reserves being developed by Exxon Corporation
(Exxon) in the Mississippi Canyon and Ewing Bank Area
Blocks, offshore Louisiana (the Mississippi Canyon
Facilities). The judge ruled that Southern's recovery
of these costs was precluded by the 1988 settlement with
Southern's customers that limits the amount of take-or-
pay payments Southern may recover in its rates. The
judge found that the cost of the facilities constitutes
non-cash consideration to Exxon for a 1989 take-or-pay
settlement and is therefore subject to the dollar "cap"
on these payments contained in the 1988 settlement.
Southern has previously recovered the maximum amount
permitted by the 1988 settlement in its rates.
The judge found alternatively that the Mississippi
Canyon Facilities were underutilized for purposes of
certain "at-risk" conditions contained in the FERC
certificate authorizing the construction of the
facilities and that, in the event his decision that the
cost of the facilities is subject to the take-or-pay
settlement cap were to be overturned on appeal, Southern
should recover only the amount of the annual cost of
service of the facilities proportional to their level of
utilization during the period of time under review,
November 1, 1992, through April 30, 1993. He calculated
the utilization level at 32 percent, and when this
factor is applied to the $11.9 million cost of service
attributable to the facilities accepted by the judge,
Southern would be permitted to include only $3.8 million
of that amount in its rates for this period.
Southern intends to file a brief on exceptions
with the FERC seeking to overturn the initial decision
of the administrative law judge as it relates to the
recoverability of its Mississippi Canyon Facilities
investment, but Southern cannot predict the action that
may be taken by the FERC or the outcome of any
subsequent appeal concerning the rate treatment of the
$45 million cost of these facilities.
With respect to the recoverability by Southern
under the Order of GSR costs associated with Southern's
gas supply contract with Exxon relating to the reserves
connected by the Mississippi Canyon Facilities,
Southern's customers have asserted in a separate
proceeding before the FERC that the gas supply contract
was non-cash consideration for the Exxon take-or-pay
settlement and that recovery by Southern of GSR costs
incurred with respect to such contract is also precluded
by the 1988 take-or-pay settlement. Estimated GSR costs
under this contract through the scheduled renegotiation
of its pricing provisions in 1997 are estimated to be in
the range of $65 million to $75 million on a present
value basis, although such estimate is subject to
significant uncertainty since the assumptions inherent
in the estimate (including underlying reserves, future
deliverability, and a range of estimated future oil and
gas market prices) are not known today with certainty
and there is a wide range of possible outcomes for each
assumption. Southern has given notice to Exxon that it
has terminated the gas purchase contract covering gas
reserves connected by the Mississippi Canyon Facilities
pursuant to certain provisions of the contract and Exxon
has filed suit against Southern seeking a declaratory
judgment that Southern does not have the right to
terminate the contract or alternatively for damages of
an unspecified amount arising out of the alleged
repudiation or breach of the contract by Southern.
Southern cannot predict the outcome of pending or future
proceedings for the recovery of GSR costs related to the
gas supplies connected by the Mississippi Canyon
Facilities or its pending litigation or settlement
discussions with Exxon regarding Southern's notice of
termination of the gas supply contract.
Southern has continued to have settlement
discussions with its major customers in an effort to
resolve all of Southern's outstanding rate and service
agreement issues and its Order No. 636 transition cost
recovery. Southern cannot predict the outcome of those
discussions or whether any settlement will be reached
with its customers. Southern is also unable to predict
all of the elements of the outcome of its Order No. 636
restructuring proceeding or its rate filings to recover
its transition costs.
5. Income Taxes
Net income for the first quarter of 1993 includes
a net gain of $21 million, or $.24 per share, related to
the settlement of an examination of the Company's
federal income tax returns for the years 1983 through
1985 and other tax issues.
6. Capital Stock
On April 28, 1994, the shareholders of the Company
approved an increase in the common stock shares
authorized from 200 million to 400 million.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations
SONAT INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Income
Sonat Inc. and its subsidiaries (the Company)
operate in the energy industry through its Exploration
and Production and Natural Gas Transmission and
Marketing segments.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Operating Income:
Exploration and production $22 $22
Natural gas transmission and marketing 53 61
Other 2 -
Operating Income $77 $83
</TABLE>
EXPLORATION AND PRODUCTION
The Company is engaged in the exploration for and
the acquisition, development, and production of oil and
natural gas in the United States through Sonat
Exploration Company. Beginning in 1988 Sonat
Exploration implemented a strategy to acquire gas
properties with significant development potential. As
a result of this strategy, Sonat Exploration has more
than quintupled its proved reserves. At the end of
March 1994, the Company had proved reserves totaling
approximately 1.4 trillion cubic feet of natural gas
equivalent.
Sonat Exploration intends to continue its strategy
of aggressively acquiring domestic gas properties with
significant development potential. During the first
quarter of 1994, Sonat Exploration acquired oil and gas
interests and properties for a total of $4 million,
which increased proved reserves by approximately
6 billion cubic feet of natural gas equivalent. In an
acquisition that closed on May 2, 1994, Sonat
Exploration paid $8.8 million for interests in oil and
gas properties having proved reserves of approximately
19 billion cubic feet of natural gas equivalent. In
addition, Sonat Exploration is engaged in negotiations
with respect to proposed purchase agreements that could
potentially add oil and gas interests having another
60 billion cubic feet of natural gas equivalent for
payments totaling approximately $34 million.
Sonat Exploration has a substantial producing
property acreage position in the eastern extension of
the Austin Chalk trend in Texas and Louisiana. During
the first quarter of 1994, Sonat Exploration
participated in the drilling of 9 wells, all of which
were successful. As of March 31, 1994, Sonat
Exploration has participated in the completion of
33 wells in the Austin Chalk trend, 32 of which are
commercial.
Sonat Exploration's proved reserves include a
portion that qualifies for Section 29 tax credits.
During the year ended December 31, 1993, Section 29 tax
credits totaled $19 million; however, production from
wells that qualify for these credits has begun to
decline in 1994 as these wells follow their normal
decline pattern.
Total capital expenditures for Sonat Exploration
are expected to approximate $390 million in 1994, which
would be down slightly from 1993. Capital spending in
1994 includes amounts for increased development drilling
and additional producing property acquisitions. At
March 31, 1994, Sonat Exploration had not entered into
any agreements or letters of intent for producing
property acquisitions except as described above.
Sonat Exploration's natural gas and liquids
production is marketed primarily in the spot market
almost entirely by Sonat Marketing Company (Sonat
Marketing), a subsidiary of Sonat Energy Services
Company (Sonat Energy Services) operating in the
Company's Natural Gas Transmission and Marketing
Segment. Due to the volatility of spot-market prices,
part of Sonat Exploration's production is hedged from
time to time through gas futures transactions and oil
and gas price swaps to reduce the effects of the
volatility of spot-market prices on operating results.
<PAGE>
Exploration and Production Operations
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Revenues:
Sales to others $ 31 $42
Intersegment sales 75 37
Total Revenues $106 $79
Depreciation, Depletion and Amortization $ 49 $31
Operating Income $ 22 $22
Equity in Earnings of Unconsolidated Affiliates $ - $ 1
Net Sales Volumes:
(Includes Sonat/P)
Gas (Bcf) 43 35
Oil and condensate (MBbls) 953 692
Natural gas liquids (MBbls) 228 164
Average Sales Prices:
(Includes Sonat/P)
Gas (Mcf) $ 2.10 $ 1.89
Oil and condensate (Bbl) 13.04 17.93
Natural gas liquids (Bbl) 9.06 8.32
</TABLE>
Quarter-to-Quarter Analysis
Sonat Exploration's operating income was
$22 million in the first quarter of 1994, unchanged from
the same period in 1993. Natural gas production rose
23 percent, reflecting acquisitions completed in late
1993, as well as aggressive development drilling. Oil
and condensate production rose 38 percent over the same
period last year, primarily due to continued growth in
production from the Austin Chalk trend in east Texas.
Quarterly results benefited from higher natural gas
prices, but oil prices were down sharply from a year ago
and amortization and other operating expenses increased
as a result of the higher production.
NATURAL GAS TRANSMISSION AND MARKETING
The Company participates in the natural gas
transmission and marketing business through Southern
Natural Gas Company, Citrus Corp. (a 50 percent-owned
company), and Sonat Energy Services Company. Southern
and Florida Gas Transmission Company (Florida Gas), a
subsidiary of Citrus, operating in the natural gas
transmission industry, have historically provided
customers of their natural gas pipelines both merchant
and transportation services. Effective
November 1, 1993, Southern separated its transportation,
storage, and merchant services to comply with Order
No. 636. (See following discussion.) Florida Gas also
restructured its services in compliance with Order
No. 636 effective on November 1, 1993. As a result of
Order No. 636, both Southern and Florida Gas have
essentially become solely gas transporters, although
Southern will continue to make limited sales pending the
expiration, termination, or assignment of its remaining
gas supply contracts. Sonat Energy Services, through
its subsidiaries, manages Sonat's unregulated natural
gas businesses, including natural gas marketing and
gathering and intrastate natural gas pipeline services.
Citrus provides natural gas marketing activities through
its affiliates, primarily to customers of Florida Gas.
The natural gas transmission industry, although
regulated, is very competitive. During the period from
the mid-1980's until the Order No. 636 restructuring,
customers had switched much of their volumes from a
bundled merchant service to transportation service,
reflecting an increased willingness to rely on gas
supply under unregulated arrangements such as those
provided by Sonat Marketing and affiliates of Citrus.
Southern competes with several pipelines for the
transportation business of its customers and at times
discounts its transportation rates in order to maintain
market share.
