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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 1-7179
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SONAT INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 63-0647939
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-3800
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1995 -- $2,310,175,672.
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1995 -- 86,351,011
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 15, 1995,
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT ON FORM 10-K.
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SONAT INC.
INDEX TO REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994
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ITEM PAGE
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PART I
Item 1. Business.................................................................... I-1
Exploration and Production................................................ I-1
Consolidated Net Production............................................. I-6
Consolidated Wells and Acreage.......................................... I-6
Consolidated Exploratory and Development Wells.......................... I-6
Competition and Current Business Conditions............................. I-7
Transmission, Storage, and Marketing of Natural Gas....................... I-7
Southern Natural Gas Company............................................ I-7
Order No. 636 Restructuring........................................... I-8
Customer Settlement................................................... I-9
Markets -- Transportation and Sales................................... I-10
Gas Supplies.......................................................... I-13
Administrative Law Judge Ruling Concerning Recoverability of
Investment in Offshore Gas Supply Facilities;
Settlement with Exxon Corporation................................... I-13
Potential Royalty Claims.............................................. I-14
Sea Robin Pipeline Company............................................ I-14
Sonat Intrastate-Alabama Inc.......................................... I-15
Sonat Ventures Inc.................................................... I-15
South Georgia Natural Gas Company..................................... I-15
Southern Energy Company............................................... I-15
Sonat Energy Services Company........................................... I-15
Sonat Marketing Company............................................... I-16
Sonat Power Inc....................................................... I-16
Citrus Corp............................................................. I-16
Florida Gas Transmission Company...................................... I-16
Competition and Current Business Conditions............................. I-17
Investment in Sonat Offshore Drilling Inc................................. I-19
Governmental Regulation................................................... I-20
Exploration and Production.............................................. I-20
Transmission, Storage, and Marketing of Natural Gas..................... I-20
Rate and Regulatory Proceedings....................................... I-21
Environmental Matters................................................... I-21
Corporate Restructuring................................................. I-21
Item 2. Properties.................................................................. I-21
</TABLE>
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SONAT INC.
INDEX TO REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
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ITEM PAGE
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Item 3. Legal Proceedings........................................................... I-21
Item 4. Submission of Matters to a Vote of Security Holders......................... I-23
Executive Officers of the Registrant.................................................... I-23
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... II-32
Item 6. Selected Financial Data..................................................... II-40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ II-2
Item 8. Financial Statements and Supplementary Data................................. II-16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. II-42
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... III-1
Item 11. Executive Compensation...................................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. III-1
Item 13. Certain Relationships and Related Transactions.............................. III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. IV-1
</TABLE>
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PART I
ITEM 1. BUSINESS
Sonat Inc. ("Sonat") is a diversified energy holding company. It is engaged
through Sonat Exploration Company ("Exploration") in domestic oil and natural
gas exploration and production and through Southern Natural Gas Company
("Southern"), Citrus Corp. ("Citrus"), and Sonat Energy Services Company
("Energy Services") in the transmission, storage, and marketing of natural gas.
Exploration, which is one of the largest independent natural gas producers
in the United States, operates primarily in Texas, Oklahoma, Louisiana,
Arkansas, and the Gulf of Mexico. Oil and gas exploration and production
activities contributed approximately 38 percent of Sonat's consolidated
operating profit for 1994.
Southern, which has been in the interstate natural gas pipeline business
since the early 1930s, is a major transporter of natural gas to the southeastern
United States. Its natural gas transmission system extends primarily from gas
producing areas of Texas and Louisiana, both onshore and offshore, to markets in
a seven-state area of the Southeast. Sonat and Enron Corp. each owns a one-half
interest in Citrus, a holding company that owns 100 percent of Florida Gas
Transmission Company ("Florida Gas"). Florida Gas is an interstate natural gas
pipeline that serves electric generation, resale, and industrial markets in
Florida. Energy Services' largest subsidiary, Sonat Marketing Company
("Marketing"), sells natural gas throughout much of the United States. In 1993
Marketing assumed responsibility for the sale of most of Exploration's natural
gas production and at year-end 1994 was one of the twenty largest natural gas
marketers in the United States. Natural gas operations, excluding Citrus,
contributed approximately 60 percent of Sonat's consolidated operating profit
for 1994. Sonat's share of Citrus' earnings are reflected in Equity in Earnings
of Unconsolidated Affiliates.
Sonat owns approximately 11.3 million or 39.7 percent of the outstanding
shares of Sonat Offshore Drilling Inc. ("Offshore"), which is in the offshore
contract drilling business. Prior to the initial public offering of Offshore's
common stock, which closed on June 4, 1993, Offshore had been a wholly owned
subsidiary of Sonat. Sonat also owns four million shares of convertible
preferred stock of Baker Hughes Incorporated ("Baker Hughes"), which provides
products and services to the petroleum and continuous process industries. The
convertible preferred stock has a liquidation preference of $200 million, a
dividend rate of six percent per annum, and is convertible at $32.50 per share
into Baker Hughes common stock.
Sonat was incorporated under the laws of Delaware in 1973 in connection
with a reorganization of Southern. At March 1, 1995, Sonat and its subsidiaries
employed approximately 1,910 people.
Sonat's principal executive offices are located at 1900 Fifth Avenue North,
AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number is
(205) 325-3800.
Additional business information is contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the Notes to
Consolidated Financial Statements in Part II of this report, which are
incorporated herein by reference. Reference is made to Note 12 of the Notes to
Consolidated Financial Statements contained in Part II of this report for
further information with respect to the portions of Sonat's revenues, operating
profit, and identifiable assets attributable to each of its business segments
and geographic areas of operations.
EXPLORATION AND PRODUCTION
Sonat is engaged in the exploration for and the acquisition, development,
and production of oil and natural gas through its wholly owned subsidiary, Sonat
Exploration Company, and its subsidiary companies (collectively referred to as
"Exploration" unless the context indicates otherwise). Exploration's principal
office is located in Houston, Texas. Exploration has regional offices in Tyler,
Texas and Oklahoma City, Oklahoma.
The oil and gas properties of Exploration are principally located onshore
in the Southern coastal states, in various states in the Southwest and Midwest,
and in federal waters offshore Louisiana and Texas. As of December 31, 1994,
Exploration had operations or properties in 14 states. Exploration had working
interests in
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approximately 2.2 million gross acres or 1.5 million net acres onshore as of
December 31, 1994. Of this onshore acreage, approximately 1.2 million gross or
654,986 net acres were producing oil or gas. In addition, as of such date,
Exploration had a working interest in 70 federal offshore blocks in the Gulf of
Mexico and one state offshore block, totaling 308,344 gross acres or 160,932 net
acres. Of these blocks, 58 were producing oil or gas.
Exploration has a 50-percent interest in a coal seam degasification project
near Brookwood, Alabama. Most of the gas from this project is sold to Southern
at spot-market prices under a long-term contract.
Beginning in 1988 Exploration implemented a strategy to acquire gas
properties with significant development potential. As a result of this strategy,
Exploration has increased its total proved reserves since that time to
approximately 1.6 trillion cubic feet of natural gas equivalent at the end of
1994, which represents more than a six-fold increase. Approximately 88 percent
of Exploration's proved reserves are natural gas.
In 1994 Exploration continued its strategy of acquiring producing oil and
gas properties with potential for additional reserves and production
development. Exploration's acquisition strategy is to make investments in areas
where it currently operates in order to take advantage of operating efficiencies
and to expand the geographic scope of its operations in select regions where
opportunities make it attractive to do so.
During 1994 Exploration acquired approximately 278 billion cubic feet
("Bcf") of proved natural gas equivalent reserves in 37 separate transactions
totaling $163 million, for an average acquisition cost of $.59 per thousand
cubic feet equivalent. Through these acquisitions, Exploration extended its
operations to the Permian Basin of west Texas and increased its position in
south Texas.
In January 1995 Exploration announced two significant acquisitions of oil
and gas producing properties, one in north Louisiana and the other in the Texas
Panhandle area. When fully completed, these transactions, which total $158.3
million, will add proved reserves of 188 Bcf of natural gas and 11.2 million
barrels of oil and condensate, yielding a unit acquisition cost on a natural gas
equivalent basis of $.62 per thousand cubic feet.
In north Louisiana, Exploration will acquire, for $135.7 million, interests
of Cobra Oil and Gas, Inc. and its partners in the north Shongaloo-Red Rock
Field. Proved reserves are estimated at 162 Bcf of natural gas and 10 million
barrels of condensate and gas liquids, with only 21 percent of the reserves
presently developed and producing. An aggressive drilling program to bring the
undeveloped reserves to producing status is planned.
In the other transaction, Exploration will acquire from Horizon Oil and Gas
Company and partners, for $22.6 million, producing interests in the northern
Texas Panhandle producing area. Proved reserves are estimated at 26 Bcf of
natural gas and 1.2 million barrels of oil and condensate, of which 41 percent
are developed and producing.
In 1994 Exploration continued its aggressive drilling program,
participating in the drilling of 343 development wells, of which approximately
85 percent were successful, increasing proved reserves by approximately 137 Bcf
of natural gas equivalent. Exploration also participated in the drilling of 15
exploratory wells in 1994, none of which were successful. Of these 15
exploratory wells, however, 13 were drilled as part of a shallow-well drilling
program in south Texas done in order to acquire additional lease acreage. Of the
total of 358 wells in which Exploration participated in drilling in 1994, it
operated 250.
Exploration is also continuing to develop its substantial acreage position
in the eastern extension of the Austin Chalk trend in Texas and Louisiana. As a
part of its drilling program, Exploration participated in the drilling of 26
horizontal wells in this trend during 1994, all of which were successful.
As of December 31, 1994, Exploration's net proved reserves totaled 32
million barrels of crude oil, condensate, and natural gas liquids and 1,367 Bcf
of natural gas. As of December 31, 1993, Exploration's net proved reserves
amounted to 27 million barrels of crude oil, condensate, and natural gas liquids
and 1,187 Bcf of natural gas. For additional information concerning reserves,
see Note 13 of the Notes to Consolidated Financial Statements in Part II of this
report.
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Exploration's total exploration and production capital expenditures in 1994
were $390 million compared with $441 million in 1993, which includes its share
of the capital expenditures of Sonat/P Anadarko Limited Partnership in 1993 (see
Note 5 of the Notes to Consolidated Financial Statements in Part II of this
report). Exploration will continue to emphasize producing property acquisitions
and development drilling in 1995, when capital spending is expected to be
approximately $410 million. While maintaining an active program, Exploration has
also continued its cost control and productivity improvement efforts.
In order to focus its exploration and production efforts and to minimize
administrative and other costs, Exploration disposed of certain non-strategic
oil and gas interests in 1994 in the states of Louisiana, Texas, Oklahoma, and
Arkansas. These properties were sold for a total of approximately $6 million and
included approximately 10,106 net developed acres of oil and gas leases with
interests in approximately 54 gross productive wells, representing net proved
reserves of approximately seven Bcf natural gas equivalent. Exploration expects
that it will continue to dispose of non-strategic oil and gas interests in the
future and anticipates that the number and size of properties sold in 1995 will
be greater than in 1994.
Exploration relies on its own technical staff for the selection of its
drilling prospects. Leases on desirable, nonproducing offshore prospects are
typically acquired in federal and state waters by acquisition or through a
competitive bidding process from the federal or state governments. Exploration
has, and may in the future, bid with other companies for leases on prospective
offshore acreage. Onshore leases are acquired by Exploration's staff and by
independent lease brokers at the direction of Exploration's staff, through
farmouts, through participation in prospects developed by others, or by
acquisition. Exploration may, as it has in the past, enter into joint venture
arrangements where exploration and development activity is performed on behalf
of the joint venture by whichever company is designated as operator. Drilling
for Exploration is conducted by independent drilling contractors.
There have been no oil or gas reserve estimates filed or included in any
reports to any federal agency within the last twelve months, except Form EIA-23
Annual Survey of Domestic Oil and Gas Reserves filed with the Federal Energy
Regulatory Commission (the "FERC") and Form 9-1866 (Request for Reservoir
Maximum Efficient Rate) filed with the Minerals Management Service of the U.S.
Department of the Interior (the "MMS"). There are no material differences in the
reserves reflected in such reports and the estimated reserves as reflected in
Note 13 of the Notes to Consolidated Financial Statements in Part II of this
report, except for differences resulting from actual production, acquisitions,
property sales, and necessary reserve revisions and additions to reflect actual
experience.
Exploration's business is subject to all of the operating risks normally
associated with the exploration for and production of oil and gas, including
blowouts, cratering, pollution, and fires, each of which could result in damage
to or destruction of oil and gas wells, formations, production facilities, or
properties or in personal injury. Sonat maintains broad insurance coverage on
behalf of Exploration limiting financial loss resulting from these operating
hazards.
See "Governmental Regulation -- Exploration and Production" below for
information concerning the effect of various laws and governmental regulations
on Exploration's operations.
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The following tables detail the gross lease acreage of both producing and
non-producing onshore properties and offshore lease blocks in which Exploration
had an interest at December 31, 1994. The following map generally depicts the
areas in which Exploration had significant lease interests as of that date.
SONAT EXPLORATION COMPANY
ONSHORE GROSS LEASE ACREAGE
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STATE PRODUCING NON-PRODUCING TOTAL
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Alabama.................................................... 80,584 -0- 80,584
Arkansas................................................... 322,091 35,591 357,682
Louisiana.................................................. 177,296 675,535 852,831
Oklahoma................................................... 256,584 84,523 341,107
Texas...................................................... 305,391 254,903 560,294
Other...................................................... 19,829 2,380 22,209
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Total............................................ 1,161,775 1,052,932 2,214,707
========= ========= =========
</TABLE>
OFFSHORE GROSS LEASE BLOCKS
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AREA PRODUCING NON-PRODUCING TOTAL
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Mustang Island.................................................. 4 2 6
High Island..................................................... 6 0 6
Sabine Pass..................................................... 5 0 5
West Cameron(1)................................................. 15 0 15
East Cameron.................................................... 10 3 13
South Marsh Island.............................................. 1 0 1
Eugene Island(2)................................................ 4 1 5
Ship Shoal...................................................... 11 3 14
Main Pass....................................................... 1 4 5
Mississippi Canyon(3)........................................... 4 0 4
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Total................................................. 61 1 74
</TABLE>
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(1) Exploration has a 12.5 percent working interest below 9,500 feet in West
Cameron 290, which is one of the 15 producing blocks. In one of the
producing blocks, West Cameron 421, Exploration only has an overriding
interest.
(2) In one of the producing blocks, Eugene Island 10, Exploration only has an
overriding interest.
(3) Exploration is not a lessee of one of the four producing blocks (Mississippi
Canyon 150), but this block has been unitized with the three producing
lease blocks in the area in which Exploration has working interests.
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SONAT EXPLORATION COMPANY MAP
[MAP TO COME]
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Consolidated Net Production
Exploration had interests in production from 3,545 producing wells onshore
and 157 producing wells offshore as of December 31, 1994. Reference is made to
the table in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part II of this report showing the consolidated net
production (sales volumes) of oil and condensate, natural gas liquids, and
natural gas for 1992 to 1994 and the average sales prices for those years
(including transfers). The average production (lifting) costs per unit of oil
and gas for each of those years was $.38 in 1994, $.38 in 1993, and $.38 in
1992. The average production cost is calculated by converting all units of
production to equivalent Mcf of gas using the relative energy content method.
Exploration sells its crude oil production generally at posted prices,
subject to adjustments for gravity and transportation. Exploration sells its
natural gas primarily to Marketing at spot-market prices. Exploration also sells
some of its gas under long-term contracts directly to pipelines, distribution
companies, and end-users. Exploration sells natural gas liquids at market prices
under monthly or long-term contracts. Sales of natural gas by Exploration to
affiliates accounted for approximately 65 percent of Exploration's revenues in
1994 and 44 percent in 1993.
During 1993 Marketing assumed responsibility for marketing all of
Exploration's natural gas production that is not sold under pre-existing term
dedications. Marketing purchases most of this production directly from
Exploration and markets the balance pursuant to an agency agreement. Marketing,
on behalf of Exploration, uses derivative transactions, including natural gas
futures contracts, options on natural gas futures contracts, and oil and gas
price swap agreements, as hedges for Exploration's production to reduce the
risks associated with spot-market price volatility. See Note 2 of the Notes to
Consolidated Financial Statements contained in Part II of this report.
Consolidated Wells and Acreage
The following table sets forth information concerning Exploration's
consolidated working interests in oil and gas properties as of December 31,
1994.
<TABLE>
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TOTAL NO. OF
PRODUCTIVE NO. OF
WELLS WELLS
---------------- DEVELOPED UNDEVELOPED BEING
OIL GAS ACRES ACRES DRILLED
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Gross...................................... 540(1) 3,162(2) 1,407,988 1,115,063 69
Net........................................ 226 1,733 789,325 843,117 37
</TABLE>
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(1) One of these wells is a multiple completion.
(2) 148 of these wells are multiple completions.
Consolidated Exploratory and Development Wells
The following table sets forth certain consolidated information regarding
exploratory and development wells drilled during the years 1992 through 1994.
<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
WELLS DRILLED WELLS DRILLED
-------------------- -------------------------
1992 1993 1994 1992 1993 1994
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<S> <C> <C> <C> <C> <C> <C>
Productive.......................................... .50 3.71 -0- 125.10 145.22 180.00
Dry................................................. .50 6.00 13.70 12.35 20.15 43.79
</TABLE>
For information concerning Exploration's (i) capitalized costs of oil and
gas producing activities, (ii) costs incurred in oil and gas producing
activities, (iii) net revenues from oil and gas production, (iv) estimated
proved oil and gas reserves, (v) estimated future oil and gas net revenues, and
(vi) present value of estimated future net revenues from estimated production of
proved oil and gas reserves, see Note 13 of the Notes to Consolidated Financial
Statements in Part II of this report. The standardized measures of
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discounted future net cash flows relating to Exploration's oil (including
condensate) and gas reserves are calculated as prescribed by Statement of
Financial Accounting Standards No. 69. The standardized measures of
Exploration's proved oil and gas reserves presented in Part II of this report do
not represent Sonat's estimate of their fair market value and are not otherwise
representative of the value thereof, but rather, as stipulated and required by
the Financial Accounting Standards Board, are intended solely to assist
financial statement users in making comparisons between companies.
Competition and Current Business Conditions
The oil and gas business is highly competitive in the search for and
acquisition of additional reserves and in the marketing of oil and natural gas.
Exploration's competitors include the major and intermediate size oil companies,
independent oil and gas concerns, and individual producers or operators.
Natural gas prices were down significantly in 1994, with Exploration's
realized gas prices averaging $1.83 per thousand cubic feet compared with $1.99
in 1993. Oil prices were also significantly lower, averaging $15.91 per barrel
in 1994 versus $17.42 per barrel in 1993. Thus far in 1995 natural gas prices
are lower than prices for the same months in 1994. Exploration is unable to
predict price levels for oil or natural gas in 1995 or beyond, but if the trend
of lower natural gas prices continues for the entire year of 1995, Exploration's
earnings and cash flow will be lower than 1994 results.
TRANSMISSION, STORAGE, AND MARKETING OF NATURAL GAS
Southern Natural Gas Company
The principal business of Southern, which is a wholly owned subsidiary of
Sonat, is the transmission of natural gas in interstate commerce. Southern,
including its subsidiaries, owns approximately 9,320 miles of interstate
pipeline. Its pipeline system has a certificated daily delivery capacity of
approximately 2.4 billion cubic feet of natural gas. Southern's pipeline system
extends from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf
of Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South
Carolina, and Tennessee. Southern also has pipeline facilities offshore Texas
connecting gas supplies to other pipelines that transport such gas to Southern's
system. A map of Southern's pipeline system, including pipelines of its
subsidiaries, as well as of the pipeline system of Florida Gas, appears on page
I-18.
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. Based on operating experience, Southern sought to have 21 Bcf of the
certificated working storage capacity of Muldon reclassified to cushion gas,
resulting in a certificated working storage capacity of 31 Bcf of gas. The FERC
approved Southern's reclassification application on a limited-term basis for a
one-year period ending November 1, 1994, subject to a further review of
engineering and geophysical data supporting the reclassification and Muldon's
operations during the 1993-94 winter period. On December 30, 1994, Southern
filed a comprehensive study with the FERC containing the data it had requested,
which is pending FERC review. Southern believes the results of the study support
the reclassification of working storage gas to cushion gas requested by
Southern. Southern's limited-term authorization has been extended until the FERC
completes its review of the study.
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tenneco Inc., each of which is
a 50-percent participant, owns a large underground natural gas storage field
located in Louisiana that is operated by Southern and provides storage service
to Southern and Tennessee Gas Pipeline Company, a subsidiary of Tenneco Inc.,
and their customers. The Bear Creek Storage Field has a total certificated
working storage capacity of approximately 65 Bcf of gas, half of which is
committed to Southern. At December 31, 1994, Bear Creek's gross facilities cost
was approximately $246,902,000, its net facilities cost was approximately
$164,257,000, and its participants' equity was $93,815,000. Southern had an
investment in Bear Creek, including its equity in undistributed earnings, of
$46,907,000 at December 31, 1994.
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Under the terms of Order No. 636, discussed below, effective November 1,
1993, Southern commenced providing contract storage services as part of its
unbundled and restructured services. Consequently, most of Southern's working
storage capacity at Muldon and its half of Bear Creek is now used for such
services.
Southern's interstate pipeline business is subject to regulation by the
FERC, the U.S. Department of Energy's Economic Regulatory Administration (the
"ERA"), and the U.S. Department of Transportation under the terms of the Natural
Gas Policy Act of 1978 (the "NGPA"), the Natural Gas Act (the "NGA"), and
various pipeline safety and environmental laws. See "Governmental
Regulation -- Transmission, Storage, and Marketing of Natural Gas" below for
information concerning the regulation of natural gas transmission operations.
Southern's business is subject to the usual operating risks associated with
the transmission of natural gas through a pipeline system, which could result in
property damage and personal injury. Sonat maintains broad insurance coverage on
behalf of Southern limiting financial loss resulting from these operating risks.
Order No. 636 Restructuring. In 1992 the FERC issued its Order No. 636
(the "Order"), which required interstate natural gas pipeline companies,
including Southern, South Georgia Natural Gas Company ("South Georgia"), a
wholly owned interstate pipeline subsidiary of Southern, and Florida Gas, to
make 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 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 new storage
customers. The Order also resulted in rates that are less seasonal, thereby
shifting revenues and earnings for Southern out of the winter months.
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, or purchasing gas at above-market
prices under, 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 contracts, based on the circumstances that existed at the time the
contracts were executed, and to the prudence of the amendments or terminations
of the contracts. 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 to 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
"price differential" 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
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<PAGE> 12
the GSR costs from Southern's firm transportation customers. The second
mechanism is a volumetric surcharge designed to collect the remaining ten
percent of such costs from Southern's interruptible transportation customers.
This funding 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 surcharge 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 its 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 sought judicial review of the September 3 and December 16 orders.
As of December 31, 1994, Southern had either paid or accrued $134 million
in GSR costs (including $4 million in interest) either to reduce significantly
the price payable under or to terminate a number of gas supply contracts
providing for payment of above-market prices. In addition, on February 17, 1995,
Southern reached an agreement to resolve its remaining high-cost supply
contracts with Exxon Corporation ("Exxon") by paying an additional $45 million
in GSR costs and foregoing a claim against $19 million in price differential
costs that have been paid to Exxon under an interim agreement entered into
between the parties pending resolution of litigation contesting Southern's
termination on March 1, 1994, of a gas purchase contract with Exxon. This
agreement is conditioned upon the Customer Settlement (described below) becoming
effective. Southern also has an agreement under which another high-cost contract
price is reduced in exchange for monthly payments having a present value of
approximately $44 million. Southern has received permission from the FERC to
purchase an annuity in order to monetize this obligation.
In addition to its GSR costs relating to termination or amendment of its
remaining gas supply contracts, Southern has incurred and expects to continue to
incur certain price differential GSR costs resulting from Southern's continued
purchase of gas under its remaining supply contracts that provide for prices in
excess of current market prices. As of December 31, 1994, Southern had incurred
$69 million in price differential costs.
Beginning in December 1993 Southern has made a number of filings with the
FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative law judge regarding whether such costs were prudently incurred
and are eligible for recovery under the Order. Southern's customers are opposing
its recovery of its GSR costs in these proceedings based on both eligibility and
prudence grounds. These proceedings, which have all been consolidated, are in
the early stages of discovery and Southern cannot predict their outcome at this
time.
Customer Settlement. Southern filed with the FERC on March 15, 1995, a
Stipulation and Agreement that would settle all of Southern's pending rate and
GSR cost recovery proceedings ("Customer Settlement"). As of that date, Southern
had been advised that customers representing more than 90 percent of the firm
transportation capacity on its pipeline system intend to support the Customer
Settlement. Pursuant to the Customer Settlement, which must be approved by the
FERC, all issues in Southern's current and prior rate cases would be settled and
Southern would credit against GSR costs incurred by Southern the full amount of
Southern's rate reserves as of February 28, 1995, which were approximately $155
million. Such amount, less certain amounts withheld for potential rate refunds
to parties, if any, that contest the Customer Settlement, will be credited in
the aggregate to reduce the GSR costs borne by Southern's customers. Southern
has filed
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<PAGE> 13
with the FERC to implement reduced settlement rates for parties that support the
Customer Settlement on an interim basis effective as of March 1, 1995, subject
to reinstatement, pending FERC consideration and approval of the Customer
Settlement. The Customer Settlement provides that, except in certain limited
circumstances, Southern will not file a general rate case to be effective prior
to March 1, 1998. In the fourth quarter of 1994 Sonat recognized a $29 million
charge associated with the Customer Settlement, which includes anticipated
amounts for GSR costs that Southern would not recover from its customers, and a
$28 million provision relating to regulatory assets that will not be recovered
as a result of the Customer Settlement, including amounts for a corporate
restructuring undertaken in 1994.
Southern's Customer Settlement would settle as to supporting parties all of
the proceedings pursuant to which Southern is seeking recovery of its GSR costs
as well as all of its other outstanding rate proceedings. If the Customer
Settlement is ultimately approved by the FERC, all challenges to the recovery of
Southern's GSR costs would be resolved as to those customers supporting the
Customer Settlement, including all issues related to eligibility and prudence.
Additionally, Southern would absorb an agreed-upon portion of its total GSR
costs, which was reflected in the provision for the Customer Settlement noted
above.
It is possible that the Customer Settlement will be contested by certain of
Southern's customers, in which case the Customer Settlement, if approved by the
FERC, will become effective only as to supporting parties and Southern's rates
and GSR costs applicable to contesting parties would be determined by the
outcome of Southern's pending rate and GSR proceedings, where Southern
anticipates that those contesting customers will continue to challenge both the
eligibility and prudence of such costs. It is also possible that the Customer
Settlement might not be approved by the FERC or, if approved, might be modified
in a way unacceptable to Southern or its customers.
In its Customer 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, recent contract renegotiations, and price differential costs actually
incurred, the total amount of GSR costs is estimated to be approximately $328
million on a present-value basis. This amount includes the payments made or
accrued through December 31, 1994, to amend or to terminate gas purchase
contracts, price differential costs through December 31, 1994, and the $64
million cost that will be incurred under the settlement of existing contracts
with Exxon, which will become effective if the Customer Settlement becomes
effective. These costs collectively total $288 million. Thus, Southern currently
estimates it will ultimately pay an additional $40 million in GSR costs. These
amounts do not include an additional $87 million in GSR costs that would be
incurred if the settlement with Exxon does not become effective and Exxon
prevails in its lawsuit regarding Southern's March 1, 1994, termination of a
contract relating to Exxon's reserves in its Mississippi Canyon blocks. See
"Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corporation" below.
Until the Customer Settlement is approved, Southern plans to make
additional rate filings quarterly to recover its price differential costs and
any other GSR costs. Additionally, Southern will continue to make monthly
filings designed to adjust the billing determinants and associated surcharges
for its firm transportation customers to reflect changes in the level of
systemwide contract demands and effective carrying charges that occur from time
to time.
If the Customer Settlement is not approved, Southern cannot predict the
ultimate outcome of its Order No. 636 restructuring proceedings, its rate
filings to recover its GSR costs, or its other outstanding rate proceedings.
Markets -- Transportation and Sales. As described above, effective
November 1, 1993, Southern and South Georgia (collectively "Southern" unless the
context indicates otherwise), restructured their services in compliance with
FERC Order No. 636 by separating their transportation, storage, and merchant
services. With the exception of some limited sales necessary to dispose of its
gas supply remaining under contract, Southern essentially became solely a
transporter of natural gas. Effective May 5, 1992, South Georgia had
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<PAGE> 14
converted all its sales service to transportation-only service and Southern had
begun to provide a gas sales service to South Georgia's former sales customers.
Southern transports or sells gas at wholesale for distribution for
domestic, commercial, and industrial uses to nine gas distributing companies, to
113 municipalities and gas districts, and to eight connecting interstate
pipeline companies. Southern also transported gas directly to 56 industrial
end-users in 1994. Southern principally transports gas to resale and industrial
customers and to other pipelines and, as indicated, continues to sell some
limited volumes of gas at wholesale for distribution. The principal industries
served directly by Southern's pipeline system and indirectly through its resale
customers' distribution systems include the chemical, pulp and paper, textile,
primary metals, stone, clay, and glass industries.
Transportation volumes in 1994 for Southern and all of its subsidiaries
were 886 Bcf, which was all of Southern's throughput in 1994, compared with
transportation volumes in 1993 of 763 Bcf, which was 91 percent of Southern's
total 1993 throughput of 836 Bcf. Sales to resale distribution customers,
including municipalities and gas districts, accounted for virtually all of 1994
sales of 103 Bcf and 1993 sales of 73 Bcf (excluding the sale of storage
inventory). The volumes associated with the 1994 sales are included in
transportation volumes because, as required by Order No. 636, all sales are now
made at the receipt points where the gas enters Southern's pipeline system.
Likewise, Southern had sales of 19 Bcf during November and December 1993
(following implementation of its Order No. 636 restructuring) that were made at
the receipt points where the gas entered its pipeline system; consequently,
those volumes are included within the 763 Bcf of transportation volumes for
1993.
Transportation service is rendered by Southern for its resale customers,
direct industrial customers and other end-users, gas producers, other gas
pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. Transportation
service is provided under rate schedules that are subject to FERC regulatory
authority. Rates for transportation service depend on whether such service is on
a firm or interruptible basis and the location of such service on Southern's
pipeline system. Transportation rates for interruptible service (i.e., service
of a lower priority than firm transportation) are charged for actual volumes
transported. Firm transportation service also includes a demand charge designed
so that the customer pays for a significant portion of the service each month
based on a contract demand volume regardless of the actual volume transported.
Rates for transportation service are discounted by Southern in individual
instances to respond to competition in the markets it serves. Continued
discounting could, under certain circumstances, increase the risk that Southern
may not recover all of its costs allocated to transportation services.
In accordance with the September 3 order approving Southern's Order No. 636
compliance plan, 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 that ended October 31, 1994, and 118 million cubic feet per day for a term
extending until April 30, 2007. 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 for terms ranging from one to ten or more years.
Alabama Gas Corporation ("Alagasco"), Southern's second largest customer,
executed firm transportation contracts for 393 million cubic feet per day under
terms extending through October 31, 2008.
Atlanta elected to renew its firm transportation service agreements with
transportation demands of 582 million cubic feet per day, which expired October
31, 1994, for a one-year term beginning November 1, 1994. In September and
October of 1994 Atlanta Gas Light Company and South Carolina Pipeline
Corporation ("SCPL") executed three-year firm service agreements with
transportation demands of an additional 100 million cubic feet per day and 28
million cubic feet per day, respectively. With these additional subscriptions,
substantially all of Southern's firm market-area capacity currently available
became fully subscribed.
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If the Customer Settlement becomes effective, Atlanta will amend its firm
transportation contracts for an aggregate of 682 million cubic feet per day to
extend their primary terms for a period of three years beginning March 1, 1995.
An additional 118 million cubic feet per day would remain under its current term
to April 30, 2007. If the Customer Settlement becomes effective, SCPL will amend
its firm transportation contract for 28 million cubic feet per day to extend its
primary term for a period of three years beginning March 1, 1995. Such extension
will be in addition to the remaining 160 million cubic feet per day of SCPL's
firm transportation services that remain in effect under terms extending from
1997 through 2003.
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated, or are assigned.
As a result of Order No. 636 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 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 sold 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. A portion of these sales agreements
were extended for an additional one-year term, while the sales agreements with
Atlanta were extended through March 31, 1995. Certain customers, including
Atlanta, have advised Southern that if the Customer Settlement becomes
effective, they will extend their sales agreements through November 1997. The
remainder of Southern's gas supply will continue to be sold on a month-to-month
basis. Subject to the cost-sharing mechanism in the Customer Settlement,
pursuant to which Southern will absorb an agreed-upon portion of its total GSR
costs, Southern will recover in accordance with the Customer Settlement or,
pending approval of the Customer Settlement, 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 sale agreements and month-to-month
sales as well as any cost previously incurred or to be incurred as a result of
Order No. 636 to terminate or to reduce the price under Southern's remaining gas
supply contracts.
Transportation and sales by Southern, combined with sales by Marketing, to
two unaffiliated distribution customers, Atlanta and Alagasco, accounted for
approximately 16 percent and ten percent, respectively, of Sonat's 1994
consolidated revenues. Atlanta and Alagasco were the only two customers that
accounted for ten percent or more of Sonat's consolidated revenues for 1994.
Southern continues to pursue growth opportunities to expand the level of
services in its traditional market area and to connect new gas supplies. On May
1, 1994, Southern completed its second pipeline expansion into northern Florida
and southwestern Georgia, which increased firm daily capacity by 40 million
cubic feet per day. On July 22, 1994, Southern filed an application with the
FERC for authorization to construct a 21-mile pipeline extension to a delivery
point near Chattanooga that will deliver natural gas to a group of new customers
that have signed ten-year contracts for firm transportation volumes totaling
approximately 11 million cubic feet per day.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
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Gas Supplies. During 1994 Southern reduced the number of its existing
long-term gas supply contracts from 60 at the end of 1993 to 31 at the end of
1994. The following table contains information as to Southern's gas supply and
the general sources from which that supply was purchased during the years 1992
through 1994.
<TABLE>
<CAPTION>
MMCF*
-----------------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Purchased from non-affiliates............................. 109,578 102,492 96,992
Purchased from affiliates................................. 11,003 7,317 5,795
------- ------- -------
Total Purchases........................................... 120,581 109,809 102,787
</TABLE>
- ---------------
* As used in this report, the term "Mcf" means thousand cubic feet; the term
"MMcf" means million cubic feet; and the term "Bcf" means billion cubic feet.
All volumes of natural gas referred to in this report are stated at a pressure
base of 14.73 pounds per square inch absolute ("psia") and at 60 degrees
Fahrenheit.
Southern entered into no new long-term gas supply agreements in 1994, due
to the cessation of its merchant role because of Order No. 636 as discussed
above. Since Order No. 636 prohibits Southern from providing its traditional
bundled merchant service, Southern does not anticipate at this time that it will
need to contract for the long-term purchase of any additional natural gas
supplies in the future, except for the two contracts entered into with Exxon as
part of the settlement described below, which, if the Exxon settlement becomes
effective, will replace six above-market-priced contracts with longer terms.
Southern will purchase minimal volumes of gas from time to time as may be
required for system management purposes. Southern does expect, however, that
adequate gas supplies will need to continue to be available to its system;
consequently, Southern has continued its efforts to have new gas supplies
attached to its system.
Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corporation. In an
initial decision issued on May 2, 1994, which Southern has appealed, 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 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. Southern has appealed the administrative
law judge's decision to the FERC, but cannot predict the outcome of this appeal.
The Customer Settlement provides that, as to customers supporting the
settlement, the costs of the Mississippi Canyon Facilities will be recovered by
Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not
preclude Southern's recovery of such costs. On February 17, 1995, Southern
reached a settlement with Exxon pursuant to which, in return for an additional
cash payment by Southern of $45 million, plus allowing Exxon to retain $19
million in price differential costs already paid to Exxon, all existing gas
purchase contracts would be terminated, two new gas purchase contracts would be
entered into having three-year terms and providing for market-based index
prices, and a lawsuit regarding Southern's termination of the gas purchase
contract covering gas reserves connected by the Mississippi Canyon Facilities
(the "Mississippi Canyon Contract") would be dismissed. The settlement with
Exxon is contingent on FERC approval of the Customer Settlement.
If this settlement with Exxon does not become effective, total GSR costs
under the Mississippi Canyon Contract through the scheduled renegotiation of its
pricing provisions in 1997 are estimated to be approximately $125 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 gas market
prices) are not known today with certainty and there is a wide range of possible
outcomes for each assumption. In addition, Southern has given notice to Exxon
that effective March 1, 1994,
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<PAGE> 17
it has terminated the Mississippi Canyon Contract pursuant to certain provisions
of the contract. Such termination, if effective, would reduce GSR costs
associated with such contract to $14 million. 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.
The court entered a summary judgment order upholding Southern's termination of
this contract, which Exxon has appealed to the Fifth Circuit Court of Appeals.
Southern's customers are challenging the recovery of GSR costs attributable to
such contract on eligibility and prudence grounds and on the basis that such
costs also constitute non-cash consideration for the 1989 take-or-pay settlement
with Exxon and thus are not recoverable due to the 1988 take-or-pay cost cap. If
the settlement with Exxon does not become effective, 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 with Exxon regarding Southern's notice of termination of the
Mississippi Canyon Contract.
Potential Royalty Claims. In connection with certain of its settlements of
take-or-pay claims made by producers during the 1980s, Southern indemnified the
producers against various potential claims related to the settlement that might
be made by royalty owners. Southern has thus far been notified by ten producers
of potential royalty claims under the indemnity provisions of various settlement
agreements. The claims for which Southern may have to indemnify these producers
have been asserted by both private lessors with respect to onshore leases and
the MMS with respect to federal offshore and Indian leases. Southern has spent
approximately $1.2 million to date in settlement of claims of this type. Under
the terms of a 1988 take-or-pay recovery settlement with Southern's customers,
Southern is entitled to seek recovery of such costs related to federal offshore
or Indian leases under the FERC's Order No. 500 cost-sharing procedures. The
customers are entitled, however, to challenge any effort by Southern to recover
those costs. Southern is unable to state whether any additional royalty claims
based on Southern's indemnification provisions in its take-or-pay settlements
will be asserted or to predict the outcome of any such claims or resulting
litigation or of Southern's efforts to recover from its customers any amounts it
may pay, but believes that these claims will not have a material adverse effect
on Southern's financial condition or results of operations.
Sea Robin Pipeline Company. Sea Robin Pipeline Company ("Sea Robin"), a
wholly owned subsidiary of Southern, owns and operates a 438-mile pipeline
system located in the Gulf of Mexico through which it gathers natural gas and
condensate for others and delivers those products to shore for condensate
removal and gas processing and redelivery to five downstream transmission
pipelines. See the system map on page I-18. Sea Robin is a transportation-only
pipeline that has restructured in compliance with FERC Order No. 636. During
1994 Sea Robin connected three new offshore gas fields to its system at a cost
of $9 million. Sea Robin has also executed contracts to connect a new deepwater
offshore production area to its system during 1995 at an expected cost of $1.1
million. Sea Robin transported approximately 282 Bcf of natural gas in 1994
compared to 287 Bcf in 1993. These Sea Robin volumes are included within the
Southern transportation volumes discussed earlier.
During the past year the FERC has issued a series of orders in which it has
found that certain facilities operated by interstate natural gas transmission
companies and, in some instances, facilities previously certificated under the
NGA, are exempt from its jurisdiction pursuant to Section 1(b) of the NGA
because they qualify as gathering facilities. Sea Robin began discussions during
the fourth quarter of 1994 with the shippers on its pipeline system regarding
the terms under which it would gather gas supplies for its existing shippers as
a gathering company not subject to the jurisdiction of the FERC. As of March 1,
1995, Sea Robin has executed new gathering contracts with shippers representing
approximately 53 percent of its annual deliveries in 1994. Discussions are
continuing with the remaining shippers. Sea Robin's general proposal to all of
its shippers includes maintenance of Sea Robin's existing rates for five years,
following which the gathering rates will be adjusted on an annual basis by
application of an inflation index. Sea Robin has negotiated gathering contracts
with each shipper on an individual basis, however, and the specific terms and
conditions of each contract may vary.
On January 20, 1995, Sea Robin filed a petition requesting the FERC to
declare that Sea Robin's facilities are exempt from the jurisdiction of the FERC
under Section 1(b) of the NGA. Shippers representing approximately 21 percent of
Sea Robin's annual deliveries in 1994 have filed in opposition to Sea
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<PAGE> 18
Robin's petition at the FERC. The new gathering contracts described above are
contingent on the FERC granting Sea Robin's request. If Sea Robin's petition is
approved by the FERC, Sea Robin expects that the FERC will require it to tender
to those shippers with which it has been unable to reach agreement a "default
contract" that will provide for gathering services under Sea Robin's existing
rates, as adjusted for inflation, for a two-year term. In addition to their
protests in the gathering proceeding, on February 16, 1995, several of Sea
Robin's shippers filed with the FERC a complaint against Sea Robin under Section
5 of the NGA claiming that Sea Robin's rates are unjust and unreasonable. Any
reduction in Sea Robin's rates as a result of this complaint, however, could be
implemented only on a prospective basis. Sea Robin is unable to predict the
outcome of either of these proceedings.
Sonat Intrastate-Alabama Inc. Sonat Intrastate-Alabama Inc. ("SIA"), a
wholly owned subsidiary of Southern, owns and operates a 454-mile intrastate
pipeline system extending from natural gas fields and coal seam gas production
areas in the Black Warrior Basin in northwest and central Alabama to connections
with customers in Alabama, as well as interconnections with three other
pipelines, including Southern. See the system map on page I-18. SIA's throughput
in 1994 was approximately 38 Bcf compared to 36 Bcf in 1993.
Sonat Ventures Inc. Sonat Ventures Inc. ("Ventures"), a wholly owned
subsidiary of Southern, was created in January 1992 for the purpose of
commercializing alternative uses for natural gas and to engage in various
activities related to the purchase and marketing of natural gas. Sonat NGV
Technology Inc. ("Sonat NGV"), a wholly owned subsidiary of Ventures, was
created in July 1992. Sonat NGV, along with Georgia Energy Company, a wholly
owned subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicles
Development Company Southeast, Inc., formed a joint venture in 1992 to convert
vehicles to natural gas. In 1994 this joint venture was reorganized into a
Georgia limited liability company, NGV Southeast Technologies Center, L.L.C.
("NGV Southeast"). The conversion facility near Atlanta, Georgia, opened in
February 1993. In addition to the conversion of vehicles, NGV Southeast has
constructed a mobile source emissions testing laboratory, which is scheduled for
completion during the second quarter of 1995. NGV Southeast intends to seek
certification by the U. S. Environmental Protection Agency to perform vehicular
emissions tests. During 1993 Ventures also entered into two joint ventures with
affiliates of local distribution companies in Alabama and Florida to construct,
own, and operate natural gas vehicle refueling stations as well as finance the
conversion of fleet vehicles. The first station in Alabama began operating in
March of 1994 and the first station in Florida is expected to begin operating in
the second quarter of 1995. A Florida limited partnership, in which Ventures is
a 50-percent general partner and an affiliate of a Florida local distribution
company is a 50-percent general partner, entered into a joint venture in January
1995 with Amoco Oil Company to develop a public fueling infrastructure for
vehicular natural gas in Dade, Broward, and Palm Beach Counties, Florida.