Southern is pursuing growth opportunities to expand
the level of services in its traditional market area and
to connect new gas supplies. Southern and South Georgia
Natural Gas Company (South Georgia), a wholly owned
subsidiary of Southern, received approval from the FERC
on May 13, 1993, for an expansion of South Georgia's
pipeline system into northern Florida and southwestern
Georgia that increased firm daily capacity by 40 million
cubic feet per day. Construction on this project has
been completed and it was placed in service on
May 1, 1994. In January 1994 Southern reached tentative
agreement with a group of new customers to expand its
service in the growing eastern Tennessee area. The
proposed project entails a 23-mile pipeline extension
that would deliver approximately nine million cubic feet
of natural gas per day to a delivery point near
Chattanooga.
Florida Gas, which has a current pipeline system
capacity of 925 million cubic feet per day, was granted
final certificate authority by the FERC on
September 15, 1993, for the further expansion of its
pipeline system. This expansion, known as Phase III,
will increase system capacity by 530 million cubic feet
per day at a capital cost of approximately $900 million
and is expected to be completed by the end of 1994. As
part of the expansion project, Florida Gas contracted
for 100 million cubic feet per day of new firm
transportation to be delivered from Southern's system.
In connection with this expansion, the Company will
advance funds to Citrus and expects to increase its
equity investment in Citrus by $150 million by the end
of the construction period. Also in connection with
this expansion, Florida Gas entered into an agreement to
acquire a 20 percent interest in an existing pipeline in
the Mobile Bay area that, pursuant to the agreement,
will be expanded by over 300 million cubic feet per day
and connected to Florida Gas' pipeline system.
Additionally, Florida Gas is currently reviewing the
prospects for further expansions of its pipeline system
that could be in service in 1996 or 1997 into the
Florida market.
Sonat Marketing continues to expand its natural gas
marketing business. At the end of 1992, Sonat
Marketing's volumes were approximately 500 million cubic
feet per day and were primarily on the Southern system.
During 1993 Sonat Marketing assumed responsibility for
marketing almost all of the natural gas and liquids
production of Sonat Exploration, including execution of
Sonat Exploration's risk management program. This has
allowed Sonat Marketing to expand its presence in Gulf
Coast, Midwest, and Northeast markets and, in turn,
provides an attractive market to unaffiliated producers.
As a result of these efforts, Sonat Marketing's average
daily sales volumes now exceed 1.1 billion cubic feet
per day, making it one of the twenty largest natural gas
marketers in the country.
<PAGE>
Natural Gas Transmission and Marketing Operations
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Revenues:
Gas sold by Southern $ 72 $217
Gas sold by Sonat Marketing 229 105
Other sales 5 4
Total Gas Sold 306 326
Market transportation and storage 82 39
Supply transportation 11 12
Other 52 22
Total Revenues $451 $399
Natural Gas Cost:
Purchased from others $214 $210
Intersegment purchases 75 37
Total Natural Gas Cost $289 $247
Transition Cost Recovery and Gas
Purchase Contract Settlement Costs $ 43 $ 17
Depreciation and Amortization $ 17 $ 16
Operating Income $ 53 $ 61
Equity in Earnings
of Unconsolidated Affiliates $ 3 $ 1
(Billion Cubic Feet)
Southern Volumes:
Gas sold - 54
Market transportation 159 102
Total Market Throughput 159 156
Supply transportation 79 84
Total Volumes 238 240
Transition gas sales 33 -
Sonat Marketing Sales Volumes 100 56
Florida Gas Volumes (100%):
Gas sold - 7
Market transportation 66 58
Total Market Throughput 66 65
Supply transportation 5 12
Total Volumes 71 77
</TABLE>
<PAGE>
Quarter-to-Quarter Analysis
Southern's operating results for the first quarter
of 1994 were down due primarily to a change in rate
design implemented under Order No. 636, which shifts
earnings out of the first quarter and into the remainder
of the year. The decrease in operating results was also
due to the reduction in rate base resulting from the
sale of working gas storage to customers as part of the
implementation of Order No. 636. These declines were
partially offset by lower operating and maintenance
expense resulting from a $4 million reduction in fuel
gas liability and by lower general and administrative
expenses due to a $4 million reduction in stock-based
employee compensation.
Gas sales revenue and gas cost at Southern
decreased significantly from the 1993 quarter as a
result of implementing Order No. 636, but still include
$73 million of transition gas sales from supply
remaining under contract (see Order No. 636 discussion
below). Total market throughput increased 2 percent
during the quarter although Order No. 636 resulted in a
shift in volumes from sales to market transportation.
Supply transportation decreased due to a decline in
deliverability.
Other revenue increased in the 1994 period due
primarily to the recovery of transition costs at
Southern.
Sonat Marketing's margins and sales volumes
increased significantly over the first quarter of 1993
as a result of fully integrating the marketing of Sonat
Exploration's production and expanding activities on
non-affiliated pipelines through the purchase of
additional third-party volumes.
Equity in earnings of Citrus for the first quarter
of 1994 increased $3 million from a loss of $2 million
in 1993 due to lower depreciation expense resulting from
a change in the estimated useful life of the pipeline
system and to increased equity AFUDC income recognized
on the Florida Gas expansion. Operationally, high
prices for natural gas relative to competing No. 6 fuel
oil contributed to a significant reduction in earnings
in 1994.
Order No. 636
In 1992 the FERC issued its Order No. 636 (the
Order). As required by the Order, interstate natural
gas pipeline companies have made significant changes in
the way they operate. The Order required pipelines,
among other things, to: (1) separate (unbundle) their
sales, transportation, and storage services; (2) provide
a variety of transportation services, including a "no-
notice" service pursuant to which the customer is
entitled to receive gas from the pipeline to meet
fluctuating requirements without having previously
scheduled delivery of that gas; (3) adopt a straight-
fixed-variable (SFV) method for rate design (which
assigns more costs to the demand component of the rates
than do other rate design methodologies previously
utilized by pipelines); and (4) implement a pipeline
capacity release program under which firm customers have
the ability to "broker" the pipeline capacity for which
they have contracted. The Order also authorized
pipelines to offer unbundled sales services at market-
based rates and allowed for pregranted abandonment of
some services.
In requiring that Southern provide unbundled
storage service, the Order resulted in a substantial
reduction of Southern's working storage gas inventory
and consequently a reduction in its rate base. This
reduction was effective on November 1, 1993, when
Southern restructured pursuant to the Order and sold, at
its cost, $123 million of its working storage gas
inventory to its customers. The Order also resulted in
rates that are less seasonal, thereby shifting revenues
and earnings for Southern out of the winter months.
The FERC issued an order on September 3, 1993 (the
September 3 order), that generally approved a compliance
plan for Southern and directed it to implement
restructured services on November 1, 1993. In
accordance with the September 3 order, Southern
solicited service elections from its customers in order
to implement its restructured services on
November 1, 1993. Southern's largest customer, Atlanta
Gas Light Company and its subsidiary, Chattanooga Gas
Company (collectively Atlanta) signed firm
transportation service agreements with transportation
demands of 582 million cubic feet per day for a one-year
term ending October 31, 1994, and 118 million cubic feet
per day for a term extending until April 30, 2007, at
the maximum FERC-approved rates. This represented an
aggregate reduction of 100 million cubic feet per day
from Atlanta's level of service prior to
November 1, 1993. Southern's other customers elected in
aggregate to obtain an amount of firm transportation
services that represented a slight increase from their
level of firm sales and transportation services from
Southern prior to Southern's implementation of Order
No. 636, at the maximum FERC-approved tariff rates, for
terms ranging from one to ten or more years.
Southern's discussions are continuing with Atlanta
and its other distribution customers regarding their
elections for firm transportation service on Southern's
system. It is possible that these discussions could
result in a rate reduction by Southern as part of an
overall settlement. Although management believes that
most of Southern's distribution customers ultimately
will commit to some type of new firm transportation
agreements with Southern under its restructuring program
beyond those described above, it is unable to predict at
what total volume level or for what duration such
commitments will be made.
Natural Gas Sales and Supply
As discussed in Note 4 of the Notes to Condensed
Consolidated Financial Statements, Southern is incurring
certain transition costs as a result of implementing
Order No. 636, and for Southern, those are primarily gas
supply realignment (GSR) costs relating to amendment or
termination of existing gas purchase contracts. In its
restructuring settlement discussions, Southern has
advised its customers that the amount of GSR costs that
it actually incurs will depend on a number of variables,
including future natural gas and fuel oil prices, future
deliverability under Southern's existing gas purchase
contracts, and Southern's ability to renegotiate certain
of these contracts. While the level of GSR costs is
impossible to predict with certainty because of these
numerous variables, based on current spot-market prices,
a range of estimates of future oil and gas prices, and
recent contract renegotiations, the amount of GSR costs
are estimated to be in the range of approximately $275-
$325 million on a present value basis. This amount
includes the payments made to amend or terminate gas
purchase contracts described in Note 4.
Sales by Southern are anticipated to continue only
until Southern's remaining supply contracts expire, are
terminated, or are assigned. Southern is attempting to
terminate its remaining gas purchase contracts through
which it had traditionally obtained its long-term gas
supply. Some of these contracts contain clauses
requiring Southern either to purchase minimum volumes of
gas under the contract or to pay for it (take-or-pay
clauses). Although Southern currently is incurring
essentially no take-or-pay liabilities under these
contracts, the annual weighted average cost of gas under
these contracts is in excess of current spot-market
prices. Pending the termination of these remaining
supply contracts, Southern has agreed to sell a portion
of its remaining gas supply to a number of its firm
transportation customers for a one-year term that began
November 1, 1993. The sales agreements with Atlanta
were extended through March 31, 1995. The remainder of
Southern's gas supply will be sold on a month-to-month
basis. Southern will file to recover as a GSR cost
pursuant to Order No. 636 the difference between the
cost associated with the gas supply contracts and the
revenue from the sales agreements and month-to-month
sales as well as any cost previously incurred or
incurred in the future as a result of Order No. 636 to
terminate or reduce the price under Southern's remaining
contracts.
Through March 31, 1994, Southern reached agreements
to reduce significantly the price payable under a number
of high-cost gas purchase contracts in exchange for
payments with a present value of approximately
$174 million. Southern's rate filings to recover these
payments as GSR costs are described in Note 4.
Southern's purchase commitments under its remaining
gas supply contracts for the years 1994 through 1998
(which exclude those under the Exxon contract related to
the Mississippi Canyon Facilities discussed in Note 4)
are estimated as follows:
<TABLE>
<CAPTION>
Estimated
Purchase
Commitments
(In Millions)
<S> <C>
1994 $200
1995 150
1996 85
1997 70
1998 65
Total $570
</TABLE>
These estimates are subject to significant
uncertainty due both to the number of assumptions
inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the
three major factors that determine purchase commitments
(underlying reserves, future deliverability, and future
price) is known today with certainty.
Rate Matters
Several general rate changes have been implemented
by Southern and remain subject to refund. See Note 4 of
the Notes to Condensed Consolidated Financial Statements
for a discussion of rate matters.
Settlement Discussions
As discussed in Note 4, Southern's customers are
challenging its recovery of GSR costs and Southern is
subject to other litigation. Southern has continued to
have settlement discussions with its major customers in
an effort to resolve all of Southern's outstanding rate
and service agreement issues and its Order No. 636
transition cost recovery. Southern cannot predict the
outcome of those discussions or whether any settlement
will be reached with its customers. Southern is also
unable to predict all of the elements of the outcome of
its Order No. 636 restructuring proceeding or its rate
filings to recover its transition costs.
Citrus Corp.
Citrus' historical losses are mainly due to a high
level of depreciation and interest expense. Since
Citrus was acquired in mid-1986, however, cash generated
by operations has been sufficient to fund normal capital
expenditures and a portion of major expansion projects.
Citrus' restructuring of its services in 1990 has helped
to mitigate the effect of declines in the price of No. 6
fuel oil on its revenue and margins. The results of
operations from Citrus, however, have continued to be
strongly influenced by the level of No. 6 fuel oil
prices and the relationship of natural gas prices to
fuel oil prices. Citrus has entered into a binding
letter agreement to restructure the pricing and extend
the term of two gas supply contracts with its major
customer on a basis that should eliminate or reduce the
price volatility that has historically been experienced
under these contracts.
Florida Gas has terminated its gas purchase
contracts with a weighted average cost in excess of
current spot-market prices and has been negotiating with
its customers and the FERC to recover settlement
payments made to terminate such contracts as a part of
its Order No. 636 proceeding. On September 17, 1993,
Florida Gas received approval of its restructuring
settlement proposal (the Restructuring Settlement) with
regard to the Order. The Restructuring Settlement
includes a Transition Cost Recovery (TCR) mechanism that
allows Florida Gas, effective November 1, 1993, to
recover from its customers 100 percent of payments above
the $106 million level approved in a previous
settlement, up to $160 million. Florida Gas will be
allowed to recover 75 percent of any amounts greater
than $160 million. Florida Gas has substantially
completed the renegotiation and termination of these
contracts for less than $160 million, however, and
therefore expects to recover all of the amounts spent
and not already expensed through its approved TCR
mechanism.
Citrus has historically obtained its own financing
independent of its parent companies. Debt financing by
Citrus with outside parties is nonrecourse to its parent
companies and the Company has no contractual or legal
requirement to maintain Citrus' liquidity. Citrus
recently obtained a $300 million one-year financing that
has support provisions from its parent companies. In
connection with the construction of the Phase III
expansion, the Company will advance Citrus funds and
expects to have made an equity investment of
approximately $150 million in 1994. See Capital
Expenditures below.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Other Income - Equity in Earnings of
Unconsolidated Affiliates $5 $1
</TABLE>
Equity in earnings of unconsolidated affiliates
increased in 1994 due primarily to an increase in equity
of Citrus (discussed earlier in the Natural Gas
Transmission and Marketing section) and to the inclusion
of equity in Sonat Offshore Drilling Inc. (See Note 2
of the Condensed Consolidated Financial Statements for
a discussion of Sonat Offshore's initial public
offering.) Sonat Offshore's results improved over 1993
due to increased operations in the Gulf Coast and Egypt,
lower interest expense, and completion of the final
turnkey well under the current Mexican package.
Slightly offsetting the increases was a decrease in
equity for the exploration and production affiliates
resulting from the late 1993 acquisition of the
remaining interest in Sonat/P.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Other Income - Other $ 4 $ 3
</TABLE>
The increase in other income is due to the
recognition of a $1 million gain from the sale of oil
and gas properties.
<TABLE>
<CAPTION>
<S> <C> <C>
Interest Income (Expense), Net $(18) $ 2
</TABLE>
The first quarter of 1993 includes $28 million in
accrued interest income and a net $1 million of interest
expense related to a settlement of an examination of the
Company's federal income tax returns for the years 1983-
1985 and certain other tax issues. First quarter 1994
interest expense is lower due to average decreased debt
levels during the quarter and lower interest rates.
<TABLE>
<CAPTION>
<S> <C> <C>
Income Taxes $ 18 $ 21
</TABLE>
In 1994 income taxes decreased due to lower pre-tax
income. The effect of this decrease was partially
offset by a $3 million reduction in taxes in the
1993 period related to a settlement of an examination of
the Company's federal tax returns for the years 1983-
1985. The decrease was also partially offset by lower
Section 29 tax credits and other tax preference items
and an increase in the federal income tax rate.
FINANCIAL CONDITION
CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
Operating Activities $173 $191
</TABLE>
Net cash provided by operating activities decreased
due to the implementation of Order No. 636 by Southern.
Under the Order, Southern currently maintains a limited
merchant role and accordingly does not have significant
quantities of inventory to sell in the winter months.
The reduced gas and inventory sales in the current
period resulted in a much lower cash flow for Southern
when compared to the 1993 period. Conversely, in the
summer months Southern will not have to incur
expenditures to replace inventory levels as it has in
prior years.
Partially offsetting the decrease in Southern's
cash flow from operations was higher cash flow from the
Sonat Exploration's operations resulting from much
higher production volumes.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1994 1993
(In Millions)
<S> <C> <C>
Investing Activities $(177) $(111)
</TABLE>
Net cash used in investing activities increased
$66 million over 1993. This increase is due primarily
to net advances of $95.8 million in the Citrus
expansion, which is slightly offset by a $25 million
reduction in capital expenditures.
<TABLE>
<CAPTION>
<S> <C> <C>
Financing Activities $ 13 $ (70)
</TABLE>
Net cash provided by financing activities reflects
increased net borrowings under the Company's revolving
credit agreement in 1994. Net cash used in 1993
reflects the redemption of Sonat's 7 1/4 Percent Zero
Coupon, Subordinated Convertible Notes, which were not
totally refinanced.
Capital Expenditures
Capital expenditures for the Company's business
segments (excluding unconsolidated affiliates) were as
follows:
<TABLE>
<S> <C> <C>
Exploration and Production $ 65 $ 94
Natural Gas Transmission and Marketing 14 6
Other - 4
Total $ 79 $ 104
</TABLE>
The Company's share of capital expenditures by its
unconsolidated affiliates was $131 million and
$11 million in the first quarter of 1994 and 1993,
respectively. The Company expects that a majority of
the $900 million capital requirements for Citrus'
Phase III expansion will be independently financed by
Florida Gas or Citrus. The Company expects to make a
total equity contribution, however, of approximately
$150 million in 1994 to complete the financing, and
during the first quarter of 1994 the Company made net
non-interest-bearing advances to Citrus of $95.8
million.
Liquidity and Capital Resources
At March 31, 1994, the Company had lines of credit
and a revolving credit agreement with a total capacity
of $750 million. Of this, $460 million was unborrowed
and available. The amount available under the lines of
credit has been reduced by the amount of commercial
paper outstanding of $90 million to reflect the
Company's policy that credit line and commercial paper
borrowings in the aggregate will not exceed the maximum
amount available under its lines of credit and revolving
credit agreement. In 1993 Sonat filed a shelf
registration with the Securities and Exchange Commission
(SEC) for up to $500 million in debt securities. The
net proceeds from the sale of these debt securities are
expected to be used for general corporate purposes,
which may include refinancing of indebtedness, working
capital increases, capital expenditures, possible future
acquisitions, and redemption of securities. Southern
also has a shelf registration with the SEC for up to
$200 million in debt securities of which $100 million
has been issued. Southern expects to continue to use
cash from operations and borrowings on the public or
private markets or loans from affiliates to finance its
capital and other corporate expenditures.
In April 1994 the Board of Directors of the Company
authorized the repurchase of up to two million shares of
the Company's common stock. Purchases would be made
from time-to-time on the open market or in privately
negotiated transactions. Shares purchased under the
authorization, if any, are expected to be reissued in
connection with employee stock option and restricted
stock programs.
The Company holds four million shares of Baker
Hughes Incorporated convertible preferred stock as well
as 11.3 million shares of Sonat Offshore common stock.
These resources, when combined with a strong cash flow
and borrowings in the public or private markets, provide
the Company with the means to fund operations and
currently planned investment and capital expenditures.
Capitalization Information
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Debt to Capitalization 42% 42%
Book Value Per Share $15.97 $15.64
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Vastar Resources, Inc. v. Southern Natural Gas
Company was filed in April 1994 in state court in Harris
County, Texas. Vastar Resources, Inc. ("Vastar") filed
suit against Southern Natural Gas Company ("Southern")
regarding a pricing dispute over the amount owed by
Southern for gas purchased from Vastar that was produced
from the Logansport Field in Louisiana and Texas.
Vastar asked for an unspecified amount of monetary
damages, specific performance, and attorneys fees.
Southern is seeking to have the Texas proceeding stayed
on the basis of a petition for declaratory judgment
styled Southern Natural Gas Company v. Arco Oil and Gas
Company, d/b/a Vastar Resources, Inc. it filed in state
court in Orleans Parish, Louisiana, regarding this same
pricing dispute. Southern is unable to predict the
outcome of either proceeding, but will file to seek to
recover as a GSR cost any additional amounts for gas
purchases that may ultimately be determined it owes to
Vastar as a result of these proceedings.