South Georgia Natural Gas Company. South Georgia, a wholly owned
subsidiary of Southern, owns and operates a 909-mile interstate natural gas
transmission system located in eastern Alabama, southern Georgia, and the
Florida Panhandle. See the system map on page I-18. As described above, South
Georgia has restructured pursuant to Order No. 636 and is a transportation-only
pipeline. South Georgia transported approximately 34 Bcf of natural gas in 1994
compared to 32 Bcf in 1993. These South Georgia volumes are included within the
Southern transportation volumes discussed earlier.
Southern Energy Company. Southern Energy Company ("Southern Energy"), a
wholly owned subsidiary of Southern, owns a liquefied natural gas ("LNG")
receiving terminal near Savannah, Georgia, which was constructed for a project,
now terminated, to import LNG from Algeria. The terminal has been inactive since
the early 1980s. On July 22, 1992, the FERC issued an order approving a
settlement relating to Southern Energy's LNG facilities. The settlement resolved
a number of outstanding rate and accounting issues and preserved an option for
customers of Southern Energy to obtain LNG through this facility at least
through the year 1999.
Sonat Energy Services Company
Energy Services, which is a wholly owned subsidiary of Sonat, acts as a
holding company for two of Sonat's largely non-FERC-regulated companies engaged
in natural gas marketing and power generation.
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<PAGE> 19
Sonat Marketing Company. Marketing, which is a wholly owned subsidiary of
Energy Services and is headquartered in Birmingham, Alabama, provides natural
gas marketing services for industrial and commercial users, gas distribution
companies, gas producers, and gas pipelines throughout the Gulf Coast,
Southeast, Midwest, and Northeast United States. During 1994 Marketing sold 482
Bcf of natural gas purchased from approximately 275 natural gas producers
compared to 1993 sales of 285 Bcf of natural gas purchased from approximately
250 natural gas producers.
Marketing continues to expand its natural gas marketing business. At the
end of 1992 Marketing's volumes were approximately 500 million cubic feet per
day and were primarily on the Southern system. During 1993 Marketing assumed
responsibility for marketing all of the natural gas production of Exploration
that is not sold under pre-existing term dedications and for executing
Exploration's risk management program. This has allowed Marketing to expand its
presence in Gulf Coast, Midwest, and Northeast markets and, in turn, provide
attractive markets to unaffiliated producers. As a result of these efforts,
Marketing's volumes exceeded 1.6 billion cubic feet of natural gas per day at
the end of 1994 versus 1.1 billion cubic feet per day at the end of 1993, making
it one of the twenty largest natural gas marketers in the country. During 1994
Marketing also added a variety of new risk-management, transportation, and
storage services for its customers.
Sonat Power Inc. Sonat Power Inc. is a wholly owned subsidiary of Energy
Services. In June 1992 Sonat and The AES Corporation formed a 50-50 joint
venture, AES/Sonat Power, L.L.C., that will construct, own, and operate natural
gas-fueled independent power and cogeneration plants in the United States,
Canada, and Mexico. In January 1994 Pacific Gas and Electric Company announced
that it would sign a contract with AES Pacific, Inc., an affiliate of AES/Sonat
Power, to purchase power from a 221-megawatt natural gas-fueled power plant to
be constructed in San Francisco. If this project goes forward, a subsidiary of
The AES Corporation would construct and operate the plant. Energy Services is
assisting in the negotiation of the gas supply and transportation contracts
needed in connection with the project. The plant is currently planned to be
completed by mid-1997 and would require an equity investment from Sonat in the
range of approximately $15-20 million.
Citrus Corp.
Sonat owns one-half of the stock of Citrus, which owns all of the stock of
Florida Gas and Citrus Trading Corp., a natural gas marketing company that began
selling natural gas to Florida Power & Light Company during 1990 under a 15-year
contract for up to 125 Bcf annually. During 1994 Citrus successfully negotiated
a restructuring of the pricing terms under this contract.
Florida Gas Transmission Company. Florida Gas, like Southern, is an
interstate natural gas transmission company. It is operated by a subsidiary of
Enron Corp., which owns the other 50 percent of Citrus. Florida Gas'
approximately 4,500-mile pipeline system extends from south Texas to a point
near Miami, Florida, with a certificated daily delivery capacity of 1,455
million cubic feet per day. See the map on page I-18. Florida Gas is the primary
pipeline transporter of natural gas in the state of Florida and the sole
pipeline transporter to peninsular Florida. In 1994 Florida Gas transported 325
Bcf of natural gas.
In August 1990 Florida Gas commenced providing open-access gas
transportation services under the provisions of FERC Order No. 500 and
restructured its sales and transportation services. As a result, Florida Gas'
throughput volumes, once primarily sales, became primarily transportation
volumes. Effective November 1, 1993, Florida Gas, like Southern, restructured
its services in compliance with FERC Order No. 636 and became solely a
transporter of natural gas. Florida Gas has terminated its gas purchase
contracts with a weighted average cost in excess of current spot-market prices
for aggregate costs that are less than the $160 million maximum amount that it
is entitled to recover from its customers pursuant to its 1993 restructuring
settlement under Order No. 636.
Florida Gas, with approval of the FERC, completed a project in the first
quarter of 1995 known as the Phase III expansion, which increased its system
capacity by 530 million cubic feet of gas per day to its current total of 1,455
million cubic feet per day. The project is fully subscribed by 31 customers
under long-term service agreements, with over 60 percent of the capacity
dedicated to the growing electric generation market in
I-16
<PAGE> 20
Florida. As part of Phase III, Florida Gas contracted for 100 million cubic feet
per day of new firm transportation to be delivered from Southern's system. Also
in connection with the expansion, Florida Gas acquired a 20-percent interest in
an existing pipeline in the Mobile Bay area that has been expanded by over
300,000 Mcf per day and connected to Florida Gas' pipeline system.
Primarily as a result of the delays and increased construction costs
associated with weather and environmental problems, the $1 billion cost of the
Phase III expansion project is more than originally estimated. While Florida Gas
believes that all of the costs of the Phase III expansion have been prudently
incurred, Florida Gas' customers have the right under general rate-making
principles to challenge any of these costs as imprudently incurred. As of
December 31, 1994, Sonat has increased its equity investment in Citrus by $159
million in order to fund Phase III.
Florida Gas is currently reviewing the prospects for further expansions of
its pipeline system into the Florida market.
At December 31, 1994, Citrus' gross pipeline and facilities cost was
approximately $2,593,563,000 and its net cost was approximately $2,235,167,000.
Sonat had an investment in Citrus, including its equity in undistributed
earnings, of $291,700,000 at December 31, 1994. For additional information
regarding Citrus, see Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in Part II of this report, and the
Notes to Citrus' Consolidated Financial Statements contained in Part IV of this
report.
Competition and Current Business Conditions
The natural gas transmission industry, although regulated, is very
competitive. Since the mid-1980s customers have switched their volumes from a
bundled merchant service to transportation service, acquiring gas supply under
unregulated arrangements such as those provided by Marketing and Citrus Trading
Corp. 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 continues to provide a limited merchant service
with gas supply remaining under contract and, in this capacity, competes with
other suppliers, pipelines, gas producers, marketers, and alternate fuels.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, electricity, and heavy crude oil. An important
consideration in Southern and Florida Gas' markets is the ability of natural gas
to compete with alternate fuels. Residual fuel oil, the principal competitive
alternate fuel in Southern and Florida Gas' market area, was at certain times in
1994, and may be at times in the future, priced at or below the comparable price
of natural gas in industrial and electric generation markets. Some parts of
Southern's market area are also served by one or more other pipeline systems
that can provide transportation as well as sales service in competition with
Southern. Southern's two largest customers are both able to obtain a portion of
their natural gas requirements through transportation by other pipelines. In
addition, certain pipeline competitors of Florida Gas are currently pursuing
proposed pipelines that may be built to serve the Florida market later in the
decade.
FERC's Order No. 636 mandates a rate design, known as straight
fixed-variable ("SFV"), that is designed to allow pipelines to recover
substantially all fixed costs, a return on equity, and income taxes in the
capacity reservation component of their rates. The firm transportation customers
of Southern and Florida Gas (with the exception of certain small customers) must
pay these reservation charges regardless of the volumes shipped. Accordingly,
the SFV rate design should result in greater stability in the earnings and cash
flows of interstate pipelines, including Southern and Florida Gas. This is
particularly true at Florida Gas, which faces intense competition in the Florida
market from residual fuel oil that affects the volumes of gas it transports.
Competition in the gas marketing business is changing as Order No. 636 is
implemented across the pipeline industry, but it is expected to remain intense
due to the large number of industry participants.
I-17
<PAGE> 21
[SOUTHERN NATURAL PIPELINE MAP GOES HERE]
I-18
<PAGE> 22
INVESTMENT IN SONAT
OFFSHORE DRILLING INC.
Sonat Offshore Drilling Inc. and its subsidiaries (collectively referred to
as "Offshore" unless the context indicates otherwise) are engaged in contract
drilling for oil and gas in offshore areas throughout the world. As a result of
the initial public offering of Offshore's common stock on June 4, 1993, Sonat
currently retains ownership of 39.7 percent of Offshore's outstanding shares.
Offshore maintains offices, land bases, and other facilities at various
locations throughout the world.
As of March 1, 1995, Offshore wholly owns 19 marine units and operates two
others that are owned by a company in which Offshore has a 24.9 percent
ownership interest. At March 1, 1995, 16 of the 21 marine units were working or
committed to work under contract.
The search for oil and gas has increasingly been moving into deeper and
more demanding offshore environments, and Offshore's primary focus has been on
the technically demanding deep-water and harsh-environment segments of the
market. Offshore operates five of the world's 13 "fourth-generation"
semisubmersibles. "Fourth-generation" semisubmersibles are those built after
1984 that are larger than other semisubmersibles, are capable of working in
harsh environments, and have other advanced features. Offshore now wholly owns
three of these five semisubmersibles, while the other two are owned by a company
in which Offshore has a 24.9 percent interest and are managed by Offshore
through most of 1995. At March 1, 1995, Reading & Bates Corporation, a
competitor of Offshore, owned 73.1 percent of the company that owns these two
rigs. Offshore also owns and operates three other semisubmersibles, two
dynamically positioned, deep-water drillships, ten jackups, and one submersible.
All of Offshore's drilling equipment is suitable for both exploration and
development drilling, and Offshore is normally engaged in both types of drilling
activity.
Offshore's contracts to provide offshore drilling services are individually
negotiated and vary in their terms and provisions. Offshore obtains most of its
contracts through competitive bidding against other contractors. It is not
unusual, however, for Offshore to be awarded drilling contracts for its
deep-water and harsh-environment units on a negotiated basis without competitive
bidding. Drilling contracts generally provide for a basic drilling rate on a
dayrate basis and for lower rates for periods of travel or when drilling
operations are interrupted or restricted by equipment breakdowns, adverse
environmental conditions, or other conditions beyond the control of Offshore.
Offshore also performs drilling services under turnkey contracts, which provide
for payment of a fixed price per well. Under turnkey contracts, Offshore agrees
to drill a well to a specified depth for a fixed price. In general, no payment
is received unless the well is drilled to the specified depth. Turnkey contracts
offer the possibility of financial gains or losses that are substantially
greater than those that would ordinarily result under conventional dayrate
contracts. Revenues from dayrate contracts have historically accounted for
substantially more of Offshore's revenues than turnkey contracts.
Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of high demand, short rig supply, and
high dayrates followed by periods of low demand, excess rig supply, and low
dayrates. The industry is characterized by high capital costs, long lead times
for construction of new rigs, and numerous competitors. The offshore contract
drilling business is influenced by many factors, including the current and
anticipated prices of oil and gas (which affect the expenditures by oil
companies for exploration and production) and the availability of drilling
units.
The offshore drilling market in 1993 and 1994 generally experienced
difficult conditions, although certain geographic areas and market segments have
performed better than others. Throughout most of 1994 the North Sea market was
depressed in comparison with recent years, primarily due to the decline in oil
prices and the effects of changes made in 1993 to the U.K. Petroleum Revenue Tax
on exploratory drilling. Beginning in late 1994 and continuing into 1995,
however, the market for drilling services in the U.K. sector of the North Sea
improved significantly because of a combination of factors, including the exodus
of rigs from the area, the commencement of both major and marginal field
development programs, and major new discoveries in the area. Offshore expects
nearly full utilization of semisubmersibles in the North Sea market in 1995. The
U.S. Gulf of Mexico shallow-water market is largely dependent on U.S. natural
gas prices. The steady decline of these prices in 1994, together with the influx
of rigs into the Gulf beginning in late 1993, resulted in declines in
I-19
<PAGE> 23
demand and dayrates in the second half of 1994. Given the uncertainties of
natural gas prices, Offshore cannot predict the extent or duration of the
current weakness in this market. The deep-water market has continued to evidence
increased demand, however, which started in early 1994. Additional contractors
have elected to focus on turnkey drilling, a factor that has caused that market
to become more competitive as compared to prior years.
Generally, Offshore has had a good degree of success in keeping its
deep-water and harsh-environment drilling units utilized at acceptable dayrates.
In spite of this success, however, there can be no assurance that, as contracts
for these units are completed, new contracts offering similar returns can be
found.
GOVERNMENTAL REGULATION
Exploration and Production
The federal government and the states in which Exploration has oil and gas
production and owns interests in producing properties regulate production, the
drilling and spacing of wells, conservation, and various other matters affecting
Exploration's oil and gas production.
The operations of Exploration under federal oil and gas leases are subject
to certain statutes and regulations of the U.S. Department of the Interior that
currently impose liability upon lessees for the cost of clean-up of pollution
resulting from their operations. Royalty obligations on all federal leases are
regulated by the MMS, which has promulgated valuation guidelines for the payment
of royalty by producers. To the extent the MMS finally determines valuation
based on a method other than actual sales proceeds received, producers could be
required to pay royalties at a rate higher than actual sales proceeds.
Other federal, state, and local laws and regulations relating to the
protection of the environment may affect Exploration's oil and gas operations,
both directly and indirectly, through their effect on the construction and
operation of facilities, drilling operations, production, or the delay or
prevention of future offshore lease sales. Sonat maintains substantial insurance
on behalf of Exploration for oil pollution liability. Exploration is also
subject to various governmental safety regulations in the jurisdictions in which
it operates.
Transmission, Storage, and Marketing of Natural Gas
Southern is subject to regulation by the FERC and by the Secretary of
Energy under the NGA, the NGPA, and the Department of Energy Organization Act of
1977 (the "DOE Act"). Southern's interstate transmission subsidiaries and
Florida Gas are also subject to such regulation.
The NGA, modified by the DOE Act, grants to the FERC authority to regulate
the construction and operation of pipeline and related facilities utilized in
the transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities. Southern, its
interstate transmission subsidiaries, and Florida Gas hold required certificates
of public convenience and necessity issued by the FERC authorizing them to
construct and operate all pipelines, facilities, and properties now in operation
for which certificates are required, and to transport and sell natural gas in
interstate commerce.
The FERC also has authority to regulate the transportation of natural gas
in interstate commerce and the sale of natural gas in interstate commerce for
resale. Although the FERC still retains jurisdiction over their resale rates,
following the implementation of Order No. 636, Southern, Florida Gas, and other
interstate pipeline companies are now permitted to charge market-based rates for
gas sold in interstate commerce for resale. Gas sold by Marketing and other
marketing companies is not regulated by the FERC. Transportation rates remain
fully regulated. As necessary, Southern, its interstate transmission
subsidiaries, and Florida Gas file with the FERC applications for changes in
their transportation rates and charges designed to allow them to recover fully
their costs of providing such service to their customers, including a reasonable
rate of return. These rates are normally allowed to become effective, subject to
refund, until such time as the FERC rules on the actual level of rates. See
"Rate and Regulatory Proceedings" below.
I-20
<PAGE> 24
Regulation of the importation of natural gas is vested in the Secretary of
Energy, who has delegated various aspects of this import jurisdiction to the
FERC and the ERA.
Southern, its natural gas transmission subsidiaries, and Florida Gas are
subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which
regulates pipeline and LNG plant safety requirements, and to the National
Environmental Policy Act and other environmental legislation. Southern, its
natural gas transmission subsidiaries, and Florida Gas have a continuing program
of inspection designed to keep all of their facilities in compliance with
pollution control and pipeline safety requirements and believe that they are in
substantial compliance with applicable requirements. Southern's capital
expenditures to comply with environmental and pipeline safety regulations were
approximately $13 million in 1994 compared to $14 million in 1993. It is
anticipated that such expenditures will be approximately $20 million in 1995.
Rate and Regulatory Proceedings. Various matters pending before the FERC,
or before the courts on appeal from the FERC, relating to, or that could affect,
Sonat or one or more of its subsidiaries are described in Part II of this report
in Note 9 of the Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption "Rate Matters," which are incorporated herein by reference. As
described in Note 9, several general rate changes have been implemented by
Southern and remain subject to refund and Southern filed with the FERC on March
15, 1995, a Customer Settlement (described above) that, if it is approved by the
FERC and becomes effective, would resolve all outstanding rates and GSR cost
recovery proceedings as to supporting customers.
ENVIRONMENTAL MATTERS
Various environmental matters relating to, or that could affect, Sonat or
one or more of its subsidiaries are described in Part II of this report in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Environmental Issues," which is incorporated
herein by reference.
CORPORATE RESTRUCTURING
In late 1994 and early 1995 Sonat completed a reduction in staffing levels
that is described in Part II of this report in Management's Discussion and
Analysis of Financial Condition and Results of Operations under the caption
"Corporate Restructuring," which is incorporated herein by reference.
ITEM 2. PROPERTIES
A description of Sonat's and its subsidiaries' properties is included under
Item 1. Business above and is incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding certain proceedings pending before federal
regulatory agencies, see Note 9 of the Notes to Consolidated Financial
Statements in Part II of this report. For information regarding various
environmental matters relating to, or that could affect, Sonat or one or more of
its subsidiaries, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this report under the caption
"Environmental Issues."
Arcadian Corporation v. Southern Natural Gas Company and Atlanta Gas Light
Company was filed in January 1992 in the U.S. District Court for the Southern
District of Georgia. This lawsuit was filed against Southern and Atlanta Gas
Light Company ("Atlanta") for alleged violation of the antitrust laws in
connection with Southern's refusal to provide direct service to the Plaintiff,
Arcadian Corporation ("Arcadian"). Arcadian claims actual damages of at least
$15 million, which could be trebled under the antitrust laws. Southern and
Arcadian executed an agreement settling this lawsuit on November 30, 1993. The
settlement provides that the lawsuit will be dismissed with prejudice upon
final, nonappealable approval by the FERC of the direct connection and
transportation service requested by Arcadian. Pending such approval the lawsuit
has been stayed. On May 12, 1994, the FERC issued an order granting such
approval. Atlanta and
I-21
<PAGE> 25
others sought rehearing on the May 12 order. Atlanta also filed a petition for
review of such order in the Court of Appeals. The FERC has not acted upon the
rehearing requests other than to give itself more time to consider the rehearing
petition. While management believes it has meritorious defenses and intends to
defend the suit vigorously if the stay were to be lifted, given the inherently
unpredictable nature of litigation and the relatively early state of discovery
in the case, management is unable to predict the ultimate outcome of the
proceeding if it were to go forward.
Exxon Corporation v. Southern Natural Gas Company was filed in February
1994 in the U.S. District Court for the Southern District of Texas. Exxon
Corporation ("Exxon"), the plaintiff in this suit, asked the court to declare
that Southern has no right to terminate a gas purchase contract with Exxon
providing for the sale and purchase of gas produced from Mississippi Canyon and
Ewing Bank Area Blocks, offshore Louisiana (the "Contract"), which Southern gave
notice of termination effective March 1, 1994. In the alternative, Exxon alleged
that Southern has repudiated and breached the Contract and asked for an
unspecified amount of monetary damages. Southern's customers are challenging the
recovery of GSR costs attributable to the Contract. See the discussion above in
Item 1 under the caption "Administrative Law Judge Ruling Concerning
Recoverability of Investment in Offshore Gas Supply Facilities; Settlement with
Exxon Corporation." The U.S. District Court for the Southern District of Texas
entered a summary judgment order on August 29, 1994, upholding Southern's
termination of the Contract. On September 6, 1994, Exxon filed an appeal of the
summary judgment order with the U.S. Court of Appeals for the Fifth Circuit,
which remains pending. On February 17, 1995, Southern reached a settlement with
Exxon pursuant to which this lawsuit would be dismissed. The settlement with
Exxon, however, will not become effective until the Customer Settlement
(described above in Item 1) is effective. Pending the settlement becoming
effective, therefore, Exxon's appeal has been stayed. If it were to go forward,
management is unable to predict the outcome of this litigation or whether its
position that it has the right to terminate the Contract would be sustained.
Southern Natural Gas Company v. ARCO Oil and Gas Company, d/b/a Vastar
Resources, Inc., was filed in January 1994 in Civil District Court for the
Parish of Orleans, Louisiana, and Vastar Resources, Inc. v. Southern Natural Gas
Company was filed in April 1994 in the 125th Judicial Court of Harris County,
Texas. Vastar Resources, Inc. ("Vastar") and Southern filed separate actions to
petition these respective state courts to determine the price of gas under a
1949 contract between Vastar and Southern, providing for the purchase and sale
of gas from the Logansport and Joaquin Fields located in Louisiana and Texas.
Southern maintains that a provision of the contract provides for a market price,
while Vastar maintains that the contract price is based upon the last regulated
price in effect, adjusted for escalation. The parties have deferred the matter
to arbitration and the two lawsuits have been stayed pending the outcome of that
proceeding, which is scheduled to begin April 3, 1995, in New Orleans,
Louisiana. Southern has recorded its reasonably estimable losses in connection
with these proceedings,but will seek to recover as a GSR cost any amounts for
gas purchases at prices above spot-market that may ultimately be determined it
owes to Vastar as a result of these proceedings.
Sonat and its subsidiaries are involved in a number of other lawsuits, all
of which have arisen in the ordinary course of business. Sonat does not believe
that any ultimate liability resulting from any of these other pending lawsuits
will have a material adverse effect on it.
I-22
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Sonat did not submit any matter to a vote of its security holders during
the fourth quarter of 1994.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
OFFICER OFFICE AGE
- ---------------------------------------- --------------------------------------------- ----
<S> <C> <C>
Ronald L. Kuehn, Jr..................... Chairman of the Board, President, and Chief 59
Executive Officer
Donald G. Russell....................... Executive Vice President 63
William A. Smith........................ Executive Vice President 50
James A. Rubright....................... Senior Vice President and General Counsel 48
Thomas W. Barker, Jr.................... Vice President -- Finance and Treasurer 50
Beverley T. Krannich.................... Vice President -- Human Resources and 44
Secretary
Ronald B. Pruet......................... Vice President and Controller 42
James E. Moylan, Jr..................... President of Southern 44
Richard B. Bates........................ President of Energy Services 41
</TABLE>
There is no family relationship between any of the above-named executive
officers.
The officers of Sonat are elected annually by the Board of Directors. The
identification of an individual as an executive officer in this report does not
constitute a determination by Sonat or its Board of Directors that such
individual is an officer of Sonat for purposes of Section 16 of the Securities
Exchange Act of 1934.
Ronald L. Kuehn, Jr. was elected Chairman of the Board of Sonat effective
March 28, 1986. Mr. Kuehn has served as Director of Sonat since April 30, 1981,
as President of Sonat since January 1, 1982, and as Chief Executive Officer of
Sonat since June 1, 1984, and currently serves in those capacities. Mr. Kuehn
also serves as Director of various Sonat subsidiaries. During the past five
years Mr. Kuehn has served as a senior executive officer of Sonat.
Donald G. Russell was elected Executive Vice President of Sonat effective
January 1, 1991, and a Director of Sonat effective September 22, 1994, and
currently serves in those capacities. Mr. Russell also serves as Chairman and
Chief Executive Officer of Exploration. During the past five years Mr. Russell
has served as an officer of Sonat and Exploration.
William A. Smith was elected Executive Vice President of Sonat effective
March 1, 1991, and currently serves in that capacity. Mr. Smith also serves as
Vice Chairman of Exploration. During the past five years Mr. Smith has served as
an officer of Sonat, Exploration, Southern, and Energy Services.
James A. Rubright was elected Senior Vice President and General Counsel of
Sonat effective April 1, 1995, and will serve in that capacity beginning on that
date. Mr. Rubright currently serves as Vice President and General Counsel of
Sonat and also serves as Executive Vice President and General Counsel of
Exploration, Southern, and Energy Services. During the past five years until his
election as Vice President and General Counsel of Sonat effective February 15,
1994, Mr. Rubright had been a member of the Atlanta, Georgia law firm of King &
Spalding.
Thomas W. Barker, Jr. was elected Vice President -- Finance of Sonat
effective June 15, 1984, and Treasurer of Sonat effective January 1, 1990, and
currently serves in those capacities. Mr. Barker also serves as Vice
President -- Finance and Assistant Treasurer of Exploration and Treasurer of
Southern and Energy Services. During the past five years Mr. Barker has served
as an officer of Sonat, Exploration, Southern, and Energy Services.
I-23
<PAGE> 27
Beverley T. Krannich was elected Vice President -- Human Resources of Sonat
effective June 1, 1987, and Secretary of Sonat effective May 11, 1984, and
currently serves in those capacities. Ms. Krannich also serves as Vice
President -- Human Resources of Exploration and Southern. During the past five
years Ms. Krannich has served as an officer of Sonat, Exploration, and Southern.
Ronald B. Pruet was elected Vice President and Controller of Sonat
effective April 1, 1994, and currently serves in that capacity. Mr. Pruet also
serves as Senior Vice President and Treasurer of Exploration. During the past
five years Mr. Pruet has served as an officer of Sonat and Exploration.
James E. Moylan, Jr. was elected President of Southern effective April 1,
1994, and currently serves in that capacity. During the past five years Mr.
Moylan has served as an officer of Sonat and Southern.
Richard B. Bates was elected President of Energy Services effective January
1, 1994, and currently serves in that capacity. Mr. Bates also serves as
President of Marketing. During the past five years Mr. Bates has served as an
officer of Exploration, Energy Services, and Marketing.
I-24
<PAGE> 28
PART II
<TABLE>
<CAPTION>
ITEM PAGE
- --------- -----
<S> <C> <C>
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... II-32
Item 6. Selected Financial Data..................................................... II-40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... II-2
Item 8. Financial Statements and Supplementary Data................................. II-16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. II-42
</TABLE>
---------------------
The financial data following on pages II-2 through II-41 is reproduced
from, and the Table of Contents below is taken from, the Sonat Inc. Annual
Report to Stockholders for 1994. An index to the financial statements and
financial statement schedules may be found under Item 14. "EXHIBITS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" in Part IV of this report.
---------------------
FINANCIAL INFORMATION CONTENTS
<TABLE>
<S> <C>
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 26
Report of Management 39
Report of Ernst & Young LLP,
Independent Auditors 39
Consolidated Financial Statements 40
Consolidated Balance Sheet 40
Consolidated Statements of Income 42
Consolidated Statements
of Changes in Stockholders' Equity 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
Selected Consolidated Financial Data 64
</TABLE>
II-1
<PAGE> 29
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.
Segment Operating Income
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
------------------------
<S> <C> <C> <C>
Exploration and Production $ 64 $ 86 $ 54
Natural Gas Transmission
and Marketing 100 144 151
Other 5 3 6
------------------------
Consolidated Operating Income $169 $233 $211
========================
</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. Sonat Exploration's strategy is to acquire gas properties
with significant development potential. Since implementing this strategy in
1988, Sonat Exploration's proved reserves have grown to approximately 1.6
trillion cubic feet of natural gas equivalent at December 31, 1994, more than a
six-fold increase.
Sonat Exploration intends to continue aggressively to acquire domestic
gas properties with significant development potential. During 1994 Sonat
Exploration acquired oil and gas interests and properties for a total of $163
million, with proved reserves of approximately 278 billion cubic feet of
natural gas equivalent. Through these acquisitions, Sonat Exploration extended
its operations to the Permian Basin of west Texas and increased its position in
south Texas.
In early 1995, Sonat Exploration announced two significant
acquisitions of oil and gas producing properties, one in north Louisiana and
the other in the Texas Panhandle area. These transactions, which total $158.3
million, will add proved reserves of 188 billion cubic feet of natural gas and
11.2 million barrels of oil and condensate, yielding a unit acquisition cost on
a natural gas equivalent basis of $.62 per thousand cubic feet.
Total capital expenditures for Sonat Exploration are expected to
approximate $410 million in 1995, which would be up slightly from 1994. Capital
spending planned for 1995 includes approximately $250 million for producing
property acquisitions.
Sonat Exploration's developmental drilling programs continue to be
very successful. During 1994 Sonat Exploration participated in the drilling of
343 development wells. These drilling programs added proved reserves of
approximately 136.5 billion cubic feet of natural gas equivalent.
Sonat Exploration's natural gas production is marketed primarily in
the spot-market by Sonat Marketing Company, a subsidiary of the Company
operating in the Natural Gas Transmission and Marketing segment.
The decline in natural gas prices since mid-year reduced earnings for
1994, particularly in the fourth quarter. These low prices are continuing into
1995 and, if the trend of lower prices continues for the entire year of 1995,
Sonat Exploration's earnings and cash flow will be lower than 1994 results.
Sonat Exploration, through Sonat Marketing, uses derivative financial
instruments as hedges to reduce the risks associated with price volatility for
its production (see Commodity Price Risk Management and Note 2 of the Notes to
Consolidated Financial Statements).
Exploration and Production Operations
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Sales to others $ 145 $ 198 $ 214
Intersegment sales 268 155 65
---------------------------
Total Revenues 413 353 279
---------------------------
Costs and Expenses:
Operating and maintenance 63 52 48
Exploration expense 12 7 5
General and administrative 46 43 49
Depreciation, depletion
and amortization 207 149 108
Taxes, other than income 21 16 15
---------------------------
349 267 225
---------------------------
Operating Income $ 64 $ 86 $ 54
===========================
Equity in Earnings of
Unconsolidated Affiliates $ - $ 5 $ 2
===========================
Proved Reserves:
(Includes Sonat/P)
Net gas (Bcf) 1,367 1,187 1,028
Net liquids (MBbls) 31,627 27,094 20,144
===========================
Net Sales Volumes:
(Includes Sonat/P)
Gas (Bcf) 182 150 127
Oil and condensate (MBbls) 4,155 3,052 2,364
Natural gas liquids (MBbls) 1,227 726 733
===========================
Average Sales Prices:
(Includes Sonat/P)
Gas ($/Mcf) $ 1.83 $ 1.99 $ 1.71
Oil and condensate ($/Bbl) 15.91 17.42 18.94
Natural gas liquids ($/Bbl) 8.90 7.96 13.04
===========================
</TABLE>
II-2
<PAGE> 30
Sonat Inc. and Subsidiaries
1994 Versus 1993. Operating income for 1994 declined 26 percent when
compared to 1993 primarily due to lower natural gas prices and higher
amortization. Revenues for 1994 were up by $60 million over 1993 due primarily
to a 21 percent increase in natural gas production and a 36 percent increase
for oil and condensate production resulting from the continuing acquisition and
development program. Natural gas liquids production increased 69 percent over
last year, primarily as a result of increased production from the Austin Chalk
trend. On average, 1994 oil and gas prices were 9 percent and 8 percent lower,
respectively, than in 1993. The hedging program's effect on revenue was a
favorable $10 million in 1994 and an unfavorable $5 million in 1993. The most
significant price fluctuation occurred in the fourth quarter of 1994 as average
gas prices declined to $1.59 per Mcf compared to $2.06 for the fourth quarter
of 1993, a 23 percent decrease. Amortization expense increased 39 percent when
compared with 1993, primarily due to increased production volumes. The 1994
amortization rate also increased from the 1993 rate due in large part to a
higher proportion of Austin Chalk (predominantly oil, condensate and natural
gas liquids) production in 1994. Expanding operations and acquisitions were
primarily responsible for increases in other operating expenses, including
general and administrative expenses.
The reduction in equity in earnings of unconsolidated affiliates
reflects Sonat Exploration's acquisition of the remaining interest in Sonat/P
Anadarko Limited Partnership (Sonat/P) in late 1993. Sonat/P was established in
the third quarter of 1992.
1993 Versus 1992. Operating income for 1993 was up significantly from
1992, reflecting in part a 16 percent increase in natural gas prices.
Acquisition activity led to higher oil and gas volumes, which increased by 29
percent and 18 percent over 1992, respectively. Amortization expense also
increased due to higher production volumes as well as higher amortization
rates. The higher amortization rates resulted from increased Austin Chalk
production, tight-sands gas drilling, and acquisitions that included more
proved, producing reserves. General and administrative expense compared
favorably to 1992 due to $4 million of restructuring charges included in 1992.
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 Marketing. Southern and Florida Gas Transmission Company, a
subsidiary of Citrus, operating in the natural gas transmission industry, have
historically provided their customers with 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, both Southern and
Florida Gas have essentially become solely gas transporters, although Southern
continues to make limited sales pending the expiration, termination, or
assignment of its remaining gas supply contracts. Citrus also provides natural
gas marketing activities through affiliates, primarily to customers of Florida
Gas.
The natural gas transmission industry, although regulated, is very
competitive. Since the mid-1980s customers have switched their volumes from a
bundled merchant service to transportation service, acquiring 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 continues to pursue growth opportunities to expand the level
of services in its traditional market area and to connect new gas supplies. On
May 1, 1994, Southern completed its second pipeline expansion into northern
Florida and southwestern Georgia, which increased firm daily capacity by 40
million cubic feet per day. On July 22, 1994, Southern filed an application
with the Federal Energy Regulatory Commission (FERC) for authorization to
construct a 21-mile pipeline extension to a delivery point near Chattanooga,
Tennessee, that will deliver natural gas to a group of new customers who have
signed 10-year contracts for firm transportation volumes totaling approximately
11 million cubic feet per day.
Florida Gas, which has a pipeline system capacity of 925 million cubic
feet per day, will place its Phase III expansion into service on March 1, 1995,
increasing its system capacity by 530 million cubic feet per day. As part of
Phase III, Florida Gas will contract for 100 million cubic feet per day of new
firm transportation to be delivered from Southern's system. Also in connection
with this expansion, Florida Gas will acquire a 20 percent interest in an
existing pipeline in the Mobile Bay area that was expanded by over 300 million
cubic feet per day and connected to Florida Gas' pipeline system.
Primarily as a result of the delays and increased construction costs
associated with weather and environmental problems, the $1 billion cost of the
Phase III expansion project is more than originally estimated. While Florida
Gas believes that all of the costs of the Phase III expansion have been
II-3
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
prudently incurred, Florida Gas' customers have the right under general
rate-making principles to challenge any of these costs as imprudently incurred.
As of December 31, 1994, the Company had increased its equity investment in
Citrus by $159 million in order to fund Phase III.
Additionally, Florida Gas is currently reviewing the prospects for
further expansions of its pipeline system into the Florida market.
Sonat Marketing continued to expand its natural gas marketing business
during 1994. It now markets the majority of the natural gas production of Sonat
Exploration, and has responsibility for the execution of Sonat Exploration's
risk management program. Adding the Sonat Exploration volumes has enabled Sonat
Marketing to expand its presence in Gulf Coast, Midwest, and Northeast markets
and to begin building a significant base of sales in these markets to enhance
its marketing of natural gas volumes acquired from unaffiliated producers. As a
result of these efforts and due to increased purchasing from third parties,
Sonat Marketing's average daily sales volumes at year-end 1994 were 1.6 billion
cubic feet per day, versus 1.1 billion cubic feet per day at the end of 1993.
Sonat Marketing uses derivative financial instruments to offer fixed
price contracts to its suppliers and customers. (See Commodity Price Risk
Management and Note 2 of the Notes to Consolidated Financial Statements.)
Natural Gas Transmission and Marketing
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating Income:
Southern Natural Gas Company $ 93 $147 $151
Sonat Marketing Company 11 2 2
Other (4) (5) (2)
------------------------
Total Operating Income $100 $144 $151
========================
</TABLE>
Southern Natural Gas Company
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
(In Millions)
<S> <C> <C> <C>
Revenues:
Gas sales $234 $541 $489
Market transportation(1) 321 170 124
Supply transportation 37 50 51
Other(2) 173 72 65
------------------------
Total Revenues 765 833 729
------------------------
Costs and Expenses:
Natural gas cost 229 364 270
Transition cost recovery and
gas purchase contract
settlement costs 116 52 52
Operating and maintenance(2) 189 103 88
General and administrative 72 85 79
Depreciation and amortization(1) 47 64 74
Taxes, other than income 19 18 15
------------------------
672 686 578
------------------------
Operating Income $ 93 $147 $151
------------------------
Equity in Earnings of
Unconsolidated Affiliates $ 9 $ 9 $ 8
------------------------
(Billion Cubic Feet)
Volumes:
Gas sales (excludes storage gas) - 73 109
Market transportation 551 435 391
------------------------
Total Market Throughput 551 508 500
Supply transportation 335 328 342
------------------------
Total Volumes 886 836 842
========================
Transition Gas Sales 103 19 -
========================
</TABLE>
(1) Southern's transportation revenues and depreciation expense in 1994
include a $16 million decrease reflecting a retroactive reduction in
certain depreciation rates.
(2) Southern's other revenue and operating and maintenance expense in 1994
include a $38 million adjustment related to the recognition of fuel
revenue and expense.
Citrus Corp.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
Equity in Earnings (Loss)
of Citrus Corp. $ 29 $ (6) $ (9)
------------------------
(Billion Cubic Feet)
--------------------
Florida Gas Volumes (100%):
Gas sales - 15 44
Market transportation 303 269 245
------------------------
Total Market Throughput 303 284 289
Supply transportation 22 45 53
------------------------
Total Volumes 325 329 342
========================
</TABLE>
II-4
<PAGE> 32
Sonat Inc. and Subsidiaries
Sonat Marketing Company
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Gas sales $926 $618 $341
Other 4 2 1
------------------------
Total Revenues $930 $620 $342
========================
Operating Income $ 11 $ 2 $ 2
========================
(Billion Cubic Feet)
--------------------
Gas Sales Volumes 482 285 178
========================
</TABLE>
1994 Versus 1993. Operating income for the Natural Gas Transmission
and Marketing segment increased 9 percent excluding the effect of significant
unusual items recognized by Southern in the fourth quarter of 1994. The
increase was due to operations of both Southern and Sonat Marketing. The
significant unusual items in 1994 included in operating and maintenance expense
consisted of a $29 million charge associated with a comprehensive customer rate
settlement that will be filed by Southern with the FERC in March 1995 (the
Customer Settlement) and a $28 million provision relating to regulatory assets
that will not be recovered as a result of the Customer Settlement, including
amounts for a corporate restructuring undertaken in 1994. See Rate Matters for
a discussion of the Customer Settlement.
Southern Natural Gas-Excluding the unusual items discussed above,
Southern's operating income for 1994 increased slightly when compared with 1993
as a result of higher transportation revenue resulting from the sale of
unsubscribed firm transportation capacity and lower general and administrative
costs. Southern's gas sales revenues and gas costs were down significantly in
1994 as a result of implementing Order No. 636 and primarily represent
recognition of gas sales made from supply remaining under contract after the
implementation of Order No. 636 (see Order No. 636 discussion below). The
volumes associated with these sales are included in transportation volumes
because, as required by Order No. 636, all sales are now made at the wellhead.
Another factor in the decrease in revenues was the recovery of $42 million of
Order No. 500 costs in 1993 revenues. Higher transportation revenues and
volumes are a result of the shift from sales to transportation due to the
implementation of Order No. 636. Other revenue also increased in 1994 due to
the recovery of transition costs of $108 million related to the implementation
of Order No. 636.
General and administrative costs decreased primarily
due to lower employee costs, including stock-based compensation expenses.
Citrus-Equity in earnings of Citrus increased to $29 million from a
loss of $6 million in 1993 due to the capitalization of financing costs (AFUDC)
in 1994 related to the Phase III expansion project, lower depreciation due to
an increase in the estimated useful life of the existing pipeline system, and
higher margins on a gas supply contract with one of its major customers, which
was restructured during 1994. This was partially offset by the favorable effect
in 1993 of the sale of gas supply contracts at Citrus Marketing.
Sonat Marketing-Operating income for Sonat Marketing was $11 million
in 1994 as compared with $2 million in 1993. Sonat Marketing's sales volumes
increased significantly over 1993 levels as a result of marketing Sonat
Exploration's production for the entire period and increasing sales on
interstate pipelines that serve the Midwest and Northeast markets through the
purchase of additional third-party volumes. In addition, average margins per
MMBtu have increased from $.03 in 1993 to $.05 in 1994 due to greater
concentration on value-added services.
1993 Versus 1992. Operating results for the Natural Gas Transmission
and Marketing segment were up slightly in 1993 excluding the effect of a $9.6
million settlement in 1992 relating to Southern Energy Company's (a subsidiary
of Southern) idle liquefied natural gas facility.
Southern Natural Gas-Excluding the unusual item discussed above,
Southern's operating results were up 4 percent in 1993.
Gas sales revenue and gas costs were abnormally high at Southern due
to the sale of $123 million of storage gas inventory pursuant to the
implementation of Order No. 636 on November 1, 1993. Total market throughput
increased 2 percent; however, Order No. 636 resulted in a shift in volumes
from sales to market transportation. Supply transportation volumes decreased
due to competition from other pipelines.
General and administrative expenses were up in 1993 due to a $4
million increase in health insurance expense and an increase in stock-based
employee compensation.
Citrus-Equity in earnings of Citrus increased $3 million over 1992.
Operationally, high prices for natural gas relative to competing No. 6 fuel oil
significantly reduced earnings in 1993. The decline was offset, however, by
gains from the sale of gas supply contracts at Citrus Marketing in 1993,
decreased depreciation expense resulting from a change in the estimated useful
life of the pipeline system, and the recognition of natural gas
II-5
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
settlement costs in 1992. Citrus' results (100 percent) were reduced by $10
million in 1993 by the recognition of the increase in the U.S. federal income
tax rate.
Sonat Marketing-Operating income for Sonat Marketing was $2 million
in both 1993 and 1992. Sonat Marketing's sales revenues and volumes increased
significantly over 1992 as a result of integrating the marketing of Sonat
Exploration's production, which was completed in late 1993, and expanding
activities on nonaffiliated pipelines through the purchase of additional
third-party volumes. Increased expenses related to expanding operations offset
the benefit of the revenue growth.
ORDER NO. 636
In 1992 the FERC issued its Order No. 636 (the Order), which required
interstate natural gas pipeline companies to make significant changes in the
way they operate, including 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. 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. 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 for terms ranging from one to 10 or
more years. Alabama Gas Corporation, Southern's second largest customer,
executed firm transportation contracts for 393 million cubic feet per day under
terms extending through October 31, 2008.
Atlanta elected to renew its firm transportation service agreements
with transportation demands of 582 million cubic feet per day, which expired
October 31, 1994, for a one-year term beginning November 1, 1994. In September
and October of 1994, Atlanta and South Carolina Pipeline Corporation (SCPL)
executed three-year firm service agreements with transportation demands of an
additional 100 million cubic feet per day and 28 million cubic feet per day,
respectively. With these additional subscriptions, substantially all of
Southern's firm market-area capacity currently available became fully
subscribed.
If the Customer Settlement (described in Note 9 of the Notes to
Consolidated Financial Statements) becomes effective, Atlanta will amend its
firm transportation contracts for an aggregate of 682 million cubic feet per
day to extend the primary term for a period of three years beginning as of the
date an interim rate reduction becomes effective, which will occur as of March
1, 1995. (See Note 9 of the Notes to Consolidated Financial Statements.) An
additional 118 million cubic feet per day would remain under its current term
to April 30, 2007.