Arcadian Corporation v. Southern Natural Gas
Company and Atlanta Gas Light Company, an antitrust
lawsuit described in Item 3. Legal Proceedings of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, had been settled pending final,
nonappealable approval by the FERC of the direct
connection and transportation service requested by
Arcadian Corporation. At its meeting on May 11, 1994,
the FERC approved an order granting such approval.
Pursuant to the settlement, the lawsuit will be
dismissed with prejudice when the order becomes final
and nonappealable.
Item 4. Submission of Matters to a Vote of Security
Holders
The Company held its 1994 Annual Meeting of
Stockholders in Birmingham, Alabama, on April 28, 1994.
In addition to the election of Directors and an Auditor,
the following matters were voted upon at the Annual
Meeting: (1) approval of the Company's Performance
Award Plan ("Proposal No. 2"); (2) approval of an
amendment to the Company's Restated Certificate of
Incorporation ("Charter") to increase the number of
authorized shares of Common Stock from 200,000,000 to
400,000,000 shares ("Proposal No. 3"); (3) approval of
a Charter amendment deleting from the Charter a
provision regarding minimum price protection in certain
business combinations ("Proposal No. 4"); (4) approval
of a Charter amendment requiring the Board of Directors
to call a special stockholder meeting upon the request
of certain 3% stockholders, subject to restrictions
("Proposal No. 5"); (5) approval of a Charter amendment
reducing the stockholder vote needed to change the
Company's By-Laws from 67% of the outstanding shares to
60% ("Proposal No. 6"); and (6) approval of a Charter
amendment reducing the stockholder vote needed to
approve certain Charter changes from 67% of the
outstanding shares to 60% ("Proposal No. 7"). The vote
on such Proposals was as follows:
<TABLE>
<CAPTION>
Voted Voted Broker
For Against Abstained Non-Votes
<S> <C> <C> <C> <C>
Proposal No. 2 67,969,197 5,386,920 486,767 502
Proposal No. 3 66,692,726 6,742,003 407,600 1,057
Proposal No. 4 63,033,322 1,517,904 1,284,214 8,007,946
Proposal No. 5 62,934,012 1,768,556 1,131,972 8,008,846
Proposal No. 6 61,943,883 2,798,349 1,093,209 8,007,945
Proposal No. 7 61,586,743 3,064,244 1,176,455 8,015,944
</TABLE>
Proposals No. 2, 3, 5, 6 and 7 were approved by the
stockholders; Proposal No. 4, which required the
affirmative vote of 80 percent of the outstanding
shares, was not approved by the stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
3-(a)* Restated Certificate of
Incorporation of Sonat Inc.
dated May 2, 1994
10* Retirement Plan for Directors
(as amended and restated as of
February 25, 1993)
11* Computation of Earnings per
Share
12* Computation of Ratio of
Earnings to Fixed Charges
23* Consent of Ernst & Young,
Independent Auditors, dated May
11, 1994
* Filed with this Report
(1) The Company will furnish to requesting
security holders the exhibits on this list upon the
payment of a fee of 10 cents per page up to a maximum of
$5.00 per exhibit. Requests must be in writing and
should be addressed to Beverley T. Krannich, Secretary,
Sonat Inc., P. O. Box 2563, Birmingham, Alabama 35202-
2563.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K
during the quarter ended March 31, 1994.<PAGE>
SONAT INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
Date: May 13, 1994 By: /s/ Thomas W. Barker, Jr.
Thomas W. Barker, Jr.
Vice President-Finance and
Treasurer
Date: May 13, 1994 By: /s/ Ronald B. Pruet, Jr.
Ronald B. Pruet, Jr.
Vice President & Controller
EXHIBIT 3-(a)
RESTATED CERTIFICATE OF INCORPORATION
of
SONAT INC.
(Restating the Certificate of Incorporation
as in effect as of April 28, 1994)
(Originally incorporated under the name Southern
Natural Industries, Inc. on January 25, 1973.)
FIRST: The name of the Corporation is Sonat
Inc.
SECOND: The address, including street, number,
city, and county, of the registered office of the
Corporation in the State of Delaware is 32 Loockerman
Square, Suite L-100, City of Dover, County of Kent;
and the name of the registered agent of the
Corporation in the State of Delaware at such address
is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to
engage in any lawful act or activity for which a
corporation may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares which the
Corporation shall have authority to issue is four
hundred ten million (410,000,000), of which ten
million (10,000,000) are to be Serial Preference Stock
of the par value of One Dollar ($1.00) per share and
four hundred million (400,000,000) are to be Common
Stock of the par value of One Dollar ($1.00) per
share.
A. SERIAL PREFERENCE STOCK
1. The Board of Directors of the Corporation
is hereby expressly granted authority, subject to the
provisions of this Article, to authorize from time to
time the issue of one or more series of Serial
Preference Stock and with respect to any such series
to fix, by resolution or resolutions adopted prior to
the issuance thereof, the voting powers (full or
limited), if any, and the designations, preferences
and relative, participating, optional or other special
rights, and qualifications, limitations or
restrictions thereof, of such series, including but
without limiting the generality of the foregoing, the
following:
(a) The number of shares to
constitute such series, and the
distinctive designation thereof;
(b) The dividend rate or rates on
shares of such series and any
restrictions, limitations or conditions
upon the payment of such dividends, and
whether dividends shall be cumulative and,
if so, the date or dates from which
dividends shall cumulate, and the dates on
which dividends, if declared, shall be
payable;
(c) Whether the shares of such
series shall be redeemable and, if so, the
time or times, at whose option the shares
are redeemable, and the price or prices at
which and the other terms and conditions
on which the shares may be redeemed;
(d) The rights of the holders of
shares of such series in the event of the
liquidation, dissolution or winding up of
the Corporation, whether voluntary or
involuntary;
(e) Whether the shares of such
series shall be subject to the operation
of a purchase, retirement or sinking fund
and, if so, the terms and conditions
thereof;
(f) Whether the shares of such
series shall be convertible into, or
exchangeable for, shares of any other
class or series of stock or any other
securities, and if so convertible or
exchangeable, the price or prices or the
rate or rates of conversion or exchange
and the method, if any, of adjusting the
same;
(g) The voting powers, if any, of
the shares of such series in addition to
the voting powers provided by law or this
Certificate of Incorporation, and if so,
the extent thereof; and
(h) Any other preferences and
relative, participating, optional or other
special rights and the qualifications,
limitations or restrictions of such
preferences and/or rights not inconsistent
with law or the provisions of this
Certificate of Incorporation.
2. All shares of any one series of Serial
Preference Stock shall be identical with each other in
all respects, except that shares of such series issued
at different times may differ as to the dates from
which dividends thereon shall cumulate or accrue; and
all shares of Serial Preference Stock of all series
shall be of equal rank in respect of the preference as
to dividends and to payments upon the liquidation,
dissolution or winding up, whether voluntary or
involuntary, of the Corporation.
3. In the event of any liquidation,
dissolution or winding up of the Corporation, whether
voluntary or involuntary, before any payment or
distribution of the assets of the Corporation shall be
made to or set apart for the holders of shares of any
class or classes of stock of the Corporation ranking
junior to Serial Preference Stock, the holders of the
shares of each series of Serial Preference Stock shall
be entitled to receive payment of the amount per share
fixed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of the
shares of such series, plus an amount equal to all
dividends accrued and unpaid thereon to the date of
final distribution to such holders. If upon any
liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of
shares of Serial Preference Stock shall be
insufficient to pay in full the preferential amount
aforesaid, then such assets, or the proceeds thereof,
shall be distributed among such holders ratably in
accordance with the respective amounts which would be
payable on such shares if all amounts payable thereon
were paid in full. After payment to holders of Serial
Preference Stock of the full preferential amounts as
aforesaid, holders of Serial Preference Stock as such
shall have no right or claim to any of the remaining
assets of the Corporation. A liquidation, dissolution
or winding up of the Corporation, as such terms are
used in this Article, shall not be deemed to be
occasioned by or to include (a) any consolidation or
merger of the Corporation with any other corporation
or corporations, or (b) any sale, lease, exchange or
other transfer of any or all of the assets of the
Corporation to another corporation or corporations
pursuant to a plan which shall provide for the receipt
by the Corporation or its stockholders, as all or the
major portion of the consideration for such sale,
lease, exchange or transfer, of securities of such
other corporation or corporations or of any
corporation or corporations controlled by, controlling
or affiliated with such other corporation or
corporations.
4. The holders of shares of Serial Preference
Stock of each series shall be entitled to cash
dividends, when and as declared by the Board of
Directors out of the funds legally available therefor,
in accordance with the resolution or resolutions
adopted by the Board of Directors providing for the
issue of such series, payable on such dates in each
year as may be fixed in such resolution or
resolutions. Dividends in full shall not be declared
or paid or set apart for payment on Serial Preference
Stock of any one series for any dividend period unless
dividends in full have been paid or declared and set
apart for payment on all shares of Serial Preference
Stock of all series upon which a dividend is then due
and payable. When the dividends then due and payable
are not paid in full on all series of Serial
Preference Stock the shares of all series shall share
ratably in the payment of dividends, including
accumulations, if any, in accordance with the sums
which would be payable on such shares if all dividends
then due and payable on such shares were declared and
paid in full. A "dividend period" is the period
between any two consecutive dividend payment dates
(or, when shares are originally issued, the period
from the date from which dividends are cumulative or
begin to accrue to the first dividend payment date) as
fixed for a particular series. Accruals of dividends
shall not bear interest.
5. So long as any Serial Preference Stock is
outstanding the Corporation will not declare or pay,
or set apart for payment, any dividends (other than
dividends payable in shares of any class or classes of
stock of the Corporation ranking junior to Serial
Preference Stock), or make any other distribution, on
shares of any class or classes of stock of the
Corporation ranking junior to Serial Preference Stock,
and will not redeem, purchase or otherwise acquire,
directly or indirectly, whether voluntarily, for a
sinking fund, or otherwise, any shares of any class or
classes of stock of the Corporation ranking junior to
Serial Preference Stock, if at the time of making such
declaration, payment, setting apart, distribution,
redemption, purchase or acquisition the Corporation
shall be in default with respect to any dividend
payable on or any obligation to retire shares of
Serial Preference Stock, provided that,
notwithstanding the foregoing, the Corporation may at
any time redeem, purchase or otherwise acquire shares
of stock of any class ranking junior to Serial
Preference Stock in exchange for, or out of the net
cash proceeds from the concurrent sale of, other
shares of stock of any such junior class.
6. If in any case the amounts payable with
respect to any obligations to retire shares of Serial
Preference Stock are not paid in full in the case of
all series with respect to which such obligations
exist, the number of shares of each of such series to
be retired pursuant to any such obligations shall be
in proportion to the respective amounts which would be
payable on account of such obligations if all amounts
payable in respect of such series were discharged in
full.
7. If and whenever dividends on any series of
Serial Preference Stock shall not have been paid in an
aggregate amount at least equal to six quarterly
dividends upon the shares of such series, the holders
of Serial Preference Stock, voting separately as a
class regardless of series, shall be entitled, at any
annual meeting of stockholders or special meeting held
in lieu thereof, or at a special meeting of the
holders of Serial Preference Stock called as
hereinafter provided, to elect two additional
directors. At any time while the holders of Serial
Preference Stock, voting as a class, are entitled to
elect two directors as herein provided, they shall not
be entitled to participate with the holders of Common
Stock in the election of any other directors
notwithstanding any right otherwise granted to any
series to vote in the election of directors. Whenever
all dividends accrued and unpaid on such series of
Serial Preference Stock then outstanding having
cumulative dividends shall have been paid and
dividends thereon for the then current dividend period
shall have been paid, or declared and a sum sufficient
in payment thereof set apart, or, if dividends on any
series of Serial Preference Stock shall not be
cumulative, whenever such dividends shall have been
paid regularly for one year, or declared and a sum
sufficient in payment thereof set apart, the right of
the holders of Serial Preference Stock to elect two
directors shall cease, subject always to the same
provisions for the vesting of such voting rights in
the case of any similar future arrearages in
dividends.
At any time after such voting power shall have
been so vested in the holders of Serial Preference
Stock, the Secretary of the Corporation may, and, upon
the written request of the holders of record of 10% or
more of Serial Preference Stock then outstanding
addressed to him at the principal office of the
Corporation shall, call a special meeting of the
holders of Serial Preference Stock for the election of
the directors to be elected by them to be held within
45 days after such call and at the place and upon the
notice provided by law and in the By-Laws for the
holding of meetings of stockholders; provided,
however, that the Secretary shall not be required to
call such special meeting in the case of any such
request received less than 90 days before the date
fixed for any annual meeting of stockholders or
special meeting in lieu thereof. If any such special
meeting required to be called as provided shall not be
called by the Secretary within 45 days after the
receipt of any such request, then the holders of
record of 10% or more of Serial Preference Stock then
outstanding may designate in writing one of their
number to call such meeting, and the person so
designated may call such meeting to be held at the
place and upon the notice above provided and for that
purpose shall have access to the Serial Preference
Stock ledger of the Corporation. No such special
meeting and no adjournment thereof shall be held on a
date later than 30 days before the annual meeting of
the stockholders or special meeting held in lieu
thereof next succeeding the time when the holders of
Serial Preference Stock become entitled to elect
directors as above provided. If any such special
meeting shall be called as above provided, then, by
vote of the holders of at least a majority of the
shares of Serial Preference Stock which are present or
represented by proxy at such meeting, the then
authorized number of directors of the Corporation
shall be increased by two, and at such meeting the
holders of Serial Preference Stock shall be entitled
to elect the additional directors so provided for, but
any directors so elected shall not hold office beyond
the annual meeting of the stockholders or special
meeting held in lieu thereof next succeeding the time
when the holders of Serial Preference Stock become
entitled to elect directors as above provided.
Whenever the holders of Serial Preference Stock shall
be divested of the voting power as above provided, the
terms of office of all persons elected as directors by
the holders of Serial Preference Stock as a class
shall forthwith terminate and the number of the Board
of Directors shall be reduced accordingly.
8. So long as any Serial Preference Stock is
outstanding, the Corporation shall not, without the
consent of the holders of two-thirds of the
outstanding shares of Serial Preference Stock,
irrespective of series, either given by vote in person
or by proxy at a meeting called for that purpose, or
given in writing, (a) authorize, or increase the
authorized number of shares of, any class of stock
ranking prior to Serial Preference Stock, or
(b) amend, alter or repeal any of the provisions of
this Article so as adversely to affect the
preferences, rights or powers of the Serial Preference
Stock; and the Corporation shall not amend, alter, or
repeal any resolution of the Board of Directors fixing
the terms of a series of Serial Preference Stock so as
adversely to affect the preferences, rights or powers
of shares of such series without the prior consent of
the holders of two-thirds in number of the outstanding
shares of such series, acting as a class, given as
aforesaid.
9. Whenever reference is made to shares
"ranking prior to Serial Preference Stock", such
reference shall mean and include only those shares of
the Corporation in respect of which the rights of the
holders thereof as to the payment of dividends or as
to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation are given preference over the rights
of the holders of Serial Preference Stock; whenever
reference is made to shares "on a parity with Serial
Preference Stock", such reference shall mean and
include only those shares of Serial Preference Stock
and all other shares of the Corporation in respect of
which the rights of the holders thereof as to the
payment of dividends and as to distributions in the
event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation rank on
an equal basis (except as to the amounts fixed
therefor) with the rights of the holders of Serial
Preference Stock; and whenever reference is made to
shares "ranking junior to Serial Preference Stock",
such reference shall mean and include only those
shares of the Corporation in respect of which the
rights of the holders as to the payment of dividends
and as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation are junior and subordinate to the
rights of the holders of Serial Preference Stock.
B. COMMON STOCK
Except as provided by the laws of Delaware, this
Certificate of Incorporation or by the resolutions of
the Board of Directors of the Corporation establishing
any series of Serial Preference Stock, the exclusive
voting power for all purposes shall be vested in the
holders of Common Stock. Except as required by the
laws of Delaware, should the affirmative vote or
written consent of the holders of shares of Serial
Preference Stock voting as a class, or shares of any
series thereof voting as a class, at the time
outstanding be required for any purpose, the holders
of Common Stock shall not have the right to vote or
consent with respect to the action to be taken, either
as a class or together with any other class or series,
unless the action to be taken would adversely affect
the rights or powers of Common Stock.
FIFTH: The following provisions are inserted
for the management of the business and for the conduct
of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of
the Corporation and of its directors and stockholders:
(1) The number of directors of the
Corporation (exclusive of directors (the
"Preference Stock Directors") who may be
elected by the holders of any one or more
series of Serial Preference Stock which
may at any time be outstanding, voting
separately as a class or classes) shall
not be less than five nor more than
fifteen, the exact number to be fixed from
time to time solely by resolution of the
Board of Directors, acting by not less
than a majority of the directors then in
office, and to be fixed initially at
twelve.
(2) The Board of Directors
(exclusive of Preference Stock Directors)
shall be divided into three classes, with
the term of office of one class expiring
each year. At the annual meeting of
stockholders in 1983, four directors of
the first class shall be elected to hold
office for a term expiring at the 1984
annual meeting, four directors of the
second class shall be elected to hold
office for a term expiring at the 1985
annual meeting and four directors of the
third class shall be elected to hold
office for a term expiring at the 1986
annual meeting. Commencing with the
annual meeting of stockholders in 1984,
each class of directors whose term shall
then expire shall be elected to hold
office for a three year term and until the
election and qualification of their
respective successors in office. In case
of any increase in the number of directors
(other than Preference Stock Directors),
the number of directors in each class
shall be as nearly equal as possible.
Election of directors need not be by
ballot unless the By-Laws so provide.
(3) Subject to the rights of the
holders of any one or more series of
Serial Preference Stock then outstanding,
newly created directorships resulting from
any increase in the authorized number of
directors or any vacancies in the Board of
Directors resulting from death,
resignation, retirement, disqualification,
removal from office or other cause shall
be filled solely by the Board of
Directors, acting by not less than a
majority of the Directors then in office.
Any director so chosen shall hold office
until the next election of the class for
which such director shall have been chosen
and until his successor shall be elected
and qualified. No decrease in the number
of directors shall shorten the term of any
incumbent director.
(4) The Board of Directors shall
have power without the assent or vote of
the stockholders
(a) To make, alter,
amend, change, or repeal the
By-Laws of the Corporation
other than By-Laws made by the
stockholders which provide
otherwise for their
alteration, amendment, change
or repeal.
(b) To determine from
time to time whether, and to
what extent, and at what times
and places, and under what
conditions and regulations,
the accounts and books of the
Corporation (other than the
stock ledger) or any of them,
shall be open to the
inspection of the
stockholders.
(5) In addition to the powers and
authorities hereinbefore or by statute
expressly conferred upon them, the
directors are hereby empowered to exercise
all such powers and do all such acts and
things as may be exercised or done by the
Corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, of
this certificate, and to any By-Laws from
time to time made by the stockholders;
provided, however, that no By-Laws so made
shall invalidate any prior act of the
directors which would have been valid if
such By-Laws had not been made.