NATURAL GAS SALES AND SUPPLY
Sales by Southern of natural gas are anticipated to continue until Southern's
remaining gas supply contracts expire, are terminated, or are assigned.
Southern is attempting to terminate its remaining gas supply 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 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
II-6
<PAGE> 34
Sonat Inc. and Subsidiaries
remaining gas supply contracts, Southern sold 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. A portion of these sales agreements were extended
for an additional one-year term, while the sales agreements with Atlanta were
extended through March 31, 1995. Certain customers, including Atlanta, have
advised Southern that if the Customer Settlement becomes effective, they will
extend their sales agree- ments through November 30, 1997. The remainder of
Southern's gas supply will continue to be sold on a month-to-month basis.
As discussed in Note 9 of the Notes to Consolidated Financial
Statements, Southern is incurring certain transition costs under the Order,
primarily gas supply realignment (GSR) costs relating to existing gas purchase
contracts. Southern's customers are contesting Southern's proceedings to
recover its GSR costs on eligibility and prudence grounds and on the basis that
Southern is precluded from recovering certain of such costs under a 1988
take-or-pay settlement that limited the amount of such costs that Southern
could recover. In its Customer 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, recent contract renegotiations, and price differential costs actually
incurred, the total amount of GSR costs are estimated to be approximately $328
million on a present-value basis. This amount includes the payments made or
accrued through December 31, 1994, to amend or to terminate gas purchase
contracts and price differential costs, and the $64 million cost that will be
incurred under a settlement of existing contracts with Exxon Corporation
(Exxon), which will become effective if the Customer Settlement becomes
effective. These costs collectively total $288 million. Thus, Southern
currently estimates it will ultimately pay an additional $40 million in GSR
costs. These amounts do not include an additional $87 million in GSR costs that
would be incurred if the settlement with Exxon does not become effective and
Exxon prevails on its lawsuit regarding Southern's March 1, 1994, termination
of a contract relating to Exxon's reserves in its Mississippi Canyon blocks.
Subject to the cost-sharing mechanism in the Customer Settlement,
pursuant to which Southern will absorb an agreed-upon portion of its total GSR
costs, Southern will recover in accordance with the Customer Settlement or,
pending approval of the Customer Settlement, 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 to be incurred
as a result of Order No. 636 to terminate or reduce the price under Southern's
remaining contracts. If the Customer Settlement is not approved, Southern
cannot predict the ultimate outcome of its Order No. 636 restructuring
proceedings and its limited rate filings to recover its GSR costs. (See Rate
Matters and Note 9 of the Notes to Consolidated Financial Statements.)
Southern's purchase commitments under its remaining gas supply
contracts for the years 1995 through 1999 are estimated as follows:
Estimated Purchase Commitments
<TABLE>
<CAPTION>
(In Millions)
-------------
<S> <C>
1995 $67
1996 69
1997 69
1998 68
1999 53
</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. These estimates also exclude estimated
purchase commitments under certain contracts with Exxon that will be terminated
if the Customer Settlement becomes effective. If the Customer Settlement does
not become effective and Southern were therefore required to perform these
contracts, and further assuming that Exxon were to prevail on its appeal of a
summary judgment upholding the Company's termination of the Mississippi Canyon
Contract, which is currently the subject of litigation between Exxon and
Southern as described in Note 9 of the Notes to Consolidated Financial
Statements, these estimates would increase by $170 million in 1995, $144
million in 1996, $57 million in 1997, $5 million in 1998, and $2 million in
1999. Of these amounts, $126 million in 1995 and 1996 and $49 million in 1997
is attributable to the Mississippi Canyon Contract. In addition, as part of its
settlement with Exxon, which as noted is contingent on the effectiveness of the
Customer Settlement, Southern and Exxon have agreed to terminate all their
existing gas purchase contracts and to enter into two new gas purchase
contracts having three-year terms and providing for market-based index prices
(which would not constitute GSR costs). Therefore, if the Customer Settlement
becomes effective,
II-7
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
these estimates could increase by $108 million in 1995, $94 million in 1996,
and $35 million in 1997 to include these two new contracts with Exxon.
RATE MATTERS
Several general rate changes have been implemented by Southern and remain
subject to refund. If the Customer Settlement is approved by the FERC and
becomes effective, all outstanding rate and Order No. 636 transition cost
recovery proceedings would be resolved. The settlement would result in reducing
Southern's filed rates to more competitive levels, would reduce somewhat
reported revenues, and would reduce depreciation expense to approximately $40
million in 1995. Although Southern has been advised by customers representing
more than 80% of its firm capacity that they intend to support the settlement,
there is no assurance that the settlement will be approved by the FERC. (See
Note 9 of the Notes to Consolidated Financial Statements for a discussion of
the Customer Settlement and other rate matters.)
CITRUS CORP.
During 1994 Citrus had net income of $55 million compared with a loss of $16
million in 1993. This increase primarily resulted from AFUDC recognized on the
Phase III expansion project, decreased depreciation due to an increase in the
estimated useful life of the existing pipeline, and improved earnings on a gas
supply contract with one of its major customers. These events, combined with
Florida Gas' Order No. 636 restructuring and resultant conversion to an SFV
rate methodology, are expected to result in stable revenues, earnings, and cash
flow at Citrus, although at somewhat lower levels than in 1994 due to the
completion of the Phase III expansion project and the resulting end of AFUDC
recognition on the project combined with the use of levelized rates on the
Phase III portion of the pipeline.
Florida Gas has terminated its gas purchase contracts with a weighted
average cost in excess of current spot-market prices and has negotiated a
settlement with its customers and the FERC to recover 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 obtains its own financing independent of its parent companies.
Debt financing by Citrus with outside parties generally is nonrecourse to its
parent companies. (See Note 5 of the Notes to Consolidated Financial Statements
for a discussion of a Florida Gas financing.) In connection with the
construction of the Phase III expansion, the Company made capital contributions
to Citrus totaling $159 million. See Capital Expenditures below.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
OTHER INCOME-EQUITY IN EARNINGS
(LOSS) OF UNCONSOLIDATED AFFILIATES:
Exploration and Production $ - $ 5 $2
Natural Gas Transmission
and Marketing 38 2 (1)
Other:
Sonat Offshore Drilling Inc. 5 4 -
Other 1 1 3
-----------------------
$44 $12 $ 4
=======================
</TABLE>
Equity in earnings of unconsolidated affiliates in the Exploration and
Production and Natural Gas Transmission and Marketing segments were discussed
earlier.
1994 Versus 1993. Results reported for Sonat Offshore Drilling Inc. in
the above table for 1993 are for the last seven months of the year, which is
the period after the date of the initial public offering (IPO) of 60 percent of
its common stock. Sonat Offshore's results on a 100 percent basis were $13
million and $17 million in 1994 and 1993, respectively. 1994 was lower
primarily due to the inclusion in 1993 of $24 million ($16 million after-tax)
of interest income relating to an IRS tax settlement for the years 1983 through
1985 and lower operating income from turnkey operations and dayrate operations
in Brazil and the North Sea. These unfavorable items were partially offset by
improved operating results in the U.S. Gulf of Mexico and Egypt and the
acquisition of the remaining 52.5 percent of the Polar Pioneer in 1994.
1993 Versus 1992. On a 100 percent basis, Sonat Offshore's results were
$17 million in 1993 compared with $84,000 in 1992. 1993 was higher due to the
1993 $24 million
II-8
<PAGE> 36
Sonat Inc. and Subsidiaries
tax settlement mentioned above and to higher results in the Gulf of Mexico,
Brazil and from turnkey operations for 1993.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
OTHER INCOME-OTHER $16 $170 $18
-----------------------
</TABLE>
1994 Versus 1993. Other income is down due to the $156 million pretax
gain on the sale of 60 percent interest in Sonat Offshore in 1993. Exclusive of
that gain, 1994 Other Income is higher due to the recognition of $4 million in
gains on the disposal of assets compared with $1 million in 1993.
1993 Versus 1992. Other income increased in 1993 due to the $156
million pretax gain on the Sonat Offshore IPO. In addition, dividends on the
Baker Hughes Incorporated preferred stock received in the sale of Teleco
Oilfield Services Inc. (Teleco) in April 1992 contributed $12 million in 1993
versus $7 million in 1992. Also included in 1992 was a $9 million gain on the
sale of oil and gas assets.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
INTEREST EXPENSE, NET $(73) $(47) $(96)
-------------------------
</TABLE>
1994 Versus 1993. Net interest expense for 1994 included $10 million
of favorable adjustments related to the settlement of the Company's federal
income tax returns for the years 1986-1988. Net interest expense in 1993
included $31 million of favorable adjustments related to the settlement of the
Company's 1983-1985 federal income tax returns and certain other tax issues.
Excluding these adjustments, net interest expense increased from 1993 due to
higher debt levels.
1993 Versus 1992. Net interest expense in 1993 included the $31
million in net interest income mentioned above. Otherwise, the decrease in
interest expense in 1993 was due to lower debt levels and interest rates. Some
higher rate debt was refinanced during 1993.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
INCOME TAXES $16 $103 $36
-----------------------
</TABLE>
1994 Versus 1993. Income tax expense in 1994 decreased as compared to
1993 due to lower pretax income (see 1993 explanation below). Both periods
included favorable settlements relating to the examination of the Company's
federal income tax returns which reduced reported income tax expense. Tax
preference items were higher in 1994 compared to 1993 primarily due to higher
dividend exclusions on unconsolidated equity investees partially offset by
lower nonconventional fuel tax credits.
1993 Versus 1992. Income taxes in 1993 increased due to higher pretax
income including the gain on the Sonat Offshore IPO. The increase in taxes was
partially offset by various tax adjustments, higher Section 29 tax credits and
a settlement of an examination of the Company's federal income tax returns for
the years 1983-1985.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
NET INCOME FROM DISCONTINUED
OPERATIONS $ - $ - $111
------------------------
</TABLE>
1992 primarily includes a $113 million gain on the sale of Teleco to
Baker Hughes.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
EXTRAORDINARY LOSS $ - $ (4) $ -
------------------------
</TABLE>
In March 1993, the Company recognized a $4 million loss, net of taxes
of $2 million, on the redemption of the Company's 7 1/4 Percent Zero Coupon,
Subordinated Convertible Notes which were due September 6, 2005.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
OPERATING ACTIVITIES $511 $454 $361
------------------------
</TABLE>
1994 Versus 1993. Net cash flows from operating activities were $57
million higher in 1994. The increase was primarily attributable to the $147
million change in gas supply realignment costs as a result of net recoveries of
$19 million received in 1994 compared with net payments of $128 million in
1993. The $38 million increase in the change in accounts receivable in 1994
reflects the effect on 1993 accounts receivable of Sonat Offshore's turnkey
operations in Mexico. The $47 million decrease in the change in inventories
reflects the sale of storage gas inventory at Southern in 1993 pursuant to
Order No. 636. The $52 million decrease in accrued interest and income taxes
reflects recognition of the settlement of an examination of the Company's
federal income tax returns and a prepayment of state taxes and related
interest. In 1994 the Company completed
II-9
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
recovery of its take-or-pay costs, resulting in the $33 million decrease in the
change in take-or-pay recoveries when compared with 1993. The amount in Other
in 1994 includes a $57 million provision for the Customer Settlement discussed
in Note 9 of the Notes to Consolidated Financial Statements, while the amount
in Other in 1993 reflects $52 million in accruals for GSR settlements.
1993 Versus 1992. Net cash provided by operating activities increased
due to higher earnings at Sonat Exploration and receipt of $62 million for the
settlement of an examination of the Company's federal income tax returns for
the years 1983-1985.
The $48 million increase in the change in inventories reflects the
sale of storage gas inventory at Southern pursuant to Order No. 636. The $36
million net change in other current assets and liabilities reflects lower cash
outflows in 1993 relating to gas imbalances. The $24 million decrease in the
change in accounts receivable reflects the growth in 1993 of Sonat Offshore's
receivables for turnkey operations in Mexico. The $51 million decrease in the
change in accrued interest and income taxes reflects the effect of the
disposition of Teleco.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
Investing Activities $(601) $(189) $(30)
--------------------------
</TABLE>
1994 Versus 1993. The change in net cash used in investing activities
reflects the equity investment in Citrus of $159 million made in 1994 and the
approximately $340 million in net cash proceeds from the sale of Sonat Offshore
common stock received in 1993. Slightly offsetting the increase is a $68
million reduction in capital expenditures for 1994.
1993 Versus 1992. Net cash used in investing activities increased $159
million in 1993. Capital expenditures of $516 million in 1993 were $291 million
over the 1992 expenditures, primarily attributable to oil and gas acquisitions.
A significant source of investing cash flows in 1993 was net cash proceeds of
approximately $340 million from the sale of Sonat Offshore common stock. Cash
proceeds in 1992 included approximately $188 million from the sale of Teleco.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
FINANCING ACTIVITIES $ 89 $(312) $(296)
------------------------
</TABLE>
1994 Versus 1993. The change in cash flows from financing activities
reflects increased borrowings in 1994 under Sonat's floating rate facilities
compared with debt repayments in 1993. Borrowings in 1994 were primarily used
for advances to Citrus and repayment of Southern's $100 million 9 5/8 Percent
Notes. In 1993 the Company redeemed its 7 1/4 Percent Zero Coupon, Subordinated
Convertible Notes and used cash from the Sonat Offshore IPO temporarily to
repay borrowings under its credit agreements.
1993 Versus 1992. The net change in cash used in financing activities
reflects a slight increase in debt repayments.
CAPITAL EXPENDITURES
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
Exploration and Production $390 $431 $156
Natural Gas Transmission
and Marketing 54 61 44
Other 4 24 26
------------------------
Total $448 $516 $226
========================
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Millions)
-------------
<S> <C> <C> <C>
Exploration and Production $ - $ 11 $ 37
Natural Gas Transmission
and Marketing 398 18 12
Other 1 3 2
------------------------
Total $399 $ 32 $ 51
========================
</TABLE>
The Company's capital expenditures (including its
$70 million share of unconsolidated affiliates' expenditures) for 1995 are
expected to be approximately $550 million.
II-10
<PAGE> 38
Sonat Inc. and Subsidiaries
CAPITAL RESOURCES
At December 31, 1994, the Company had lines of credit and revolving credit
agreements with a total capacity of $1.05 billion. Of this amount, $475 million
was available for borrowing. The amount available has been reduced by the $100
million of commercial paper outstanding to reflect the Company's policy that
bank and commercial paper borrowings in the aggregate will not exceed the
maximum amount available under its lines of credit and revolving credit
agreements. On July 26, 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. On August 1, 1994, Sonat entered into a new
364-day revolving credit agreement with a group of banks. The revolving credit
agreement provides for borrowings of up to $300 million through July 31, 1995.
The Company expects to continue to use cash from operations and borrowings in
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
are being made from time-to-time in the open market or in privately negotiated
transactions. Shares purchased under the authorization are expected to be
reissued in connection with employee stock option and restricted stock
programs. At December 31, 1994, 940,000 shares of common stock had been
purchased under this program.
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. As discussed in Note 3 of the Notes to
Consolidated Financial Statements, the Company holds four million shares of
Baker Hughes preferred stock, as well as 11.3 million shares of Sonat Offshore
common stock, both of which could be monetized.
Capitalization Information
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------
<S> <C> <C> <C>
Cash Flow from Operating
Activities to Weighted
Average Debt 44% 43% 29%
Debt to Capitalization-
End of Year 46% 42% 50%
Book Value Per Share-
End of Year $16.11 $15.64 $13.62
=========================
</TABLE>
COMMODITY PRICE RISK MANAGEMENT
Sonat Exploration and Sonat Marketing use natural gas futures contracts and
options on gas futures and oil and gas price swap agreements to hedge the
effects of spot-market price volatility on operating results.
The Company's use of these instruments is implemented under a set of
policies approved by the Board of Directors. These policies prohibit
speculation, determine approval levels for each transaction, and set limits
regarding volume relative to budgeted production or sales levels. All swap
counterparties are approved by the Board, and volume limits are set for any
single counterparty. Reports detailing each transaction and showing the
Company's aggregate hedge position are prepared daily and distributed to
management. In addition, all hedge activities are internally reviewed to ensure
compliance with all policies. (See Note 2 of the Notes to Consolidated
Financial Statements.)
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
Although the rate of inflation in the United States has been moderate over the
past several years, its potential impact should be considered when analyzing
historical financial information. In past times of high general inflation, oil
and gas prices have increased at comparable, and at times, higher rates. The
pending customer settlement which will be filed by Southern in March 1995, if
approved, would prohibit Southern from recovering higher costs of operations
prior to March 1, 1998 (see Note 9 of the Notes to Consolidated Financial
Statements). The results of operations in the Company's two major business
segments will be affected by future changes in domestic and international oil
and gas prices and the interrelationship between oil, gas, and other energy
prices.
II-11
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CORPORATE RESTRUCTURING
In late 1994 and early 1995 the Company completed a reduction in staffing
levels through a combination of special early retirement options (SERO) and
involuntary terminations. The SEROs and terminations, which involved 340
employees, or approximately 15 percent of the Company's work force, occurred
primarily in field locations, but also included significant reductions in
office employees. The total cost of the program amounted to $21 million. The
majority of the charge represented accelerated retirement costs, with the
remainder being primarily cash severance payments. The Company anticipates the
savings in 1995 from this program will approximate $12 million.
ENVIRONMENTAL ISSUES
Sonat Exploration, Southern, and their subsidiaries are subject to extensive
federal, state, and local environmental laws and regulations that affect their
operations. Governmental authorities may enforce these laws and regulations
with a variety of civil and criminal enforcement measures, including monetary
penalties, assessment and remediation requirements, and injunctions as to
future activities. The use and disposal by Sonat Exploration, Southern, and
their subsidiaries of hazardous materials and toxic substances are subject to
the requirements of the federal Toxic Substances Control Act (TSCA) and the
federal Resource Conservation and Recovery Act (RCRA), among others, and
comparable state and local statutes. The Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), also known as "Superfund," imposes
liability, without regard to fault or the legality of the original act, for
release of a "hazardous substance" into the environment.
The Environmental Protection Agency (EPA) has notified Sonat
Exploration that it could become a potentially responsible party (PRP) at the
D. L. Mud Superfund Site in Abbeyville Parish, Louisiana. Based on the
information that it currently possesses, Sonat Exploration does not believe
that any contribution will be sought from it with regard to this site and
believes that, if it were named as a PRP, its status would be that of a de
minimis contributor. Sonat Exploration has settled its potential liability at
two other Superfund sites at which it had been named as a PRP in exchange for
payments not material to it and, barring unexpected events, does not expect to
have any further liability with regard to those sites.
Southern was named by the EPA in October 1994 as a PRP at a Superfund
site in Mississippi known as the Pike County Drum Site. In response to a
request from the EPA, Southern provided the EPA with information concerning
materials shipped to the site. The EPA advised Southern and the other PRPs in
January 1995 that the cost to date of the response actions related to this site
through EPA funding was approximately $330,000, and the EPA made demand on
Southern and the other PRPs for payment of such amount plus applicable
interest. In accordance with the procedures prescribed by the EPA, Southern has
indicated to the EPA Southern's intent to participate in settlement
negotiations relating to the allocation of such cost among all of the PRPs.
Southern believes that, based on the nature and volume of materials that it
shipped to this site and the information currently available to it, Southern
should be a de minimis contributor to any settlement of such cost.
In connection with the Superfund site in Alabama known as the Fuels
and Chemicals Site, both Southern and a company in which a subsidiary of Sonat
Exploration is a 50-percent shareholder, which were both named among the PRPs
at this site, have signed an Administrative Order on Consent for Removal Action
(AOC) with the EPA for removal actions at the site. To satisfy their
obligations under the AOC, all of the signatory PRPs to the AOC have entered
into an Indemnification, Reopener and Settlement Bank Fund Agreement
(Indemnification Agreement) with one of the largest PRPs, who has agreed to
undertake to perform all remedial actions required by the AOC and any
additional response obligation required by the EPA or the Alabama Department of
Environmental Management. In return for payments not material to Southern or
Sonat Exploration, this PRP has agreed to indemnify the two Sonat entities
against any further liability related to the AOC and a prior AOC dated July 20,
1993, (Phase I AOC) unless costs of complying with the AOC and the Phase I AOC
exceed a specified amount. Based on the information that it currently
possesses, Sonat does not expect the specified amount to be exceeded, unless
tests that are being conducted indicate the presence of groundwater
contamination at this site.
II-12
<PAGE> 40
Sonat Inc. and Subsidiaries
Southern has settled its potential liability at three other Superfund
sites, at two of which it had been named as a PRP, in exchange for payments not
material to it and, barring unexpected events, does not expect to have any
further liability with regard to any of the three sites.
Liability for PRPs under CERCLA (and applicable state law) is joint
and several among all PRPs. Although volumetric allocation is a factor in
assessing liability, it is not necessarily determinative; thus, the ultimate
liability at any of these sites could be substantially greater than the amounts
described above.
In the operation of their natural gas pipeline systems, Southern and
its wholly owned subsidiary, South Georgia Natural Gas Company (South Georgia),
have used, and continue to use at several locations, gas meters containing
elemental mercury. Southern and South Georgia plan to remove all remaining
mercury meters during the course of regularly scheduled facilities upgrades.
Mercury and mercury meters are handled pursuant to procedures that are designed
to protect employees and comply with Occupational Safety and Health
Administration standards. It is generally believed in the natural gas pipeline
industry that, in the course of normal maintenance and replacement operations,
elemental mercury may have been released from mercury meters. Southern believes
that its mercury meters may in the past have been the sources of small releases
of elemental mercury. Southern intends to commence site characterization and,
as appropriate, remediation of mercury-contaminated soil located in Louisiana
during the first quarter of 1995. Southern expects to undertake the
characterization and remediation of mercury-contaminated soil in its other
states of operation beginning in 1996, subject to completion of work in
Louisiana. Southern is unable to estimate with precision the cost of the
characterization and remediation of mercury-contaminated soil at this time,
because costs will vary based on a number of factors particular to each site
and because regulatory standards for elemental mercury cleanup are uncertain at
this time. Neither the EPA nor any state in which Southern operates has issued
standards with respect to cleanup of mercury-contaminated soil; however,
Southern has received informal guidance from the State of Louisiana with
respect to cleanup standards in that state. Southern has budgeted the amount of
$500,000 in 1995 for the characterization and remediation of
mercury-contaminated soil in Louisiana and, based on the information that it
currently possesses, believes that this amount may be sufficient to complete
such characterization and remediation, subject to the actual extent of
contamination discovered at any site.
During the course of retirement and removal of certain field
compressors, Southern discovered soil and groundwater contamination in the
Logansport and Joaquin Fields, respectively, in the states of Louisiana and
Texas. Although no link between Southern's operations and the groundwater
contamination has been established, Southern notified the Louisiana Department
of Environmental Quality (LDEQ) of this discovery because of a possibility that
the groundwater contamination may be associated to some extent with Southern's
past operations in the area. In November 1994 Southern received a request from
the LDEQ for an Assessment Work Plan (the Plan) designed to determine the
extent, source, and magnitude of soil and groundwater contamination discovered
under Southern's field compressor locations, including evaluation procedures
used to determine recommendations for remediation of soil and groundwater.
Southern filed the Plan in December 1994. Southern expects that work under the
Plan will commence during the first quarter of 1995, subject to review and
approval of the Plan by the LDEQ. Southern believes that the cost to clean up
any soil contamination at its field compressors will not be material. To date,
Southern does not have in its possession sufficient information reasonably to
estimate the cost, if any, that it may be required to bear for any cleanup of
groundwater contamination. No reporting was required in Texas.
II-13
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sonat generally considers environmental assessment and remediation
costs and costs associated with compliance with environmental standards
incurred by Southern and South Georgia to be recoverable through rates since
they are prudent costs incurred in the ordinary course of business and,
accordingly, generally will seek recovery of such costs through rate filings,
although no assurance can be given with regard to their ultimate recovery. As
described in Note 9 of the Notes to Consolidated Financial Statements, however,
Southern's proposed Customer Settlement, if approved, would prevent Southern
from filing a general rate case to be effective prior to March 1, 1998.
Sonat Exploration, Southern, and their subsidiaries are subject to the
federal Clean Air Act (Clean Air Act), the federal Clean Air Act Amendments of
1990 (1990 Amendments), which added significantly to the existing requirements
established by the Clean Air Act, and the state regulations and requirements
promulgated thereunder (together the Clean Air Rules). The 1990 Amendments
require that the EPA issue new regulations, mainly related to mobile sources,
air toxicants, ozone non-attainment areas, acid rain, permitting, and enhanced
monitoring. Southern operates three compressor stations in areas that do not
meet the National Ambient Air Quality Standards (NAAQS) established under the
Clean Air Act for ozone. Two of these stations are located in Louisiana and one
is located in Alabama. The Clean Air Rules require Southern to submit an
emissions control plan for nitrogen oxides (NOX) that may require the addition
of emissions control technology at each of these stations.
The LDEQ had previously instructed Southern to suspend the
implementation of its Louisiana emissions control plans for NOX until September
1, 1994, because of the possibility that the emissions of NOX are not the cause
of the area's failure to meet NAAQS. In a subsequent letter dated November 22,
1994, the LDEQ instructed Southern to suspend such implementation indefinitely
pending the resolution of the LDEQ's request of the EPA for an exemption from
the NOX Reasonably Available Control Technology (NOX RACT) requirements. The
letter further advised that, upon receipt of such exemption, LDEQ intends to
rescind the NOX RACT rules for this area entirely, in which case Southern would
no longer be required to add emissions control technology for NOX for the
affected facilities. Alabama regulators have not yet published specific
emissions control requirements for NOX. Further, Alabama regulators have
undertaken to have the area in which Southern's station is located
recharacterized as meeting the NAAQS for NOX. Based on these actions, Southern
does not currently know whether it will be required to implement emissions
control plans for these stations.
Based on Southern's projected cost of implementing its emissions
control plans in Louisiana, its estimate of the possible cost of implementing a
similar emissions control plan in Alabama, and its projected cost of complying
with other applicable provisions of the Clean Air Rules, Southern currently
estimates that the capital costs that it may incur to implement such plans and
to comply with the Clean Air Rules could approximate $15 million.
Based on information currently available, management believes that it
is not reasonably likely that Sonat or any of its subsidiaries will incur
liabilities as a result of the presently identified environmental contingencies
in excess of the amounts specifically identified above in amounts material to
Sonat. While the nature of environmental contingencies makes complete
evaluation impractical, Sonat is currently aware of no other environmental
matter that could reasonably be expected to be material. Sonat has an active
and ongoing environmental program at all levels of its organization and
believes responsible environmental management is integral to its business.
Sonat believes that its subsidiaries have conducted their operations in
substantial compliance with applicable environmental laws and regulations
governing their activities.
II-14
<PAGE> 42
REPORT OF MANAGEMENT Sonat Inc. and Subsidiaries
The management of the Company is responsible for the preparation and integrity
of all financial data included in this annual report. The Consolidated
Financial Statements have been prepared in conformity with generally accepted
accounting principles and necessarily include amounts based on estimates and
judgments of management.
The Company maintains a system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded against
loss or unauthorized use and that the financial records are adequate and
reliable for preparation of financial statements and other financial data. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal accounting control must not exceed the related benefits. The
systems of internal accounting control are complemented by the selection,
training and development of qualified accounting and internal audit personnel.
The Company engages the firm of Ernst & Young LLP as independent
auditors to audit the Company's consolidated financial statements and express
their opinion thereon. Their audit is conducted in accordance with generally
accepted auditing standards and includes a review and evaluation of the
Company's internal accounting control systems and tests of transactions as they
consider appropriate. The Report of Ernst & Young LLP, Independent Auditors,
appears below. Internal audit activities are coordinated with the independent
auditors to maximize audit effectiveness.
The Audit Committee of the Board of Directors is composed solely of
directors who are not active or retired officers or employees of the Company.
It recommends a firm to serve as independent auditors of the Company, subject
to nomination by the Board of Directors and election by the stockholders,
authorizes all audit and other professional services rendered by the
independent auditors and regularly reviews their independence. The Audit
Committee reviews and reports on significant accounting decisions and
transactions and the scope and results of audits by the Company's internal
auditing staff and the independent auditors. It reviews with management
compliance with the Company's business ethics and conflict of interest policies
and reviews with independent auditors the adequacy of the Company's system of
internal controls. The internal auditors and the independent auditors have free
access to the Audit Committee, without management's presence, to discuss the
Company's internal controls and the results of their audits.
Ronald B. Pruet, Jr.
- -----------------------------
Ronald B. Pruet, Jr.
Vice President and Controller
February 23, 1995
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sonat Inc.
We have audited the accompanying consolidated balance sheets of Sonat Inc. and
Subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sonat Inc. and
Subsidiaries at December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Birmingham, Alabama
January 19, 1995
II-15
<PAGE> 43
CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,131 $ 10,822
Accounts and notes receivable 279,553 256,925
Inventories (Note 4) 26,722 29,896
Gas imbalance receivables 35,091 43,867
Other 36,344 43,953
-------------------------------
Total Current Assets 386,841 385,463
-------------------------------
Investments and Advances:
Unconsolidated affiliates (Note 5) 486,329 295,221
Other investments (Notes 2 and 3) 217,979 214,105
-------------------------------
704,308 509,326
-------------------------------
Plant, Property and Equipment,
successful efforts method of accounting used
for oil and gas properties (Notes 6 and 13) 4,741,296 4,400,286
Less accumulated depreciation,
depletion and amortization 2,497,691 2,313,168
-------------------------------
2,243,605 2,087,118
-------------------------------
Deferred Charges:
Gas supply realignment costs (Note 9) 160,850 179,586
Recoverable natural gas purchase
contract settlement costs (Note 9) - 18,535
Other 35,082 33,969
-------------------------------
195,932 232,090
-------------------------------
$3,530,686 $3,213,997
===============================
</TABLE>
See accompanying notes.
II-16
<PAGE> 44
CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year (Note 7) $ 19,250 $ 120,083
Unsecured notes (Note 7) 200,000 112,846
Accounts payable 208,751 193,383
Accrued income taxes 22,029 55,828
Accrued interest 36,825 49,853
Gas imbalance payables 42,975 59,144
Other 40,371 42,274
--------------------------------
Total Current Liabilities 570,201 633,411
--------------------------------
Long-Term Debt (Note 7) 963,378 741,161
--------------------------------
Deferred Credits and Other:
Deferred income taxes (Note 8) 187,957 192,977
Reserves for regulatory matters (Note 9) 183,343 120,801
Other 233,921 162,432
--------------------------------
605,221 476,210
--------------------------------
Commitments and Contingencies (Notes 5 and 9)
Stockholders' Equity:
Common stock, $1.00 par, 400,000,000 shares
authorized; 87,252,015 and 87,157,982
shares issued in 1994 and 1993,
respectively (Note 10) 87,252 87,158
Other capital 42,311 36,074
Retained earnings 1,287,339 1,239,983
--------------------------------
1,416,902 1,363,215
Less treasury stock, 870,967 shares, at cost (25,016) -
Total Stockholders' Equity 1,391,886 1,363,215
--------------------------------
$ 3,530,686 $ 3,213,997
================================
</TABLE>
See accompanying notes.
II-17
<PAGE> 45
CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per-Share Amounts)
----------------------------------------
<S> <C> <C> <C>
Revenues (Note 12) $1,773,927 $1,741,147 $1,484,423
----------------------------------------------------
Costs and Expenses:
Natural gas cost 795,025 794,254 532,595
Transition cost recovery and gas purchase contract
settlement costs 116,159 51,827 52,314
Operating and maintenance 260,861 249,801 286,773
General and administrative 133,138 148,738 153,928
Depreciation, depletion and amortization 257,759 225,989 213,877
Taxes, other than income 41,546 37,623 33,845
----------------------------------------------------
1,604,488 1,508,232 1,273,332
----------------------------------------------------
Operating Income 169,439 232,915 211,091
----------------------------------------------------
Other Income, Net:
Equity in earnings of unconsolidated affiliates (Note 5) 44,319 12,365 4,132
Sale of subsidiary stock (Note 3) - 155,836 -
Other 16,348 13,884 17,904
----------------------------------------------------
60,667 182,085 22,036
----------------------------------------------------
Interest:
Interest income 7,403 39,331 10,735
Interest expense (86,982) (90,704) (115,515)
Interest capitalized 6,692 4,101 8,422
----------------------------------------------------
(72,887) (47,272) (96,358)
----------------------------------------------------
Income from Continuing Operations before
Extraordinary Item and Income Taxes 157,219 367,728 136,769
Income Taxes (Note 8) 15,812 102,659 35,807
----------------------------------------------------
Income from Continuing Operations before Extraordinary Item 141,407 265,069 100,962
Income from Discontinued Operations (Note 3) - - 111,447
Extraordinary Loss, Net of Income
Tax Benefit of $1,972,000 (Note 7) - (3,829) -
----------------------------------------------------
Net Income $ 141,407 $ 261,240 $ 212,409
====================================================
Earnings Per Share of Common Stock: (Note 10)
Earnings from continuing operations before extraordinary item $ 1.62 $ 3.05 $ 1.17
Earnings from discontinued operations - - 1.30
Extraordinary loss - (.04) -
----------------------------------------------------
Earnings Per Share $ 1.62 $ 3.01 $ 2.47
====================================================
Weighted Average Shares Outstanding (Note 10) 87,119 86,703 85,945
Dividends Paid Per Share (Note 10) $ 1.08 $ 1.04 $ 1.00
====================================================
</TABLE>
See accompanying notes.
II-18
<PAGE> 46
CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
SHARES AMOUNT Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock, $1.00 Par, 400,000,000
Shares Authorized (Note 10):
Balance at beginning of year 87,158 $ 87,158 86,077 $ 86,077 85,878 $ 85,878
Issued 94 94 1,081 1,081 199 199
-------------------------------------------------------------------------
Balance at end of year 87,252 87,252 87,158 87,158 86,077 86,077
-------------------------------------------------------------------------
Other Capital:
Balance at beginning of year 36,074 17,339 14,397
Benefit plans 6,237 18,735 2,942
-------------------------------------------------------------------------
Balance at end of year
42,311 36,074 17,339
-------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year 1,239,983 1,068,904 942,421
Net income 141,407 261,240 212,409
Cash dividends at $1.08 per share for 1994,
$1.04 per share for 1993 and
$1.00 per share for 1992
(94,051) (90,161) (85,926)
-------------------------------------------------------------------------
Balance at end of year
1,287,339 1,239,983 1,068,904
-------------------------------------------------------------------------
Treasury Stock, at cost:
Purchased (940) (27,005) - - - -
Issued 69 1,989 - - - -
-------------------------------------------------------------------------
Balance at end of year (871) (25,016) - - - -
-------------------------------------------------------------------------
86,381 $1,391,886 87,158 $1,363,215 86,077 $1,172,320
=========================================================================
</TABLE>
See accompanying notes.
II-19
<PAGE> 47
CONSOLIDATED FINANCIAL STATEMENTS Sonat Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 141,407 $ 261,240 $ 212,409
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 257,759 225,989 224,691
Deferred income taxes 1,607 49,635 20,479
Equity in (earnings) loss of unconsolidated affiliates,
less distributions (31,740) 1,532 3,040
Gain on sale of subsidiary stock and disposal of assets (3,554) (158,592) (191,843)
Reserves for regulatory matters 62,542 16,845 22,458
Gas supply realignment costs 18,736 (127,986) -
Natural gas purchase contract settlement costs 18,535 51,947 52,619
Change in:
Accounts receivable (22,533) (60,687) (36,302)
Inventories 3,174 50,535 2,473
Accounts payable 15,368 44,921 27,312
Accrued interest and income taxes, net (46,758) 5,199 56,214
Other current assets 16,490 10,446 (21,243)
Other current liabilities (18,072) (2,325) (7,099)
Other 97,671 84,823 (4,467)
------------------------------------------------------
Net cash provided by operating activities 510,632 453,522 360,741
------------------------------------------------------
Cash Flows from Investing Activities:
Plant, property and equipment additions (448,314) (516,466) (225,766)
Net proceeds from sale of subsidiary stock and disposal of assets 18,832 343,610 227,842
Investments in unconsolidated affiliates and other (171,660) (16,185) (32,114)
------------------------------------------------------
Net cash used in investing activities (601,142) (189,041) (30,038)
------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 4,448,000 880,676 221,881
Payments of long-term debt (4,327,835) (1,237,694) (379,181)
Changes in short-term borrowings 87,154 112,846 (59,792)
------------------------------------------------------
Net changes in debt 207,319 (244,172) (217,092)
Dividends paid (94,051) (90,161) (85,926)
Other (24,449) 22,667 6,653
------------------------------------------------------
Net cash provided by (used in) financing activities 88,819 (311,666) (296,365)
------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,691) (47,185) 34,338
Cash and Cash Equivalents at Beginning of Year 10,822 58,007 23,669
------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 9,131 $ 10,822 $ 58,007
======================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 80,310 $ 66,793 $ 78,555
Income taxes, net 44,061 71,398 16,643
======================================================
</TABLE>
See accompanying notes.
II-20
<PAGE> 48
Notes to Consolidated Financial Statements Sonat Inc. and Subsidiaries
1. BUSINESS DESCRIPTION AND
SIGNIFICANT ACCOUNTING POLICIES
Business Description-The Consolidated Financial Statements of Sonat Inc. and
its subsidiaries (the Company) reflect operations in the Exploration and
Production and Natural Gas Transmission and Marketing segments. The Exploration
and Production segment is involved in exploration, development and production
of domestic oil and natural gas. The principal activity of the Natural Gas
Transmission and Marketing segment is the interstate transmission and sale of
natural gas. For further description of business segments, see Note 12. For a
description of financial instruments, credit risk and contingencies, see Notes
2 and 9.
Principles of Consolidation-The Consolidated Financial Statements
include the accounts of Sonat Inc. and its subsidiaries. Intercompany
transactions and accounts have been eliminated in consolidation. The equity
method of accounting is used for investments in affiliates owned 50 percent or
less.
Certain amounts in the 1993 and 1992 Consolidated Financial Statements
have been reclassified to conform with the 1994 presentation.
Cash Equivalents-Cash equivalents are typically money-market
investments in the form of repurchase agreements, certificates of deposit and
time deposits with original maturities of three months or less. These
investments are accounted for at cost, which approximates market value.
Inventories-At December 31, 1994, inventories consist primarily of
materials and supplies that are carried at cost.
Gas Imbalance Receivables and Payables-Gas imbalances represent the
difference between gas receipts from and gas deliveries to the Company's
transportation and storage customers. Gas imbalances arise when these
customers deliver more or less gas into the pipeline than they take out.
Imbalances incurred prior to implementation of Order No. 636 are settled
through exchange of gas. Imbalances incurred after implementation of Order
No. 636 are settled monthly.
Plant, Property and Equipment and Depreciation-Plant, property and
equipment is carried at cost. The Company provides for depreciation on a
composite or straight-line basis, except for oil and gas properties. (See Notes
6 and 13.)
Revenue Recognition-Revenue is recognized in the Exploration and
Production segment when deliveries of oil and natural gas are made. The
Company's Natural Gas Transmission and Marketing segment recognizes revenue
from both natural gas sales and transportation in the period the product is
delivered or the service is provided. Reserves are provided on revenues
collected subject to refund when appropriate. Revenues included in the
Consolidated Statements of Income relating to the period when Sonat Offshore
Drilling's operations were consolidated were recognized as earned based on
contractual daily drilling rates, or on a per-well basis. (See Note 3.)
Environmental Expenditures-The Company accrues for environmental
liabilities when environmental assessments and/or remediation are probable and
such costs to the Company can be reasonably estimated.
Income Taxes-The Company follows a liability and asset approach in
accounting for income taxes. Deferred tax liabilities and assets are determined
using the tax rate for the period in which those amounts are expected to be
paid or received.
Issuance of Stock by Subsidiary-The Company follows an accounting
policy of income statement recognition for issuances of stock by a subsidiary.
Other than the initial public offering (IPO) by Sonat Offshore Drilling Inc.
(see Note 3) there have been no issuances of subsidiary stock during the
periods presented in these Consolidated Financial Statements.
Earnings Per Share-Earnings per share amounts are computed on the
basis of the weighted average number of common shares outstanding during the
periods. The dilutive effect of stock options is less than 3 percent and is
therefore excluded from the computation.
Derivative Financial Instruments-The Company follows hedge accounting
for changes in the market value of derivative financial instruments. (See Note
2.) Gains and losses are included in deferred assets or liabilities,
respectively, until they are recognized in revenue when the hedged transaction
is recorded.
2. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company through its subsidiaries (Sonat Exploration Company and Sonat
Marketing Company) uses natural gas futures contracts, options on natural gas
futures contracts, and oil and gas price swap agreements to reduce the effects
of spot-market price volatility on operating results. All derivative
transactions are identified with specific cash transactions or positions.
Speculation in derivatives is prohibited by company policy.
Futures-Natural gas futures contracts are traded on the New York
Mercantile Exchange (NYMEX). Contracts are for fixed units of 10,000 MMBtu and
#are available for up to 18 months in the future. Options on natural gas
futures contracts are traded on the NYMEX.
Brokers require both parties (buyers and sellers) to futures contracts
to# deposit cash or other assets with a broker (the margin) at the time the
contract is initiated.
II-21
<PAGE> 49
2. FINANCIAL INSTRUMENTS (Continued)
Brokers mark open positions to market daily and require additional assets to
be maintained on deposit when unrealized losses are experienced. Conversely,
customers' accounts are credited when unrealized gains are experienced. This
daily adjustment generally must be settled in cash or acceptable collateral,
which serves to reduce credit risk. Maintenance of the deposit account can
result in fluctuating cash requirements for both parties. At December 31,
1994, Sonat Marketing had $2.2 million on deposit with brokers for margin
calls.
Sonat Exploration uses futures contracts to lock in the price of a
portion of its expected future natural gas and/or oil production when it
believes that prices are at acceptable levels. Generally, contracts have
been sold no more than six months into the future and by company policy
cannot exceed 50 percent of budgeted monthly gas or oil production. At
December 31, 1994, Sonat Exploration had no futures contracts open.
Sonat Marketing buys and resells natural gas as part of its normal
business operations. In situations where natural gas is not bought and
sold simultaneously, Sonat Marketing will use futures contracts to reduce
the risk of price changes. For example, Sonat Marketing may purchase
certain natural gas volumes before a customer has been identified, then sell
an equivalent volume in natural gas futures contracts or options on futures
contracts to match the cash transaction. Futures transactions or options
are generally one year or less in duration; however, two option agreements
extend four and five years. Company policy limits futures contracts to 1,000
net contracts per month. At December 31, 1994, Sonat Marketing had a total
of 282 net contracts open (2,270 long and 1,988 short futures contracts) and
a marked-to-market loss of $2.6 million, $1.0 million of which will be
realized in January 1995, the remainder representing unrealized losses on
contracts that will mature in 1995. To date, option activity has not been
significant.
Swaps-Price swap agreements call for one party to make monthly
payments to (or receive payments from) another party based upon the
differential between a fixed and a variable price or two variable prices for a
notional volume specified by the contract.
Sonat Exploration and Sonat Marketing had a total of 16 price swap
agreements at December 31, 1994, to exchange payments based on a total
notional volume of 25,755,000 MMBtu of natural gas over periods ranging from
one month to five years. The average price the Company paid was $1.56 per
MMBtu and the average price the Company received was $1.63 per MMBtu for the
1994 period.
The Company's credit exposure on swaps is limited to the value of
swaps that are in a favorable position to the Company. At December 31, 1994,
the market value of the Company's favorable swaps was $2.1 million. The net
position of all swaps, both favorable and unfavorable, was $1.8 million
favorable. The Company is exposed to credit loss in the event of
nonperformance by counterparties on swap contracts. Company policy regarding
derivative trading activity limits swap agreements to counterparties with
appropriate credit standings that have been approved by the Board of Directors.
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
other than derivatives are as follows:
<TABLE>
<CAPTION>
Carrying Fair
December 31, 1994 Amounts Value
- -----------------------------------------------------------
(In Thousands)
----------------------
<S> <C> <C>
Cash and Cash Equivalents $ 9,131 $ 9,131
Investment Securities:
Non-current equity securities 180,000 150,000
Non-current debt securities 33,821 32,946
Gas Supply Realignment Costs 160,850 160,850
Unsecured Notes Payable 200,000 200,000
Long-Term Debt 982,628 987,506
December 31, 1993
Cash and Cash Equivalents $ 10,822 $ 10,822
Investment Securities:
Non-current equity securities 180,000 180,000
Non-current debt securities 30,854 33,469
Gas Supply Realignment Costs 179,586 179,586
Natural Gas Purchase Contract
Settlement Costs 18,535 18,535
Unsecured Notes Payable 112,846 112,846
Long-Term Debt 861,244 945,888
</TABLE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for balance sheet financial instruments:
Cash and cash equivalents, gas supply realignment (GSR) costs, natural
gas purchase contract settlement costs and unsecured notes payable: The
carrying amount reported in the Consolidated Balance Sheet approximates its
fair value.
Investment securities: The fair value for equity securities is based
upon an estimate received from an independent valuation consultant. The fair
values for marketable debt securities are based on quoted market prices.
Long-term debt: The fair values of the Company's long-term debt are based
on quoted market values or estimated using discounted cash flow analyses, based
on the Company's
II-22
<PAGE> 50
Sonat Inc. and Subsidiaries
current incremental borrowing rates for similar types of borrowing
arrangements.
All of the Company's financial instruments are held for purposes other than
trading.
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents, investments, accounts
receivableand GSR costs which the Company expects to recover from its
customers.
The Company's cash equivalents and short-term investments represent
high-quality securities placed with various high investment grade
institutions. This investment practice limits the Company's exposure to
concentrations of credit risk.
Accounts receivable of the Exploration and Production segment are
primarily from joint-interest partners, oil and gas marketing companies and
pipeline companies. Accounts receivable of the Natural Gas Transmission and
Marketing segment relate to business conducted with gas distribution
companies, municipalities, gas districts, industrial customers, and interstate
pipeline companies in the Southeast.
The Company performs ongoing credit evaluations of its customers'
financial condition and, in some circumstances, requires collateral from its
customers.
3. Changes in Operations
Stock Sale by Subsidiary-On June 4, 1993, the IPO of approximately 60 percent
of Sonat Offshore's common stock at $22.00 per share was closed. Prior to the
offering, the Company owned 100 percent of Sonat Offshore. Sonat Offshore
issued 15.5 million shares, and the Company sold 1.448 million of its shares
resulting in a combined pretax gain of $155.8 million. Net cash proceeds
from the combined transactions after underwriting commissions, expenses and
tax provisions totaled approximately $340 million. The Company recognized an
after-tax gain of $99.7 million, or $1.15 per share, from the combined
transactions. At December 31, 1994, the Company held 11.3 million shares of
Sonat Offshore common stock with a market value of $199.7 million.
Discontinued Operations-On April 23, 1992, the Company completed the
sale of Teleco Oilfield Services Inc. to Baker Hughes Incorporated. The
Company received $200 million in cash and four million shares of Baker
Hughes convertible preferred stock. The convertible preferred stock has a
face amount of $200 million, a dividend rate of 6 percent per annum, and
is convertible at $32.50 per share into Baker Hughes common stock. The
Company attributed a value of $180 million to the noncash portion of the
transaction which is included in "Other Investments" on the Consolidated
Balance Sheets.
Summary operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1992
- -----------------------------------------------------------
(In Thousands)
--------------
<S> <C>
Revenues $ 44,868
Loss Before Income Taxes $ (472)
Income Taxes 166
Loss from Discontinued Operations (638)
Net Gain on Disposal, Net of
Income Taxes of $70,618,000 112,085
--------
Income from Discontinued Operations $111,447
========
</TABLE>
4. Inventories
The table below shows the values of various categories of the Company's
inventories by segment.
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
------------------
<S> <C> <C>
Exploration and Production:
Materials and supplies $ 3,725 $ 4,050
Natural Gas Transmission and Marketing:
Gas stored underground 1,695 1,829
Materials and supplies 21,267 23,945
-----------------
22,962 25,774
-----------------
Other 35 72
-----------------
$26,722 $ 29,896
=================
</TABLE>
5. Unconsolidated Affiliates
At December 31, 1994, the Company's investments in unconsolidated affiliates
totaled $486.3 million, and the Company's share of underlying equity in net
assets of the investees was $552.7 million. The difference is primarily due
to the excess over cost of the Company's share of the underlying equity in
net assets of Citrus Corp., which is being amortized over the depreciable
life of Citrus' assets. Through December 31, 1994, the Company's cumulative
equity in earnings of these unconsolidated affiliates was $222.1 million and
cumulative dividends received from them totaled $146.2 million.
II-23
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. UNCONSOLIDATED AFFILIATES (CONTINUED)
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
COMPANY'S SHARE OF
REPORTED EARNINGS (LOSSES)
Exploration and Production:
Sonat/P Anadarko $ - $ 4,163 $ 1,368
Other exploration and
production affiliates 245 502 410
---------------------------
245 4,665 1,778
---------------------------
Natural Gas Transmission
and Marketing:
Citrus Corp. 27,554 (8,066) (11,058)
Amortization of Citrus
basis difference 1,383 1,738 2,096
Bear Creek Storage 8,954 8,638 8,002
Other natural gas
transmission and
marketing affiliates (211) (121) 332
---------------------------
37,680 2,189 (628)
----------------------------
Other:
Sonat Offshore Drilling 5,049 4,497 -
Other affiliates 1,345 1,014 2,982
---------------------------
6,394 5,511 2,982
---------------------------
$44,319 $12,365 $ 4,132
===========================
</TABLE>
Exploration and Production Affiliate-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 remaining interest in Sonat/P not owned by it
from Prudential Insurance Company (see Note 13). For the 1993 period prior to
acquisition, Sonat/P had revenues of $16.3 million and reported earnings of
$6.6 million. Sonat/P had revenues of $6.1 million and reported earnings of
$2.5 million in 1992.
Natural Gas Transmission and Marketing Affiliates-Sonat owns 50 percent of
Citrus, the parent company of Florida Gas Transmission Company. Southern
Natural Gas Company owns 50 percent of Bear Creek Storage Company, an
underground gas storage company.
The following is summarized financial information for Citrus.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
----------------------------------
<S> <C> <C> <C>
Revenues $477,462 $574,302 $550,139
Expenses:
Natural gas cost 294,670 405,920 414,051
Operating expenses 71,871 71,754 70,170
Depreciation and
amortization 63,737 59,896 51,502
Allowance for funds used
during construction (87,908) (2,712) (1,042)
Other expenses, net 45,496 50,935 50,728
Income taxes (benefits) 34,487 4,641 (13,153)
---------------------------------
Income (Loss) Reported $ 55,109 $ (16,132) $(22,117)
=================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
-----------------------
<S> <C> <C>
ASSETS
Current $ 154,596 $ 59,872
Net transmission plant and property 2,235,167 1,402,993
Other 139,035 110,405
----------------------
$2,528,798 $1,573,270
======================
LIABILITIES AND EQUITY
Current $ 116,699 $ 417,689
Long-term debt and
other liabilities 1,699,023 815,614
Stockholders' equity 713,076 339,967
----------------------
$2,528,798 $1,573,270
======================
</TABLE>
The significant increase in allowance for funds used during construction
relates to Florida Gas' Phase III expansion, a$1 billion expansion of its
pipeline facilities that will increase the system throughput capacity by 57
percent.
On November 7, 1994, Florida Gas issued $700 million of Senior Notes of
various maturities ranging from three years to 30 years, with an average life
of approximately 10 years. Proceeds from the Notes were primarily used to
refund construction financing and funds advanced by Citrus' parent companies
for construction of the Phase III expansion. The Notes are senior, unsecured
obligations of Florida Gas, but Sonat provided indirect credit support in the
form of a standby note purchase agreement to the extent of 50 percent of the
outstanding Notes plus accrued interest in the event Florida Gas' largest
customer exercises its right to terminate
II-24
<PAGE> 52
Sonat Inc. and Subsidiaries
its Phase III service contracts as a result of the Phase III facilities not
being in service by January 14, 1996. In addition, Sonat has agreed to provide
funds required by Florida Gas for any interest payments due on the debt (to the
extent of 50 percent of any such required amounts) prior to the attainment of
the in-service date for the Phase III facilities. Once the in-service date of
the Phase III facilities is attained, Sonat will be released from all
obligations under the standby note purchase agreement and the Notes will be
non-recourse except to Florida Gas. Phase III will go into service on March 1,
1995. In connection with the construction of the Phase III expansion, the
Company made equity contributions to Citrus of $159 million during 1994.
The following is summarized financial 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>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
---------------------------
<S> <C> <C> <C>
Revenues $35,655 $36,566 $36,528
Expenses:
Operating expenses 5,303 6,137 5,156
Depreciation 5,396 5,397 5,397
Other expenses, net 7,048 7,756 9,971
---------------------------
Income Reported $17,908 $17,276 $16,004
===========================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
------------------
<S> <C> <C>
ASSETS
Current $ 6,968 $ 5,916
Net plant and property 164,257 169,521
Other 533 594
------------------
$171,758 $176,031
==================
LIABILITIES AND EQUITY
Current $ 8,356 $ 8,607
Long-term debt and other liabilities 69,587 76,517
Participants' equity 93,815 90,907
------------------
$171,758 $176,031
==================
</TABLE>
Contract Drilling Affiliate-Since June 4, 1993, the Company has owned
approximately 40 percent of Sonat Offshore, which provides offshore drilling
services (see Note 3).
The following is summarized financial information for Sonat Offshore.
<TABLE>
<CAPTION>
Period of
YEAR ENDED June 5-
DECEMBER 31, December 31,
1994 1993
- ------------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C>
Revenues $242,953 $164,983
Expenses (Income):
Operating expenses 197,550 132,523
Depreciation 24,506 12,082
Other (income)
expenses, net 658 (931)
Income taxes 7,524 10,036
-------------------------
Income Reported $ 12,715 $ 11,273
=========================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C>
ASSETS
Current $127,683 $143,713
Net plant and property 326,064 259,527
Other 39,750 68,780
------------------------
$493,497 $472,020
========================
LIABILITIES AND EQUITY
Current $ 48,487 $65,427
Long-term debt
and other liabilities 123,863 92,287
Stockholders' equity 321,147 314,306
------------------------
$493,497 $472,020
========================
</TABLE>
6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION
Plant, property and equipment, by business segment, is shown in the following
table.
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
---------------------------
<S> <C> <C>
Exploration and
Production $2,383,355 $2,077,854
Natural Gas Transmission
and Marketing 2,299,411 2,261,020
Other 58,530 61,412
---------------------------
$4,741,296 $4,400,286
===========================
</TABLE>
II-25
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PLANT, PROPERTY AND EQUIPMENT AND DEPRECIATION (CONTINUED)
Plant, property and equipment includes construction work in progress of
$37.5 million and $56.0 million at December 31, 1994 and 1993, respectively.
The accumulated depreciation, depletion and amortization amounts, by
business segment, are as follows:
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
-----------------------------
<S> <C> <C>
Exploration and Production $ 991,621 $ 853,634
Natural Gas Transmission
and Marketing 1,481,543 1,437,739
Other 24,527 21,795
---------------------------
$2,497,691 $2,313,168
===========================
</TABLE>
The annual depreciation rates or useful productive lives, by business
segment, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission
and Marketing:
Mainline transmission property 2.8% 2.8% 2.8%
Gas supply 4.4% 5.1% 5.1%
Gas gathering 2.8% 6.25% 6.25%
Underground storage facilities 3.3% 3.3% 3.3%
Liquefied natural gas facilities 3.2% 3.2% 3.2%
Other 5-20 yrs. 5-20 yrs. 5-25 yrs.
=================================
</TABLE>
The successful efforts method of accounting used for oil and gas properties
in the Exploration and Production segment results in the cost of proved oil and
gas properties and development dry holes being capitalized and amortized on a
unit-of-production basis over the life of remaining proved reserves. Also
included in amortization on a unit-of-production basis are the estimated future
dismantlement and abandonment costs.
In the third quarter of 1994, Southern Natural Gas Company adjusted its
transportation revenue reserve and depreciation expense by $16 million
reflecting a retroactive reduction in certain depreciation rates. The entry had
no effect on net income.
7. LONG-TERM DEBT AND LINES OF CREDIT
Long-Term Debt-Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
-----------------
<S> <C> <C>
Sonat Inc.
Revolving Credit Agreement at
rates based on prime,
international or money-market
lending rates (effective rate
of 6.3% at December 31, 1994)
due December 31, 1998 $375,000 $135,000
9-1/2% Notes due August 15, 1999 100,000 100,000
8.65% Notes due through July 29, 1997 27,857 37,143
9.41% Notes due July 29, 1997 35,000 35,000
9% Notes due May 1, 2001 100,000 100,000
8.24% Senior Notes due
December 31, 2000 13,900 17,400
Southern Natural Gas Company
7.85% Notes due January 15, 2002 100,000 100,000
8-5/8% Notes due May 2, 2002 100,000 100,000
9-5/8% Notes due June 15, 1994 - 100,000
8-7/8% Notes due February 15, 2001 100,000 100,000
South Georgia Natural Gas Company
9.85% Term Loan due through
December 31, 1997 2,640 3,520
7.80% Term Loan due through
December 31, 1997 1,200 1,600
Southern Energy Company
Promissory Note (an effective rate
of 6.75% at December 31, 1994)
due through April 1999 25,000 30,000
Capital Leases 2,031 1,581
--------------------
Total Outstanding 982,628 861,244
Less Long-Term Debt Due
Within One Year 19,250 120,083
--------------------
$963,378 $741,161
====================
</TABLE>
Annual maturities of long-term debt at December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Years
- -----------------------------------------------------------
(In Thousands)
--------------
<S> <C>
1995 $ 19,250
1996 18,453
1997 52,869
1998 382,213
1999 107,224
2000-2002 402,619
--------
$982,628
========
</TABLE>
II-26
<PAGE> 54
Sonat Inc. and Subsidiaries
During 1994, Sonat borrowed $4.4 billion and repaid $4.2 billion under its
long-term revolving credit agreement, which provides for periodic borrowings
and repayments of up to $500 million through December 15, 1998. At December
31, 1994, $375 million was outstanding at a rate of 6.30 percent.
On June 15, 1994, Southern's $100 million 9 5/8 Percent Notes matured and
were redeemed. Funds were obtained by increased borrowings under Sonat's
floating rate facilities.
Lines of Credit and Credit Agreement-At December 31, 1994, the Company had
available $475 million under its lines of credit and revolving credit
agreements. The amount available has been reduced by the $100 million of
commercial paper outstanding to reflect the Company's policy that bank and
commercial paper borrowings in the aggregate will not exceed the maximum amount
available under its lines of credit and revolving credit agreements. Loans
outstanding under all short-term credit facilities are for a duration of less
than three months.
Short-Term Credit Facilities-On May 30, 1994, Sonat and Southern renewed
their short-term lines of credit with several banks to provide for borrowings
of $200 million and $50 million, respectively. Borrowings are available through
May 29, 1995, in the form of unsecured promissory notes and bear interest at
rates based on the banks' prevailing prime, international, or money-market
lending rates. At December 31, 1994, no amounts were outstanding under either
agreement. At December 31, 1993, $9 million was outstanding under the Sonat
agreement at a rate of 3.38 percent, and no amounts were outstanding under the
Southern agreement.
On August 1, 1994, Sonat entered into a new 364-day revolving credit
agreement with a group of banks. The revolving credit agreement provides for
periodic borrowings of up to $300 million through July 31, 1995. Borrowings are
supported by unsecured promissory notes that, at the option of the Company,
will bear interest at the banks' prevailing prime or international lending
rate, or such rates as the banks may competitively bid. At December 31, 1994,
$100 million was outstanding at a rate of 6.33 percent under this agreement.
Sonat had $100 million and $60 million in commercial paper outstanding at
average rates of 6.30 percent and 3.64 percent at December 31, 1994 and 1993,
respectively.
Extraordinary Item-On March 15, 1993, Sonat redeemed all of its
outstanding 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes due
September 6, 2005, at a cost of approximately $272 million. The funds utilized
for the redemption consisted of $52 million of cash on hand and a $200 million
borrowing under Sonat's $500 million revolving credit agreement. The Company
recognized an extraordinary noncash loss after income taxes of $3.8 million, or
$.04 per share, on the redemption.
8. INCOME TAXES
An analysis of the Company's income tax expense (benefit) on continuing
operations is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
--------------
<S> <C> <C> <C>
Current:
Federal $ 4,619 $ 46,230 $(5,497)
Foreign - 3,305 (651)
State 10,930 6,446 10,245
----------------------------
15,549 55,981 4,097
----------------------------
Deferred:
Federal 13,188 40,435 35,074
Foreign - 649 (26)
State (12,925) 5,594 (3,338)
----------------------------
263 46,678 31,710
----------------------------
Income Tax Expense on
Continuing Operations $15,812 $102,659 $35,807
============================
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $277,856 $229,020
Investments 58,841 58,398
Inventories 11,571 10,513
Other 4,449 4,881
------------------
Total deferred tax liabilities 352,717 302,812
------------------
Deferred Tax Assets:
Revenue reserves 76,829 45,997
Non-conventional fuel tax credits 32,334 24,856
Employee benefits 11,880 15,537
Other accounting accruals 24,191 4,433
Interest on income taxes 6,047 11,577
Other 13,479 7,435
------------------
Total deferred tax assets 164,760 109,835
------------------
Net Deferred Tax Liabilities $187,957 $192,977
==================
</TABLE>
The Company has not provided a valuation allowance to offset deferred tax
assets because, based on the weight of available evidence, it is more likely
than not that all deferred tax assets will be realized.
II-27
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (Continued)
Consolidated income tax expense relating to continuing operations is
different from the amount computed by applying the U.S. federal income tax
rate to income from continuing operations before income tax. The reasons for
this difference are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -------------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
Income Tax Expense at Statutory
Federal Income Tax Rates $ 55,027 $128,705 $ 46,501
Increases (Decreases)
Resulting from:
State income taxes, net of
federal income tax benefit (3,634) 4,899 4,940
Non-conventional
fuel tax credits (14,217) (19,242) (13,998)
Refunds and adjustment of
accrued tax position (7,881) (9,319) (2,769)
Dividend exclusion (12,440) (2,412) 708
Effect of change in statutory
rate on deferred taxes - 1,342 -
Other (1,043) (1,314) 425
----------------------------
Income Tax Expense on
Continuing Operations $ 15,812 $102,659 $ 35,807
============================
</TABLE>
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
Domestic $157,219 $360,771 $119,245
Foreign - 6,957 17,524
----------------------------
Income from Continuing
Operations before
Income Taxes $157,219 $367,728 $136,769
============================
</TABLE>
9. 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. Under
the settlement, the FERC will decide the cost classification, cost allocation,
and rate design issues based on written submissions of the parties and the
existing record in the proceeding. By orders issued on December 16, 1993, and
May 5, 1994, the FERC approved the settlement. One party has sought judicial
review of these FERC orders. Southern cannot predict the outcome of this
appeal.
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 cost allocation and rate design issues were consolidated
with similar issues in Southern's rate proceeding filed May 1, 1993, which is
described below, and will be resolved in that proceeding. This settlement was
also approved by FERC orders issued on December 16, 1993, and May 5, 1994. One
party has sought judicial review of these FERC orders as well. Southern also
cannot predict the outcome of this appeal.
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 January 9, 1995, Southern filed a
trial stipulation that resolved certain cost of service issues with the FERC
staff in this proceeding. A hearing regarding all other outstanding issues
concluded in February 1995. Southern cannot predict the outcome of this
hearing.
Southern will file with the FERC in March 1995 a Stipulation and Agreement
that would settle all of Southern's pending rate (described above) and GSR cost
recovery proceedings as described below (Customer Settlement). Southern has
been advised that customers representing more than 80 percent of the
pipeline's firm capacity intend to support the Customer Settlement. Pursuant to
the Customer
II-28
<PAGE> 56
Sonat Inc. and Subsidiaries
Settlement, which must be approved by the FERC, all issues in Southern's
current and prior rate cases would be settled and Southern would credit against
GSR costs incurred by Southern the full amount of Southern's rate reserves at
February 28, 1995, which, as of December 31, 1994, were approximately $148
million. Such amount, less certain amounts withheld for potential rate refunds
to parties, if any, that contest the Customer Settlement and certain amounts
related to one specific contesting customer, will be credited in the aggregate
to reduce the GSR costs borne by Southern's customers. Southern will implement
the settlement rates for supporting parties on an interim basis, subject to
reinstatement, which will become effective March 1, 1995, pending FERC
consideration and approval of the Customer Settlement. The Customer Settlement
provides that, except in certain limited circumstances, Southern will not file
a general rate case to be effective prior to March 1, 1998. Southern's GSR
costs are discussed below (see Order No. 636).
The Company recognized a $29 million charge associated with the anticipated
customer rate settlement, which includes anticipated amounts for GSR costs that
Southern would not recover from its customers, and a $28 million provision
relating to regulatory assets that will not be recovered as a result of the
Customer Settlement, including amounts for a corporate restructuring undertaken
in 1994. These charges resulted in the increase in "Other" in the Deferred
Credits and Other section of the 1994 Consolidated Balance Sheet.
It is possible that the Customer Settlement will be contested by certain of
Southern's customers, in which case the Customer Settlement, if approved by the
FERC, will become effective only as to supporting parties and Southern's rates
and GSR costs applicable to the contesting parties would be determined by the
outcome of Southern's pending rate and GSR proceedings. It is also possible
that the Customer Settlement might not be approved by the FERC or, if approved,
might be modified in a way unacceptable to Southern or its customers.
Gas Purchase Contracts-Pursuant to a final and nonappealable FERC order,
Southern has collected substantially all of its gas purchase contract
settlement payments from its customers over a five-year period that ended on
April 30, 1994. Southern currently is incurring 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 transition cost is
related to amendment or termination of existing gas purchase contracts, which
are referred to as gas supply realignment 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 contracts, based on the circumstances that
existed at the time the contracts were executed, and to the prudence of the
amendments or terminations of the contracts. 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
"price differential" 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
mechanismswill 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 complianceplan 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
II-29
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 sought judicial review
of the September 3 and December 16 orders.
As of December 31, 1994, Southern had either paid or accrued $134 million
in GSR costs (including $4 million in interest) either to reduce significantly
the price payable under or to terminate a number of gas supply contracts
providing for payment of above-market prices. In addition, on February 17,
1995, Southern reached an agreement to incur $64 million in GSR costs to
resolve its remaining high-cost supply contracts with Exxon Corporation (Exxon)
that is conditioned upon the effectiveness of the Customer Settlement described
above. Southern also has an agreement under which another high-cost contract
price is reduced in exchange for monthly payments having a present value of
approximately $44 million. Southern has received permission from the FERC to
purchase an annuity in order to monetize this obligation.
In addition to its GSR costs relating to termination or amendment of its
remaining gas supply contracts, Southern has incurred and expects to continue
to incur certain "price differential" GSR costs resulting from Southern's
continued purchase of gas under its remaining supply contracts that provide for
prices in excess of current market prices. As of December 31, 1994, Southern
had incurred $69 million in price differential costs.
Beginning in December 1993, Southern has made a number of filings with the
FERC seeking to recover GSR costs paid through various periods prior to the
filings. In each instance, the FERC has accepted Southern's filing subject to
refund, and subject to a determination through a hearing before an
administrative law judge regarding whether such costs were prudently incurred
and are eligible for recovery under the Order. Southern's customers are
opposing its recovery of its GSR costs in these proceedings based on both
eligibility and prudence grounds. These proceedings, which have all been
consolidated, are in the early stages of discovery and Southern cannot predict
their outcome at this time.
As described above, Southern's Customer Settlement would settle all of the
proceedings pursuant to which Southern is seeking recovery of its GSR costs as
well as all of its other outstanding rate proceedings. If the Customer
Settlement is ultimately approved by the FERC, all challenges to the recovery
of Southern's GSR costs would be resolved as to those customers supporting the
Customer Settlement, including all issues related to eligibility and prudence.
Additionally, Southern would absorb an agreed-upon portion of its total GSR
costs, which was reflected in the provision for the Customer Settlement. As
indicated above, it is possible that the Customer Settlement will be contested
by certain of the customers on Southern's system and the possibility exists
that the FERC may not approve the Customer Settlement or may modify it in a way
unacceptable to Southern or its customers. In addition, Southern's GSR costs
allocated to those customers who contest the Customer Settlement will remain
subject to Southern's pending GSR cost recovery proceedings, where Southern
anticipates that those customers will continue to challenge both the
eligibility and prudence of such costs.
In its Customer 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, recent contract renegotiations, and price differential costs actually
incurred, the amount of GSR costs are estimated to be approximately $328
million. This amount includes the payments already made or accrued to amend or
to terminate gas purchase contracts and price differential costs, and the $64
million cost that will be incurred under a settlement of existing contracts
with Exxon, which will become effective if the Customer Settlement becomes
effective. These costs collectively total $288 million. Thus, Southern
currently estimates it will ultimately pay an additional $40 million in GSR
costs.
Until the Customer Settlement is approved, Southern plans to make
additional rate filings quarterly to recover its price differential costs and
any other GSR costs. Additionally,
II-30
<PAGE> 58
Sonat Inc. and Subsidiaries
Southern will continue to make monthly filings designed to adjust the billing
determinants and associated surcharges for its firm transportation customers to
reflect changes in the level of systemwide contract demands and effective
carrying charges that occur from time to time.
Administrative Law Judge Ruling Concerning Recoverability of Investment in
Offshore Gas Supply Facilities; Settlement with Exxon Corporation-In an initial
decision issued on May 2, 1994, which Southern has appealed, 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 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. Southern has appealed the administrative law judge's
decision to the FERC but cannot predict the outcome of this appeal.
The Customer Settlement provides that as to customers supporting the
settlement, the costs of the Mississippi Canyon Facilities will be recovered by
Southern on a rolled-in basis and the 1988 take-or-pay settlement cap will not
preclude Southern's recovery of such costs. On February 17, 1995, Southern
reached a settlement with Exxon pursuant to which, in return for an additional
cash payment by Southern of $45 million, plus allowing Exxon to retain $19
million in price differential costs already paid to Exxon, all existing gas
purchase contracts would be terminated, two new gas purchase contracts would be
entered into having three-year terms and providing for market-based index
prices, and a lawsuit regarding Southern's termination of the gas purchase
contract covering gas reserves connected by the Mississippi Canyon Facilities
(Mississippi Canyon Contract) would be dismissed. The settlement with Exxon is
contingent on FERC approval of the Customer Settlement.
If this settlement with Exxon does not become effective, total GSR costs
under the Mississippi Canyon Contract through the scheduled renegotiation of
its pricing provisions in 1997 are estimated to be approximately $125 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 gas
market prices) are not known today with certainty and there is a wide range of
possible outcomes for each assumption. In addition, Southern has given notice
to Exxon that effective March 1, 1994, it has terminated the Mississippi Canyon
Contract pursuant to certain provisions of the contract. Such termination, if
effective, would reduce GSR costs associated with such contract to $14
million. 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. The court entered a summary
judgment order upholding Southern's termination of this contract, which Exxon
has appealed to the Fifth Circuit Court of Appeals. Southern's customers are
challenging the recovery of GSR costs attributable to such contract on
eligibility and prudence grounds and on the basis that such costs also
constitute non-cash consideration for the 1989 take-or-pay settlement with
Exxon and thus are not recoverable due to the 1988 take-or-pay cost cap. If the
settlement with Exxon does not become effective, 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 with Exxon regarding Southern's notice of termination of the
Mississippi Canyon Contract.
Leases-The Company has operating lease commitments expiring at various
dates, principally for office space and equipment. The Company has no
significant capital leases.
Rental expense for all operating leases from continuing operations is
summarized below.
RENTAL EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
---------------------------
<S> <C> <C> <C>
Non-Affiliated
Operating Leases $12,731 $14,816 $16,962
Affiliated Operating Leases 3,669 3,589 3,482
---------------------------
$16,400 $18,405 $20,444
===========================
</TABLE>
At December 31, 1994, future minimum payments for non-cancelable operating
leases for the years 1995 through 1999 are $9 million or less per year.
II-31
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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.
Per share prices of the Company's common stock, based on the New York Stock
Exchange listing of composite transactions, and dividends paid per common share
for the last two years are summarized below.
PRICE RANGE AND DIVIDENDS PAID PER COMMON SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Quarter 1994 1993
- -----------------------------------------------------------
<S> <C> <C>
Price Range High-Low
First $33 -26 $28 11/16-21 5/8
Second 32 1/4-26 7/8 33 5/8-27 1/8
Third 34 7/8-30 1/4 35 13/16-32 1/8
Fourth 33 1/2-26 3/8 36 1/2-26 3/8
--------------------------------
Dividends Paid
First $ .27 $ .25
Second .27 .25
Third .27 .27
Fourth .27 .27
--------------------------------
$ 1.08 $ 1.04
================================
Shareholders of Record at
Year-End 12,697 13,040
================================
</TABLE>
The Company had no restrictions on the payment of dividends at December 31,
1994.
The Company has a Stockholder Rights Plan designed to protect the interest
of stockholders in the event of a hostile attempt to take over the Company and
to make it more difficult for a person to gain control of the Company in a
manner or on terms not approved by the Board of Directors. The rights under
this plan are redeemable at any time by the Company before February 3, 1996,
the end of their 10-year term, so long as an entity has not acquired 20 percent
or more of the Company. As of December 31, 1994, 92,556,554 shares of common
stock were reserved for issuance under this plan.
Executive Award Plan-The Company has an Executive Award Plan that provides
awards to certain key employees in the form of stock options, restricted stock,
and stock appreciation rights (SARs) in tandem with any or all stock options.
In years prior to 1991, tax offset payments were generally provided in
conjunction with these awards. SARs permit the holder of an exercisable option
to surrender that option for an amount equal to the excess of the market price
of the common stock on the date of exercise over the option price
(appreciation). The appreciation is payable in cash, common stock, or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. No SARs have been issued since 1990. At
December 31, 1994, 389,634 SARs were outstanding. The Company issued 72,700
shares of restricted stock to employees during 1994. The shares generally vest
10 years from the date of grant, unless the closing price of the Company's
common stock achieves certain specified levels. At December 31, 1994, 51,998 of
the 319,000 cumulative restricted shares issued have vested.
The following table summarizes option activities in the Plan:
NUMBER OF SHARES UNDER OPTION
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------
<S> <C> <C> <C>
Beginning of Year 3,518,595 3,889,154 3,191,082
Granted 990,700 989,700 956,200
Exercised (122,842) (1,332,661) (198,592)
Forfeited (27,633) (27,598) (59,536)
----------------------------------------------
End of Year 4,358,820 3,518,595 3,889,154
==============================================
Exercisable 2,637,880 2,245,556 2,050,612
==============================================
Outstanding
Option Prices $12.0625-30.00 $12.0625-30.00 $11.5625-26.0625
==============================================
Exercised
Option Prices $12.0625-25.75 $12.0625-25.75 $11.5625-17.75
==============================================
Shares Authorized
for Future
Grants at
Year-End 946,023 1,999,256 3,009,758
==============================================
</TABLE>
Stock-based employee compensation increased pretax income by $1.2 million
in 1994 and decreased pretax income by $12.6 million and $9.3 million in 1993
and 1992, respectively.
At December 31, 1994 and 1993, there were 10,000,000 shares of $1.00 par
value Serial Preference Stock authorized, with none issued.
Directors Restricted Stock Plan-The Company has a Restricted Stock Plan
for non-employee members of the Board of Directors of Sonat Inc. Full rights
vest over a maximum of five years. The Company issued 1,433 shares during 1994.
At December 31, 1994, 18,660 of the 36,493 cumulative shares granted have
vested.
Treasury Stock-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 are being made from time to time in the open market or in
privately negotiated transactions. Shares purchased under the authorization
are expected to be reissued in connection with employee stock option and
restricted stock programs. At December 31, 1994, 940,000 shares of common stock
had been purchased and 69,000 shares had been reissued under this program.
II-32
<PAGE> 60
Sonat Inc. and Subsidiaries
11. RETIREMENT PLANS AND OTHER
POST EMPLOYMENT BENEFITS
Retirement Plans-Sonat Inc. has a trusteed, non-contributory, tax qualified
defined benefit retirement plan (the Retirement Plan) covering substantially
all employees of the Company. A supplemental benefit plan (the Supplemental
Plan) that provides retirement benefits in excess of those allowed under the
Company's tax qualified retirement plan is also in effect for the Company.
Benefits under the plans are based on a combination of years of service and a
percentage of compensation. Benefits vest after a period of five years.
In connection with the Sonat Offshore divestiture, the qualified retirement
plan assets and liabilities related to Sonat Offshore employees were
transferred to a new, separate qualified retirement plan to be maintained by
Sonat Offshore. For the Supplemental Plan, Sonat retained the obligation to pay
the benefit accrued through the date of the IPO for all of Sonat Offshore's
current and retired employees. Sonat Offshore retains responsibility for the
obligation to its employees' supplemental benefits subsequent to the date of
the IPO.
The Company determines the amount of funding to the Retirement Plan on a
year-to-year basis, with amounts consistent with minimum and maximum funding
requirements established by various governmental bodies. The trust established
to provide benefits under the Supplemental Plan is being funded; however, this
trust is not subject to any funding requirements. At December 31, 1994, this
trust had assets with a fair market value of $32.9 million available to pay
benefits.
The Company's net periodic pension (income) cost included in continuing
operations consists of the following components:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
Service Cost-Benefits Earned
during the Period $ 6,256 $ 9,722 $11,190
Interest Cost on
Projected Benefit Obligation 24,407 25,246 27,101
Loss (Gain) on Assets 11,982 (60,558) (22,495)
Net Amortization and Deferral (49,397) 29,607 (10,004)
----------------------------
$ (6,752) $ 4,017 $ 5,792
============================
</TABLE>
The change in the discount rate assumption in 1994 to 8.5 percent from 7.0
percent was the primary reason for the change in net periodic pension cost.
The following table sets forth the assets and liabilities of the plans and
the amount of the net pension asset or liability recognized in the Company's
Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Plans with Plans with
Obligations Obligations in
Less than Assets(1) Excess of Assets(2)
December 31, December 31,
--------------------------------------
1994 1993 1994 1993
- ------------------------------------------------------------------
(In Thousands)
--------------------------------------
<S> <C> <C> <C> <C>
Actuarial Present Value
of Benefit Obligations:
Vested benefit
obligations $225,115 $239,797 $21,306 $24,604
Non-vested benefit
obligations 8,195 12,848 314 491
-------------------------------------
Accumulated benefit
obligations 233,310 252,645 21,620 25,095
Effect of projected
future salary
increases 39,102 76,096 9,470 3,750
-------------------------------------
Projected benefit
obligations 272,412 328,741 31,090 28,845
Plan Assets at
Fair Value(3) 355,106 383,000 - -
-------------------------------------
Projected Benefit
Obligations
(in Excess of)
or Less than
Plan Assets 82,694 54,259 (31,090) (28,845)
Unrecognized Net
(Assets) or
Obligations at
Transition(4) (14,686) (16,416) 358 409
Unrecognized Net
(Gain) Loss (70,182) (50,542) 5,286 5,740
Unrecognized Prior
Service Cost 5,936 9,150 4,203 2,698
Net Unamortized
Deferred Charge from
Early Retirement
Termination Benefits(5) 9,022 5,401 2,523 984
-------------------------------------
Net Pension Asset
(Liability) Recognized
in the Consolidated
Balance Sheets $ 12,784 $ 1,852 $(18,720)$(19,014)
======================================
</TABLE>
(1) The Retirement Plan.
(2) The Supplemental Plan.
(3) Plan assets consist primarily of debt and equity securities, and
investments in equity index and foreign index funds.
(4) Amortization periods for unrecognized net (asset) or obligation are 16.5
years for the Retirement Plan and 15 years for the Supplemental Plan.
(5) Amortization periods for early retirement termination benefits are 10
years for the Retirement Plan and five years for the Supplemental Plan.
II-33
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS AND OTHER
POST EMPLOYMENT BENEFITS (CONTINUED)
Until July 1993, the Company set aside assets in fixed income securities
such that values of those assets equaled or exceeded the present value of the
Company's benefit obligations to current retirees (immunized obligations).
After that date, a separate immunized portfolio has not been maintained. The
assumed rates used to measure the projected benefit obligations and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Discount Rate:
Non-immunized obligations 8.5% 7.0% 7.0%
Immunized obligations - - 7.4%
Long-Term Rate of Return:
Non-immunized assets 8.5% 9.0% 9.0%
Immunized assets - - 7.4%
Increase in Future Compensation
Levels (Composite Rate):
Retirement and Supplemental
Plans 5.5% 6.0% 6.0%
=====================
</TABLE>
Other Post Employment Benefits-The Company has plans that provide for
postretirement health care and life insurance benefits to substantially all of
its employees when they retire. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for all plans as of January 1, 1993. SFAS No.
106 requires companies to accrue the cost of postretirement health care and
life insurance benefits within the employees' active service periods. The
Company has elected to amortize the transition obligation over a 20-year
period. The Company previously expensed the cost of its retiree medical
benefits as they were paid. Expense for retiree life insurance benefits was
recognized as the Company funded its Retiree Life Insurance Plan.
With respect to the Sonat Offshore IPO, Sonat Offshore has responsibility
for its retired employees for both health care and life insurance benefits. The
portion of assets held by Sonat in a Continued Life Insurance Reserve fund that
related to Sonat Offshore employees, $1.2 million, was transferred to Sonat
Offshore during 1993.
The annual net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
---------------------
<S> <C> <C>
Service Cost $ 1,843 $ 2,109
Interest Cost 7,051 7,567
Return on Plan Assets (428) (219)
Net Amortization and Deferral 3,200 3,947
--------------------
$11,666 $13,404
====================
</TABLE>
Prior to the adoption of SFAS No. 106, the cost of providing health care
and life insurance benefits was $5.1 million in 1992.
The Company funds its Retiree Life Insurance Plan with the amount of
funding determined on a year-to-year basis with the objective of having assets
equal plan liabilities. In addition, during 1993 the Company initiated funding
of postretirement health care benefits for employees of its regulated
subsidiaries in an amount generally equal to the subsidiaries' annual SFAS No.
106 expense. Southern implemented rates effective May 1, 1993, which provide
for the recovery of its share of the postretirement expense.
The following table sets forth the funded status at December 31, 1994 and
1993, for the Company's postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
---------------------
<S> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ 61,226 $ 69,421
Fully eligible active plan
participants 9,055 15,767
Other active plan participants 22,711 23,586
---------------------
92,992 108,774
Plan Assets at Fair Value(1) 17,030 11,050
---------------------
Accumulated Postretirement
Benefit Obligation in Excess of
Plan Assets (75,962) (97,724)
Unrecognized Transition Obligation 65,142 77,899
Unrecognized Net (Gain) Loss (6,902) 15,031
Net Unamortized Deferred Charge
from Early Retirement Termination
Benefits 10,232 -
---------------------
Accrued Postretirement Benefit Cost $ (7,490) $ (4,794)
======================
</TABLE>
(1) Plan assets are held in a life insurance reserve account which consists
primarily of fixed income securities, and in equity securities, municipal
tax exempt bonds, and short-term investment funds.
II-34
<PAGE> 62
Sonat Inc. and Subsidiaries
The assumed rates used to measure the projected benefit obligation and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993
- ---------------------------------------------------------
<S> <C> <C>
Discount Rate 8.5% 7.0%
Long-Term Rate of Return:
Medical assets 5.5% 5.5%
Life insurance assets 8.5% 7.0%
===============
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 11.6 percent in 1995, decreasing gradually to 6
percent by the year 2003. Increasing the assumed health care cost trend rate by
1 percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1994, by approximately $4.9 million and increase
the service cost and interest cost components of the net periodic
postretirement benefit cost by approximately $.5 million.
The Company sponsors a postemployment benefit plan that provides
disability benefits to former or inactive employees, their beneficiaries, and
covered dependents after employment but before retirement. The Company adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" as of January
1, 1994. SFAS No. 112 requires companies to accrue a liability for employees'
compensation for future absences if certain conditions are met. For the year
ended December 31, 1994, $1.3 million of expense was recognized for this
employee benefit plan.
Corporate Restructuring-In late 1994 and early 1995 the Company completed
a reduction in staffing levels in the office and field locations through a
combination of special early retirement options (SERO) and involuntary
terminations involving 340 employees. The total cost of the program amounted to
$21.3 million, which included $3.1 million related to the qualified retirement
plan, $10.8 million related to the postretirement plans, and $6.0 million of
cash severance payments. Included in the cash severance amount was $2.0 million
paid during 1994. All of the terminations, voluntary and involuntary, were
completed by the end of January 1995.
12. BUSINESS SEGMENT AND
GEOGRAPHIC AREA ANALYSIS
The Company's operations, capital expenditures, and assets by business segment
and geographic location are shown in the following tables.
On June 4, 1993, the Company's ownership of Sonat Offshore, which provides
offshore drilling services, was reduced from 100 percent to approximately 40
percent. (See Note 3.) Sonat Offshore's results prior to June 4, 1993, are
reported in the Other Business segment. The Company's share of Sonat Offshore's
results since June 4, 1993, is shown as equity in earnings of Sonat Offshore.
Intersegment sales are primarily gas sales by the Exploration and Production
segment and are generally priced at rates determined by market forces.
Operating profit is revenues less operating expenses. In determining
operating profit, none of the following items have been included: unallocated
general corporate revenues and expenses, interest, dividend and other income,
interest expense, income taxes and equity in earnings of unconsolidated
affiliates.
BUSINESS SEGMENT ANALYSIS
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ----------------------------------------------------------------
(In Thousands)
---------------------------------
<S> <C> <C> <C>
Revenues:
Exploration and production $ 412,750 $ 353,018 $ 279,161
Natural gas transmission and
marketing 1,635,051 1,437,321 1,061,564
Other 7,585 113,902 222,405
Intersegment revenue (281,459) (163,094) (78,707)
---------------------------------
$1,773,927 $1,741,147 $1,484,423
=================================
Depreciation, Depletion and
Amortization Expense:
Exploration and
production $ 206,842 $ 149,179 $ 107,537
Natural gas transmission
and marketing 49,530 66,448 76,335
Other, including
depreciation of
corporate equipment 1,387 10,362 30,005
---------------------------------
$ 257,759 $ 225,989 $ 213,877
=================================
Operating Profit:
Exploration and
production $ 64,001 $ 86,474 $ 54,033
Natural gas transmission
and marketing 100,338 143,461 151,354
Other 2,851 4,477 7,383
---------------------------------
Operating profit 167,190 234,412 212,770
Corporate Expenses, Net 2,249 (1,497) (1,679)
---------------------------------
Operating income 169,439 232,915 211,091
Equity in Earnings of
Unconsolidated Affiliates:
Exploration and production 245 4,665 1,778
Natural gas transmission
and marketing 37,680 2,189 (628)
Other 6,394 5,511 2,982
Other Income, Net 16,348 169,720 17,904
Interest Expense, Net (72,887) (47,272) (96,358)
---------------------------------
Income from Continuing
Operations before
Extraordinary Item and
Income Taxes $ 157,219 $ 367,728 $ 136,769
=================================
</TABLE>
II-35
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS SEGMENT AND
GEOGRAPHIC AREA ANALYSIS (Continued)
Revenues from the Major Unaffiliated Customers of the Natural Gas Transmission
& Marketing Segment
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
Atlanta Gas Light $290,858 $364,217 $312,361
Alabama Gas Corporation 178,531 204,558 161,779
============================
</TABLE>
Capital expenditures for unconsolidated affiliates are accounted for on the
books of the unconsolidated affiliates and therefore are not reflected in the
totals appearing in the Company's Consolidated Financial Statements.