(6) Except as otherwise provided
in Article FOURTH of this certificate with
respect to the holders of any one or more
series of Serial Preference Stock, special
meetings of the stockholders for any
purpose or purposes shall be called solely
by resolution of the Board of Directors,
acting by not less than a majority of the
entire Board, and, except as set forth in
this Section (6), the power of
stockholders to call a special meeting is
specifically denied. Notwithstanding the
foregoing, and subject to the conditions
set forth in this Section (6), the Board
of Directors shall call a special meeting
of stockholders upon the receipt by the
Secretary of the Corporation of a Request
(as hereinafter defined) of a Qualified
Holder (as hereinafter defined). The
place and notice of any special meeting
shall be as set forth below and in the By-
Laws. Only business properly brought
before a special meeting shall be
transacted at such meeting. Business
shall be deemed properly brought only if
it is (i) specified in the notice of
meeting (or any supplement thereto) given
by or at the direction of the Board of
Directors, (ii) otherwise properly brought
before the meeting by or at the direction
of the Board of Directors or (iii) brought
before the meeting by a Qualified Holder
entitled to vote at such meeting if
written notice of such Qualified Holder's
intent to bring such business before such
meeting was contained in the Request. The
Chairman of the meeting may refuse to
transact any business at any special
meeting made without compliance with the
foregoing procedure.
If the Secretary of the Corporation
receives a Request from a Qualified
Holder, the Board of Directors shall
select a date for the special meeting not
less than 60 nor more than 90 days after
the date the Request is received;
provided, however, that (a) the Board
shall not be required to call a special
meeting at the request of any Qualified
Holder that has, within the twelve months
preceding the date the Request is
received, delivered to the Corporation a
Request pursuant to which a special
meeting has been called, and (b) the Board
shall not be required to call a special
meeting pursuant to a Request received
during the 150-day period preceding the
anniversary of the most recent annual
meeting of stockholders.
For the purposes of this Section
(6):
(a) The term "Qualified Holder"
shall mean any individual, corporation,
partnership or other person or entity
(collectively, a "Person") which, together
with all of its "affiliates" (as such term
is defined on December 3, 1993 in Rule 405
under the Securities Act of 1933), has had
continuous Ownership (as hereinafter
defined) of at least 3 percent of the
outstanding shares of capital stock of the
Corporation entitled to vote for the
election of directors ("Voting Stock")
throughout the six-month period prior to
the date the Corporation receives the
Request from such Person. A "Qualified
Holder" shall not include a group of
Persons acting in concert or pursuant to a
contractual arrangement.
(b) The term "Ownership" of Voting
Stock shall mean the sole possession of
both the power to vote (or direct the
voting of) and the power to dispose of (or
direct the disposition of) such Voting
Stock.
(c) The term "Request" shall mean
a writing received by the Secretary of the
Corporation at the principal executive
offices of the Corporation, which requests
the Board of Directors to call a special
meeting of the stockholders and which sets
forth: (1) a brief description of the
business desired to be brought before the
meeting and the reasons for conducting
such business at the meeting; (2) the name
and address of the Qualified Holder who
intends to propose such business; (3) a
representation that the stockholder is a
Qualified Holder of Voting Stock, agrees
to furnish such supporting documentation
with respect to such stockholder's status
as a Qualified Holder as the Corporation
may request, is entitled to vote at such
meeting and intends to appear in person or
by proxy at such meeting to propose such
business; and (4) any material interest of
the stockholder in such business. If the
Qualified Holder intends to present a
proposal at the special meeting and to
have such proposal included in the
Corporation's proxy materials for such
meeting and the Request includes the
proposal and any supporting statement with
respect thereto, the Corporation's proxy
materials for the meeting shall include
such proposal and supporting statement,
provided (A) the Qualified Holder complies
with the requirements of Rule 14a-8 under
the Securities Exchange Act of 1934, as
amended (or any successor rule), and
(B) the Board of Directors does not
determine that such proposal and
supporting statement may be omitted from
the Corporation's proxy materials pursuant
to paragraph (c) of such Rule 14a-8.
(7) Subject to the rights of the
holders of any one or more series of
Serial Preference Stock then outstanding,
any director or the entire Board of
Directors of the Corporation may be
removed only for cause. At any annual
meeting of stockholders of the Corporation
or at any special meeting of stockholders
of the Corporation the notice of which
shall state that the removal of a director
or directors is among the purposes of the
meeting, the holders of capital stock
entitled to vote thereon, present in
person or by proxy, by vote of a majority
of the outstanding shares thereof, may
remove such director or directors for
cause.
(8) The annual meeting of
stockholders of the Corporation shall be
held each year at such date during the
first five months of each year beginning
January 1 as shall be specified in the By-
Laws. At such annual meeting, or at such
adjournment thereof as may be taken
pursuant to the By-Laws, the Board of
Directors of the Corporation shall be
elected to hold office as provided in
Section (2) of this Article FIFTH.
(9) No action required to be taken
or which may be taken at any annual or
special meeting of stockholders of the
Corporation may be taken without a
meeting, and the power of stockholders to
consent in writing, without such a
meeting, to the taking of any action is
specifically denied.
(10) The stockholders of the
Corporation may exercise their power to
alter, amend, change, repeal or adopt By-
Laws of the Corporation only by the
affirmative vote of the holders of not
less than 60 percent of the outstanding
shares of capital stock of the Corporation
entitled to vote for the election of
directors, provided that notice of such
proposed alteration, amendment, repeal or
adoption is included in the notice of
meeting called for the taking of such
action.
(11) At each annual meeting of the
stockholders, or at an adjournment
thereof, there shall be elected by
plurality vote of the outstanding shares
of Common Stock an Auditor of the Corpora-
tion, who shall hold office until the next
annual meeting of the stockholders. The
Auditor shall be an individual who is a
member in good standing of the American
Institute of Accountants or (if said
Institute shall cease to exist) of its
successor or an organization of comparable
standing, or shall be a co-partnership a
majority of whose members are members in
good standing of said Institute or its
successor or comparable organization as
aforesaid; and shall in any event have
rendered audit reports for at least five
corporations or associations each having
at the time of such reports assets carried
on their respective balance sheets at more
than $20,000,000. The Auditor shall not
be a director of the Corporation, nor an
officer or salaried employee thereof. Not
later than thirty days prior to the day
fixed for the annual meeting of
stockholders in any year, the Auditor
shall submit a written report by the
Auditor as to the balance sheet of the
Corporation as at the close of business on
the December 31 next preceding the date of
such report, as to the surplus account of
the Corporation and as to the earnings or
income of the Corporation since its
organization or since the last preceding
report by the Auditor as the case may be.
The Corporation shall cause copies of such
report to be mailed not later than twenty
days prior to the day fixed for such
annual meeting to each stockholder of
record of the Corporation. The Board of
Directors of the Corporation shall cause
to be included in the notice given to
stockholders of each annual meeting a
statement of the name of the individual or
co-partnership which the Board of
Directors recommends for election as
Auditor at such meeting, and also a
statement of the name of the Auditor then
in office; but no such recommendation by
the Board of Directors shall be binding
upon the stockholders. The Board of
Directors shall cause a copy of such
notice to be mailed to the existing
Auditor at the same time at which it is
mailed or otherwise given to stockholders.
No person, other than the Auditor then in
office, shall be eligible for election as
Auditor at any annual meeting of
stockholders unless notice of intention to
nominate that person as Auditor has been
given by a stockholder to the Corporation
not less than ten days before such annual
meeting; the Corporation shall promptly
mail a copy of such notice to the Auditor
then in office. The Auditor shall have
the right to attend all meetings of stock-
holders at which the Auditor or any
accounts of the Corporation examined or
reported on by the Auditor are considered
and to make any statement or explanation
regarding the accounts which the Auditor
may desire; but the Auditor shall not be
entitled to any vote. The Auditor shall
have the right of access to all books,
accounts, vouchers and records of the
Corporation and may require from its
officers such information and explanation
as may be necessary for the performance of
the duties of the Auditor. The officers
and directors of the Corporation may rely
upon the accuracy of all reports by the
Auditor to the Corporation or its
stockholders and will be protected in any
action or nonaction by them in good faith
in reliance thereon. Semi-annual,
quarterly or interim reports shall be made
by the Auditor from time to time as may be
directed by the Board of Directors of the
Corporation. The Board of Directors may
fill any vacancy occurring in the office
of Auditor, by death, resignation or
otherwise, at any time except between the
call and final adjournment of an annual
meeting of stockholders or of a special
meeting of stockholders called for the
purpose of removing the Auditor or
electing a new Auditor. The Auditor may
be removed, and a new Auditor elected to
fill the vacancy caused by such removal or
otherwise, at any special meeting of the
stockholders the notice of which shall
include such removal and election as
purposes of the meeting, by the vote of a
majority of the outstanding shares of the
Common Stock of the Corporation; a copy of
the notice of any such meeting shall be
mailed by the Corporation to the Auditor
then in office at the same time at which
such notice is mailed or otherwise given
to stockholders.
(12) The Board of Directors of the
Corporation in its discretion may submit
for approval, ratification or confirmation
by the stockholders any contract,
transaction or act of the Board of
Directors or any committee thereof or of
any officer, agent or employee of the
Corporation, and any such contract,
transaction or act which shall have been
so approved, ratified or confirmed by the
holders of a majority of the issued and
outstanding stock entitled to vote shall
be as valid and binding upon the
Corporation and upon the stockholders
thereof as though it had been approved and
ratified by each and every stockholder of
the Corporation.
(13) No contract or agreement
between the Corporation and any other
corporation or party which owns a majority
of the capital stock of the Corporation or
any subsidiary of such other corporation
shall be made or entered into without the
affirmative vote of a majority of the
whole Board of Directors at a regular
meeting of the Board.
(14) No director shall be
personally liable to the Corporation or
any stockholder for monetary damages for
breach of fiduciary duty as a director,
except (i) for any breach of such
director's duty of loyalty to the
Corporation or its stockholders, (ii) for
acts or omissions not in good faith or
which involve intentional misconduct or a
knowing violation of law, (iii) under
Section 174 of the Delaware General
Corporation Law, or (iv) for any
transaction from which the director
derived an improper personal benefit. If
the Delaware General Corporation Law is
amended after approval by the stockholders
of this provision to authorize corporate
action further eliminating or limiting the
personal liability of directors, then the
liability of directors of the Corporation
shall be eliminated or limited to the full
extent permitted by the Delaware General
Corporation Law, as so amended.