Capital Expenditures by Business Segment
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -------------------------------------------------------------
(In Thousands)
----------------------------
<S> <C> <C> <C>
Consolidated:
Exploration and production $389,766 $430,852 $156,418
Natural gas transmission
and marketing 54,406 61,012 43,796
Other 4,142 24,602 25,552
----------------------------
448,314 516,466 225,766
----------------------------
Unconsolidated Affiliates
(Company's Portion):
Exploration and production 101 10,559 37,415
Natural gas transmission
and marketing 398,389 18,516 11,988
Other 52 3,080 2,172
----------------------------
398,942 32,155 51,575
----------------------------
$847,256 $548,621 $277,341
============================
</TABLE>
Identifiable assets by business and geographic area are those assets that
are used in the Company's operations in each business and location. Corporate
assets are typically investments, cash and equipment.
Assets by Business Segment
<TABLE>
<CAPTION>
December 31, 1994 1993 1992
- ------------------------------------------------------------------
(In Thousands)
----------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Exploration and production $1,488,054 $1,308,189 $1,034,678
Natural gas transmission
and marketing 1,344,893 1,400,796 1,297,945
Other 37,531 42,640 367,704
Adjustments and eliminations
(70,444) (86,159) (64,566)
----------------------------------
2,800,034 2,665,466 2,635,761
----------------------------------
Investments in
Unconsolidated Affiliates:
Exploration and production 6,281 6,345 26,898
Natural gas transmission
and marketing 339,539 150,069 155,526
Other 140,508 138,807 73,263
----------------------------------
486,329 295,221 255,687
Corporate Assets 244,323 253,310 273,884
----------------------------------
Total Assets $3,530,686 $3,213,997 $3,165,332
==================================
</TABLE>
Revenues and operating profit from continuing operations of domestic and
foreign operations have been computed consistent with the methods previously
discussed.
II-36
<PAGE> 64
Sonat Inc. and Subsidiaries
Foreign operations were conducted by the Company's offshore drilling
subsidiary. The following table summarizes by domestic and foreign areas
revenues, operating profit and equity in earnings of unconsolidated affiliates
by year and identifiable assets and investments in unconsolidated affiliates by
domestic and foreign areas at the end of each year.
Geographic Area Analysis
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------
(In Thousands)
---------------------------------
<S> <C> <C> <C>
Revenues:
Domestic $1,773,927 $1,655,380 $1,322,064
Foreign - 85,767 162,359
---------------------------------
$1,773,927 $1,741,147 $1,484,423
=================================
Operating Profit:
Domestic $ 167,190 $ 226,756 $ 202,276
Foreign - 7,656 10,494
---------------------------------
Operating profit 167,190 234,412 212,770
Corporate Expenses 2,249 (1,497) (1,679)
----------------------------------
Operating income 169,439 232,915 211,091
Equity in Earnings (Loss) of
Unconsolidated Affiliates:
Domestic 44,319 12,657 2,382
Foreign - (292) 1,750
Other Income, Net 16,348 169,720 17,904
Interest Expense, Net (72,887) (47,272) (96,358)
---------------------------------
Income from Continuing
Operations Before
Extraordinary Item and
Income Taxes $ 157,219 $ 367,728 $ 136,769
=================================
Identifiable Assets:
Domestic $2,800,034 $2,665,466 $2,354,875
Foreign - - 280,886
---------------------------------
2,800,034 2,665,466 2,635,761
---------------------------------
Investments in
Unconsolidated Affiliates:
Domestic 486,329 295,221 194,560
Foreign - - 61,127
---------------------------------
486,329 295,221 255,687
Corporate Assets 244,323 253,310 273,884
---------------------------------
Total Assets $3,530,686 $3,213,997 $3,165,332
=================================
</TABLE>
Foreign cash equivalents amounted to $18.4 million at December 31, 1992.
There were no foreign cash equivalents at December 31, 1994 and 1993.
13. OIL AND GAS OPERATIONS (Unaudited)
At December 31, 1994, the Company had interests in oil and gas properties that
are located primarily in Texas, Louisiana, Arkansas, Oklahoma, Alabama, and
offshore Louisiana and Texas in the Gulf of Mexico. The Company does not own or
lease any oil and gas properties outside the United States.
In October 1993, the Company acquired the remaining interest in Sonat/P not
owned by it from Prudential InsuranceCompany whereby the partnership was
subsequently dissolved. (See Note 5.)
Capitalized costs relating to oil and gas producing activities and related
accumulated depreciation, depletion and amortization were as follows:
Capitalized Costs
<TABLE>
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------
(In Thousands)
----------------------
<S> <C> <C>
Oil and Gas Properties:
Proved properties $2,258,237 $1,935,450
Unproved properties 125,118 142,404
----------------------
2,383,355 2,077,854
Less Accumulated Depreciation,
Depletion and Amortization 991,621 853,634
----------------------
$1,391,734 $1,224,220
======================
</TABLE>
Costs incurred in oil and gas producing activities were as follows:
Costs Incurred
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
-------------------------------
<S> <C> <C> <C>
Property Acquisition Costs:
Proved properties $142,294 $211,933 $ 14,253
Unproved properties 28,953 62,617 11,975
Exploration Costs 11,284 8,265 7,017
Development Costs 215,205 151,875 126,265
-------------------------------
Total Costs $397,736 $434,690 $159,510
===============================
Sonat's Share of Sonat/P's
Costs of Property
Acquisition, Exploration,
and Development $ - $ 10,432 $ 37,053
===============================
</TABLE>
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, and changes in
such quantities were as follows:
II-37
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OIL AND GAS OPERATIONS (Unaudited) (Continued)
Reserve Data
<TABLE>
<CAPTION>
OIL- GAS- Oil- Gas- Oil- Gas-
THOUSAND BILLION Thousand Billion Thousand Billion
BBLS. CU. FT. Bbls. Cu. Ft. Bbls. Cu. Ft.
- ---------------------------------------------------------------------------------------
December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved
(Developed and
Undeveloped)
Reserves, Net:
Beginning
of year 27,094 1,186.6 19,604 974.9 19,125 1,077.9
Revisions of
previous
estimates (2,891) 31.3 2,410 (6.2) 1,987 1.1
Transfer of
Sonat/P
reserves - - 426 39.5 - -
Extensions,
discoveries
and other
additions 4,876 107.2 2,470 68.7 1,790 41.0
Purchases of
reserves
in place 8,059 229.9 6,396 274.7 525 34.6
Sales of
reserves
in place (129) (6.0) (468) (18.9) (735) (54.0)
Production (5,382) (181.7) (3,744) (146.1) (3,088) (125.7)
---------------------------------------------------------------
End of
Year 31,627 1,367.3 27,094 1,186.6 19,604 974.9
===============================================================
Proved Developed
Reserves:
Beginning
of year 19,776 899.6 15,304 696.5 15,745 658.7
End of year 22,269 1,001.0 19,776 899.6 15,304 696.5
===============================================================
Sonat's Proportional Interest in:
Proved reserves
of Sonat/P
end of year - - - - 540 53.1
Production
of Sonat/P - - 34 4.2 9 1.3
===============================================================
</TABLE>
The significant changes to reserves, other than acquisitions, dispositions or
production, are due to reservoir performance in existing fields, drilling of
additional wells in existing fields and development of new fields. In early
1995, Sonat Exploration announced two significant acquisitions of oil and gas
producing properties, one in north Louisiana and the other in the Texas
Panhandle area. These transactions of $158.3 million, which are not reflected
in the above data, will add proved reserves of 188 billion cubic feet of
natural gas and 11.2 million barrels of oil and condensate. There were no other
events or major discoveries, favorable or adverse, that may be considered to
have caused a significant change in the estimated proved reserves since
December 31, 1994.
Results of operations from producing activities by fiscal year were as
follows:
Results of Operations
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
--------------------------------
<S> <C> <C> <C>
Net Revenues:
Sales $ 148,530 $ 200,143 $ 211,339
Affiliated sales 264,220 151,987 62,095
--------------------------------
Total 412,750 352,130 273,434
Production Costs (81,067) (64,548) (55,565)
Exploration Expenses (12,181) (6,678) (5,125)
Depreciation, Depletion and
Amortization (206,842) (149,179) (107,537)
--------------------------------
112,660 131,725 105,207
Income Tax Expense (25,031) (27,066) (21,839)
--------------------------------
Results of Operations from
Producing Activities
(Excluding Corporate
Overhead and
Interest Costs) $ 87,629 $ 104,659 $ 83,368
================================
Sonat's Share of Sonat/P's
Results of Operations
for Producing Activities
(before Tax) $ - $ 4,900 $ 1,689
================================
</TABLE>
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves follows:
Standardized Measure of
Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
December 31, 1994 1993 1992
- ---------------------------------------------------------------
(In Thousands)
------------------------------------
<S> <C> <C> <C>
Future Cash Inflows $ 2,835,781 $ 3,051,484 $2,483,976
Future Production and
Development Costs (1,200,581) (1,044,410) (816,706)
Future Income Tax Expenses (83,931) (236,632) (180,754)
------------------------------------
Future Net Cash Flows 1,551,269 1,770,442 1,486,516
10% Annual Discount for
Estimated Timing of
Cash Flows (465,469) (477,824) (489,043)
------------------------------------
Standardized Measure of
Discounted Future Net
Cash Flows $ 1,085,800 $ 1,292,618 $ 997,473
====================================
Sonat's Share of Sonat/P's
Standardized Measure
of Discounted Future
Net Cash Flows
(before Tax) $ - $ - $ 48,677
=====================================
</TABLE>
II-38
<PAGE> 66
Sonat Inc. and Subsidiaries
For the calculations in the preceding table, estimated future cash inflows
from estimated future production of proved reserves were computed using
realized oil and gas prices for each December.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
Changes in Standardized Measure of Discounted
Future Net Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1993 1992
- -----------------------------------------------------------
(In Thousands)
--------------------------------
<S> <C> <C> <C>
Sales and Transfers of
Oil and Gas Produced,
Net of Production Costs $(331,683) $(287,583) $(217,869)
Net Changes in Prices and
Production Costs (327,290) (25,100) 81,509
Extensions, Discoveries and
Improved Recovery, Less
Related Costs 104,554 87,185 44,226
Transfer of Sonat/P Reserves - 44,209 -
Changes in Estimated Future
Development Costs (28,397) (17,179) (527)
Development Costs Incurred
During the Period 68,945 47,278 52,817
Revisions of Previous
Quantity Estimates 11,157 8,572 13,973
Accretion of Discount 129,974 103,689 102,663
Net Change in Income Taxes 40,039 (34,751) 13,767
Purchases of Reserves in
Place 160,335 317,764 31,791
Sales of Reserves in Place (5,226) (17,159) (55,606)
Changes in Production
Rates (Timing) and Other (29,226) 68,220 (73,386)
--------------------------------
$(206,818) $ 295,145 $ (6,642)
================================
</TABLE>
14. QUARTERLY RESULTS (Unaudited)
Shown below are selected unaudited quarterly data.
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------
(In Thousands, Except Per-Share Amounts)
-----------------------------------------
<S> <C> <C> <C> <C>
1994(1)
Revenues $479,507 $415,015 $411,765 $467,640
Operating Income
(Loss) 76,699 52,505 49,203 (8,968)
Net Income 49,610 34,541 35,292 21,964
======================================
Earnings Per Share $ .57 $ .40 $ .40 $ .25
======================================
1993(2)
Revenues $496,913 $356,492 $324,546 $563,196
Operating Income 83,102 43,682 44,273 61,858
Income from
Continuing
Operations before
Extraordinary Item 68,923 125,865 20,294 49,987
Loss from
Extraordinary Item (3,829) - - -
Net Income 65,094 125,865 20,294 49,987
======================================
Earnings Per Share:
Earnings from
continuing
operations before
extraordinary
item $ .80 $ 1.45 $ .23 $ .57
Loss from
extraordinary
item (.04) - - -
--------------------------------------
Earnings Per Share $ .76 $ 1.45 $ .23 $ .57
======================================
</TABLE>
(1) Net income for the fourth quarter of 1994 includes a gain of $20.3
million, or $.23 per share, related to the settlement of an examination of
the Company's federal income tax returns for the years 1986 through 1988;
a charge for Southern Natural's Rate Settlement of $17.9 million, or $.21
per share; and charges for a reduction in work force and other matters
amounting to $22.0 million, or $.25 per share.
(2) Net income for the second quarter of 1993 includes a gain of $99.7
million, or $1.15 per share, from the closing of the initial public
offering of Sonat Offshore Drilling Inc. common stock. Net income also
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
from 1983 through 1985 and other tax issues.
The third quarter of 1993 includes a loss of $12 million, or $.14 per
share, due to the Omnibus Budget Reconciliation Act of 1993 which
increased corporate and personal income tax rates. Net income also
included favorable income tax adjustments of $4 million, or $.05 per
share.
Net income for the fourth quarter of 1993 includes favorable income tax
adjustments of $3 million, or $.03 per share.
II-39
<PAGE> 67
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per-Share Amounts)
---------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,773.9 $1,741.1 $1,484.4 $1,421.0
Costs and Expenses 1,604.5 1,508.2 1,273.3 1,217.5
- ----------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 169.4 232.9 211.1 203.5
Other Income (Expense), Net 60.7 182.1 22.0 14.7
Interest Expense, Net (72.9) (47.3) (96.3) (117.7)
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Extraordinary Item and Income Taxes 157.2 367.7 136.8 100.5
Income Taxes (Benefits) 15.8 102.7 35.8 22.6
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Cumulative Effect of Accounting Changes 141.4 265.0 101.0 77.9
Income (Loss) from Discontinued Operations(1) - - 111.4 (11.9)
Extraordinary Loss, Net of Tax(2) - (3.8) - -
Cumulative Effect of Change in Method
of Accounting for Investment Tax Credits - - - -
Cumulative Effect of Change in Method
of Accounting for Income Taxes - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 141.4 $ 261.2 $ 212.4 $ 66.0
============================================================================================================================
Earnings (Loss) Per Share from Continuing
Operations before Extraordinary Item $ 1.62 $ 3.05 $ 1.17 $ .91
Earnings (Loss) Per Share $ 1.62 $ 3.01 $ 2.47 $ .77
Weighted Average Shares
Outstanding (thousands) 87,119 86,703 85,945 85,771
Dividends Paid Per Share $ 1.08 $ 1.04 $ 1.00 $ 1.00
============================================================================================================================
Assets $3,530.7 $3,214.0 $3,165.3 $3,208.5
Debt Maturing within One Year $ 219.3 $ 232.9 $ 20.1 $ 79.2
Long-Term Debt 963.4 741.2 1,175.7 1,315.1
Stockholders' Equity 1,391.9 1,363.2 1,172.3 1,042.7
- ----------------------------------------------------------------------------------------------------------------------------
Total Capitalization $2,574.6 $2,337.3 $2,368.1 $2,437.0
============================================================================================================================
</TABLE>
Notes:
(1) Discontinued operations include the measurement-while-drilling businesses
as of 1991, the marine transportation and underwater services businesses as
of 1986, and the forest products business as of 1984.
(2) In March 1993, the Company recognized a loss on the redemption of the
Company's 7 1/4 Percent Zero Coupon, Subordinated Convertible Notes which
were due September 6, 2005.
II-40
<PAGE> 68
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986 1985 1984
- ----------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per-Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$1,356.9 $1,659.2 $1,277.3 $1,344.9 $1,628.6 $2,258.6 $2,380.9
1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 2,225.2 2,050.8
- ----------------------------------------------------------------------------------------------------------------------------
164.7 177.8 134.9 168.4 (300.7) 33.4 330.1
69.8 47.1 12.5 41.5 118.1 5.2 (1.3)
(102.6) (75.2) (54.4) (54.6) (77.9) (47.9) (30.0)
- -----------------------------------------------------------------------------------------------------------------------------
131.9 149.7 93.0 155.3 (260.5) (9.3) 298.8
40.7 54.1 40.5 85.2 (144.7) (13.0) 136.9
- ----------------------------------------------------------------------------------------------------------------------------
91.2 95.6 52.5 70.1 (115.8) 3.7 161.9
2.7 (2.0) 2.2 24.9 (73.6) (14.1) 35.1
- - - - - - -
- - - - - 62.4 -
- - 13.1 - - - -
- ----------------------------------------------------------------------------------------------------------------------------
$ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) $ 52.0 $ 197.0
============================================================================================================================
$ 1.07 $ 1.17 $ .65 $ .87 $ (1.43) $ .05 $ 2.00
$ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34) $ .64 $ 2.44
85,612 81,682 81,238 80,912 80,948 80,916 80,902
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .9625 $ .85
============================================================================================================================
$3,045.1 $2,892.3 $2,969.5 $3,074.4 $3,288.8 $3,413.2 $3,392.5
$ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6 $ 150.7 $ 20.1
1,094.0 929.5 859.4 824.8 1,336.3 996.2 810.8
1,060.5 1,035.3 1,010.2 1,023.0 1,005.9 1,276.3 1,301.5
- ----------------------------------------------------------------------------------------------------------------------------
$2,217.6 $2,120.7 $1,920.0 $2,073.4 $2,446.8 $2,423.2 $2,132.4
============================================================================================================================
</TABLE>
II-41
<PAGE> 69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Sonat has not had a change in accountants within twenty-four months prior
to the date of its most recent financial statements or in any period subsequent
to such date.
II-42
<PAGE> 70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Directors and nominees for Director of Sonat
required by Item 401 of Regulation S-K is presented under the heading "Election
of Directors" in the Proxy Statement of Sonat Inc. dated as of March 15, 1995
(the "Proxy Statement"), which information is hereby incorporated by reference
herein. A copy of the Proxy Statement is filed as an exhibit to this report on
Form 10-K. Information regarding the executive officers of Sonat is presented
following Item 4 of this report, as permitted by General Instruction G(3) to
Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive
compensation is presented under the headings "Compensation of Outside Directors"
and "Compensation of Executive Officers" in the Proxy Statement, which
information is hereby incorporated by reference herein. Notwithstanding the
foregoing, the information provided under the headings "Report of the Executive
Compensation Committee" and "Performance Graph" in the Proxy Statement are not
incorporated by reference herein. A copy of the Proxy Statement is filed as an
exhibit to this report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial
owners and management required by Item 403 of Regulation S-K is presented under
the heading "Ownership of Common Stock by Directors and Executive Officers" in
the Proxy Statement, which information is hereby incorporated by reference
herein. A copy of the Proxy Statement is filed as an exhibit to this report on
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
required by Item 404 of Regulation S-K is presented under the heading "Certain
Business Relationships and Transactions" in the Proxy Statement, which
information is hereby incorporated by reference herein. A copy of the Proxy
Statement is filed as an exhibit to this report on Form 10-K.
III-1
<PAGE> 71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules, and
Exhibits
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors.................................. II-15
Consolidated Balance Sheets at December 31, 1994 and 1993.......................... II-16
Consolidated Statements of Income for the years ended December 31, 1994, 1993, and
1992............................................................................ II-18
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1994, 1993, and 1992............................................... II-19
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993,
and 1992........................................................................ II-20
Notes to Consolidated Financial Statements......................................... II-21
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Included in Part IV of this report:
Consolidated Financial Statements of Citrus Corp. (50-percent-owned joint venture)
at December 31, 1994, listed on Page IV-7....................................... IV-7
</TABLE>
Financial Statement Schedules have been omitted because they are not
applicable or because the subject matter is either not present or is not present
in amounts sufficient to require submission of the schedule, in accordance with
the instructions contained in Regulation S-X, or the required information is
included in the financial statements or notes thereto.
Financial statements of 50-percent-or-less-owned companies and joint
ventures, other than Citrus Corp., are not presented herein because such
companies and joint ventures do not meet the significance test.
3. EXHIBITS (1)
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------------------------------------------------- ------------------------------
<C> <S> <C>
RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Sonat Inc. Filed as Exhibit 3-(a) to Form
dated May 2, 1994 10-Q of Sonat Inc. for the
quarter ended March 31, 1994
3-(b) By-Laws of Sonat Inc. as amended and in effect Filed as Exhibit 3-(2) to Form
January 1, 1987 10-K of Sonat Inc. for the
year 1991
</TABLE>
- ---------------
(1) Sonat will furnish to requesting security holders any exhibit on this list
upon the payment of a fee of 10c per page up to a maximum of $5.00 per
exhibit. Requests must be made in writing and should be addressed to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham,
Alabama 35202.
IV-1
<PAGE> 72
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------------------------------------------------- ------------------------------
<C> <S> <C>
INSTRUMENTS DEFINING THE
RIGHTS OF SECURITY HOLDERS
4.1 Rights Agreement dated January 23, 1986 between Sonat Filed as Exhibit 4-(1) to Form
Inc. and Manufacturers Hanover Trust Company, as 10-K of Sonat Inc. for the
Rights Agent, with exhibits, as amended by Amendment year 1991
dated July 28, 1988
4.2 Form of Indenture dated June 1, 1986 from Sonat Inc. Filed as Exhibit 4-(1) to
to Manufacturers Hanover Trust Company, Trustee Amendment No. 1 to
Registration No. 33-5947,
dated June 4, 1986
4.3 Form of Indenture dated June 1, 1987 from Southern Filed as Exhibit 4-(1) to
Natural Gas Company to Manufacturers Hanover Trust Registration No. 33-47266 of
Company, Trustee Southern Natural Gas Company
dated April 16, 1992
4.4 $400 Million Note Agreement dated November 3, 1986 Filed as Exhibit 4-(5) to Form
between Citrus Corp. and the Purchasers named therein 10-K of Sonat Inc. for the
year 1990
4.5 Credit Agreement dated as of December 15, 1993 among Filed as Exhibit 4-(5) to Form
Sonat Inc., the Banks named therein, and The Chase 10-K of Sonat Inc. for the
Manhattan Bank (National Association), Chemical Bank year 1993
and Morgan Guaranty Trust Company of New York as Co-
Agents
PRINCIPAL SERVICE AGREEMENTS
OF SOUTHERN NATURAL GAS COMPANY
10.1 Form of Service Agreements, Nos. 866940, 866941 and Filed as Exhibit 10-(2) to
S10710, between Southern Natural Gas Company and Form 10-Q of Sonat Inc. for
Alabama Gas Corporation, effective November 1, 1993 the quarter ended September
30, 1993
10.2 Service Agreements Nos. 901710 and 901711, effective Filed as Exhibit 10.5 to Form
June 1, 1994, and No. 902516, effective October 1, 10-Q of Sonat Inc. for the
1994, between Southern Natural Gas Company and South quarter ended September 30,
Carolina Pipeline Corporation 1994
10.3(a) Service Agreement No. 902470, effective September 1, Filed as Exhibit 10.6 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(b) Service Agreement No. 904460, effective November 1, Filed as Exhibit 10.7 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(c) Service Agreement No. 904461, effective November 1, Filed as Exhibit 10.8 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(d) Service Agreement No. 904480, effective November 1, Filed as Exhibit 10.9 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
</TABLE>
IV-2
<PAGE> 73
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------------------------------------------------- ------------------------------
<C> <S> <C>
10.3(e) Service Agreement No. 904481, effective November 1, Filed as Exhibit 10.10 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(f) Service Agreement No. S20150, effective November 1, Filed as Exhibit 10.11 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
10.3(g) Service Agreement No. S20140, effective November 1, Filed as Exhibit 10.12 to Form
1994, between Southern Natural Gas Company and 10-Q of Sonat Inc. for the
Atlanta Gas Light Company quarter ended September 30,
1994
COMPENSATION PLANS AND
MANAGEMENT CONTRACTS
10.4 Supplemental Benefit Plan of Sonat Inc. as Amended Filed as Exhibit 10-(4) to
and Restated effective February 25, 1993, and (1) Form 10-K of Sonat Inc. for
amendment dated April 28, 1994 year 1993, except (1) which
was filed as Exhibit 10.2 to
Form 10-Q of Sonat Inc. for
quarter ended September 30,
1994
10.5 Executive Award Plan of Sonat Inc. as Amended and Filed as Exhibit 10-(5) to
Restated as of December 3, 1993 Form 10-K of Sonat Inc. for
the year 1993
10.6 Restricted Stock Plan for Directors of Sonat Inc. (as Filed as Exhibit 10-(6) to
Amended and Restated as of September 15, 1993) Form 10-K of Sonat Inc. for
the year 1993
10.7 Performance Award Plan of Sonat Inc. effective as of Filed as Exhibit 10-(7) to
January 27, 1994 Form 10-K of Sonat Inc. for
the year 1993
10.8 Cash Bonus Plan of Sonat Inc. effective as of January Filed as Exhibit 10-(8) to
27, 1994 Form 10-K of Sonat Inc. for
the year 1993
10.9 Sonat Inc. Retirement Plan for Directors as Amended Filed herewith
and Restated as of December 2, 1994
10.10 Executive Severance Agreement dated April 27, 1989 Filed as Exhibit 10-(14) to
between Sonat Inc. and Ronald L. Kuehn, Jr. and (1) Form 10-K of Sonat Inc. for
schedule identifying substantially identical the year 1989 except (1),
Executive Severance Agreements between Sonat Inc. and which was filed as Exhibit
other parties 10-(10) to Form 10-K of Sonat
Inc. for the year 1993
10.11 Directors' Fees Deferral Plan of Sonat Inc. effective Filed as Exhibit 10-(14) to
as of August 15, 1985 Form 10-K of Sonat Inc. for
the year 1990
</TABLE>
IV-3
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------------------------------------------------- ------------------------------
<C> <S> <C>
10.12 Indemnity Agreement dated December 4, 1987 between Filed as Exhibit 10-(11) to
Sonat Inc. and Ronald L. Kuehn, Jr. and schedule Form 10-K of Sonat Inc. for
identifying substantially identical indemnity the year 1992, except (1)
agreements between Sonat Inc. and other directors of which was filed as Exhibit
Sonat Inc. and (1) Indemnity Agreement dated 10.3 to Form 10-Q of Sonat
September 1, 1994 between Sonat Inc. and Adrian M. Inc. for the quarter ended
Tocklin, and (2) Indemnity Agreement dated September September 30, 1994, and (2)
22, 1994 between Sonat Inc. and Donald G. Russell which was filed as Exhibit
10.4 to Form 10-Q of Sonat
Inc. for the quarter ended
September 30, 1994
10.13 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(15) to
Inc. and AmSouth Bank N.A. for Section 415 Retirement Form 10-K of Sonat Inc. for
Plan Benefits and Vesting Benefits under the the year 1991
Supplemental Benefit Plan and Early Retirement
Benefits under the Executive Severance Agreements
10.14 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(16) to
Inc. and AmSouth Bank N.A. for Section 415 Stock Form 10-K of Sonat Inc. for
Purchase Plan Benefits under the Supplemental Benefit the year 1991
Plan
10.15 Trust Agreement dated December 19, 1986 between Sonat Filed as Exhibit 10-(17) to
Inc. and AmSouth Bank N.A. for Benefits under the Form 10-K of Sonat Inc. for
Retirement Plan for Directors the year 1991
10.16 Form of Sonat Inc. Executive Life Insurance Program Filed as Exhibit 10-(20) to
Split Dollar Agreement, Collateral Assignment Form 10-K of Sonat Inc. for
Agreement and Program Description, each dated as of the year 1990 except (1) which
July 1, 1990, with (1) schedule identifying the is filed as Exhibit 10-(16) to
persons participating in such Programs Form 10-K of Sonat Inc. for
the year 1993
OTHER MATERIAL CONTRACTS
10.17 Restated and Amended Joint Venture Agreement dated Filed as Exhibit 10-(22) to
September 1, 1981 between Tennessee Storage Company Form 10-K of Sonat Inc. for
and Southern Gas Storage Company forming Bear Creek the year 1991
Storage Company (with Appendices A-G)
10.18 Service Agreement dated June 1, 1981 with Bear Creek Filed as Exhibit 10-(23) to
Storage Company, and FERC Gas Tariff of Bear Creek Form 10-K of Sonat Inc. for
Storage Company, effective July 1, 1981 the year 1991
10.19 Parents Agreement dated September 15, 1981 from Filed as Exhibit 10-(25) to
Southern Natural Gas Company and Tenneco Inc. in Form 10-K of Sonat Inc. for
favor of Manufacturers Hanover Trust Company and T. the year 1991
C. Crane
10.20 Capital Stock Agreement among Sonat Inc., Enron Filed as Exhibit 10-(26) to
Corp., Houston Natural Gas Corporation and Citrus Form 10-K of Sonat Inc. for
Corp. dated June 30, 1986 the year 1991
</TABLE>
IV-4
<PAGE> 75
<TABLE>
<CAPTION>
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------------------------------------------------- ------------------------------
<C> <S> <C>
10.21 Standby Note Purchase Agreement among Sonat Inc., Filed as Exhibit 10-(23) to
Credit Lyonnais New York Branch, as Administrative Form 10-K of Sonat Inc. for
Agent for the Banks party to the Revolving Credit the year 1993
Agreement with Citrus Corp., and Citrus Corp. dated
December 23, 1993, and the $300 Million Revolving
Credit Agreement dated as of December 23, 1993, among
Citrus Corp., as Borrower, and The Banks named
therein, as Banks, and Credit Lyonnais New York
Branch and The Toronto-Dominion Bank, as Managing
Agents, to which the Standby Note Purchase Agreement
applies
11 Sonat Inc. and Subsidiaries Computation of Earnings Filed herewith
Per Share
12 Computation of Ratio of Earnings to Fixed Charges Filed herewith
21 Subsidiaries of Sonat Inc. Filed herewith
22 Proxy Statement of Sonat Inc. dated as of March 15, Filed herewith
1995 (which is not to be deemed "filed" as part of
the Form 10-K, except to the extent incorporated by
reference under Items 10, 11, 12 and 13 of Part III
of the Form 10-K of Sonat Inc. for the year 1994)
23 Consent of Ernst & Young LLP, Independent Auditors Filed herewith
dated March 24, 1995
24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Filed herewith
Thomas W. Barker, Jr.; James A. Rubright; Ronald B.
Pruet; and John C. Griffin to sign the Sonat Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, on behalf of certain directors and
officers of the registrant
27 Financial Data Schedule for the period ended December Filed electronically with the
31, 1994 Securities and Exchange
Commission
</TABLE>
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Sonat and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of Sonat and its subsidiaries on a consolidated basis. Sonat
agrees to furnish a copy of each such instrument to the Commission upon request.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1994.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K and filed with this report
on Form 10-K accompany this report in a separate exhibit volume.
IV-5
<PAGE> 76
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
By /s/ RONALD L. KUEHN, JR.
------------------------------------
RONALD L. KUEHN, JR.
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: March 28, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------------- ----------------------------- ---------------
<C> <S> <C>
(i) Principal Executive Officer:
/s/ RONALD L. KUEHN, JR. Chairman of the Board March 28, 1995
- ----------------------------------------------- President and Chief
RONALD L. KUEHN, JR. Executive Officer
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Vice President -- Finance and March 28, 1995
- ----------------------------------------------- Treasurer
THOMAS W. BARKER, JR.
Principal Accounting Officer:
/s/ RONALD B. PRUET, JR. Vice President and Controller March 28, 1995
- -----------------------------------------------
RONALD B. PRUET, JR.
(iii) Directors:*
RONALD L. KUEHN, JR.
WILLIAM O. BOURKE
JOHN J. CREEDON
ROBERTO C. GOIZUETA
ROBERT J. LANIGAN
CHARLES MARSHALL
BENJAMIN F. PAYTON
JOHN J. PHELAN, JR.
JEROME J. RICHARDSON
DONALD G. RUSSELL
L. EDWIN SMART
ADRIAN M. TOCKLIN
JAMES B. WILLIAMS
JOE B. WYATT
*Signed on behalf of each of these persons:
By /s/ JAMES A. RUBRIGHT
--------------------------------------------
JAMES A. RUBRIGHT
VICE PRESIDENT AND GENERAL COUNSEL
AS AUTHORIZED BY CERTAIN
POWERS OF ATTORNEY DATED
FEBRUARY 23, 1995, AND ONE DATED
MARCH 4, 1995 ALL OF WHICH
ARE FILED HEREWITH AS EXHIBIT 24
</TABLE>
IV-6
<PAGE> 77
CITRUS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Report of Ernst & Young LLP, Independent Auditors IV-8
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - Assets IV-9
Consolidated Balance Sheets - Liabilities and Stockholders' Equity IV-10
Consolidated Statements of Operations and Retained Earnings IV-11
Consolidated Statements of Cash Flows IV-12
Notes to Consolidated Financial Statements IV-13
</TABLE>
IV-7
<PAGE> 78
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Citrus Corp.
We have audited the accompanying consolidated balance sheets of Citrus Corp.
and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations and retained earnings and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Citrus
Corp. and Subsidiaries at December 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Birmingham, Alabama
February 24, 1995
IV-8
<PAGE> 79
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
December 31,
-----------------------
(In Thousands) 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 78,068 $ 9,455
Trade and other receivables
Customers, net 45,628 42,869
Affiliated companies 752 2,017
Contract reformation costs, net 29,749 33,919
Commodity adjustment costs 5,399 --
Materials and supplies 1,955 5,281
Other 228 250
-----------------------
Total Current Assets 161,779 93,791
-----------------------
Deferred Charges
Unamortized debt expense 9,736 3,243
Contract reformation costs, net 32,832 54,412
Commodity adjustment costs 45,628 --
Other 15,691 18,831
-----------------------
Total Deferred Charges 103,887 76,486
-----------------------
Property, Plant and Equipment, at cost 2,593,533 1,737,701
Less - accumulated depreciation and amortization 358,396 334,708
-----------------------
Net Property, Plant and Equipment 2,235,137 1,402,993
-----------------------
TOTAL ASSETS $2,500,803 $1,573,270
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-9
<PAGE> 80
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31,
-----------------------
(In Thousands) 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks and current maturities of long-term debt $ -- $ 305,000
Accounts payable
Trade 36,015 44,383
Affiliated companies 27,018 48,071
Accrued liabilities
Interest 18,342 9,951
Income taxes 4,856 --
Other taxes 1,341 1,358
TCR deferred revenues 21,258 --
Other 17,985 8,926
-----------------------
Total Current Liabilities 126,815 417,689
-----------------------
Long-Term Debt 1,125,000 395,000
Deferred Credits
Deferred income taxes 444,250 418,673
TCR deferred revenues 45,034 --
Other 46,628 1,941
-----------------------
Total Deferred Credits 535,912 420,614
-----------------------
Commitments and Contingencies (Notes 8 and 9)
Stockholders' Equity
Common stock, $1 par value; 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 634,271 316,271
Retained earnings 78,804 23,695
-----------------------
Total Stockholders' Equity 713,076 339,967
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,500,803 $1,573,270
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-10
<PAGE> 81
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
(In Thousands) 1994 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gas sales $ 305,350 $ 407,977 $ 434,153
Gas transportation 172,112 141,725 115,986
Other -- 24,600 --
-----------------------------------
477,462 574,302 550,139
-----------------------------------
Costs and Expenses
Natural gas purchased 294,670 405,920 402,711
Operations and maintenance 63,365 63,228 62,016
Depreciation and amortization 63,737 59,896 62,842
Taxes-other than income taxes 8,506 8,526 8,154
-----------------------------------
430,278 537,570 535,723
-----------------------------------
Operating Income 47,184 36,732 14,416
-----------------------------------
Other Income (Expense)
Interest expense, net (55,760) (51,842) (51,993)
Allowance for funds used during construction 98,114 2,712 1,042
Other, net 58 907 1,265
-----------------------------------
42,412 (48,223) (49,686)
-----------------------------------
Income (Loss) Before Income Tax 89,596 (11,491) (35,270)
Income Tax Expense (Benefit) 34,487 4,641 (13,153)
-----------------------------------
Net Income (Loss) 55,109 (16,132) (22,117)
Retained Earnings, Beginning of Year 23,695 39,827 61,944
-----------------------------------
Retained Earnings, End of Year $ 78,804 $ 23,695 $ 39,827
- ------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-11
<PAGE> 82
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
(In Thousands) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ 55,109 $ (16,132) $ (22,117)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 63,737 59,896 62,842
Deferred income taxes 25,577 4,641 (9,941)
Allowance for funds used during construction (98,114) (2,712) (1,042)
Changes in assets and liabilities
Trade and other receivables (1,494) 9,763 (4,196)
Materials and supplies 3,326 4,270 2,859
Accounts payable (29,421) 11,040 (41,116)
Accrued liabilities 13,230 771 (93)
Other current assets and liabilities 9,081 (3,175) (1,357)
Contract reformation settlements and adjustments (8,169) (18,802) (68,751)
Other, net (49,960) (22,442) 5,541
-----------------------------------
Net Cash Provided by (Used in) Operating Activities (17,098) 27,118 (77,371)
-----------------------------------
Cash Flows From Investing Activities
Additions to property, plant and equipment (855,832) (110,615) (23,731)
Allowance for funds used during construction 98,114 2,712 1,042
Disposition of property, plant and equipment, net (2,024) (696) 491
-----------------------------------
Net Cash Used in Investing Activities (759,742) (108,599) (22,198)
-----------------------------------
Cash Flows From Financing Activities
Short-term bank borrowings, net (275,000) 120,000 129,800
Proceeds from issuance of long-term debt 790,000 -- --
Payment of long-term debt (90,000) (30,000) (30,000)
TCR proceeds 86,313 -- --
TCR payments (20,021) -- --
Hedging proceeds 36,161 -- --
Equity contribution from shareholders 318,000 -- --
-----------------------------------
Net Cash Provided by Financing Activities 845,453 90,000 99,800
-----------------------------------
Increase in Cash and Cash Equivalents 68,613 8,519 231
Cash and Cash Equivalents, Beginning of Year 9,455 936 705
-----------------------------------
Cash and Cash Equivalents, End of Year $ 78,068 $ 9,455 $ 936
- ------------------------------------------------------------------------------------------------------
Additional cash flow information
The Company made the following interest and income tax payments:
Interest (net of amounts capitalized) $ 58,180 $ 54,510 $ 55,377
Income taxes paid (received) 4,054 (2,149) (2,064)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-12
<PAGE> 83
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) REPORTING ENTITY
Citrus Corp. (the Company), a holding company formed during 1986,
owns 100% of the stock of Florida Gas Transmission Company
(Transmission) and Citrus Trading Corp. (Trading). The stock of the
Company is owned 50% by Sonat Inc. (Sonat) and 50% by Houston Pipe
Line Company, a subsidiary of Enron Corp. (Enron).
Transmission, an interstate gas pipeline, is engaged in the
interstate transmission and sale of natural gas, and is subject to the
jurisdiction of the Federal Energy Regulatory Commission (FERC).
Trading is engaged in the sale of natural gas primarily to Florida
Power & Light Co., a large electric utility in the state of Florida,
to local distribution customers, and to end users.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers as cash
equivalents all highly liquid short-term investments with original
maturities of three months or less. These investments are accounted
for at cost, which approximates estimated fair value.
MATERIALS AND SUPPLIES - Materials and supplies are valued at
actual cost. Materials transferred out of warehouses are priced out at
average cost.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the
risks of price fluctuations, Trading follows the practice of entering
into swap agreements in certain energy products. All related gains and
losses are recognized currently in income as adjustments to costs and
expenses. Trading uses the settlement method of accounting for its
commodity swaps and the Company uses the deferral method for its
interest-rate swaps. Commodity swaps are settled monthly and gains and
losses are recognized immediately. The effects of commodity swaps are
recorded as an adjustment to natural gas purchased. The current year
interest-rate swaps have been closed and the termination gain has been
deferred in other deferred credits in the consolidated balance sheet
at December 31, 1994, to be amortized against interest expense over
the portion of the debt agreement associated with the swaps. Fees
associated with these transactions have been expensed as incurred.
DEPRECIATION, AMORTIZATION AND MAINTENANCE POLICIES - The Company
amortizes that portion of its investment in Transmission and other
subsidiaries which is in excess of historical cost (acquisition
adjustment) on a straight-line basis at an annual rate of 1.9% based
upon the estimated remaining useful life of the pipeline system.
Transmission has provided for depreciation of assets on a
straight-line basis at an annual composite rate of .75%, 3.06% and
3.16% for 1994, 1993 and 1992, respectively. Depreciation rates are
based on the estimated useful lives of the individual assets.
In 1994, Transmission changed its depreciation rate applicable to
its mainline transportation assets to better reflect its remaining
useful life. The effect of the change was a reduction in depreciation
and amortization expense of $13.3 million in 1994. During the third
quarter of 1993, the Company changed its depreciation rate applicable
to the acquisition adjustment to better reflect its remaining useful
life. The effect of the change was a reduction in depreciation and
amortization expense of $5.6 million in 1993.
IV-13
<PAGE> 84
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
In 1994, Trading entered into an agreement with a major customer
which provides significant future benefits over previous gas sales
contracts. The agreement requires Trading to make approximately $55
million in deposits on the customers behalf over sixteen months ending
in August 1995. Trading is amortizing the total amounts paid on a
volumetric basis over the term of the new agreement. Amortization of
these payments is included in depreciation and amortization expense.
Transmission amortizes contract reformation costs based on volume
deliveries and FERC-approved recovery rates. Such amortization is
included in depreciation and amortization expense.
The Company charges to maintenance the costs of repairs and
renewal of items determined to be less than units of property. Costs
of replacements and renewals of units of property are capitalized. The
original costs of units of property retired are charged to the
depreciation reserves, net of salvage and removal costs.
INCOME TAXES - The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards (SFAS) No.
109. SFAS No. 109 provides for an asset and liability approach for
accounting for income taxes. Under this approach, deferred tax assets
and liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax
bases.
RECLASSIFICATIONS - Certain items on the consolidated financial
statements have been reclassified in 1993 and 1992 to conform with the
1994 presentation.
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt outstanding at December 31, 1994 and 1993 was as
follows (in thousands):
<TABLE>
<CAPTION>
Citrus Corp. 1994 1993
------------ ---------- ----------
<S> <C> <C>
11.10% Notes due 1998-2006 $ 175,000 $ 175,000
9.70% Notes due 1994-1996 -- 90,000
8.49% Notes due 2007-2009 90,000 --
---------- ----------
265,000 265,000
---------- ----------
Transmission
------------
7.75% Notes due 1997 100,000 --
9.30% Notes due 1998 25,000 25,000
8.14% Notes due 1999 200,000 --
9.75% Notes due 1999-2008 65,000 65,000
8.63% Notes due 2004 250,000 --
10.11% Notes due 2009-2013 70,000 70,000
9.19% Notes due 2005-2024 150,000 --
---------- ----------
860,000 160,000
---------- ----------
Total Long-Term Debt 1,125,000 425,000
Less Current Maturities -- 30,000
---------- ----------
Total Long-Term Debt, Net of Current Maturities $1,125,000 $ 395,000
========== ==========
</TABLE>
IV-14
<PAGE> 85
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued)
Annual maturities and sinking fund requirements on long-term debt
outstanding as of December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1995 $ --
1996 --
1997 100,000
1998 44,250
1999 225,750
Thereafter 755,000
----------
$1,125,000
==========
</TABLE>
The Company has a note agreement that contains certain
restrictions which, among other things, limits the incurrence of
additional debt, the sale of assets and the payment of dividends. The
agreements relating to Transmission's promissory notes include, among
other things, restrictions as to the payment of dividends.
The Company had no committed lines of credit at December 31, 1994.
Transmission has a committed line of credit of $70.0 million and
uncommitted bid note facilities for up to $45.0 million, all of which
were available at December 31, 1994.
In April 1994, Transmission entered into an agreement in which it
transferred the rights to future cash flows from collections of
certain transportation surcharge receivables relating to the recovery
of contract reformation costs. Transmission received $86.3 million
relating to the transfer of rights to future cash flows. The Company's
TCR deferred revenues on the consolidated balance sheet at December
31, 1994 are collateralized by transportation surcharge receivables
included in contract reformation costs.
(4) INCOME TAXES
The principal components of the Company's net deferred income tax
liabilities at December 31, 1994 and 1993 are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryforward $ 5,013 $ 24,928
Other 29,077 5,568
--------- ---------
34,090 30,496
--------- ---------
Deferred income tax liabilities
Depreciation and amortization 436,712 420,155
Contract reformation costs 37,181 25,713
Other 4,447 3,301
--------- ---------
478,340 449,169
--------- ---------
Net deferred income tax liabilities $ 444,250 $ 418,673
========= =========
</TABLE>
IV-15
<PAGE> 86
(4) INCOME TAXES (continued)
Total income tax expense (benefit) for the years ended December
31, 1994, 1993 and 1992 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Payable currently
Federal $ 7,000 $ -- $ (2,758)
State 1,910 -- --
-------- -------- --------
8,910 -- (2,758)
-------- -------- --------
Payment deferred
Federal 21,882 (5,091) (8,604)
State 3,695 (347) (1,791)
-------- -------- --------
25,577 (5,438) (10,395)
-------- -------- --------
Effect of tax rate increase on
deferred tax liability -- 10,079 --
-------- -------- --------
Total income tax expense (benefit) $ 34,487 $ 4,641 $(13,153)
======== ======== ========
</TABLE>
The differences between taxes computed at the U.S. federal
statutory rate and the Company's effective tax rate for the years
ended December 31, 1994, 1993 and 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax provision $ 31,359 $ (4,022) $(11,992)
Net state income taxes 3,063 (226) (1,183)
Tax rate increase -- 10,079 --
Revision of prior years' tax estimates -- (1,200) --
Other 65 10 22
-------- -------- --------
Income tax expense (benefit) $ 34,487 $ 4,641 $(13,153)
======== ======== ========
</TABLE>
The Company has a consolidated net operating loss carryforward for
tax purposes of approximately $13 million. This loss carryforward will
be available until 2008, at which time it will begin to expire. For
financial statement purposes, the Company has recognized the benefit
of this loss carryforward by a reduction of deferred tax liabilities.
(5) EMPLOYEE BENEFIT PLANS
Enron maintains a retirement plan (the Enron Plan) which is a
noncontributory defined benefit plan covering substantially all
employees in the United States and certain employees in foreign
countries. Through December 31, 1994, participants in the Enron Plan
with five years or more of service are entitled to retirement benefits
based on a formula that uses a percentage of final average pay and
years of service. Pension expenses charged to the Company by Enron
were $.2, $.4 and $.3 million for 1994, 1993 and 1992, respectively.
Enron amended the Enron Plan providing, among other things, that
all employees become fully vested in retirement benefits earned
through December 31, 1994, and effective January 1, 1995, temporarily
suspended accruals under the Enron Plan in connection with Enron's
decision to change the benefits formula effective January 1, 1996.
IV-16
<PAGE> 87
(5) EMPLOYEE BENEFIT PLANS (continued)
Enron maintains a noncontributory employee stock ownership plan
(ESOP) which covers all eligible employees. Allocations to individual
employees' retirement accounts within the ESOP offset a portion of
benefits earned under the Enron Plan. To the extent allocations to the
individual employees' retirement account within the ESOP exceed
accrued benefits under the Enron Plan at the date of retirement, the
individual employees receive the additional shares.
As of September 30, 1994, the most recent valuation date, the
actuarial present value of projected plan benefit obligations for the
Enron Plan in which the employees of the Company participate was less
than the plan net assets by approximately $18.9 million. The assumed
discount rate and rate of return on plan assets used in determining
the actuarial present value of projected plan benefits were 8.0% and
10.5%, respectively. The assumed rate of increase in wages was 4.0%.
In addition to providing pension benefits, Enron also provides
certain health care and life insurance benefits to eligible employees
(and their eligible surviving spouses) who retire under the Enron
Plan. Benefits are provided under the provisions of a contributory
defined dollar benefit plan.
Effective January 1, 1993, Enron adopted the provisions of SFAS
No. 106 "Employers Accounting for Postretirement Benefits Other Than
Pensions". SFAS No. 106 requires that employers providing
postretirement benefits accrue those costs over the service lives of
the employees expected to be eligible to receive such benefits. Enron
has elected the prospective transition approach and is amortizing the
transition obligation which existed at January 1, 1993, over a period
of approximately 19 years. The Company's net periodic postretirement
benefit cost charged by Enron were $.8 and $.7 million for 1994 and
1993, respectively, substantially all of which relates to Transmission
and is expected to be recovered through rates. The measurement of the
accumulated postretirement benefit obligation (APBO) assumes a 8%
discount rate and a health care cost trend rate of 12.3% in 1994
decreasing to 5% by the year 2006 and beyond. The APBO exceeded plan
assets by $103.6 million as of its most recent valuation date of
December 31, 1994.
(6) MAJOR CUSTOMERS
Revenues from individual customers exceeding 10% of total revenues
for the years ended December 31, 1994, 1993 and 1992 were
approximately as follows (in thousands):
<TABLE>
<CAPTION>
Customers 1994 1993 1992
--------- -------- -------- --------
<S> <C> <C> <C>
Florida Power & Light Co. $267,000 $263,000 $269,000
Peoples Gas System, Inc. 36,000 55,000 65,000
</TABLE>
At December 31, 1994, the Company's subsidiaries had receivables
of approximately $19.6 and $3.0 million from Florida Power & Light Co.
and Peoples Gas System, Inc., respectively.
(7) RELATED PARTY TRANSACTIONS
The Company incurred corporate administrative expenses including
employee benefit costs from Enron and its affiliates. The Company was
charged approximately $17.4, $14.8 and $12.1 million for these
expenses for the years ended December 31, 1994, 1993 and 1992,
respectively.
IV-17
<PAGE> 88
(7) RELATED PARTY TRANSACTIONS (continued)
The Company's subsidiaries provide natural gas sales and transport
services to Enron and Sonat affiliates at rates equal to rates charged
to non-affiliated customers in the same class of service. Revenues
related to these services amounted to approximately $9.1, $13.0 and
$4.3 million for the years ended December 31, 1994, 1993 and 1992,
respectively. The Company's subsidiaries purchased gas from affiliates
of Sonat of approximately $22.0, $10.8 and $8.8 million for the years
ended December 31, 1994, 1993 and 1992, respectively. The Company's
subsidiaries also purchased gas from affiliates of Enron of
approximately $139.4, $31.1 and $41.4 million for the years ended
December 31, 1994, 1993 and 1992, respectively.
The Company has an agreement with an affiliate of Enron in which
the affiliate manages the operations of Trading in exchange for a $1.2
million annual fee.
(8) RATE MATTERS
Transmission was authorized by the FERC in April 1989, to recover
via a volumetric surcharge certain take-or-pay buy-out and buy-down
costs billed by Southern Natural Gas Company (Southern Fixed Charges)
and paid by Transmission. On May 31, 1994, the Southern Fixed Charges
billed to Transmission ceased. Transmission's recovery mechanism was
suspended effective June 1, 1994, pending a determination of the
status of actual collections and remaining balances to be refunded to
or collected from Transmission's customers. On September 12, 1994,
Transmission filed tariff sheets to reinstate its flow-through billing
mechanism effective November 1, 1994. The September 12 filing included
schedules detailing the outstanding Southern Fixed Charge account
balances owed Transmission at May 31, 1994, by customer, totaling
approximately $7.2 million. In an order issued October 28, 1994, the
FERC accepted the tariff sheets, subject to refund and conditions, and
directed Transmission to provide additional information and
documentation. Supplemental filings were made November 14, 1994, to
comply with the October 28 order and to correct certain minor errors
contained in the September 12 filing. Several parties have requested
rehearing of the October 28 order. These requests are currently
pending before the FERC.
Transmission has been authorized by the FERC to recover certain
transition costs incurred through the reformation of gas supply
contracts related to Transmission's former sales services. The Order
No. 636 restructuring settlement, effective November 1, 1993, allows
Transmission to recover 100% of any such transition costs between $106
million and $160 million and 75% of payments exceeding $160 million.
Transmission has made payments totaling $134 million through December
31, 1994. It is possible that additional payments to suppliers may be
made to resolve gas purchase contract issues. However, to the extent
additional payments are made, management believes that these costs
will be 100% recoverable through Transmission's existing tariff
mechanisms.
By orders issued January 15, 1993, April 21, 1993 and September
15, 1993, the FERC approved the Stipulation and Agreement filed in
Docket Nos. CP92-182, et al. on August 25, 1992 and authorized
Transmission to construct and operate a major expansion of its system
(Phase III Expansion). These orders also authorized Transmission to
provide firm transportation service through the expanded capacity
pursuant to a new firm transportation rate schedule, FTS-2.
Construction was completed and service under FTS-2 commenced March 1,
1995.
On December 30, 1994, Transmission made a Section 4 rate filing
proposing an increase in its annual revenues, exclusive of the Phase
III Expansion, of approximately $9.7 million. In an order issued
January 31, 1995, the FERC accepted and suspended the filing to be
effective July 1, 1995, subject to refund and certain conditions.
IV-18
<PAGE> 89
(9) COMMITMENTS AND CONTINGENCIES
In late 1994, the FERC's Division of Audits completed a compliance
review of Transmission's books and records for the time periods
January 1, 1991 through December 31, 1993. Among other things, the
FERC auditors questioned certain aspects of Transmission's procedures
for accounting for the costs of financing Transmission's Phase III
expansion facilities. The Company's management does not believe
ultimate resolution of these compliance issues will have a material
effect on the Company's results of operations or financial position.
(10) CONCENTRATIONS OF CREDIT RISK AND OTHER FINANCIAL INSTRUMENTS
The Company and its subsidiaries have a concentration of customers
in the electric and gas utility industries. These concentrations of
customers may impact the Company's overall exposure to credit risk,
either positively or negatively, in that the customers may be
similarly affected by changes in economic or other conditions. Credit
losses incurred on receivables in these industries compare favorably
to losses experienced in the Company's receivable portfolio as a
whole. The Company and its subsidiaries also have a concentration of
customers located in the southeastern United States, primarily within
Florida. Receivables are generally not collateralized. The Company's
management believes that the portfolio of receivables, which includes
local distribution companies and municipalities, is well diversified
and that such diversification minimizes any potential credit risk.
The carrying amounts and fair value of the Company's financial
instruments at December 31, 1994 and 1993, are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract reformation costs $ 62,581 $ 62,581 $ 88,331 $ 88,331
Notes payable to banks -- -- 275,000 275,000
TCR deferred revenues 66,292 66,292 -- --
Long-term debt
(including current maturities) 1,125,000 1,156,375 425,000 512,532
</TABLE>
The carrying amount of contract reformation costs, notes payable
to banks and TCR deferred revenues reasonably approximate their fair
value. The fair value of long-term debt is based upon market
quotations of similar debt at interest rates currently available.
(11) PRICE RISK MANAGEMENT
In August 1990, Trading entered into a price swap agreement to
effectively manage approximately 10% of the market risk caused by
fluctuations in the price of natural gas and residual fuel oil. The
agreement provides a hedge on 41,000 MMBtu of natural gas and 5,000
barrels of residual fuel oil per day. The agreement requires Trading
to make payments to (or receive payments from) the other party based
upon the differential between a fixed and a floating price for natural
gas and residual fuel oil as specified in the agreement. The current
swap agreement is effective for a period of five years beginning
August 1, 1990.
Additionally, in May 1994, the Company entered into an offsetting
swap agreement with an affiliate of Enron, the term of which coincides
with the remaining life of the previously referenced swap.
IV-19
<PAGE> 90
(11) PRICE RISK MANAGEMENT (continued)
The Company's after-tax results of operations for the years ended
December 31, 1994, 1993 and 1992 included net gains of $5.5 ($2.4
million of this amount is from an affiliate of Enron), $4.6 and $1.1
million, respectively, related to these agreements. Under the swap
agreements, Trading effectively pays a fixed price of $13.75 per
barrel and receives a fixed price of $20.135 per barrel for residual
fuel, and pays a fixed price of $2.381 per mcf and receives a fixed
price of $2.042 mcf for natural gas.
The Company entered into two off-balance-sheet transactions
involving interest-rate swaps in 1994. The Company's objective in
managing interest rate exposure was to control interest rate risk
associated with its then anticipated $700 million private debt
placement for construction of Phase III facilities. Management's
strategy with regards to interest-rate swaps was to limit the impact
of changes in interest rates on this specific private debt placement
only.
The Company's interest-rate swaps modified the interest
characteristics of the then anticipated private debt placement from an
unknown to a fixed-basis interest rate. These agreements involved the
placement of a fixed rate on anticipated tranches of the principal
amount of the debt without an exchange of the underlying principal
amount. The approximately $36 million differential paid to the Company
was received in November 1994, when the Company effected the placement
of the debt and closed out the swaps.
The Company is exposed to credit loss in the event of
nonperformance by counterparties on interest-rate and commodity swaps.
The counterparty involved in the interest-rate swap has already
performed and the Company does not anticipate nonperformance by other
counterparties. The amount of such exposure is generally the
unrealized gain on such contracts.
IV-20
<PAGE> 91
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1994
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
I-5 Map of the Southwestern and Southcentral United States (Texas, Oklahoma,
Arkansas, Louisiana, Mississippi and Alabama) generally showing the gas
reserve basins and areas in which Exploration has significant lease
interests. These leases are described in the charts on page I-4.
I-18 Map of the Southeastern United States showing the approximate location of
the pipeline systems of Southern and Florida Gas (including Phase III) (as
described on pages I-7, I-14, I-15, and I-16), the underground storage
facilities of Southern (as described on page I-7), and Southern Energy's
LNG terminal (as discussed on page I-15).
</TABLE>
<PAGE> 1
EXHIBIT 10.9
SONAT INC.
RETIREMENT PLAN
FOR DIRECTORS
(as amended and restated as of December 2, 1994)
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;
<PAGE> 2
(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
December 2, 1994, 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 December 2, 1994, such director's retirement
income shall be paid as a lump-sum payment as provided in Paragraph 4 below
("Lump-Sum Payment") 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 retirement income paid as a
term-certain annuity as provided for in Paragraph 5 below ("Term-Certain
Annuity"), in which case such income shall be paid as specified in such
election.
- 2 -
<PAGE> 3
4. AMOUNT AND PAYMENT OF RETIREMENT INCOME AS LUMP-SUM FORM PAYMENT
Upon the retirement of an eligible director who is entitled to receive
his retirement income as a Lump-Sum Payment, 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 date of payment) 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 7-12 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 second
preceding business day before the first business day of the
calendar quarter next following 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 such
second preceding business day, the discount rate shall be the
yield on substantially similar securities on such
- 3 -
<PAGE> 4
second preceding business day as determined by AmSouth Bank
N.A. upon the request of the director or his beneficiary (as
the case may be).
(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 or election as an officer
occurs prior to the end of a calendar quarter, for purposes of
this Paragraph 4 he will be deemed to have served as a
non-officer director until the end of such quarter.
The cash lump-sum payment calculated and made pursuant to this
Paragraph 4 shall be paid on the first business day of the calendar quarter
next following the date of the director's retirement.
5. AMOUNT AND PAYMENT OF RETIREMENT INCOME PAID AS TERM-CERTAIN ANNUITY
Upon the retirement of an eligible director who is entitled to receive
his retirement income as a Term-Certain Annuity, 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
- 4 -
<PAGE> 5
substantially equal payments for the number of whole calendar quarters (not to
exceed the service period) elected by the director as provided in Paragraph 3.
Such series of payments shall have a present value equal to that of the
Lump-Sum Payment. Payments shall be made quarterly, commencing with the first
business day of the calendar quarter next following the date of the director's
retirement.
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
- 5 -
<PAGE> 6
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 retiremnt income as a
Lump-Sum Payment 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 as either a Lump-Sum Payment or as a Service Period Annuity
(as defined). Effective December 2, 1994, the Plan was amended to provide for
payment of retirement income as either a Lump-Sum Payment or as a Term-Certain
Annuity.
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
- 6 -
<PAGE> 7
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 December 2, 1994.
SONAT INC.
BY: /s/ Beverley T. Krannich
------------------------------------------
Beverley T. Krannich
Vice President-Human Resources and Secretary
- 7 -
<PAGE> 1
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1993 1992
---- ---- ----
(In Thousands Except
Per-Share Amounts)
Primary Earnings Per Share (1)
--------------------------
<S> <C> <C> <C>
Earnings:
Income from Continuing Operations
before Extraordinary Item $141,407 $265,069 $100,962
Income from Discontinued Operations - - 111,447
Extraordinary Loss - (3,829) -
-------- -------- --------
Net Income $141,407 $261,240 $212,409
======== ======== ========
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 87,119 86,703 85,945
Common Stock Equivalents Applicable
to Outstanding Stock Options 951 994 414
-------- -------- --------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 88,070 87,697 86,359
======== ======== ========
Primary Earnings Per Share:
Income from Continuing Operations
before Extraordinary Item $ 1.61 $ 3.02 $ 1.17
Income from Discontinued Operations - - 1.29
Extraordinary Loss - (.04) -
-------- -------- --------
$ 1.61 $ 2.98 $ 2.46
======== ======== ========
</TABLE>
(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 above do not agree
with earnings per share shown on the Consolidated Statements of Income
in Part II.
<PAGE> 1
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS
FROM CONTINUING OPERATIONS TO FIXED CHARGES
TOTAL ENTERPRISE (A)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $154,871 $364,198 $133,728 $ 98,374 $127,811
Fixed charges (see computation below) 125,916 128,468 156,428 175,980 165,021
Less allowance for interest capitalized (6,692) (4,101) (8,422) (7,951) (6,184)
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $274,095 $488,565 $281,734 $266,403 $286,648
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $120,295 $122,204 $149,165 $168,510 $158,550
Rentals(b) 5,621 6,264 7,263 7,470 6,471
-------- -------- -------- -------- --------
$125,916 $128,468 $156,428 $175,980 $165,021
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.2 3.8 1.8 1.5 1.7
======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing joint ventures.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF SONAT INC.
--------------------------
AS OF JANUARY 1, 1995
---------------------
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ------------
<S> <C> <C>
SONAT INC.:
CITRUS CORP. (a) Delaware 50%
SNT REALTY INC. (b) Alabama 100%
SONAT ENERGY SERVICES COMPANY Delaware 100%
Sonat Marketing Company Delaware 100%
Keystone Trading Company Delaware 100%
JV Trading Inc. Delaware 100%
Vail Trading Company Delaware 100%
Sonat Power Inc. (c) Delaware 100%
Pacific Gas Power Inc. Delaware 100%
SONAT EXPLORATION COMPANY Delaware 100%
Crosstex Pipeline, Inc. Texas 100%
Field Gas Gathering Inc. Delaware 100%
Sonat Coal Gas Inc. (d) Delaware 100%
Sonat Minerals Inc. Delaware 100%
Sonat Minerals Leasing Inc. Delaware 100%
</TABLE>
- ------------------------------
Indentations indicate subsidiaries of subsidiaries
<PAGE> 2
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ------------
<S> <C> <C>
SONAT EXPLORATION COMPANY (cont'd.) Delaware 100%
Sonat Texas Gathering Company Delaware 100%
Sonat Oil Transmission Inc. Delaware 100%
Stateline Gas Gathering Company Delaware 100%
SONAT INTEROCEAN (TEXAS) INC. Texas 100%
SONAT SERVICES INC. Alabama 100%
Sonat Services (D.C.) Inc. Delaware 100%
SOUTHERN NATURAL GAS COMPANY Delaware 100%
Peninsula Pipeline Company Delaware 100%
Sonat Gathering Company Delaware 100%
Sonat Intrastate-Alabama Inc. Alabama 100%
Sonat Ventures Inc. (e) Delaware 100%
Sonat NGV Technology Inc. (f) Delaware 100%
South Georgia Natural Gas Company Delaware 100%
Southern Deepwater Pipeline Company (g) Delaware 100%
Southern Energy Company Delaware 100%
Southern Gas Storage Company (h) Delaware 100%
Southern Offshore Pipeline Company (g) Delaware 100%
- 2 -
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ------------
<S> <C> <C>
SONAT OFFSHORE DRILLING INC. (i) Delaware 39.7%
Arcade Drilling as. (j) Norway 24.9%
EPN-Sonat, S.A. de C.V. (k) Mexico 49%
Sonat Norwegian Ventures Inc. Delaware 100%
Sonat Offshore Norway Inc. (l) Delaware 100%
ASIE Sonat Offshore Sdn. Bhd. (m) Malaysia 49%
Sonat Brasocean Servicos
de Perfuracoes Ltd. Brazil 100%
Sonat Offshore do Brasil
Perfuracoes Maritimas Ltda. Brazil 100%
Sonat Offshore USA Inc. Delaware 100%
Sonat Offshore Ventures, Inc. Delaware 100%
Sonat Offshore (U.K.) Inc. Delaware 100%
Sonat Servicos Maritimas Limitada Brazil 100%
Sonat Turnkey Drilling Inc. (n) Delaware 100%
</TABLE>
- 3 -
<PAGE> 4
Notes
- -----
(a) Citrus Corp. owns 100 percent of the stock of Florida Gas Transmission
Company, Florida Intrastate Pipeline Company, Citrus Trading Corp.,
Citrus Industrial Sales Company and Citrus Interstate Pipeline Company.
Houston Natural Gas Company, a subsidiary of Enron Corp., owns the
remaining 50 percent of Citrus Corp.
(b) SNT Realty Inc. has a 50-percent interest in Fifth Avenue Realty Company,
an unincorporated joint venture, the remaining 50 percent of which is
owned by AmSouth Bank N.A.
(c) Sonat Power Inc. has a 50-percent interest in AES/Sonat Power, L.L.C., a
Virginia limited liability company, the remaining 50- percent interest of
which is held by The AES Corp.
(d) Sonat Coal Gas Inc. has a 50-percent interest in Black Warrior Methane
Corp. and Black Warrior Transmission Corp., the remaining 50 percent of
each being owned by Jim Walter Resources, Inc.
(e) Sonat Ventures Inc. ("Ventures") is a 50-percent participant in Florida
Natural Fuels Ltd., a Florida limited partnership, the remaining
50-percent interest of which is held by Suwannee Gas Marketing Inc., a
wholly owned subsidiary of Peoples Gas System, Inc. Florida Natural
Fuels Ltd. has a 67-percent interest in Amoco/Florida Natural Fuels
Partnership, a Florida general partnership, the remaining 33-percent
interest of which is held by Amoco Oil Company. Ventures is also a
50-percent participant in Monarch CNG, an unincorporated joint venture,
the remaining 50 percent of which is held by Midtown NGV, Inc., a wholly
owned subsidiary of Alabama Gas Corporation.
(f) Sonat NGV Technology Inc. is a 33-percent participant in NGV Southeast
Technologies Center, L.L.C., a Georgia limited liability company, the
remaining interests of which are equally held by Georgia Energy Company,
a wholly owned subsidiary of Atlanta Gas Light Company, and Natural Gas
Vehicles Development Company Southeast, Inc., a wholly owned subsidiary
of Natural Gas Vehicles Development Company, Inc.
(g) Southern Deepwater Pipeline Company and Southern Offshore Pipeline
Company each have a 50-percent interest in Sea Robin Pipeline Company, an
unincorporated joint venture.
(h) Southern Gas Storage Company has a 50-percent interest in Bear Creek
Storage Company, an unincorporated joint venture, the remaining 50
percent of which is owned by Tenneco Inc. through its wholly owned
subsidiary, Tennessee Storage Company. Bear Creek Storage Company owns
100 percent of the stock of Bear Creek Capital Corporation.
(i) Sonat Inc. owns approximately 11,252,300 shares of 39.7 percent of the
common stock of Sonat Offshore Drilling Inc. ("Offshore"). The
remainder of the
- 4 -
<PAGE> 5
(i) Sonat Inc. owns approximately 11,252,300 shares of 39.7 percent of the
common stock of Sonat Offshore Drilling Inc. ("Offshore"). The
remainder of the common stock of Offshore is listed on the New York Stock
Exchange and is publicly traded.
(j) Reading & Bates Corporation owns 73.1 percent of Arcada Drilling as. and
the remaining two percent is owned by a number of different persons.
(k) The remaining 51-percent interest in EPN-Sonat, S.A. de C.V. is held by
EPN, S.A. de C.V., a Mexican industrial company.
(l) Sonat Offshore Norway Inc. has a 47.5 percent interest in Partrederiet
Polar Frontier Drilling, a 40-percent interest in Polar A/S, and a
47.5-percent interest in Polar Frontier Drilling A/S, all of which are
Norwegian joint venture partnerships.
(m) The remaining interest in ASIE Sonat Offshore Sdn. Bhd., a Malaysian
joint venture, is owned by ASIE Sdn. Bhd.
(n) Sonat Turnkey Drilling Inc. has a 50-percent interest in Offshore Turnkey
Ventures, a Texas partnership, the remaining 50 percent of which is held
by Petroleum Engineers International Inc.
- 5 -
<PAGE> 1
EXHIBIT 22
SONAT INC.
P. O. BOX 2563, BIRMINGHAM, ALABAMA 35202 TELEPHONE: (205) 325-3800
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 27, 1995
To Our Stockholders:
The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation,
will be held at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane,
Houston, Texas at 9:00 a.m., local time, on Thursday, April 27, 1995, for the
following purposes:
1. To elect four Directors as members of the Board of Directors of the
Company, to serve until the 1998 Annual Meeting of Stockholders and
until their respective successors have been duly elected and qualified.
2. To elect an Auditor of the Company for the ensuing year. The Board of
Directors of the Company has recommended Ernst & Young, the present
Auditor, for election as Auditor (Proposal No. 1).
3. To approve a proposed amendment and restatement of the Executive Award
Plan as outlined in the accompanying Proxy Statement and set forth in
Exhibit A thereto (Proposal No. 2).
4. To approve a Restricted Stock Grant Program under the Executive Award
Plan (Proposal No. 3).
5. To transact such other business as may properly be brought before the
meeting.
Only holders of Common Stock of record at the close of business on March
10, 1995, will be entitled to vote at the meeting.
The meeting may be adjourned from time to time without other notice than by
announcement at the meeting, or any adjournment thereof, and any and all
business for which the meeting is hereby noticed may be transacted at any such
adjournment.
By order of the Board of Directors,
BEVERLEY T. KRANNICH
Secretary
Birmingham, Alabama
March 15, 1995
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
PLEASE COMPLETE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED RETURN ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 2
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS APRIL 27, 1995
This Proxy Statement is furnished in connection with the solicitation of
proxies by Sonat Inc. on behalf of the Board of Directors of the Company, to be
voted at the Annual Meeting of Stockholders, called to be held on Thursday,
April 27, 1995 at 9:00 a.m. at the Ballroom, The Ritz-Carlton Houston, 1919
Briar Oaks Lane, Houston, Texas. Mailing of the Proxy Statement and the
accompanying proxy card to the stockholders is expected to commence on or about
March 17, 1995.
VOTING SECURITIES
As of January 31, 1995, the Company had outstanding 86,351,011 shares of
Common Stock, par value $1.00 per share, which are its only voting securities.
Holders of Common Stock are entitled to one vote for each share held. The Board
of Directors has fixed March 10, 1995, as the record date for the determination
of stockholders entitled to notice of, and to vote at, the Annual Meeting.
THE PROXY
If a proxy is executed properly by a stockholder and is not revoked, it
will be voted at the Annual Meeting in the manner specified on the proxy, or if
no manner is specified, it will be voted "FOR" the election of the four nominees
for Director and "FOR" Proposal No. 1, 2 and 3. The submission of an executed
proxy will not affect a stockholder's right to attend, and to vote in person at,
the Annual Meeting. A stockholder who executes a proxy may revoke it at any time
before it is voted by filing a written revocation with the Secretary of the
Company, executing a proxy bearing a later date or attending and voting in
person at the Annual Meeting.
THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE.
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation provides for the
classification of the Board of Directors into three classes (Class I, Class II
and Class III). Four Class III Directors are to be elected at the Annual Meeting
of Stockholders to serve for a three-year term and until the election and
qualification of their respective successors in office.
The four nominees for election as Class III Directors are John J. Creedon,
Benjamin F. Payton, John J. Phelan, Jr. and L. Edwin Smart. Each of the nominees
has been previously elected as a Director by the stockholders. In the event that
any of the nominees becomes unavailable for any reason, which is not
anticipated, the Board of Directors in its discretion may, unless it has taken
appropriate action to provide for a lesser number of Directors, designate a
substitute nominee, in which event, pursuant to the accompanying proxy, votes
will be cast for such substitute nominee.
Pursuant to the Board's retirement policy, Mr. Creedon would retire from
the Board on the date of the 1997 Annual Meeting of Stockholders, and Mr. Smart
would retire from the Board on the date of the 1996 Annual Meeting of
Stockholders. Upon the retirement of a Director, the Board has the authority to
fill the vacancy on the Board for the remainder of such Director's term.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" JOHN J. CREEDON, BENJAMIN F.
PAYTON, JOHN J. PHELAN, JR. AND L. EDWIN SMART AS CLASS III DIRECTORS.
<PAGE> 3
NOMINEES FOR DIRECTOR -- CLASS III -- TERMS TO EXPIRE 1998
<TABLE>
<S> <C>
- ----------------------- JOHN J. CREEDON, age 70, is the former President and Chief Executive
Officer of Metropolitan Life Insurance Company. He has served as a
Director of the Company since 1987. Mr. Creedon is also a Director
of Melville Corporation, Metropolitan Life Insurance Company, NYNEX
[PHOTO] Corporation, Praxair, Inc., Rockwell International Corporation and
Union Carbide Corporation. Prior to his retirement, Mr. Creedon
served as Chief Executive Officer and as Chairman of the Executive
Committee of the Board of Directors of Metropolitan Life Insurance
Company.
- -----------------------
- ------------------------------------------------------------------------------------------------
- ----------------------- BENJAMIN F. PAYTON, age 62, is President of Tuskegee University, a
position he has held during the past five years. He has served as a
Director of the Company since 1992. Dr. Payton is also a Director of
[PHOTO] AmSouth Bancorporation, ITT Corporation, Liberty Corporation,
Morrison's, Inc., Praxair, Inc. and ITT Sheraton Corporation.
- -----------------------
- ------------------------------------------------------------------------------------------------
- ----------------------- JOHN J. PHELAN, JR., age 63, is the former Chairman of the Board and
Chief Executive Officer of the New York Stock Exchange. He has
served as a Director of the Company since 1990. Mr. Phelan is also a
Director of Avon Products, Inc., Eastman Kodak Company, Merrill
[PHOTO] Lynch & Co., Inc. and Metropolitan Life Insurance Company. During
the past five years prior to his retirement in December 1990, Mr.
Phelan served as Chairman of the Board and Chief Executive Officer
of the New York Stock Exchange.
- -----------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
- ----------------------- L. EDWIN SMART, age 71, serves as counsel to the law firm of Hughes
Hubbard & Reed. He has served as a Director of the Company (or its
predecessor, Southern Natural Gas Company, now a wholly-owned
subsidiary of the Company) since 1967. Mr. Smart is also a Director
[PHOTO] of Flagstar Companies, Inc. and Flagstar Corporation. Prior to his
retirement in April 1987, Mr. Smart served as an executive officer
of Flagstar Corporation (and its predecessor, Transworld
Corporation), Trans World Airlines, Inc. and Hilton International
Co.
- -----------------------
CONTINUING DIRECTORS -- CLASS I -- TERMS EXPIRING 1996
- ----------------------- WILLIAM O. BOURKE, age 67, is Chairman of the Executive Committee of
the Board of Directors and a Director of Reynolds Metals Company, an
aluminum and consumer products company. He has served as a Director
[PHOTO] of the Company since 1990. Mr. Bourke is also a Director of Merrill
Lynch & Co., Inc. and Premark International Inc. During the past
five years prior to his retirement in April 1992, Mr. Bourke served
as an executive officer of Reynolds Metals Company.
- -----------------------
- ------------------------------------------------------------------------------------------------
- ----------------------- ROBERTO C. GOIZUETA, age 63, is Chairman of the Board and Chief
Executive Officer of The Coca-Cola Company, the principal business
of which is the manufacture of soft drinks. He has served as a
Director of the Company since 1981. Mr. Goizueta is also a Director
[PHOTO] of Eastman Kodak Company, Ford Motor Company, SunTrust Banks, Inc.,
Trust Company of Georgia and Trust Company Bank of Georgia, and a
member of the Board of Trustees of Emory University. During the past
five years, Mr. Goizueta has served as an executive officer of The
Coca-Cola Company.
- -----------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
- ----------------------- RONALD L. KUEHN, JR., age 59, is Chairman of the Board, President
and Chief Executive Officer of the Company. He has served as a
Director of the Company since 1981. Mr. Kuehn is also a Director of
[PHOTO] AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation,
Sonat Offshore Drilling Inc. and Union Carbide Corporation, and a
member of the Board of Trustees of Birmingham-Southern College and
Tuskegee University. During the past five years, Mr. Kuehn has
served as an executive officer of the Company.
- -----------------------
- -----------------------------------------------------------------------------------------------
- ----------------------- ROBERT J. LANIGAN, age 66, is Chairman Emeritus of the Board of
Directors of Owens-Illinois, Inc., the principal business of which
is the manufacture and sale of packaging products. He has served as
[PHOTO] a Director of the Company since 1983. Mr. Lanigan is also a Director
of Chrysler Corporation, Sonat Offshore Drilling Inc., The Coleman
Company, Inc. and The Dun & Bradstreet Corporation. During the past
five years prior to his appointment to his current position, Mr.
Lanigan served as an executive officer of Owens- Illinois, Inc.
- -----------------------
- -----------------------------------------------------------------------------------------------
- ----------------------- CHARLES MARSHALL, age 65, is the former Vice Chairman of the Board
of American Telephone and Telegraph Company. He has served as a
Director of the Company since 1982. Mr. Marshall is also a Director
[PHOTO] of Ceridian Corporation, GATX Corporation, Hartmarx Corporation,
Sundstrand Corporation and Zenith Electronics Corporation. Prior to
his retirement in June 1989, Mr. Marshall served as an executive
officer of American Telephone and Telegraph Company.
- -----------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
CONTINUING DIRECTORS -- CLASS II -- TERMS EXPIRING 1997
<TABLE>
<S> <C>
- ----------------------- JEROME J. RICHARDSON, age 58, is Chairman of the Board of Flagstar
Companies, Inc. and Flagstar Corporation (a wholly-owned subsidiary
of Flagstar Companies, Inc.), the principal business of which is
food services. He has served as a Director of the Company since
[PHOTO] 1991. Mr. Richardson is also a Director of NCAA Foundation and
Isotechnologies, Inc., Owner- Founder of the NFL Carolina Panthers,
a trustee of Saint Mary's College and Wofford College and a Member
of the Board of Visitors of Duke University Medical Center. During
the past five years, Mr. Richardson has served as an executive
officer of Flagstar Companies, Inc. and Flagstar Corporation.
- -----------------------
- -------------------------------------------------------------------------------------------------
- ----------------------- DONALD G. RUSSELL, age 63, is Executive Vice President of the
Company and Chairman of the Board and Chief Executive Officer of
Sonat Exploration Company (a wholly-owned subsidiary of the
[PHOTO] Company). On September 22, 1994, he was elected as a Director by the
Board of Directors, effective as of September 22, 1994. Mr. Russell
is also a Director of Grant Geophysical, Inc. and Sonat Offshore
Drilling Inc. During the past five years, Mr. Russell has served as
an executive officer of the Company and Sonat Exploration Company.
- -----------------------
- -------------------------------------------------------------------------------------------------
- ----------------------- ADRIAN M. TOCKLIN, age 43, is President and Chief Operating Officer
and a Director of The Continental Corporation, the principal
business of which is property and casualty insurance. On July 28,
[PHOTO] 1994, she was elected as a Director by the Board of Directors,
effective as of September 1, 1994. During the past five years, Ms.
Tocklin has served as an executive officer of The Continental
Corporation.
- -----------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
- ----------------------- JAMES B. WILLIAMS, age 61, is Chairman of the Board and Chief
Executive Officer of SunTrust Banks, Inc. He has served as a
Director of the Company since 1987. Mr. Williams is also a Director
[PHOTO] of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine
Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC
Energy Services, Inc. During the past five years, Mr. Williams has
served as an executive officer of SunTrust Banks, Inc. and certain
of its subsidiaries.
- -----------------------
- -------------------------------------------------------------------------------------------------
- ----------------------- JOE B. WYATT, age 59, is Chancellor, Chief Executive Officer and
Trustee of Vanderbilt University, a position he has held during the
past five years. He has served as a Director of the Company since
[PHOTO] 1984. Chancellor Wyatt is also a Director of Advanced Network &
Services, Inc., Ingram Industries, Inc., Reynolds Metals Company and
University Research Association, and a Trustee of EDUCOM, Inc.
- -----------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
BOARD MEETINGS AND COMMITTEES
During 1994 the Board of Directors held ten regular and special meetings.
The Board has established Committees which assist the Board in the discharge of
its responsibilities. Each Director attended at least 75% of the meetings of the
Board and the Committees on which he served, except Mr. Phelan, who attended 74%
of such meetings.
Audit Committee. The Audit Committee reviews and reports to the Board the
scope and results of audits by the Auditor and the Company's internal auditing
staff, and reviews with the Auditor the adequacy of the Company's system of
internal controls. It reviews transactions between the Company and its Directors
and officers and Company policies with respect thereto, and compliance with the
Company's business ethics and conflict of interest policies. The Committee also
recommends a firm of certified public accountants to serve as Auditor of the
Company (subject to nomination by the Board and election by the stockholders),
authorizes all audit and other professional services rendered by the Auditor and
periodically reviews the independence of the Auditor.
Membership on the Audit Committee is restricted to those Directors who are
not active or retired officers or employees of the Company. The Company's policy
on Audit Committee membership complies with the Audit Committee Policy Statement
adopted by the New York Stock Exchange. The current members of the Committee are
Mr. Creedon, Chairman, and Mr. Goizueta, Mr. Phelan, Mr. Richardson, Ms. Tocklin
and Mr. Wyatt. The Committee met three times during 1994.
Committee on Directors. The Committee on Directors makes recommendations
to the Board with respect to the size and composition of the Board, Board
retirement and tenure policies, and Director compensation. It also reviews the
qualifications of potential candidates for the Board of Directors, evaluates the
performance of incumbent Directors and recommends to the Board nominees to be
elected at the Annual Meeting of Stockholders. The current members of the
Committee are Mr. Marshall,
6
<PAGE> 8
Chairman, and Mr. Bourke, Dr. Payton, Mr. Phelan, Mr. Richardson and Mr.
Williams. The Committee met five times during 1994.
The Committee on Directors will consider nominees for Director recommended
by stockholders. Such recommendations should be submitted in writing,
accompanied by a resume of the nominee's qualifications and business experience
and a signed statement of the proposed candidate consenting to be named as a
candidate and, if nominated and elected, to serve as a Director, and addressed
to the offices of the Company to the attention of Beverley T. Krannich,
Secretary.
Employee Benefits Committee. The Employee Benefits Committee periodically
reviews the status of the Company's employee benefit programs and the
performance of the managers of the funded programs. To assist in its review, the
Committee meets periodically with the chairmen of the administrative and benefit
asset committees of each of the funded plans. The current members of the
Committee are Mr. Wyatt, Chairman, and Mr. Lanigan, Mr. Marshall, Dr. Payton,
Ms. Tocklin and Mr. Williams. The Committee met twice during 1994.
Executive Compensation Committee. The Executive Compensation Committee
reviews and makes recommendations to the Board with respect to the Company's
overall executive compensation policy. The Committee also reviews and approves
the compensation of the officers of the Company and makes awards under the
Executive Award Plan, Performance Award Plan and Cash Bonus Plan. Membership on
the Executive Compensation Committee is restricted to Directors who are not
active or retired officers or employees of the Company. The current members of
the Committee are Mr. Goizueta, Chairman, and Mr. Bourke, Mr. Lanigan, Mr. Smart
and Mr. Wyatt. The Committee met five times during 1994.
Finance Committee. The Finance Committee approves long-term financial
policies and annual financial plans, significant capital expenditures, insurance
programs and investment policies of the Company. It also makes recommendations
to the Board concerning dividend policy, the issuance and terms of debt and
equity securities and the establishment of bank lines of credit. The current
members of the Committee are Mr. Williams, Chairman, and Mr. Creedon, Mr.
Goizueta, Mr. Lanigan, Mr. Richardson and Mr. Smart. The Committee met three
times during 1994.
Public Affairs Committee. The Public Affairs Committee reviews the
Company's policies and practices which address issues of social and public
concern, such as government affairs, the environment, energy conservation and
charitable contributions. It also reviews stockholder relations and considers
stockholder proposals and matters of corporate governance. The current members
of the Committee are Mr. Smart, Chairman, and Mr. Bourke, Mr. Creedon, Mr.
Marshall, Dr. Payton, Mr. Phelan and Ms. Tocklin. The Committee met three times
during 1994.
Strategic Planning Committee. The Strategic Planning Committee assists in
the formulation of the business strategies of the Company and its subsidiaries
and reviews the Company's management succession plan. The current members of the
Committee are Mr. Lanigan, Chairman, and Mr. Bourke, Mr. Creedon, Mr. Goizueta,
Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Mr. Smart, Ms. Tocklin,
Mr. Williams and Mr. Wyatt. The Committee met twice during 1994.
COMPENSATION OF OUTSIDE DIRECTORS
FEES AND RETAINERS. Each non-employee Director of the Company receives a
quarterly retainer of $8,250 ($9,500 for Committee Chairmen) and a fee of $1,250
for each Board meeting and each Board Committee meeting attended, plus incurred
expenses where appropriate.
Pursuant to the Director's Fees Deferral Plan, a Director may elect to
defer receipt of some or all of the Director's fees and retainer. All amounts
deferred are credited to the Director's account under the Plan. The Director may
invest the Plan balance in "phantom" investments in the Company's common stock
and five mutual funds. The Director may choose to have the account balance
distributed in a lump sum or in annual installments, commencing upon termination
of service as a Director.
7
<PAGE> 9
RETIREMENT PLAN FOR DIRECTORS. Directors of the Company who during some
portion of their service as Directors were not officers of the Company or its
subsidiaries are participants in the Retirement Plan for Directors. An eligible
Director who ceases being a Director after reaching age 70, completing five
years of service as a non-employee Director or as a result of death or permanent
disability, will receive a retirement benefit from the Plan. The Director may
choose to have such benefit paid as either (1) a cash lump sum in an amount
equal to the value of a series of quarterly payments equal to the retainer (as
of the date of the Director's retirement) for the period the Director served as
a non-employee Director of the Company (or its predecessor, Southern Natural Gas
Company) or (2) in a series of quarterly payments with a value equal to such
lump-sum payment.