The Corporation shall indemnify to
the full extent permitted by the laws of
the State of Delaware as from time to time
in effect, each person who is or was a
director or officer of the Corporation in
the event that he was or is a party or is
threatened to be made a party to, or
otherwise requires representation by
counsel in connection with, any
threatened, pending or completed action,
suit or proceeding, whether civil,
criminal, administrative or investigative,
by reason of the fact that he is or was a
director, officer, employee or agent of
the Corporation, or is or was serving at
the request of the Corporation as a
director, officer, employee or agent of
another corporation, partnership, joint
venture, trust or other enterprise, or by
reason of any action alleged to have been
taken or omitted in such capacity. The
right to indemnification conferred by this
Section (14) shall also include the right
of such persons to be paid in advance by
the Corporation for their expenses to the
full extent permitted by the laws of the
State of Delaware as from time to time in
effect. The right to indemnification
conferred on the directors and officers of
the Corporation by this Section (14) shall
be a contract right.
Unless otherwise determined by the
Board of Directors of the Corporation, the
Corporation shall indemnify to the full
extent permitted by the laws of the State
of Delaware as from time to time in
effect, each person who is or was an
employee or agent of the Corporation in
the event that he was or is a party or is
threatened to be made a party to, or
otherwise requires representation by
counsel in connection with, any
threatened, pending or completed action,
suit or proceeding, whether civil,
criminal, administrative or investigative,
by reason of the fact that he is or was an
employee or agent of the Corporation, or
is or was serving at the request of the
Corporation as a director, officer,
employee or agent of another corporation,
partnership, joint venture, trust or other
enterprise, or by reason of any action
alleged to have been taken or omitted in
such capacity.
The rights and authority conferred
in this Section (14) shall not be
exclusive of any other right which any
person may have or hereafter acquire under
any statute, provision of this Certificate
of Incorporation or the By-Laws of the
Corporation, agreement, vote of
stockholders or disinterested directors or
otherwise.
Neither the amendment nor repeal of
this Section (14), nor the adoption of any
provision of the Certificate of
Incorporation or By-Laws or of any statute
inconsistent with this Section (14), shall
eliminate or reduce the effect of this
Section (14) in respect of any acts or
omissions occurring prior to such
amendment, repeal or adoption of an
inconsistent provision.
Notwithstanding any other provisions of this
Certificate of Incorporation or the By-Laws of the
Corporation (and notwithstanding the fact that a
lesser percentage may be specified by law, this
Certificate of Incorporation or the By-Laws of the
Corporation), the affirmative vote of the holders of
60 percent of the outstanding shares of capital stock
of the Corporation entitled to vote for the election
of directors shall be required to amend, repeal or
adopt any provision inconsistent with Sections (1),
(2), (3), (6), (7), (8), (9) and (10) of this Article
FIFTH.
SIXTH: Whenever a compromise or arrangement is
proposed between the Corporation and its creditors or
any class of them and/or between the Corporation and
its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware
may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof
or on the application of any receiver or receivers
appointed for the Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any
receiver or receivers appointed for the Corporation
under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case
may be, to be summoned in such manner as the said
Court directs. If a majority in number representing
three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any
reorganization of the Corporation as consequence of
such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if
sanctioned by the Court to which the said application
has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or
class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
SEVENTH: Any other provision of this
Certificate of Incorporation to the contrary
notwithstanding, the affirmative vote of the holders
of not less than 80 percent of the outstanding shares
of capital stock of the Corporation entitled to vote
generally (the "Voting Stock") and the affirmative
vote of the holders of not less than 67 percent of the
Voting Stock held by stockholders other than a Related
Person (as hereinafter defined) shall be required for
the approval or authorization of any Business
Combination (as hereinafter defined) or of any series
of related transactions which, if taken together,
would constitute a Business Combination of the
Corporation with any Related Person; provided,
however, that the 80 percent and 67 percent voting
requirements shall not be applicable if:
1. A majority of Continuing
Directors (as hereinafter defined) of the
Corporation (a) have expressly approved in
advance the acquisition of Voting Stock of
the Corporation that caused the Related
Person to become a Related Person, or
(b) have approved the Business
Combination; or
2. The Business Combination is a
merger or consolidation and the cash or
fair market value of the property,
securities or other consideration to be
received per share by holders of Common
Stock of the Corporation in the Business
Combination is not less than the highest
per share price (with appropriate
adjustments for recapitalizations and for
stock splits, stock dividends and like
distributions), in each case determined in
good faith by a majority of Continuing
Directors, paid by the Related Person in
acquiring any of its holdings of the
Corporation's Common Stock either in or
subsequent to the transaction or series of
transactions in which the Related Person
became a Related Person.
Such affirmative vote shall be required
notwithstanding the fact that no vote may be required,
or that a lesser percentage may be specified, by law
or in any agreement with any national securities
exchange or otherwise.
For purposes of this Article SEVENTH:
(a) The term "Business
Combination" shall mean (i) any merger or
consolidation of the Corporation or a
Subsidiary (as hereinafter defined) with
or into a Related Person, (ii) any sale,
lease, exchange, transfer or other
disposition, including without limitation
a pledge, mortgage or any other security
device, of all or any Substantial Part (as
hereinafter defined) of the assets either
of the Corporation (including without
limitation any voting securities of a
Subsidiary) or of a Subsidiary, or both,
to a Related Person, (iii) any merger or
consolidation of a Related Person with or
into the Corporation or a Subsidiary of
the Corporation, (iv) any sale, lease,
exchange, transfer or other disposition of
all or any Substantial Part of the assets
of a Related Person to the Corporation or
a Subsidiary of the Corporation, (v) the
issuance of any securities of the
Corporation or a Subsidiary of the
Corporation to a Related Person, (vi) any
reclassification of securities (including
a reverse stock split) or any other
recapitalization that would have the
effect of increasing the voting power of a
Related Person and (vii) any agreement,
contract or other arrangement providing
for any of the transactions described in
this definition of Business Combination.
(b) The term "Related Person"
shall mean and include any individual,
corporation, partnership or other person
or entity which, together with its
"Affiliates" and "Associates" (as defined
on March 1, 1983 in Rule 12b-2 under the
Securities Exchange Act of 1934),
"beneficially owns" (as defined on March
1, 1983 in Rule 13d-3 under the Securities
Exchange Act of 1934) in the aggregate
10 percent or more of the outstanding
Voting Stock of the Corporation, any
Affiliate or Associate of any such
individual, corporation, partnership or
other person or entity, and any assignee
of any of the foregoing.
(c) Notwithstanding the definition
of "beneficially owned" in
subparagraph (b) of this Article SEVENTH,
any Voting Stock of the Corporation that
any Related Person has the right to
acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or
options, or otherwise, shall be deemed
beneficially owned by the Related Person.
(d) The term "Substantial Part"
shall mean more than 20 percent of the
fair market value of the total assets of
the corporation in question, as determined
in good faith by a majority of Continuing
Directors, as of the end of its most
recent fiscal year ending prior to the
time the determination is being made.
(e) For the purposes of
subparagraph (a) of this Article SEVENTH,
the term "Subsidiary" means any
corporation of which a majority of any
class of equity security is owned directly
or indirectly by the Corporation and whose
assets constitute a Substantial Part of
the assets of the Corporation, as
determined in good faith by a majority of
Continuing Directors.
(f) For the purposes of the first
paragraph of this Article SEVENTH, in any
Business Combination of a Subsidiary of
the Corporation with a Related Person, the
voting provisions contained therein shall
be deemed to be required for the
Corporation to cause the Subsidiary to
approve or authorize such Business
Combination.
(g) For the purposes of
subparagaph (2) of this Article SEVENTH,
the term "other consideration to be
received" shall include, without
limitation, Common Stock of the
Corporation retained by its existing
public stockholders in the event of a
Business Combination in which the
Corporation is the surviving corporation.
(h) The term "Continuing Director"
shall mean a Director who was a member of
the Board of Directors of the Corporation
immediately prior to the time that the
Related Person involved in a Business
Combination became a Related Person.
EIGHTH: The Corporation reserves the right to
amend, alter, change or repeal any provision contained
in this certificate of incorporation in the manner now
or hereafter prescribed by law, and all rights and
powers conferred herein on stockholders, directors and
officers are subject to this reserved power.
This certificate only restates and integrates,
and does not further amend, the provisions of the
Corporation's Certificate of Incorporation as
theretofore amended or supplemented. There is no
discrepancy between the provisions of said Certificate
of Incorporation, as amended or supplemented, and the
provisions of this certificate.
IN WITNESS WHEREOF, SONAT INC. has caused its
corporate seal to be hereunto affixed and this
certificate, having been duly adopted by the directors
in accordance with the provisions of Section 245 of
the General Corporation Law of the State of Delaware,
to be signed by Ronald L. Kuehn, Jr., its Chairman,
and Beverley T. Krannich, its Secretary, this 2nd day
of May, 1994.
SONAT INC.
/S/ Ronald L. Kuehn, Jr.
By: Ronald L. Kuehn, Jr.
Chairman
/S/ Beverley T. Krannich
Attest: Beverley T. Krannich
Secretary
(Corporate Seal)
EXHIBIT 10
SONAT INC.
RETIREMENT PLAN
FOR DIRECTORS
(as amended and restated as of February 25, 1993)
1. Purpose
The Sonat Inc. Retirement Plan for Directors (the
"Plan") is intended to advance the best interests of Sonat
Inc. (the "Company") by providing retirement income to
eligible directors of the Company, thereby enabling the
Company to attract and retain high caliber persons to serve
as directors. The Plan is also intended to enhance the
ability of directors to evaluate the best interests of the
Company and its stockholders in the event of a proposed
or threatened Change in Control (as defined in Paragraph 8)
by minimizing the personal uncertainties and risks created
by such a proposal or threat.