RESTRICTED STOCK PLAN FOR DIRECTORS. Each non-employee Director of the
Company is a participant in the Restricted Stock Plan for Directors. Each such
Director who was a member of the Board of Directors on April 22, 1993 (the
effective date of the Plan, as amended and restated) was granted 2,000 shares of
restricted stock on such date, except that each Director who is scheduled to
retire from the Board under the Board's retirement policy prior to April 1, 1998
(the Plan's termination date) was granted 400 shares of restricted stock for
each remaining year of service as a Director. The Plan provides that 400 shares
granted to each Director will vest on April 1 of each of the years 1994 through
1998.
Each person who first becomes a non-employee Director after April 22, 1993
will be granted 33.33 shares of restricted stock for each calendar month or
fraction thereof from the Director's election as a non-employee Director to the
following March 31 (rounded to the nearest whole share), plus 400 shares for
each subsequent Plan Year (April 1 -- March 31) until the earlier of April 1,
1998 or the Director's scheduled retirement date. The product of 33.33 shares
times the number of full and partial calendar months from the Director's
election as a non-employee Director to the following March 31 (rounded to the
nearest whole share) will vest on the April 1 following such election, and 400
shares will vest on each April 1 thereafter through April 1, 1998.
All shares of restricted stock will vest immediately upon the Director's
death or disability. At the time the restricted stock vests, the Director will
receive a cash tax-offset "supplemental payment" in an amount equal to the
amount necessary to pay the federal income tax payable with respect to both the
vesting of restricted stock and receipt of the supplemental payment, assuming
the Director is taxed at the maximum effective federal income tax rate. If a
Director leaves the Board of Directors before all of the Director's shares of
restricted stock have vested, the unvested shares will be forfeited.
8
<PAGE> 10
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount and nature of beneficial ownership of
shares of the Common Stock of the Company beneficially owned by the Directors
and certain executive officers of the Company, and by all present Directors and
executive officers of the Company as a group, as of January 31, 1995.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)
------------------------------------------------------- -----------------------
<S> <C>
William O. Bourke...................................... 5,000
John J. Creedon........................................ 13,900(2)
Roberto C. Goizueta.................................... 3,600
Ronald L. Kuehn, Jr. .................................. 669,409(3 and 4)
Robert J. Lanigan...................................... 6,040
Charles Marshall....................................... 7,600
James E. Moylan, Jr. .................................. 54,362(3)
Benjamin F. Payton..................................... 2,461
John J. Phelan, Jr. ................................... 2,660
Jerome J. Richardson................................... 4,882(5)
James A. Rubright...................................... 17,400(3)
Donald G. Russell...................................... 175,212(3)
L. Edwin Smart......................................... 3,600
William A. Smith....................................... 198,677(3)
Adrian M. Tocklin...................................... 1,633(6)
James B. Williams...................................... 15,200
Joe B. Wyatt........................................... 3,200
All Present Directors and Executive Officers as a Group
(21 persons)......................................... 1,349,953(7)
</TABLE>
NOTE 1: Each Director and executive officer has sole voting power and sole
investment power with respect to all shares beneficially owned by such
individual, unless otherwise indicated. As of January 31, 1995, each such
individual beneficially owned less than 0.80% of the outstanding shares of
Common Stock of the Company, and all present Directors and executive officers of
the Company as a group, consisting of 21 persons, beneficially owned 1.56% of
the outstanding shares of the Company's Common Stock.
The number of shares shown includes 1,600 shares of restricted stock for
each of Messrs. Bourke, Goizueta, Lanigan, Marshall, Payton, Phelan, Richardson,
Williams and Wyatt, 1,433 shares of restricted stock for Ms. Tocklin, 1,200
shares of restricted stock for Mr. Creedon, and 800 shares of restricted stock
for Mr. Smart, granted under the Company's Restricted Stock Plan for Directors,
which shares had not vested as of January 31, 1995. Such persons have the power
to vote and receive dividends on such shares, but do not have the power to
dispose of, or to direct the disposition of, such shares until such shares are
vested pursuant to the terms of such plan.
In addition to the shares of Common Stock shown above, as of January 31,
1995, the following individuals also held the following number of "phantom"
shares of the Company's Common Stock under the Company's Supplemental Benefit
Plan (with respect to Messrs. Kuehn and Russell) or Director's Fees Deferral
Plan (with respect to the other named individuals): Mr. Creedon, 5,127 phantom
shares; Mr. Kuehn, 10,501 phantom shares; Mr. Marshall, 348 phantom shares; Mr.
Russell, 4,928 phantom shares; Ms. Tocklin, 672 phantom shares; and Mr.
Williams, 480 phantom shares.
NOTE 2: The number of shares shown for Mr. Creedon includes 3,200 shares
held in trusts for two of his children, of which shares he disclaims any
beneficial ownership.
NOTE 3: The number of shares shown for Messrs. Kuehn, Moylan, Rubright,
Russell and Smith includes 85,700 shares, 7,200 shares, 9,400 shares, 27,000
shares and 17,000 shares, respectively, of restricted stock granted under the
Company's Executive Award Plan, which shares had not vested as of
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<PAGE> 11
January 31, 1995. Such persons have the right to vote and receive dividends on
such shares, but do not have the power to dispose of, or to direct the
disposition of, such shares until such shares are vested pursuant to the terms
of such plan. The number of shares shown for Messrs. Kuehn, Moylan, Rubright,
Russell and Smith also includes (a) 43,565 shares, 9,041 shares, 0 shares, 9,216
shares and 14,771 shares, respectively, held by the Trustee under the Company's
Savings Plan as of January 31, 1995; and (b) 515,600 shares, 35,200 shares,
8,000 shares, 134,000 shares and 157,000 shares, respectively, covered by
options under the Company's Executive Award Plan which were exercisable within
sixty days after January 31, 1995.
NOTE 4: The number of shares shown for Mr. Kuehn includes 7,500 shares
owned by his wife and 1,500 shares held in trust for one of his children, of
which shares he disclaims any beneficial ownership.
NOTE 5: Mr. Richardson filed a late report to the Securities and Exchange
Commission with respect to shares purchased through the automatic quarterly
reinvestments of dividends under the Company's Automatic Dividend Reinvestment
Service during 1991-1993.
NOTE 6: The number of shares shown for Ms. Tocklin includes 100 shares
owned by her husband, of which shares she disclaims any beneficial ownership.
Ms. Tocklin filed a late report to the Securities and Exchange Commission with
respect to her initial ownership of shares of the Company's Common Stock.
NOTE 7: The number of shares shown includes 167,700 shares of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1995; 104,655 shares held by the Trustee under the
Company's Savings Plan as of January 31, 1995; 958,967 shares covered by options
under the Company's Executive Award Plan which were exercisable within sixty
days after January 31, 1995; and 17,833 shares of restricted stock granted under
the Company's Restricted Stock Plan for Directors, which shares had not vested
as of January 31, 1995.
CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS
James B. Williams, a Director of the Company, is Chairman and Chief
Executive Officer of SunTrust Banks, Inc. Trust Company Bank, a subsidiary of
SunTrust Banks, Inc. ("Trust Company"), has extended short-term credit
facilities to the Company and one of its affiliates permitting the borrowing of
an aggregate of $48,400,000. During 1994, there were periodic borrowings and
repayments under these facilities and, at December 31, 1994, there was
$6,700,000 principal amount outstanding thereunder. In addition, the Company and
one of its wholly-owned subsidiaries were permitted to borrow an aggregate of
$38,800,000 pursuant to long-term loan agreements, and were indebted to Trust
Company in the principal amount thereunder of an aggregate of $38,800,000 at
December 31, 1994. A subsidiary of Trust Company also serves as an investment
manager for trusts that fund the Company's retirement, disability and retiree
medical benefits programs.
L. Edwin Smart, a Director of the Company, serves as counsel to the law
firm of Hughes Hubbard & Reed. Hughes Hubbard & Reed provides legal services to
the Company and certain of its subsidiaries.
COMPENSATION OF EXECUTIVE OFFICERS
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Executive Compensation Committee of the Board of Directors of the
Company, which is composed solely of non-employee Directors, administers the
Company's executive compensation program. The Committee's primary responsibility
is to ensure that the executive compensation program furthers the interests of
the Company and its stockholders.
The Company's executive compensation program has three principal
objectives: (1) to attract and retain a highly qualified and motivated
management team; (2) to appropriately reward individual
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<PAGE> 12
executives for their contributions to the attainment of the Company's key
strategic goals; and (3) to link the interests of executives and stockholders
through stock-based plans and performance measures.
The Committee meets with outside consultants at least annually to evaluate
the Company's performance against the performance of a peer group of companies
and to review and compare the level of compensation paid or awarded to key
executives to the compensation practices of the peer group. The peer group used
for determining compensation for corporate executives consists of 19 publicly
held companies in the Company's key business segments and investments -- natural
gas transmission and sales, domestic oil and gas exploration and production, and
offshore drilling (the "Corporate Peer Group"). The aggregate asset mix of the
companies included in the Corporate Peer Group approximates the Company's asset
mix. In comparing the level of the Company's compensation to that of the
companies in the Corporate Peer Group, the Committee reviews an analysis which
"size-adjusts" the compensation paid by a company to take into account the
relative size of the company as measured by its revenues. The recommended
size-adjustment is computed by an independent compensation consulting firm. The
Committee also reviews and may give greater weight to compensation survey data
specific to a particular business segment when considering the compensation of
executive officers whose job is related primarily to a single business segment.
The Standard & Poor's Natural Gas Distribution/Pipeline Group described in the
five-year total stockholder return comparison on page 19 of this Proxy Statement
is not used to determine the compensation of executives, because that group's
aggregate asset mix does not include an appropriate weighting for exploration
and production and offshore drilling.
The key components of the Company's executive compensation program are base
salary, annual cash bonus incentives, and long-term stock incentives. The
Committee's policies with respect to each component of the program, including
the bases for the compensation of Mr. Kuehn, Chairman of the Board, President
and Chief Executive Officer of the Company, are described below. The Committee
consults with Mr. Kuehn in reviewing the individual performance and compensation
of key executives of the Company (other than Mr. Kuehn). The Committee reviews
Mr. Kuehn's performance and compensation in executive session at least annually.
BASE SALARIES. Base salaries are initially established by an evaluation of
the executive's position, responsibilities and experience and a review of salary
surveys. Each year the Committee reviews the base salaries of key executive
officers of the Company and its subsidiaries and determines whether salaries
should be adjusted, based primarily on the executive's individual performance
and experience and salary survey information. In general, the Committee's
objective is to maintain executive salaries at the median of the salaries for
comparable executives in the Corporate Peer Group or other relevant peer group.
Executive salaries for 1994 were at the median level overall, although some
executives were below and some above the median. Taking into consideration Mr.
Kuehn's individual performance and experience and the salary survey data, Mr.
Kuehn's base salary was increased 13%, effective April 1, 1994. Mr. Kuehn has
been in his current position for approximately 10 1/2 years and his salary for
1994 was slightly above the size-adjusted median for the Corporate Peer Group.
ANNUAL CASH BONUS INCENTIVES. Annual cash bonus incentive opportunities
are awarded each year. The amount of an executive's bonus opportunity (which is
expressed as a percentage of base salary) is dependent primarily upon such
individual's position and responsibilities and bonus opportunities provided to
comparable positions within the Corporate Peer Group or other relevant peer
group. At the beginning of each year, the Committee reviews and approves annual
performance goals. Shortly after the end of the year, the Committee determines
the appropriate bonus payout levels based on the degree to which these goals
have been achieved. The annual incentive program is designed to pay total annual
cash compensation in the upper quartile of the relevant peer group when the
Company meets substantially all of the goals established for an executive's
bonus opportunity. Similarly, when the goals are not achieved, the program is
intended to result in total annual cash compensation below the median of the
relevant peer group.
The payout of an executive's 1994 bonus opportunity was based on the level
of achievement of certain financial goals, corporate and subsidiary goals, and
individual goals, as described below. The
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<PAGE> 13
goals for each executive's bonus opportunity were weighted as follows: financial
goals -- 40% for Mr. Kuehn and 25-30% for the other named executive officers;
company and subsidiary goals -- 45% for Mr. Kuehn and 55-60% for the other named
executive officers; and individual goals -- 15% for all executives.
The financial goals included in the 1994 bonus opportunities were the
Company's 1994 earnings per share ("EPS") as compared to EPS targets established
by the Committee, and the Company's five-year average cash flow return on assets
as compared to that of the Corporate Peer Group. In general, these goals were
weighted equally. Payout of the EPS goal was based on comparison of actual EPS
and the EPS targets, provided that a minimum level of EPS was required for any
payout to be made. The payout of the cash flow return on assets goal was based
on the Company's absolute ranking within the Corporate Peer Group and its
performance against the mean of the Corporate Peer Group.
The company and subsidiary goals included in the 1994 bonus opportunities
included operating, marketing and strategic goals relating to each major
business segment, and annual corporate goals relating to safety and the
environment, human resources, and corporate citizenship. Subsidiary goals also
included financial goals with respect to earnings and cash flow. When
appropriate, an executive's goals focused on the company for which he was
primarily employed. Achievement of many of the goals was determined by
quantitative or objective measures, while other goals were subjective in nature.
Each executive's 1994 bonus opportunity included individual goals. Mr.
Kuehn's individual performance is based primarily on the Company's achievement
of its financial and business goals. The Committee also has discretion to make
additional cash bonus awards to recognize exceptional individual performance.
In January 1995, the Committee reviewed in detail the extent to which the
1994 performance goals had been achieved. The Company's EPS was below the EPS
target, while cash flow return on assets was in the upper quartile of the
Corporate Peer Group and significantly above the mean for the Corporate Peer
Group. The payout percentage for these financial goals was 84% of the bonus
opportunity for the EPS goal and 95% of the bonus opportunity for the cash flow
return on assets goal. The Company and its subsidiaries also substantially
achieved key company and subsidiary goals relating to oil and gas production and
reserve replacement, pipeline restructuring, oil and gas marketing, and the
environment. Goals relating to subsidiary earnings were also substantially
achieved, with the exception of the earnings goal of Sonat Exploration Company
(which was not achieved due to decreases in natural gas prices during 1994). The
payout percentages for Company and subsidiary goals ranged from 84% to 95% of
the bonus opportunity for these goals.
Mr. Kuehn's total bonus payout percentage for 1994 was 82.7% of his bonus
opportunity.
LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of
the Company's executive compensation program is designed to align executive and
stockholder interests by rewarding executives for the attainment of stock price
appreciation and total stockholder returns.
As a general rule, the Committee administers the long-term stock incentive
program through annual grants of stock options and restricted stock to certain
executive officers of the Company and its major operating subsidiaries. Awards
under the annual grant program were made in December 1994. In addition, the
Committee may make special awards to individual executives during the year on a
discretionary basis.
In 1994, the number of stock options and restricted shares granted to each
executive officer as part of the annual grant program was determined primarily
by individual position and responsibilities, compensation survey data of the
Company's Corporate Peer Group, and the Company's three-year total stockholder
return (considering stock price appreciation and reinvestment of dividends, and
weighted for most recent performance) as compared to the total stockholder
return of the Corporate Peer Group. The amount of an executive's annual
long-term incentive grant was expressed as a percentage of base salary. The
percentage used for each executive was tied to the Company's total stockholder
return as compared to that of the Corporate Peer Group. In 1994, the Company's
weighted annualized three-year total
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<PAGE> 14
stockholder return was substantially above that of the Corporate Peer Group. The
December 1994 long-term incentive grants were designed to reflect that
performance and to result in long-term compensation in the upper quartile of the
Corporate Peer Group. For purposes of determining the value of long-term
incentive compensation, an independent compensation consulting firm uses a
modified Black-Scholes option pricing model to value stock options granted by
the Company and the companies in the Corporate Peer Group. Similarly, the
consulting firm values restricted share grants based on the present value of the
shares on the date of grant (taking into account the vesting schedules of the
grants and projected executive turnover). The Committee may adjust the grants to
take into account individual performance and the number of options and
restricted shares previously granted to the executive.
In December 1994, Mr. Kuehn was awarded stock options and restricted stock
as a part of the annual program. As discussed above, the amount of this award
was intended to reward and compensate Mr. Kuehn for the excellent performance of
the Company's stock as compared to the Corporate Peer Group and to result in
long-term compensation in the upper quartile of the Corporate Peer Group.
STOCK OWNERSHIP GUIDELINES. In 1992 the Committee established guidelines
designed to encourage key executives of the Company and its subsidiaries to
attain specified levels of stock ownership over a five-year period. Stock
ownership goals are based on the value of the Company's stock, and are expressed
as a multiple of the executive's base salary. The Committee periodically reviews
the guidelines and the executives' progress toward attaining the stock ownership
goals.
POLICY WITH RESPECT TO SECTION 162(m). Section 162(m) of the Internal
Revenue Code, which was enacted in August 1993, limits the tax deduction that
the Company or its subsidiaries can take with respect to the compensation of
certain executive officers, unless the compensation is "performance-based." The
Committee expects that all income recognized by executive officers upon the
exercise of stock options granted under the Executive Award Plan will qualify as
performance-based compensation. The portion of the Company's annual cash bonus
program that is based on objective financial and operating measures, and the
restricted stock grant program, have been modified in an effort to qualify
compensation thereunder as performance-based.
The Committee feels that it should not totally relinquish its
responsibility for compensating management to mechanical formulas. Therefore,
the Committee currently intends to continue to make cash bonus payments that are
based on the achievement of subjective, non-quantifiable goals, and that may
therefore not qualify as performance-based compensation. The Committee believes
that these Company, subsidiary and individual goals, while not properly
measurable by the kind of quantifiable targets that are required to qualify
compensation as performance-based, are important to the long-term financial
success of the Company and to its stockholders.
CONCLUSION. The Committee believes that the executive compensation
philosophy that it has adopted effectively serves the interests of the
stockholders and the Company. It is the Committee's intention that the pay
delivered to executives be commensurate with Company performance.
Roberto C. Goizueta William O. Bourke Robert J. Lanigan
L. Edwin Smart Joe B. Wyatt
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<PAGE> 15
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ending December 31, 1992,
1993 and 1994 the cash compensation paid by the Company, and a summary of
certain other compensation paid or accrued for such years, to certain of the
Company's executive officers (as determined pursuant to the rules of the
Securities and Exchange Commission) (the "named executive officers") for service
in all capacities with the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------- -----------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS (1) AWARDS (2) OPTIONS/SARS (3)
- ------------------------ ----- --------- --------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr., 1994 $ 660,000 $ 450,000 $ 0 $ 459,938(4) 112,000 $103,689
Director, Chairman of 1993 $ 590,000 $ 504,600 $300,362 $ 420,000(5) 110,000 $113,528
the Board, President and 1992 $ 560,000 $ 455,000 $ 0 $1,071,100(6 & 7) 91,600 $117,801
Chief Executive Officer
James E. Moylan, Jr., 1994 $ 200,000 $ 114,300 $ 0 $ 91,988(4) 22,000 $ 18,875
President of 1993 $ 151,875 $ 65,500 $410,888 $ 75,000(5) 21,000 $ 18,467
Southern Natural 1992 $ 142,500 $ 59,700 $ 563 $ 29,575(7) 9,000 $ 16,589
Gas Company(8)
James A. Rubright, 1994 $ 240,625 $ 130,600 $115,572 $ 268,275(4 & 10) 67,500 $ 35,813
Vice President and
General Counsel(9)
Donald G. Russell, 1994 $ 430,000 $ 250,000 $ 0 $ 278,750(4) 66,000 $ 64,790
Executive Vice President 1993 $ 362,500 $ 250,000 $649,292 $ 300,000(5) 65,000 $102,687
1992 $ 340,000 $ 218,000 $ 705 $ 147,875(7) 40,000 $ 70,240
William A. Smith, 1994 $ 342,000 $ 200,000 $ 0 $ 167,250(4) 45,000 $ 38,064
Executive Vice President 1993 $ 313,500 $ 200,000 $530,865 $ 180,000(5) 45,000 $ 41,440
1992 $ 300,000 $ 180,000 $ 1,339 $ 105,625(7) 32,000 $ 38,271
</TABLE>
NOTE 1: With respect to 1993, represents the amount of tax-offset
"supplemental payments" paid upon the exercise of stock options (or tandem stock
appreciation rights) granted under the Company's Executive Award Plan. The
amount shown for Mr. Rubright includes (a) relocation allowances, related to Mr.
Rubright's move from Atlanta, Georgia to Birmingham, Alabama, of $89,317 in
excess of relocation allowances normally provided under Company policy, and (b)
tax reimbursement payments of $26,255 made with respect to such reimbursement
allowances.
NOTE 2: The amount shown represents the dollar value of restricted stock
awards made during the year, calculated by multiplying the closing price of
unrestricted shares of the Company's Common Stock on the date of grant by the
number of shares awarded. Dividends are paid on all shares of restricted stock.
All shares of restricted stock generally vest at the earlier of age 65 (age
67, with respect to the shares granted to Mr. Russell) or 10 years from the date
of grant, unless the average closing price of the Company's Common Stock
achieves certain specified levels, in which case vesting of such shares is
accelerated. All shares of restricted stock that have not previously vested are
generally forfeited upon termination of employment, unless such termination
occurs either by reason of death or disability or for the convenience of the
Company (as determined by the Executive Compensation Committee). All shares of
restricted stock that have not previously vested will immediately vest upon a
"Change of Control" of the Company, as described under "Compensation Upon Change
of Control" below.
The number of shares of restricted stock held by the named executive
officers as of December 31, 1994, and the value of such shares (calculated by
multiplying the closing price of unrestricted shares of the Company's Common
Stock on December 31, 1994 by the number of shares held on such date) is as
follows: Mr. Kuehn, 85,700 shares, $2,399,600; Mr. Moylan, 7,200 shares,
$201,600; Mr. Rubright, 9,400 shares, $263,200; Mr. Russell, 27,000 shares,
$756,000; and Mr. Smith, 17,000 shares, $476,000.
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<PAGE> 16
NOTE 3: With respect to 1994, represents the following amounts for each of
Messrs. Kuehn, Moylan, Rubright, Russell and Smith, respectively: (1) Company
matching contributions to the trust established under the Company's Savings
Plan -- $6,375, $6,649, $0, $6,375 and $6,375; (2) Company contributions to the
Savings Plan accounts under the Company's Supplemental Benefit Plan -- $43,350,
$4,250, $19,479, $23,800 and $16,320; and (3) with respect to premiums paid by
the Company under the Company's "split-dollar" Executive Life Insurance Program,
the sum of (a) the value of the premium payment used to purchase term life
insurance plus (b) the value of the benefit to the executive officer of the
remainder of the premium payment -- $53,964, $7,976, $16,334, $34,615 and
$15,369.
NOTE 4: Includes the value of 16,500 shares, 3,300 shares, 4,400 shares,
10,000 shares and 6,000 shares of restricted stock granted on December 1, 1994
to Messrs. Kuehn, Moylan, Rubright, Russell and Smith, respectively.
NOTE 5: Represents the value of 14,000 shares, 2,500 shares, 10,000 shares
and 6,000 shares of restricted stock granted on December 2, 1993 to Messrs.
Kuehn, Moylan, Russell and Smith, respectively.
NOTE 6: Includes the value of 40,000 shares of restricted stock granted to
Mr. Kuehn on May 28, 1992. Such shares were granted in recognition of Mr.
Kuehn's performance with respect to the sale of an oilfield services subsidiary.
NOTE 7: Includes the value of 15,200 shares, 1,400 shares, 7,000 shares
and 5,000 shares of restricted stock granted on December 3, 1992 to Messrs.
Kuehn, Moylan, Russell and Smith, respectively.
NOTE 8: Mr. Moylan served as Vice President and Controller of the Company
from January 1, 1992 until March 31, 1994.
NOTE 9: Mr. Rubright was employed by the Company as Vice President and
General Counsel effective as of February 15, 1994.
NOTE 10: Includes the value of 5,000 shares of restricted stock granted to
Mr. Rubright on January 26, 1994 (contingent upon his commencement of employment
with the Company on February 15, 1994).
15
<PAGE> 17
OPTION GRANT TABLE
The following table contains certain information with respect to stock
options granted in 1994 under the Company's Executive Award Plan to the named
executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (10 YEARS)
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION --------------------------------
NAME GRANTED (1) IN 1994 ($/SHARE) (2) DATE (3) 5% (4) 10% (4)
- -------------------------- ------------ ------------ ------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
All Stockholders.......... -- -- -- -- $1,521,302,302 $3,854,226,105
Ronald L. Kuehn, Jr. ..... 112,000(5) 11.3% $27.875 11/30/04 $ 1,963,920 $ 4,975,600
James E. Moylan, Jr. ..... 22,000(5) 2.2% $27.875 11/30/04 $ 385,770 $ 977,350
James A. Rubright......... 40,000(6) 4.0% $29.125 1/25/04 $ 732,600 $ 1,856,600
James A. Rubright ........ 27,500(5) 2.8% $27.875 11/30/04 $ 482,213 $ 1,221,688
Donald G. Russell......... 66,000(5) 6.7% $27.875 11/30/04 $ 1,157,310 $ 2,932,050
William A. Smith.......... 45,000(5) 4.5% $27.875 11/30/04 $ 789,075 $ 1,999,125
Named Executive Officers' Potential Realizable Value as a % of
All Stockholders' Potential Realizable Value --
December 1, 1994 Option Grant 0.31% 0.31%
</TABLE>
NOTE 1: Any stock options that have not previously become exercisable (as
described at notes 5 and 6) are generally forfeited upon termination of
employment, unless such termination occurs by reason of retirement after age 65,
death, disability or for the convenience of the Company (as determined by the
Executive Compensation Committee). Any options held by then-current employees
will become immediately exercisable in the event of a "Change of Control" of the
Company, as described under "Compensation Upon Change of Control" below.
NOTE 2: The exercise price equals the closing price of the Company's
Common Stock on the date of grant.
NOTE 3: The stock options are subject to termination prior to their
expiration date in the event of termination of employment.
NOTE 4: For each named executive officer, the potential realizable values
shown represent the difference between the Resulting Company Stock Price for the
option (as described below) and the exercise price of the option, multiplied by
the number of options granted to such executive officer. For all stockholders,
the potential realizable values shown represent the difference between the
Resulting Company Stock Price for the options granted on December 1, 1994 and
the exercise price of such options, multiplied by the number of outstanding
shares of the Company's Common Stock as of December 31, 1994.
The Resulting Company Stock Price for an option equals the price the
Company's Common Stock would attain at the end of the option's 10-year term if
the price of the Company's Common Stock appreciated from the date of stock
option grant at a rate of 5% or 10% per year (as the case may be). The Resulting
Company Stock Prices are as follows: (1) for the options granted to all named
executive officers on December 1, 1994, $45.41 (5% annual stock price
appreciation) and $72.30 (10% annual stock price appreciation) and (2) for the
options granted to Mr. Rubright on January 26, 1994, $47.44 (5% annual stock
price appreciation) and $75.54 (10% annual stock price appreciation).
NOTE 5: Represents stock options granted on December 1, 1994. The stock
options become exercisable in equal installments on each of the first five
anniversaries of the date of grant, provided that the entire option grant will
become immediately exercisable if, during any 10 business day period ending
16
<PAGE> 18
prior to December 1, 1999, the average of the closing prices of the Company's
Common Stock during such period is at least $41.813.
NOTE 6: Represents stock options granted to Mr. Rubright on January 26,
1994 (contingent upon his commencement of employment with the Company on
February 15, 1994). The stock options become exercisable in five equal
installments beginning on February 15, 1995, provided that the entire option
grant will become immediately exercisable if, during any 10 business day period
ending prior to February 15, 1999, the average of the closing prices of the
Company's Common Stock during such period is at least $43.688.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table shows certain information with respect to the named
executive officers concerning unexercised stock options (or stock appreciation
rights ("SARs") granted in tandem therewith) held as of December 31, 1994. None
of the named executive officers exercised stock options (or tandem SARs) during
1994.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED,
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END (1) AT FISCAL YEAR END (2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald L. Kuehn, Jr. ....................... 515,600 200,000 $ 5,345,625 $14,000
James E. Moylan, Jr. ....................... 35,200 38,800 $ 224,625 $ 2,750
James A. Rubright........................... 0 67,500 $ 0 $ 3,438
Donald G. Russell........................... 134,000 118,000 $ 832,500 $ 8,250
William A. Smith............................ 175,000 81,000 $ 1,567,563 $ 5,625
</TABLE>
NOTE 1: Certain stock options granted before December 6, 1991, were
granted with tandem SARs. Each stock option granted before December 6, 1991 was
granted with a tax-offset "supplemental payment" payable upon the exercise of
the stock option (or tandem SAR). The amount of the supplemental payment is the
amount necessary to pay the federal income tax payable with respect to both (1)
exercise of the stock option (or tandem SAR) and (2) receipt of the supplemental
payment, based on the assumption that the participant is taxed at the maximum
effective federal income tax rate applicable to such income.
NOTE 2: The value of each unexercised in-the-money stock option (or tandem
SAR) is equal to the difference between $28.00 (the closing price of the
Company's Common Stock on December 31, 1994) and the exercise price of the stock
option. Such value does not include the value of any tax-offset supplemental
payments.
DEFINED BENEFIT PLANS
Employees and officers of the Company and participating subsidiaries are
participants in the Company's Retirement Plan. In general, annual retirement
benefits are based on average covered compensation for the highest five
consecutive years of the final ten years of employment. Covered compensation
under the Retirement Plan currently includes salaries and amounts paid under the
Performance Award Plan and the Cash Bonus Plan (reported in the Summary
Compensation Table) and certain personal benefits; covered compensation does not
include amounts relating to the grant or vesting of restricted stock, the
exercise of stock options and SARs, and receipt of supplemental payments under
the Executive Award Plan, or to employer contributions under the Savings Plan or
the Supplemental Benefit Plan.
The maximum annual retirement benefit is 65% of the participant's average
covered compensation minus 50% of his primary social security benefit.
Participants accrue benefits under the following formula: (a) 2.4% of average
covered compensation minus 2.0% of primary social security benefits for each
year
17
<PAGE> 19
of service prior to January 1, 1992; plus (b) 2.0% of average covered
compensation minus 1.667% of primary social security benefits for each year of
service after January 1, 1992; plus (c) when the total of (a) plus (b) above
equals 60% of average covered compensation minus 50% of primary social security
benefits, 1% of average covered compensation for each year of service after
January 1, 1992, not included in the calculation in (b) above, up to five such
additional years of service. The eligible survivors of a deceased Retirement
Plan participant are entitled to a survivors benefit, which usually equals 75%
of the participant's retirement benefit. Retirement Plan benefits are generally
paid as life annuities.
The Supplemental Benefit Plan provides its eligible participants and their
eligible survivors with retirement and survivors benefits which would have been
payable under the Retirement Plan but for the fact that benefits payable under
funded pension plans are limited by federal tax laws. As a general rule, during
1994 the federal tax laws limited annual benefits under the Retirement Plan to
$118,800 (subject to reduction in certain circumstances), and required the
Retirement Plan to disregard any portion of the participant's 1994 compensation
in excess of $150,000. A participant may choose to have benefits under the Plan
paid either as a life annuity or in a cash lump sum upon termination of
employment.
The following table sets forth information with respect to the named
executive officers concerning the benefits payable under the Retirement Plan and
Supplemental Benefit Plan.
DEFINED BENEFIT PLAN TABLE
<TABLE>
<CAPTION>
CURRENT ESTIMATED ANNUAL
YEARS OF 1994 COVERED RETIREMENT
NAME SERVICE (1) COMPENSATION (2) BENEFIT AT AGE 65 (3)
- ---------------------------------------------- ----------- ---------------- ---------------------
<S> <C> <C> <C>
Ronald L. Kuehn, Jr........................... 24.4 $1,164,600 $ 745,344
James E. Moylan, Jr........................... 18.5 $ 265,500 $ 172,575
James A. Rubright............................. 0.8 $ 405,600 $ 152,100
Donald G. Russell............................. 6.9 $ 680,000 $ 131,920
William A. Smith.............................. 24.7 $ 546,000 $ 354,900
</TABLE>
NOTE 1: The number of years of credited service under the Retirement Plan
and Supplemental Benefit Plan as of December 31, 1994.
NOTE 2: The amount of covered compensation under the Retirement Plan and
Supplemental Benefit Plan during 1994.
NOTE 3: The estimated annual retirement benefit payable as a single life
annuity at age 65 to the named executive officer (based on the assumptions that
such officer retires at age 65 and has average covered compensation at his
retirement date equal to his 1994 covered compensation, and calculated prior to
the offset for primary social security benefits).
18
<PAGE> 20
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's Common Stock for the five-year period ending December 31, 1994, with
the cumulative total return of two indices during such period.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
SONAT INC.; STANDARD & POOR'S 500 STOCK INDEX;
STANDARD & POOR'S NATURAL GAS DISTRIBUTION/PIPELINE GROUP (1)
[GRAPH]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P NATURAL
(FISCAL YEAR COVERED) SONAT INC. S&P 500 GAS
<S> <C> <C> <C>
12/31/89 100.00 100.00 100.00
12/31/90 100.09 96.89 87.55
12/31/91 74.16 126.28 76.23
12/31/92 113.88 135.88 84.19
12/31/93 141.31 149.52 99.89
12/31/94 142.13 151.55 95.35
</TABLE>
The total returns set forth above assume that $100 was invested in the
Company's Common Stock and each of the indices set forth above on December 31,
1989, and that all dividends were reinvested.
NOTE 1: The Standard & Poor's Natural Gas Distribution/Pipeline Group
consists of the following companies: The Coastal Corporation, Columbia Gas
System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron
Corp., Ensearch Corporation, NICOR Inc., NorAm Energy Corp. (formerly Arkla,
Inc.), ONEOK Inc., Pacific Enterprises, Panhandle Eastern Corporation, Peoples
Energy Corporation, Sonat Inc., Transco Energy Company and The Williams
Companies Inc.
COMPENSATION UPON CHANGE OF CONTROL
Certain of the Company's benefit plans provide for the acceleration of
certain benefits in the event of a "Change of Control" of the Company. Under
such plans, a Change of Control will be deemed to have occurred if (1) any
person or group acquires (or obtains the right to acquire) beneficial ownership
of 35% or more of the Company's voting securities, (2) there is a change in the
composition of a majority of the Company's Board of Directors within any period
of three consecutive years which change was not approved by a majority of the
Board of Directors as constituted immediately prior to the commencement of such
three-year period, or (3) at any meeting of stockholders of the Company called
for the purpose of electing Directors, the entire slate nominated by the Board
of Directors fails to be elected.
Any outside Director who is eligible for a retirement benefit under the
Retirement Plan for Directors will receive such benefit (regardless of whether
he has met the other eligibility requirements of the Plan)
19
<PAGE> 21
in the event he ceases to be a Director following a Change of Control. A
Director who participates in the Director's Fees Deferral Plan may, prior to the
year the fees are earned, elect to have the balance of his account distributed
to him in a lump sum in the event his service as a Director is terminated within
one year following a Change of Control, regardless of any other elections he may
have made with respect to the timing and manner of payment of amounts in his
account. Also, all shares of restricted stock granted under the Restricted Stock
Plan for Directors will vest immediately upon a Change of Control.
Upon the occurrence of a Change of Control, all outstanding shares of
restricted stock under the Executive Award Plan will immediately vest, and all
outstanding options (and tandem SARs) under the Executive Award Plan held by
then-current employees will become immediately exercisable. If an SAR is
exercised within 60 days of the occurrence of a Change of Control, the holder
will receive, in addition to the amount otherwise due on exercise, a payment
equal to the excess over the amount otherwise due of the highest price per share
of Common Stock paid during the 60-day period prior to exercise of the SAR, plus
a supplemental payment on such excess. Also, upon the occurrence of a Change of
Control, the participant will receive 100% of his bonus opportunities under the
Performance Award Plan and the Cash Bonus Plan. Any officer of the Company or
certain of its subsidiaries who at the time of a Change of Control is not vested
under the Retirement Plan will be provided with a vested benefit under the
Supplemental Benefit Plan equal to the benefit that would have been payable
under the Retirement Plan if his actual years of service had been sufficient for
vesting. Following a Change of Control, a participant's Savings Plan account
under the Supplemental Benefit Plan will be distributed within 30 days of his
termination of employment.
EXECUTIVE SEVERANCE AGREEMENTS
The Company has Executive Severance Agreements with Messrs. Kuehn,
Rubright, Russell and Smith. These agreements provide that if the executive
officer's employment is terminated within three years after a Change of Control
(as defined above), either (a) by the Company for reasons other than dishonesty,
conviction of a felony or willful unauthorized disclosure of confidential
information or other than as a consequence of death, disability or retirement at
age 65 or (b) by the executive officer for reasons relating to a diminution of
responsibilities or compensation, or relocation requiring a change in residence
or a significant increase in travel, or a good faith determination by the
executive officer that he can no longer effectively discharge his duties, he
will receive: (1) a lump sum payment equal to three times his highest earnings
(defined to include those items described as covered compensation under the
Retirement Plan) during any 12-month period during the three years preceding the
termination (such lump sum payment to be reduced pro rata to the extent there
are less than 36 months until the officer reaches age 65); (2) life, medical,
and accident and disability insurance as provided in the Company's insurance
programs or, in certain circumstances, substantially equivalent insurance to be
provided by the Company for a period of 36 months after termination of
employment (or until age 65, whichever is sooner); and (3) for an executive
officer who has reached age 50 and is not otherwise entitled to an early
retirement benefit under the terms of a qualified retirement plan of the Company
or its subsidiaries, an annual benefit equal to the amount such officer would
have received had he been entitled to an early retirement benefit (reduced by
any benefits payable to him under such retirement plan and the Supplemental
Benefit Plan), and a 75% survivors benefit with respect to such early retirement
benefit. Assuming that the executive officers terminated employment on January
31, 1995, in a manner entitling them to benefits under the Executive Severance
Agreements, the respective executive officers would receive the following lump
sum cash payments pursuant to item (1) above and the following annual retirement
benefits pursuant to item (3) above: Mr. Kuehn, $3,493,800 in cash and $0 in
retirement benefits; Mr. Rubright, $1,185,598 in cash and $0 in retirement
benefits; Mr. Russell, 1,316,112 in cash and $11,153 in retirement benefits; and
Mr. Smith, $1,646,000 in cash and $60,312 in retirement benefits.
The Executive Severance Agreements provide that the executive officer may
not voluntarily leave the employ of the Company if a third party attempts to
effect a Change of Control until such third party abandons such attempt or a
Change of Control has occurred. The executive officer is also required to be
20
<PAGE> 22
available for three years after his termination of employment for consultation
with senior officers of the Company. The Agreements renew automatically for
one-year terms unless terminated at the end of any term by the Board of
Directors. The Agreements shall also terminate if the Executive Compensation
Committee determines that the executive officer is no longer a key employee,
unless a Change of Control is threatened at the time or has occurred within the
past three years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
L. Edwin Smart, a member of the Executive Compensation Committee of the
Board of Directors, serves as counsel to the law firm of Hughes Hubbard & Reed.
Hughes Hubbard & Reed provides legal services to the Company and certain of its
subsidiaries.
ELECTION OF AUDITOR (PROPOSAL NO. L)
Ernst & Young has been nominated for election as Auditor of the Company.
The Restated Certificate of Incorporation provides that no other person shall be
eligible for election as Auditor unless notice of intention to nominate such
person has been given to the Company not less than ten days before the Annual
Meeting.
A representative of Ernst & Young will be present at the Annual Meeting
with the opportunity to make a statement if such representative desires to do so
and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ERNST &
YOUNG AS AUDITOR (PROPOSAL NO. L).
AMENDMENT AND RESTATEMENT OF EXECUTIVE
AWARD PLAN (PROPOSAL NO. 2)
The Executive Award Plan was adopted in 1981 and amended and restated in
1985, 1988 and 1991, in each case with the approval of stockholders. The Plan
was amended without shareholder approval in 1992 and 1993 to limit the number of
stock options that may be granted to any employee in any 12-month period, to
reflect the two-for-one split of the Company's Common Stock that was effective
as of September 15, 1993, and to make various technical amendments. The Plan is
intended to enable the Company to attract, motivate and retain key employees of
outstanding ability.
The Board of Directors believes that the Plan is accomplishing its purpose.
However, the Board believes that in order to carry out the purposes of the Plan
it is necessary to amend the Plan to increase the number of shares available for
issuance and to make certain technical amendments. Accordingly, at its January
26, 1995 meeting, the Board of Directors took action to submit to stockholders,
for their approval at the 1995 Annual Meeting of Stockholders, the amendment and
restatement of the Plan.
The amendments approved by the Board are (1) increasing the number of
shares which may be issued under the Plan by 4,000,000, (2) extending the period
during which incentive stock options may be granted, and (3) adopting certain
technical amendments regarding the manner of determining the number of shares
available under the Plan. Approval of the Plan as amended and restated will also
constitute approval of the amendments previously adopted by the Board of
Directors.
PRINCIPAL PROVISIONS OF THE EXECUTIVE AWARD PLAN
The following summary of the Plan, as amended and restated effective as of
April 27, 1995, is qualified by reference to the full text of the Plan which is
attached as Exhibit A to this Proxy Statement.
GENERAL PROVISIONS
The Plan is administered by the Executive Compensation Committee of the
Board of Directors consisting of at least three Directors, all of whom are
"disinterested" within the meaning of Rule 16b-3
21
<PAGE> 23
under the Securities Exchange Act of 1934. The Committee designates the key
employees of the Company and its subsidiaries and affiliated companies to be
granted awards and the type and amount of awards to be granted. Officers of the
Company are eligible to participate in the Plan. Directors who are not officers
or employees are not eligible. Approximately 170 current employees have received
awards under the Plan. It is estimated that the total number of key employees
who are eligible to receive awards under the Plan would not at present exceed
250.
The aggregate number of shares of Common Stock which may be issued under
the Plan with respect to awards granted after April 27, 1995 may not exceed
4,000,000, plus any unused shares which were previously authorized by
stockholders (numbering 946,023 as of January 31, 1995). Unused shares which
were authorized under the Plan as in effect on April 25, 1985 will not be
available for issuance with respect to awards granted after April 24, 1995. Cash
supplemental payments will not count against these limits. Lapsed, forfeited or
cancelled awards will not count against these limits and can be regranted under
the Plan (regardless of whether the recipient received dividends or other
economic benefits with respect to the awards); however, the cancellation of an
option upon exercise of the related stock appreciation right will count against
these limits. If the exercise price of an option is paid in Common Stock or if
shares are withheld from payment of an award to satisfy tax obligations with
respect to the award, such shares will also not count against the above limits.
Options with respect to more than 250,000 shares of Common Stock may not be
granted to any employee in any 12-month period.
The shares issued under the Plan may be issued from shares held in treasury
or from authorized but unissued shares. On April 28, 1994, the Board of
Directors authorized the Company to repurchase before May 1, 1996, up to
2,000,000 shares of the Company's Common Stock, for the purpose of having such
shares available for issuance under the Plan. As of February 15, 1995, 1,039,900
shares had been repurchased under the stock repurchase program (of which shares
148,467 shares have been subsequently reissued under the Plan). The Company
intends to repurchase additional shares under this program when, in its
judgment, it is appropriate to do so.
TYPES OF AWARDS
The Plan authorizes the granting of the following types of awards:
1. Stock Options. The Committee is authorized to determine the terms and
conditions of all option grants, subject to the limitations that the option
price per share may not be less than the fair market value of a share of Common
Stock on the date of grant, and the term of an option may not be longer than ten
years.
The Plan authorizes the Committee to specify the manner of payment of the
option price. Payment may be made in cash or in any other manner specified by
the Committee (which may include payment in Common Stock of the Company). The
Committee may permit payment to be made by way of successive, automatic
applications of shares received upon exercise of a portion of the option to
satisfy the exercise price for additional portions of the option, a payment
method known as "pyramiding". The Committee may also permit arrangements with a
brokerage firm whereby shares issuable upon exercise of an option would be sold
by the broker and the proceeds used to pay the option price, a payment method
known as "cashless exercise".
The Committee is authorized to specify the period, if any, over which
options become exercisable, and to accelerate the exercisability of options on a
case by case basis at any time. The Committee is also authorized to specify the
period during which options may be exercised following an employee's termination
of employment, and to extend such period on a case by case basis.
All options heretofore granted under the Plan have been non-qualified
options for federal income tax purposes. Although the Company presently intends
to continue granting non-qualified options, the Plan also authorizes the grant
of incentive stock options and any other form of tax-favored options that may in
the future be included in the Internal Revenue Code (the "Code").
22
<PAGE> 24
2. Stock Appreciation Rights. The Committee is authorized to grant stock
appreciation rights ("SARs") in tandem with options under the Plan. An SAR can
be exercised only to the extent the option with respect to which it is granted
is not exercised, and is subject to the same terms and conditions as the option
to which it is related. Any SAR which is outstanding on the last day of the term
of the related option will be automatically exercised on such date for cash.
Upon exercise of an SAR the holder is entitled to receive, for each share
with respect to which the SAR is exercised, an amount (the "appreciation") equal
to the difference between the option price of the related option and the fair
market value of a share of Common Stock on the date of exercise of the SAR. The
appreciation is payable in cash, Common Stock, or a combination of both, as
determined by the Committee.
3. Restricted Stock. The Committee is authorized to award restricted stock
under the Plan subject to such terms and conditions as the Committee may
determine in its sole discretion. The Committee has authority to determine the
number of shares of restricted stock to be awarded, the price, if any, to be
paid by the recipient of the restricted stock, and the date or dates on which
the restricted stock will vest. The vesting of restricted stock may be
conditioned upon the completion of a specified period of service with the
Company, upon the attainment of specified performance goals, or upon such other
criteria as the Committee may determine. The Plan gives the Committee discretion
to accelerate the vesting of restricted stock on a case by case basis at any
time. The Committee also has authority to determine whether the employee will
have the right to vote and/or receive dividends on shares of restricted stock,
and whether the certificates for such shares will be held by the Company or
delivered to the employee bearing legends to restrict their transfer.
Stock certificates representing the restricted stock granted to an eligible
employee will be registered in the employee's name. However, no share of
restricted stock may be sold, transferred, assigned or pledged by the employee
until such share has vested in accordance with the terms of the restricted stock
award. In the event of an employee's termination of employment before all of his
restricted stock has vested, or in the event other conditions to the vesting of
restricted stock have not been satisfied prior to any deadline for the
satisfaction of such conditions set forth in the award, the shares of restricted
stock which have not vested will be forfeited and any purchase price paid by the
employee will be returned to the employee. At the time restricted stock vests, a
certificate for such vested shares will be delivered to the employee (or the
beneficiary designated by the employee, in the event of death), free of all
restrictions.
The Committee has adopted a Restricted Stock Grant Program (the "Program")
pursuant to which the grant of restricted stock is contingent upon the
attainment of objective performance goals set by the Committee. Shares awarded
under the Program will be issued under the Plan, and will be subject to the
Plan's limitations on the number of shares issuable. The Program is being
separately submitted for shareholder approval to qualify awards under the
Program as "performance-based" for purposes of Section 162(m) of the Code. (See
"Approval of Restricted Stock Grant Program (Proposal No. 3)" below.) The
adoption of the Program does not limit the Committee's ability to make other
grants of restricted stock under the Plan.
4. Supplemental Payments. The Committee is authorized to provide for a
"supplemental payment" by the Company to an option holder in connection with the
exercise of an option or SAR, and to a holder of restricted stock in connection
with the vesting of such restricted stock. The amount of the supplemental
payment is subject to the discretion of the Committee, but can be no greater
than the amount necessary to pay the federal income tax payable with respect to
both (1) exercise of the option or tandem SAR, or vesting of the restricted
stock, and (2) receipt of the supplemental payment, based on the assumption that
the participant is taxed at the maximum effective federal income tax rate
applicable to such income. Due to variations in the actual tax rates applicable
to employees, the benefit of the supplemental payment may not correspond to the
actual tax liability of the employee.
A supplemental payment can be awarded at either the time of grant or of
exercise of an option or SAR, and at either the time of grant or of vesting of
restricted stock.
23
<PAGE> 25
Supplemental payments are payable in cash or Common Stock, at the
discretion of the Committee. It is contemplated that as a general matter the
payment would be made in cash.
PROVISIONS RELATING TO A CHANGE OF CONTROL
The Plan provides for certain benefits in the event of a "Change of
Control" of the Company. A "Change of Control" is deemed to have occurred if (1)
any person or group acquires (or obtains the right to acquire) beneficial
ownership of 35% or more of the Company's voting securities, (2) there is a
change in the composition of a majority of the Company's Board of Directors
within any period of three consecutive years which change was not approved by a
majority of the Board as constituted immediately prior to the commencement of
such three-year period, or (3) at any meeting of stockholders of the Company
called for the purpose of electing Directors the entire slate nominated by the
Board of Directors fails to be elected.
Upon the occurrence of a Change of Control all outstanding shares of
restricted stock will immediately vest, and all outstanding options (and tandem
SARs) held by then-current employees will become immediately exercisable and
will remain exercisable for three years following the employee's termination of
employment or such longer period as may be provided in the option (but not
beyond their expiration date).
If an SAR is exercised within 60 days of the occurrence of a Change of
Control, the holder will receive, in addition to the amount otherwise due on
exercise, a payment equal to the excess over the amount otherwise due of the
highest price per share of Common Stock paid during the 60-day period prior to
the exercise of the SAR, plus, if the holder is entitled to a supplemental
payment on the SAR, a supplemental payment on such excess.
OTHER PROVISIONS
The Plan permits employees who do not receive a cash supplemental payment
with respect to an award to satisfy all or a portion of their federal, state,
and local tax liability with respect to the award by having the Company withhold
from the shares otherwise deliverable to such employee shares having a value
equal to the tax liability to be so satisfied. Employees who receive a cash
supplemental payment will have their tax withholding obligation satisfied out of
such supplemental payment.
In the event of specified changes in the Company's capital structure, the
Committee will have the power to adjust the number and kind of shares authorized
by the Plan (including any limitations on individual awards) and the number,
option price or kinds of shares covered by outstanding awards, and to make such
other adjustments in awards under the Plan as it deems appropriate.
The Board of Directors may amend the Plan without shareholder approval,
unless such approval is required by law or stock exchange requirements.
The Committee may amend any grant under the Plan, including currently
outstanding options, to include any provision which, at the time of such
amendment, is authorized under the terms of the Plan, except that no award can
be modified in a manner unfavorable to the holder without the written consent of
the holder. In addition, the Committee may, without shareholder approval, cancel
an option or other award granted under the Plan and grant a new option or award
to the employee on more favorable terms and conditions than the cancelled award.
The Plan shall continue in effect for an unlimited period, but may be terminated
by the Board of Directors in its discretion at any time. No incentive stock
options may be granted under the Plan after April 26, 2005.
FEDERAL INCOME TAX CONSEQUENCES
Under the Code and Treasury Regulations currently in effect, the grant of a
non-qualified stock option, SAR, or right to a supplemental payment is not
taxable. The entire amount received upon exercise of an SAR or as a supplemental
payment will be taxed as ordinary income to the recipient.
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<PAGE> 26
If a non-qualified option is exercised, the option spread (i.e., the
difference between the option price and the fair market value of the shares) on
the income recognition date (defined below) will be taxed as ordinary income to
the option holder as of such income recognition date. An employee who receives
stock upon the exercise of an SAR or as a supplemental payment will recognize
income in the amount of the fair market value of such stock on the income
recognition date. For these purposes, the income recognition date is the date of
exercise of an option or SAR (or of receipt of a supplemental payment), except
that for officers subject to Section 16(b) of the Securities Exchange Act of
1934 ("Section 16(b)") who exercise an option within six months of the date of
grant the income recognition date is the date six months after such grant unless
the officer elects to recognize income as of the date of exercise.
If an option is granted which is designated as an incentive stock option
("ISO") under Section 422 of the Code, an optionee will not recognize any income
upon the exercise of such option prior to termination of employment or within
specified periods (generally three months) thereafter. However, the option
spread on the date of exercise will constitute an item of tax preference which
may cause an employee to be subject to the alternative minimum tax. If the
optionee does not dispose of the shares received upon exercise of an ISO before
the end of the required holding periods (two years from the option grant and one
year from exercise), any gain recognized by the option holder on the sale or
exchange of the shares will be treated as long-term capital gain. If the shares
acquired upon the exercise of an ISO are disposed of before the end of such
holding periods, the optionee will recognize ordinary income in an amount equal
to the lesser of (1) the option spread on the income recognition date, or (2)
the excess of the amount received upon disposition of the shares over the option
price. Any excess of the amount received upon disposition of the shares over the
value of the shares on the income recognition date will be taxed as a long-term
or short-term capital gain, depending on whether the shares were held for more
than one year.
Generally, and except as noted below, the grant of restricted stock is not
taxable. Instead, at the time restricted stock vests, an employee will recognize
ordinary income equal to (1) the excess of the fair market value of such
restricted stock on the date the shares vest over (2) the price, if any, paid
for the restricted stock. Dividends paid on the shares before they vest will be
taxed as additional compensation to the employee. An employee may, however,
elect to recognize income as of the date of grant of the restricted stock, in an
amount equal to (1) the excess of the fair market value of the restricted stock
on the date of grant over (2) the price, if any, paid for the restricted stock.
Such employee will not recognize a loss for tax purposes in the event of a
subsequent forfeiture of the shares.
In most cases, the basis in shares acquired upon exercise of a
non-qualified option or SAR or as restricted stock or a supplemental payment
will be equal to the fair market value of the shares on the employee's income
recognition date, and the holding period for determining gains and losses on a
subsequent disposition of such shares will begin on such date.
As a general rule, the Company or one of its subsidiaries will be entitled
to a deduction for federal income tax purposes at the same time and in the same
amount that an employee recognizes ordinary income from awards under the Plan,
to the extent such income is considered reasonable compensation under the Code.
However, Section 162(m) of the Code limits to $1 million the annual tax
deduction that the Company and its subsidiaries can take with respect to the
compensation of each of certain executive officers unless the compensation
qualifies as "performance-based" or certain other exemptions apply. The Company
believes that all compensation recognized with respect to options granted under
the Plan will be deemed performance-based under Section 162(m) of the Code, and
that all compensation recognized with respect to restricted stock granted under
the Plan pursuant to the Restricted Stock Grant Program will be deemed
performance-based if the Program is approved by the stockholders.
Neither the Company nor any subsidiary will be entitled to a deduction with
respect to payments to employees which are contingent upon a change of control
if such payments are deemed to constitute "excess parachute payments" pursuant
to Section 280G of the Code and do not qualify as reasonable compensation
pursuant to that Section; such payments will subject the recipients to a 20%
excise tax.
25
<PAGE> 27
ADDITIONAL INFORMATION
If the stockholders do not approve the Plan as amended and restated, the
Company intends to continue to grant awards under the Plan as currently in
effect (to the extent shares are available for grant under the Plan), or as may
be amended from time to time by the Board of Directors to the extent such
amendments do not require stockholder approval.
Because the granting of awards under the Plan is discretionary, it is not
possible to state which employees will be granted awards, or the amount or type
of awards that would have been granted to particular individuals or in the
aggregate had the Plan, as proposed to be amended, been in effect during 1994.
See the Summary Compensation Table on page 14 above for information as to the
awards actually granted during the last three years under the Plan as then in
effect.
The last sale price of Common Stock of the Company on the consolidated
transactions reporting system on March 1, 1995 was $28.625 per share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE EXECUTIVE
AWARD PLAN AS AMENDED AND RESTATED (PROPOSAL NO. 2).
APPROVAL OF RESTRICTED STOCK GRANT PROGRAM
(PROPOSAL NO. 3)
Since 1992 the Executive Compensation Committee of the Company's Board of
Directors (the "Committee") has granted restricted stock awards under the
Company's Executive Award Plan (the "Plan") based on the Company's total
shareholder return as compared to the total shareholder return of a peer group
of companies. In 1993, the Internal Revenue Code was amended by the addition of
Section 162(m), which limits to $1 million the annual tax deduction available
with respect to compensation paid to certain executive officers unless the
compensation qualifies as "performance-based" (as defined for purposes of
Section 162(m)) or certain other exemptions apply. Among the requirements for
performance-based compensation are that the compensation be paid based solely on
the attainment of objective performance goals established by a committee of
outside directors, and that the material terms under which the compensation is
to be paid be disclosed to and approved by stockholders.
Following the adoption of Section 162(m), the Committee formalized its
prior practice by adopting a Restricted Stock Grant Program (the "Program")
which continued to satisfy the objective performance goal requirement of Section
162(m). In order to satisfy the shareholder approval requirement of Section
162(m), on January 26, 1995, the Board took action to submit the Program for
stockholder approval at the 1995 Annual Meeting of Stockholders. Stockholder
approval of the Program would enable the shares of restricted stock granted
under the Program to qualify as performance-based for purposes of Section 162(m)
and therefore to continue to be deductible by the Company without regard to the
deduction limit otherwise imposed by Section 162(m).
In January 1995 the Board also took action to amend the Plan (subject to
shareholder approval) to, among other things, increase the number of shares
issuable under the Plan. (See "Amendment and Restatement of Executive Award Plan
(Proposal No. 2)" above.) While approval of the Program is not conditioned on
approval of the Plan as amended and restated, because shares granted under the
Program are issued under the Plan, failure to increase the number of shares
issuable under the Plan will effectively limit the number of shares that can be
granted under the Program.
PRINCIPAL PROVISIONS OF THE RESTRICTED STOCK GRANT PROGRAM
The purpose of the Program is to further the purposes of the Plan by
providing a means to award restricted stock in a manner that results in
performance-based compensation under Section 162(m). The Program determines only
the number of shares of restricted stock which are awarded. All terms of the
restricted stock (including the vesting provisions thereof), and all provisions
with respect to the
26
<PAGE> 28
administration of awards granted under the Program, are set forth in the Plan,
the full text of which, as proposed to be amended, is set forth as Exhibit A to
this Proxy Statement.
ADMINISTRATION. The Program is administered by the Committee, the members
of which are "disinterested" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934. The provisions of the Plan regarding
administration and the powers of the Committee also apply to the Program.
ELIGIBILITY. Eligibility for the Program is limited to officers of the
Company and certain subsidiaries who hold positions of Vice President and above.
Directors who are not officers of the Company and its subsidiaries are not
eligible to participate. As of January 31, 1995, approximately 22 current
employees have received grants under the Program. It is estimated that the total
number of employees who are eligible to participate in the Program would not at
present exceed 40.
DETERMINATION OF SIZE OF GRANT. The number of shares of restricted stock
to be granted to an eligible employee under the Program is determined pursuant
to a formula that measures the total shareholder return of the Company relative
to the total shareholder returns of a peer group of companies selected by the
Committee. For a given grant of restricted stock, the annual total shareholder
returns for the Company and each company in the peer group are first calculated
for each of the last three years. The average total shareholder return for the
peer group for each year is determined by adjusting the annual returns of each
company to reflect the capitalization of the various companies in the peer
group. The total shareholder returns for the Company and the peer group are also
weighted to give the most weight to the most recent year, and the least weight
to the earliest of the three years. The extent to which the Company's weighted
total shareholder return exceeds that of the peer group determines the maximum
dollar value of the award (which is expressed as a different percentage of base
pay for each category of officer). The maximum dollar value of an award cannot
exceed $1,920,000. The applicable dollar amount is converted into shares by
dividing it by 66% of the market price of the Company's Common Stock (to reflect
the reduction in value due to the forfeitable nature of the restricted shares).
Notwithstanding the results of the calculation, no more than 100,000 shares of
restricted stock may be issued to any employee under the Program in any year.
The Committee may reduce the number of shares of restricted stock granted below
the number of shares calculated under the Program's formula.
AMENDMENT AND TERMINATION. The Committee may amend the Program from time
to time without stockholder approval except as required to satisfy Section
162(m). The Program shall continue in effect for an unlimited period, but may be
terminated by the Committee or the Board of Directors, in its discretion, at any
time.
ADDITIONAL INFORMATION
If the stockholders do not approve the Program, further awards would not be
made under the Program, but the Committee would retain the ability to make other
grants of restricted stock under the Plan. However, such grants would not
satisfy the performance-based compensation requirements of Section 162(m), and
income attributable to such awards would be included in the determination of
whether an executive officer's compensation exceeded the annual limit imposed by
Section 162(m).
BENEFITS UNDER THE PROGRAM
It is not possible to specify the number of shares of restricted stock to
be granted to particular individuals under the Program, since the maximum size
of each grant under the Program will be determined by the total shareholder
return of the Company and of the companies in the peer group (subject to an
overall annual limit of 100,000 shares of restricted stock per participant). The
following
27
<PAGE> 29
table sets forth the number of shares of restricted stock granted under the
Program in 1994 for the persons indicated below.
NEW PLAN BENEFITS
RESTRICTED STOCK GRANT PROGRAM
<TABLE>
<CAPTION>
1994 GRANT
NAME AND POSITION (NUMBER OF SHARES)
--------------------------------------------------------------- ------------------
<S> <C>
Ronald L. Kuehn, Jr. .......................................... 16,500
Chairman of the Board, President and Chief Executive Officer
James E. Moylan, Jr. .......................................... 3,300
President of Southern Natural Gas Company
James A. Rubright.............................................. 4,400
Vice President and General Counsel
Donald G. Russell.............................................. 10,000
Executive Vice President
William A. Smith............................................... 6,000
Executive Vice President
Current Executive Officer Group................................ 48,600
(9 persons)
Non-Executive Director Group................................... 0
(12 persons)
Non-Executive Officer Employee Group........................... 19,100
(13 persons)
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE RESTRICTED
STOCK GRANT PROGRAM (PROPOSAL NO. 3).
OTHER MATTERS
PROPOSALS OF STOCKHOLDERS
STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT. In order for
proposals by stockholders to be considered for inclusion in the proxy statement
and form of proxy relating to the 1996 Annual Meeting of Stockholders, such
proposals must be received at the principal executive offices of the Company,
AmSouth-Sonat Tower, Birmingham, Alabama 35203, by no later than November 17,
1995.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS. A stockholder who
desires to propose any business at a meeting of stockholders must give the
Company written notice within ten days following public disclosure by the
Company of the meeting date (by notice to the New York Stock Exchange or
otherwise) or, if the meeting is adjourned and the Company is required by
Delaware law to give notice of the adjourned meeting date, within five days
after the earlier of the date public disclosure is made by the Company of the
adjourned meeting date (by notice to such exchange or otherwise) or the date
notice of the adjourned meeting is given to stockholders. The stockholder's
notice must set forth (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (b) the name and address of the stockholder who intends to propose such
business; (c) a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting (or if the record date for
such meeting is subsequent to the date required for such stockholder notice, a
representation that the stockholder is a holder of record at the time of such
notice and intends to be a holder of record on the record date for such meeting)
and intends to appear in person or by proxy at such meeting to propose such
business; and (d) any material interest of the stockholder in such business.
STOCKHOLDER NOMINATIONS FOR DIRECTORS. A stockholder who desires to
nominate Directors at a meeting of stockholders must give the Company written
notice within the time period described in the preceding paragraph. The
stockholder's notice must set forth (a) the name and address of the
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<PAGE> 30
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting (or if the record date for
such meeting is subsequent to the date required for such stockholder notice, a
representation that the stockholder is a holder of record at the time of such
notice and intends to be a holder of record on the record date for such meeting)
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would have been required
to be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the Board of Directors; and (e) the consent of each nominee
to serve as a Director of the Company if so elected.
The Chairman of the meeting may refuse to transact any business or to
acknowledge the nomination of any person if a stockholder has failed to comply
with the foregoing procedures.
A copy of the Company's By-Laws may be obtained from the Company upon
written request to the Company at its principal place of business.
VOTING AT THE ANNUAL MEETING
The presence, in person or by proxy, of the holders of a majority of the
Company's Common Stock is necessary to constitute a quorum at the Annual Meeting
or any adjournment thereof.
The vote required for the election of Directors and the approval of the
other matters scheduled for a vote at the Annual Meeting is controlled by the
provisions of the Company's Charter and By-Laws and the Delaware General
Corporation Law. Directors are elected by a plurality vote. Approval of Proposal
No. 1 would require a plurality vote. Approval of Proposal No. 2 and 3 would
each require the affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting and voting either for or
against, or abstaining from voting on, such proposal. Broker "non-votes" (shares
not voted on a matter because a nominee holding shares for a beneficial owner
neither receives voting instructions from such beneficial owner nor has
discretionary voting power with respect thereto) shall not have an effect on the
vote at the Annual Meeting. Abstentions shall have the effect of a vote against
Proposal No. 2 and 3. The vote will be tabulated by an independent tabulator and
the results of such vote will be certified by independent inspectors of
election.
SOLICITATION OF PROXIES
The Company will bear the costs of solicitation of proxies. Officers and
regular employees of the Company may solicit proxies by mail, telephone,
telegraph and personal interview. In addition, the Company has retained D. F.
King & Co., Inc. to assist in the solicitation of proxies, and anticipates that
the fees that it will incur for this service, excluding out-of-pocket expenses,
will not exceed $50,000. Arrangements will be made with brokerage houses and
with other custodians, nominees and fiduciaries to forward proxy soliciting
material to beneficial owners. The Company will reimburse persons holding stock
for others in their names or in those of their nominees for their reasonable
out-of-pocket expenses in sending proxy material to their principals and
obtaining their proxies.
------------------------
The information provided under the headings "Report of the Executive
Compensation Committee" and "Performance Graph" above shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission or subject to Regulations 14A or 14C, other than as provided in Item
402 of Regulation S-K, or to the liabilities of Section 18 of the Securities
Exchange Act of 1934 and, unless specific reference is made therein to such
headings, shall not be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
29
<PAGE> 31
The Company is not aware that any matters other than those mentioned above
will be presented for action at the 1995 Annual Meeting, but if any other
matters do properly come before the meeting, the persons named as proxies will
vote upon such matters in accordance with their best judgment.
Please complete, sign, date and return the enclosed proxy card promptly.
SONAT INC.
/s/ Beverley T. Krannich
------------------------
Beverley T. Krannich
Secretary
Birmingham, Alabama
March 15, 1995
30
<PAGE> 32
EXHIBIT A
EXECUTIVE AWARD PLAN OF SONAT INC.
(AS AMENDED AND RESTATED AS OF APRIL 27, 1995)
I. GENERAL
1.1 PURPOSE OF THE PLAN
The Executive Award Plan (the "Plan") of Sonat Inc. (the "Company") is
intended to advance the best interests of the Company and its subsidiaries by
providing key employees with additional incentives through the grant of options
("Options") to purchase shares of Common Stock of the Company ("Common Stock")
and through the award of shares of restricted Common Stock ("Restricted Stock"),
thereby increasing the personal stake of such employees in the continued success
and growth of the Company and encouraging them to remain in the employ of the
Company.
The Plan was adopted effective May 1, 1981, and has been amended at various
times. The provisions of the Plan as hereby amended and restated may, at the
discretion of the Committee referred to below, be made available to all grants
outstanding on the effective date of this Amendment and Restatement, and all
awards granted after such date, except that no such provision shall alter any
outstanding grant in a manner unfavorable to the holder thereof without the
written consent of the holder.
1.2 ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Executive Compensation Committee
or other designated committee (the "Committee") of the Board of Directors of the
Company (the "Board of Directors") which shall consist of at least three
Directors all of whom are not eligible to participate in the Plan and are
"disinterested" within the meaning of Rule 16b-3 under the Securities Exchange
Act of 1934. The Committee shall have authority to interpret conclusively the
provisions of the Plan, to adopt such rules and regulations for carrying out the
Plan as it may deem advisable, to decide conclusively all questions of fact
arising in the application of the Plan, and to make all other determinations
necessary or advisable for the administration of the Plan. All decisions and
acts of the Committee shall be final and binding upon all affected Plan
participants.
(b) The Committee shall meet once each fiscal year, and at such additional
times as it may determine or at the request of the chief executive officer of
the Company, to designate the eligible employees, if any, to be granted awards
under the Plan and the type and amount of such awards and the time when awards
will be granted. All awards granted under the Plan shall be on the terms and
subject to the conditions hereinafter provided.
1.3 ELIGIBLE PARTICIPANTS
Key employees, including officers, of the Company and its subsidiaries, and
of partnerships or joint ventures in which the Company and its subsidiaries have
a significant ownership interest as determined by the Committee (all of such
subsidiaries, partnerships and joint ventures being referred to as
"Subsidiaries") shall be eligible to participate in the Plan. Directors who are
not employees of the Company or its Subsidiaries shall not be eligible to
participate in the Plan.
1.4 AWARDS UNDER THE PLAN
Awards under the Plan may be in the form of (i) Options to purchase shares
of Common Stock, (ii) Stock Appreciation Rights issued in tandem with such
Options, (iii) shares of Restricted Stock, (iv) Supplemental Payments with
respect to Options, Stock Appreciation Rights and Restricted Stock, or (v) any
combination of the foregoing.
A-1
<PAGE> 33
1.5 SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Common Stock which may be issued with
respect to Options or Restricted Stock granted after April 27, 1995 (including
Stock Appreciation Rights and Supplemental Payments related thereto) shall not
exceed (i) 4,000,000 shares plus (ii) the number of shares previously authorized
for use in the Plan which have not been issued or have again become available
for grants pursuant to the following paragraph. At no time shall the number of
shares issued plus the number of shares subject to outstanding awards under the
Plan exceed the number of shares that may be issued under the Plan. Options with
respect to more than 250,000 shares of Common Stock shall not be granted to any
optionee in any 12-month period. Shares distributed pursuant to the Plan may
consist of authorized but unissued shares or treasury shares of the Company, as
shall be determined from time to time by the Board of Directors.
If any Option under the Plan shall expire, terminate or be cancelled
(except upon the holder's exercise of a related Stock Appreciation Right) for
any reason without having been exercised in full, or if any shares of Restricted
Stock shall be forfeited to the Company, the unexercised Options and forfeited
shares of Restricted Stock shall not count against the above limit and shall
again become available for grants under the Plan (regardless of whether the
holder of such Options or shares received dividends or other economic benefits
with respect to such Options or shares). Shares of Common Stock equal in number
to the shares surrendered in payment of the option price, and shares of Common
Stock which are withheld in order to satisfy federal, state or local tax
liability, shall not count against the above limit and shall again become
available for grants under the Plan. Notwithstanding the foregoing, any shares
which were authorized for issuance under the Plan as in effect on April 25, 1985
shall not be available for issuance with respect to awards granted after April
24, 1995.
1.6 OTHER COMPENSATION PROGRAMS
The existence and terms of the Plan shall not limit the authority of the
Board of Directors in compensating employees of the Company and its subsidiaries
in such other forms and amounts, including compensation pursuant to any other
plans as may be currently in effect or adopted in the future, as it may
determine from time to time.
II. STOCK OPTIONS
2.1 TERMS AND CONDITIONS OF OPTIONS
Subject to the following provisions, all Options granted under the Plan
shall be in such form and shall have such terms and conditions as the Committee,
in its discretion, may from time to time determine.
(a) Option Price. The option price per share shall not be less than
the fair market value of the Common Stock (as determined by the Committee)
on the date the Option is granted.
(b) Term of Option. The term of an Option shall not exceed ten years
from the date of grant, and, notwithstanding any other provision of this
Plan, no Option shall be exercised after the expiration of its term.
(c) Exercise of Options. Options shall be exercisable at such time or
times and subject to such terms and conditions as the Committee shall
specify in the Option grant. The Committee shall have discretion to at any
time declare all or any portion of the Options held by any optionee to be
immediately exercisable. An Option may be exercised in accordance with its
terms as to any or all shares purchasable thereunder.
(d) Payment for Shares. Payment for shares as to which an Option is
exercised shall be made in such manner and at such time or times as shall
be provided by the Committee in the Option grant. Payment may be made in
cash or in such other manner as the Committee in its discretion may
authorize.
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<PAGE> 34
(e) Nontransferability of Options. No Option or any interest therein
shall be transferable by the optionee other than by will or by the laws of
descent and distribution. During an optionee's lifetime, all Options shall
be exercisable only by such optionee or by the guardian or legal
representative of the optionee.
(f) Shareholder Rights. The holder of an Option shall, as such, have
none of the rights of a shareholder.
(g) Termination of Employment. The Committee shall have discretion to
specify in the Option grant or an amendment thereof, provisions with
respect to the period, not extending beyond the term of the Option, during
which the Option may be exercised following the optionee's termination of
employment.
(h) Change of Control. Notwithstanding the exercisability schedule
governing any Option, upon the occurrence of a Change of Control (as
defined in Section 4.9) all Options outstanding at the time of such Change
of Control and held by optionees who are employees of the Company or its
Subsidiaries at the time of such Change of Control shall become immediately
exercisable and, unless the optionee agrees otherwise in writing, shall
remain exercisable for a period of three years following the optionee's
termination of employment or such longer period as may be provided in the
Option.
2.2 STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS
(a) The Committee may, either at the time of grant of an Option or at any
time during the term of the Option, grant Stock Appreciation Rights with respect
to all or any portion of the shares of Common Stock covered by such Option. A
Stock Appreciation Right may be exercised at any time the Option to which it
relates is then exercisable, but only to the extent the Option to which it
relates is exercisable, and shall be subject to the conditions applicable to
such Option. When a Stock Appreciation Right is exercised, the Option to which
it relates shall cease to be exercisable to the extent of the number of shares
with respect to which the Stock Appreciation Right is exercised. Similarly, when
an Option is exercised, the Stock Appreciation Rights relating to the shares
covered by such Option exercise shall terminate. Any Stock Appreciation Right
which is outstanding on the last day of the term of the related Option (as
determined pursuant to Section 2.1(b)) shall be automatically exercised on such
date for cash without any action by the optionee.
(b) Upon exercise of a Stock Appreciation Right, the holder shall receive,
for each share with respect to which the Stock Appreciation Right is exercised,
an amount (the "Appreciation") equal to the difference between the option price
per share of the Option to which the Stock Appreciation Right relates and the
fair market value (as determined by the Committee) of a share of Common Stock on
the date of exercise of the Stock Appreciation Right. The Appreciation shall be
payable in cash, Common Stock, or a combination of both, at the option of the
Committee, and shall be paid within 30 days of the exercise of the Stock
Appreciation Right.
(c) Notwithstanding the foregoing, if a Stock Appreciation Right is
exercised within 60 days of the occurrence of a Change of Control, (i) the
Appreciation and any Supplemental Payment (as defined in Section 2.3) to which
the holder is entitled shall be payable solely in cash if the Stock Appreciation
Right has been outstanding at least six months and solely in Common Stock in all
other cases, and (ii) in addition to the Appreciation and the Supplemental
Payment (if any), the holder shall receive (in cash, if the Stock Appreciation
Right has been outstanding for at least six months, and in Common Stock in all
other cases) (1) the amount by which the greater of (a) the highest market price
per share of Common Stock during the 60-day period preceding exercise of the
Stock Appreciation Right or (b) the highest price per share of Common Stock (or
the cash-equivalent thereof as determined by the Board of Directors) paid by an
acquiring person during the 60-day period preceding a Change of Control, exceeds
the Appreciation, plus (2) if the holder is entitled to a Supplemental Payment,
an additional payment, calculated under the same formula as used for calculating
such holder's Supplemental Payment, with respect to the amount referred to in
clause (1) of this sentence.
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<PAGE> 35
2.3 SUPPLEMENTAL PAYMENT ON EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS
The Committee, either at the time of grant or at the time of exercise of
any Option or related Stock Appreciation Right, may provide for a supplemental
payment (the "Supplemental Payment") by the Company to the optionee with respect
to the exercise of any Option or related Stock Appreciation Right. The
Supplemental Payment shall be in the amount specified by the Committee, which
shall not exceed, but may be equal to, the amount necessary to pay the federal
income tax payable with respect to both exercise of the Option or related Stock
Appreciation Right and receipt of the Supplemental Payment, assuming the
optionee is taxed at the maximum effective federal income tax rate applicable
thereto. The Supplemental Payment shall be paid in cash, Common Stock, or a
combination of both, at the option of the Committee. The Supplemental Payment
shall be paid within 30 days of the date of exercise of an Option or Stock
Appreciation Right (or, if later, within 30 days of the date on which income is
recognized for federal income tax purposes with respect to such exercise).
2.4 STATUTORY OPTIONS
Subject to the limitations on Option terms set forth in Section 2.1, the
Committee shall have the authority to grant (i) incentive stock options within
the meaning of Section 422 of the Code and (ii) Options containing such terms
and conditions as shall be required to qualify such Options for preferential tax
treatment under the Code as in effect at the time of such grant. Options granted
pursuant to this Section 2.4 may contain such other terms and conditions
permitted by Article II of this Plan as the Committee, in its discretion, may
from time to time determine (including, without limitation, provision for Stock
Appreciation Rights and Supplemental Payments), to the extent that such terms
and conditions do not cause the Options to lose their preferential tax
treatment. To the extent the Code and Regulations promulgated thereunder require
a plan to contain specified provisions in order to qualify options for
preferential tax treatment, such provisions shall be deemed to be stated in this
Plan.
III. RESTRICTED STOCK
3.1 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
Subject to the following provisions, all awards of Restricted Stock shall
be in such form and shall have such terms and conditions as the Committee, in
its discretion, may from time to time determine:
(a) The Restricted Stock award shall specify the number of shares of
Restricted Stock to be awarded, the price, if any, to be paid by the
recipient of the Restricted Stock, and the date or dates on which the
Restricted Stock will vest. The vesting of Restricted Stock may be
conditioned upon the completion of a specified period of service with the
Company or its Subsidiaries, upon the attainment of specified performance
goals, or upon such other criteria as the Committee may determine in its
sole discretion.
(b) Stock certificates representing the Restricted Stock granted to an
employee shall be registered in the employee's name. Such certificates
shall either be held by the Company on behalf of the employee, or delivered
to the employee bearing a legend to restrict transfer of the certificate
until the Restricted Stock has vested, as determined by the Committee. The
Committee shall determine whether the employee shall have the right to vote
and/or receive dividends on the Restricted Stock before it has vested. No
share of Restricted Stock may be sold, transferred, assigned, or pledged by
the employee until such share has vested in accordance with the terms of
the Restricted Stock award. In the event of an employee's termination of
employment before all of his Restricted Stock has vested, or in the event
other conditions to the vesting of Restricted Stock have not been satisfied
prior to any deadline for the satisfaction of such conditions set forth in
the award, the shares of Restricted Stock which have not vested shall be
forfeited and any purchase price paid by the employee shall be returned to
the employee. At the time Restricted Stock vests (and, if the employee has
been issued legended certificates of Restricted Stock, upon the return of
such
A-4
<PAGE> 36
certificates to the Company), a certificate for such vested shares shall be
delivered to the employee (or the beneficiary designated by the employee in
the event of death), free of all restrictions.
(c) Notwithstanding the vesting conditions set forth in the Restricted
Stock award, (i) the Committee may in its discretion accelerate the vesting
of Restricted Stock at any time, and (ii) all shares of Restricted Stock
shall vest upon a Change of Control of the Company.
3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK
The Committee, either at the time of grant or at the time of vesting of
Restricted Stock, may provide for a Supplemental Payment by the Company to the
employee in an amount specified by the Committee which shall not exceed, but may
be equal to, the amount necessary to pay the federal income tax payable with
respect to both the vesting of the Restricted Stock and receipt of the
Supplemental Payment, assuming the employee is taxed at the maximum effective
federal income tax rate applicable thereto and has not elected to recognize
income with respect to the Restricted Stock before the date such Restricted
Stock vests. The Supplemental Payment shall be paid within 30 days of each date
that Restricted Stock vests. The Supplemental Payment shall be paid in cash or
Common Stock, in the discretion of the Committee, except that in the event of a
Change of Control the Supplemental Payment shall be paid in cash.
IV. ADDITIONAL PROVISIONS
4.1 GENERAL RESTRICTIONS
Each award under the Plan shall be subject to the requirement that, if at
any time the Committee shall determine that (i) the listing, registration or
qualification of the shares of Common Stock subject or related thereto upon any
securities exchange or under any state or federal law, or (ii) the consent or
approval of any government regulatory body, or (iii) an agreement by the
recipient of an award with respect to the disposition of shares of Common Stock
is necessary or desirable (in connection with any requirement or interpretation
of any federal or state securities law, rule or regulation) as a condition of,
or in connection with, the granting of such award or the issuance, purchase or
delivery of shares of Common Stock thereunder, such award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITALIZATION
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, rights offer, liquidation, dissolution, merger,
consolidation, spin-off, sale of assets, payment of an extraordinary cash
dividend, or any other change in or affecting the corporate structure or
capitalization of the Company, the Committee shall make appropriate adjustment
in the number and kind of shares authorized by the Plan (including any
limitations on individual awards), in the number, price or kind of shares
covered by the awards and in any outstanding awards under the Plan.
4.3 AMENDMENTS
(a) The Board of Directors may amend the Plan from time to time. No such
amendment shall require approval by the stockholders unless stockholder approval
is required by applicable law or stock exchange requirements.
(b) The Committee shall have the authority to amend any grant to include
any provision which, at the time of such amendment, is authorized under the
terms of the Plan; however, no outstanding award may be revoked or altered in a
manner unfavorable to the holder without the written consent of the holder.
A-5
<PAGE> 37
4.4 CANCELLATION OF AWARDS
Any award granted under the Plan may be cancelled at any time with the
consent of the holder and a new award may be granted to such holder in lieu
thereof, which award may, in the discretion of the Committee, be on more
favorable terms and conditions than the cancelled award.
4.5 WITHHOLDING
(a) Whenever the Company proposes or is required to issue or transfer
shares of Common Stock under the Plan, the Company shall have the right to
require the holder to remit to the Company an amount sufficient to satisfy any
federal, state or local withholding tax liability prior to the delivery of any
certificate for such shares. Whenever under the Plan payments are to be made in
cash, such payments shall be net of an amount sufficient to satisfy any federal,
state or local withholding tax liability.
(b) An employee entitled to receive Common Stock under the Plan who has not
received a cash Supplemental Payment may elect to have the federal, state and
local tax liability (or a specified portion thereof) with respect to such Common
Stock satisfied by having the Company withhold from the shares otherwise
deliverable to the employee shares of Common Stock having a value equal to the
amount of the tax liability to be satisfied with respect to the Common Stock. An
election to have all or a portion of the tax liability satisfied using Common
Stock shall comply with such requirements as may be imposed by the Committee and
shall be subject to the disapproval of the Committee (expressed either prior to
or within two days after the making of such election).
4.6 NON-ASSIGNABILITY
Except as expressly provided in the Plan, no award under the Plan shall be
assignable or transferable by the holder thereof except by will or by the laws
of descent and distribution. During the life of the holder, awards under the
Plan shall be exercisable only by such holder or by the guardian or legal
representative of such holder.
4.7 NON-UNIFORM DETERMINATIONS
Determinations by the Committee under the Plan (including, without
limitation, determinations of the persons to receive awards; the form, amount
and timing of such awards; the terms and provisions of such awards and the
agreements evidencing same; and provisions with respect to termination of
employment) need not be uniform and may be made by it selectively among persons
who receive, or are eligible to receive, awards under the Plan, whether or not
such persons are similarly situated.
4.8 NO GUARANTEE OF EMPLOYMENT
The grant of an award under the Plan shall not constitute an assurance of
continued employment for any period.
4.9 CHANGE OF CONTROL
A "Change of Control" shall be deemed to have occurred if:
(i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as in effect on March 1, 1985) is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Securities Exchange Act of 1934 as in effect on March 1, 1985) 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,
(ii) there shall occur a change in the composition of a majority of
the Board of Directors within any period of three consecutive years which
change shall not have been approved by a majority of the Board of Directors
as constituted immediately prior to the commencement of such period, or
A-6
<PAGE> 38
(iii) 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.
4.10 DURATION AND TERMINATION
(a) The Plan shall be of unlimited duration. Notwithstanding the foregoing,
no incentive stock option (within the meaning of Section 422 of the Code) shall
be granted under the Plan after April 26, 2005, but awards granted prior to such
date may extend beyond such date, and the terms of this Plan shall continue to
apply to all awards granted hereunder.
(b) The Board of Directors may discontinue or terminate the Plan at any
time. Such action shall not impair any of the rights of any holder of any award
outstanding on the date of the Plan's discontinuance or termination without the
holder's written consent.
This document (a) incorporates into a single document the provisions of the
Plan as amended and restated as of December 3, 1993, (b) amends the Plan to
increase the number of shares available for issuance by 4,000,000, (c) extends
the period during which incentive stock options may be granted under the Plan,
and (d) makes certain technical amendments regarding the manner of determining
the number of shares available under the Plan.
A-7
<PAGE> 1
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 19,
1995, with respect to the consolidated financial statements of Sonat Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1994.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Birmingham, Alabama
March 24, 1995
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn,
Jr.; Thomas W. Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C.
Griffin, and each of them, his true and lawful attorneys to execute in his name
(whether on behalf of Sonat Inc. or as an officer or director of Sonat Inc.)
the Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December
31, 1994, and any and all amendments thereto to be filed with the Securities
and Exchange Commission pursuant to Section 13 and 15(d) of the Securities
Exchange Act of 1934 and to file the same, with all exhibits thereto, and any
other documents in connection therewith, with the Securities and Exchange
Commission. The undersigned does hereby ratify and confirm all that said
attorneys and agents, and each of them, shall do or cause to be done by virtue
hereof. Each of such attorneys shall have and may exercise all powers to act
hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Ronald L. Kuehn, Jr.
----------------------------
Ronald L. Kuehn, Jr.
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ William O. Bourke
-------------------------------
William O. Bourke
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ John J. Creedon
-----------------------------
John J. Creedon
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Roberto C. Goizueta
---------------------------------
Roberto C. Goizueta
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Robert J. Lanigan
-------------------------------
Robert J. Lanigan
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Charles Marshall
------------------------------
Charles Marshall
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 4th day of March, 1995.
/s/ Benjamin F. Payton
--------------------------------
Benjamin F. Payton
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ John J. Phelan, Jr.
---------------------------------
John J. Phelan, Jr.
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Jerome J. Richardson
-----------------------------------
Jerome J. Richardson
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Donald G. Russell
-------------------------------
Donald G. Russell
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ L. Edwin Smart
----------------------------
L. Edwin Smart
<PAGE> 12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Adrian M. Tocklin
-------------------------------
Adrian M. Tocklin
<PAGE> 13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ James B. Williams
-------------------------------
James B. Williams
<PAGE> 14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; Ronald B. Pruet, Jr.; James A. Rubright and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and any and
all amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall
have and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 23rd day of February, 1995.
/s/ Joe B. Wyatt
--------------------------
Joe B. Wyatt
<TABLE> <S> <C>
<ARTICLE> 5
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