2. Eligibility
Eligible directors are directors of the Company who
during some portion of the time of their service as directors
were not officers of the Company or any of its subsidiaries.
Such directors shall be entitled to the retirement income
described in Paragraph 4 or 5 (as the case may be) upon
their ceasing to serve as a director of the Company
(hereinafter referred to as "retirement") under any of the
following circumstances:
(a) at any time after reaching age 70;
(b) at any time after having completed five years
of service as an outside director;
(c) upon becoming permanently disabled, as
determined by the Board of Directors in its
sole judgment;
(d) death; or
(e) at any time following a Change in Control.
Notwithstanding the foregoing, no director shall be an
eligible director or entitled to retirement income under the
Plan if (a) such director is removed from the Board of
Directors for cause (which shall mean only dishonesty,
conviction of a felony, or wilful unauthorized disclosure of
confidential information), or (b) the retirement of such
director occurs prior to January 1, 1985 unless such
retirement follows a Change in Control.
3. Determination of Form of Payment
If an eligible director's date of retirement occurred
prior to February 25, 1993, such director's retirement
income shall be paid in the manner provided for in the Plan
prior to such date. If an eligible director's date of
retirement occurred on or after February 25, 1993, such
director's retirement income shall be paid in lump-sum form
as provided in Paragraph 4 below ("Lump-Sum Form")
unless, at least twelve full calendar months before the date
of the director's retirement, the director filed with the
Company an irrevocable written election to have such
benefits paid in annuity form as provided in Paragraph 5
below ("Annuity Form"), in which case such benefits shall
be paid in Annuity Form.
4. Amount and Payment of Retirement Income in Lump-
Sum Form
Upon the retirement of an eligible director who is
entitled to receive his retirement income in Lump-Sum
Form, the Company will pay to such eligible director (or his
beneficiary, in the event of his death) retirement income in
the form of a cash lump-sum payment equal to the "present
value" (calculated as of the later of the date of payment
and January 1, 1992) of a series of payments equal to the
"quarterly retainer," based on the assumption that the
quarterly retainer is paid quarterly, commencing with the
beginning of the calendar quarter next following the date of
the director's retirement, for a period of time equal to the
"service period."
For purposes of this Paragraph 4 and Paragraph 5:
(a) "present value" shall be calculated using a
discount rate equal to the yield on new
10 year AA rated general obligation tax-
exempt bonds as determined by Merrill
Lynch & Co. (or its affiliates) and published in
The Wall Street Journal (or other financial
publication) on the business day immediately
preceding the date of the director's retirement
(or, if such yield is not so determined and
published on such business day, on the most
immediately preceding day on which such
yield was so determined and published);
provided, however, that if such yield has not
been so determined and published within
90 days prior to the director's retirement, the
discount rate shall be the yield on
substantially similar securities on the business
day preceding the director's retirement as
determined by AmSouth Bank N.A. upon the
request of the director or his beneficiary (as
the case may be). Notwithstanding the
foregoing, the discount rate used with respect
to retirement income calculations for directors
who retired before January 1, 1992 shall
equal the yield on new 10 year AA rated
general obligation tax-exempt bonds as
determined by Merrill Lynch & Co. and
published in the November 1, 1991 issue of
The Wall Street Journal.
(b) "quarterly retainer" shall mean one-fourth of
the basic annual retainer (excluding fees and
special retainers paid for meetings and Board
Committee appointments) in effect for
directors on the date of the director's
retirement.
(c) "service period" shall mean the total of the
number of whole calendar quarters of service
by such director on the Board of Directors of
the Company and service by such director
prior to May 25, 1973 on the Board of
Directors of Southern Natural Gas Company
during which period such director was not an
officer of the Company or any of its
subsidiaries; provided, however, that if a
director's retirement, death or election as an
officer occurs prior to the end of a calendar
quarter, for purposes of this Paragraph 3 he
will be deemed to have served as a non-officer
director until the end of such quarter.
Notwithstanding the foregoing, the service
period of each director who retired before
September 26, 1991 shall be reduced by the
number of whole calendar quarters of such
service for which he had received retirement
income from this Plan as in effect prior to
September 26, 1991.
The cash lump-sum payment calculated and made
pursuant to this Paragraph 4 shall be paid as soon as
practicable (and within 60 days) after the later of
November 1, 1991 and the date of the director's
retirement.
5. Amount and Payment of Retirement Income in
Annuity Form
Upon the retirement of an eligible director who is
entitled to receive his retirement income in Annuity Form,
the Company will pay to such eligible director (or his
beneficiary, in the event of his death) retirement income in
the form of a series of payments equal to the quarterly
retainer. Payments shall be made quarterly, commencing
with the beginning of the calendar quarter next following
the date of the director's retirement, for a period of time
equal to the service period.
6. Beneficiaries
A director shall be entitled to designate a beneficiary
(and to change such beneficiary from time to time) for
payment of retirement income under this Plan in the event
of the director's death. If no beneficiary has been
designated, the director's estate shall be deemed the
beneficiary.
7. Funding and Assignment
The Plan shall not be funded. Retirement income
under the Plan shall be paid from the general assets of the
Company, and may not be assigned or transferred by a
director or his beneficiary.
8. Change in Control
A "Change in Control" shall be deemed to have
occurred if:
(a) any "person" (as defined in Sections 3(a)(9)
and 13(d)(3) of the Securities Exchange Act
of 1934, as in effect on May 1, 1984 (the
"Exchange Act")) is or becomes the
"beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of
securities of the Company representing 35%
or more of the voting power of the
outstanding securities of the Company having
the right under ordinary circumstances to vote
at an election of the Board of Directors;
(b) there shall occur a change in the composition
of a majority of the Board of Directors of the
Company within any period of three
consecutive years which change shall not
have been approved by a majority of the
Board of Directors of the Company as
constituted immediately prior to the
commencement of such period; or
(c) at any meeting of the stockholders of the
Company called for the purpose of electing
directors, all persons nominated by the Board
of Directors for election as directors shall fail
to be elected.
9. Effective Date
The Plan became effective as of July 26, 1984.
Effective September 26, 1991, the Plan was amended to
provide for payment of retirement income in the Lump-Sum
Form for directors in receipt of a retirement income under
this Plan on such date and for eligible directors who retired
after such date. Effective February 25, 1993, the Plan was
amended to provide for payment of retirement income in
both the Lump-Sum Form and the Annuity Form.
10. Amendment
The Board of Directors may amend the Plan from
time to time and may discontinue the Plan at any time, but
no amendment or discontinuance of the Plan shall adversely
affect any rights under the Plan of any former director who
at the time is entitled to receive retirement income or any
director who at the time would be entitled to receive
retirement income if such director had ceased to serve as
a director immediately prior to such amendment or
discontinuance.
IN WITNESS WHEREOF, pursuant to authorization by
the Board of Directors of Sonat Inc., Sonat Inc. has caused
this amendment and restatement of the Plan to be executed
as of February 25, 1993.
SONAT INC.
/S/ Beverley T. Krannich
Beverley T. Krannich
Vice President-
Human Resources
and Secretary
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months
Ended March 31,
1994 1993
(In Thousands Except
Per-Share Amounts)
Primary Earnings Per Share(1)
Earnings:
Income from Continuing Operations
before Extraordinary Item $49,610 $68,923
Extraordinary Loss - (3,829)
Net Income $49,610 $65,094
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 87,177 86,195
Common Stock Equivalents Applicable
to Outstanding Stock Options 947 801
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 88,124 86,996
Primary Earnings Per Share:
Income from Continuing Operations
before Extraordinary Item $ .56 $ .79
Extraordinary Loss - (.04)
$ .56 $ .75
(1) This calculation is submitted in accordance
with Regulation S-K Item 601(b)(11) although
not required by Footnote 2 to Paragraph 14 of
APB Opinion No. 15 because it results in
dilution of less than 3%. For this reason,
the primary earnings per share amounts shown
for both periods do not agree with primary
earnings per share shown on the Condensed
Consolidated Statements of Income in Part I.
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
1994 1993 1993 1992 1991 1990 1989
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income (loss) before income taxes $67,323 $ 90,221 $364,198 $133,728 $ 98,374 $127,811 $145,333
Fixed charges
(see computation below) 30,355 37,645 128,468 156,428 175,980 165,021 145,873
Less allowance for
interest capitalized (1,615) (1,011) (4,101) (8,422) (7,951) (6,184) (6,116)
Total Earnings Available for
Fixed Charges $96,063 $126,855 $488,565 $281,734 $266,403 $286,648 $285,090
Fixed Charges:
Interest expense before deducting
interest capitalized $28,541 $ 35,879 $122,204 $149,165 $168,510 $158,550 $141,029
Rentals(b) 1,814 1,766 6,264 7,263 7,470 6,471 4,844
$30,355 $ 37,645 $128,468 $156,428 $175,980 $165,021 $145,873
Ratio of Earnings to Fixed Charges 3.2 3.4 3.8 1.8 1.5 1.7 2.0
</TABLE>
________________
(a)Amounts include the Company's portion of the captions as they relate
to persons accounted for by the equity method.
(b)These amounts represent 1/3 of rentals which approximate the
interest factor applicable to such rentals of the Company and its
subsidiaries and continuing unconsolidated
affiliates.
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the
Registration Statement (Form S-8, No. 33-50140)
pertaining to the Sonat Inc. Executive Award Plan and in
the related Prospectus; (ii) the Registration Statement
(Form S-8, No. 33-50142) pertaining to the Sonat Savings
Plan and the related Prospectus; and (iii) the
Registration Statement (Form S-3, No. 33-62166) of Sonat
Inc. and the related Prospectus and Prospectus
Supplement of our report dated January 20, 1994, with
respect to the consolidated financial statements and
schedules of Sonat Inc. included in its Annual Report
(Form 10-K) for the year ended December 31, 1993.
ERNST & YOUNG
Birmingham, Alabama
May 11, 1994
