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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, 1995
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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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. /X/
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1996 -- $2,957,214,800.
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1996 -- 86,121,785
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 13, 1996,
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, 1995
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ITEM PAGE
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PART I
Item 1. Business................................................................. I-1
Exploration and Production............................................. I-2
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 and Storage of Natural Gas................................ I-7
Southern Natural Gas Company........................................ I-7
Order No. 636 Restructuring....................................... I-8
Customer Settlement............................................... I-8
Storage Fields.................................................... I-10
Markets -- Transportation and Sales............................... I-10
Gas Supplies...................................................... I-12
Potential Royalty Claims.......................................... I-13
Sea Robin Pipeline Company........................................ I-13
Sonat Intrastate-Alabama Inc. .................................... I-13
South Georgia Natural Gas Company................................. I-13
Southern Energy Company........................................... I-13
Citrus Corp......................................................... I-14
Florida Gas Transmission Company.................................. I-14
Competition and Current Business Conditions......................... I-15
Natural Gas and Electric Power Marketing............................... I-17
Sonat Energy Services Company....................................... I-17
Sonat Marketing Company L.P. ..................................... I-17
Sonat Power Marketing Inc. ....................................... I-17
Sonat Power Inc. ................................................. I-17
Competition and Current Business Conditions......................... I-18
Governmental Regulation................................................ I-18
Exploration and Production.......................................... I-18
Transmission and Storage of Natural Gas............................. I-18
Rate and Regulatory Proceedings................................... I-19
Environmental Matters.................................................. I-19
Forward Looking Statements............................................. I-19
Item 2. Properties............................................................... I-19
Item 3. Legal Proceedings........................................................ I-20
Item 4. Submission of Matters to a Vote of Security Holders...................... I-21
Executive Officers of the Registrant.................................................. I-21
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<TABLE>
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ITEM PAGE
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................ II-32
Item 6. Selected Financial Data.................................................. II-41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... II-2
Item 8. Financial Statements and Supplementary Data.............................. II-17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................. II-43
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, through Southern Natural Gas Company
("Southern") and Citrus Corp. ("Citrus") in the transmission and storage of
natural gas, and through Sonat Energy Services Company ("Energy Services") in
natural gas and electric power marketing.
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 12 percent of Sonat's consolidated
operating income for 1995.
Southern is a major transporter of natural gas to the southeastern United
States. Its natural gas pipeline 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., an unaffiliated
company, 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. Natural gas transmission operations, excluding
Citrus, contributed approximately 84 percent of Sonat's consolidated operating
income for 1995. Sonat's share of Citrus' earnings are reflected in Equity in
Earnings of Unconsolidated Affiliates.
Energy Services' largest subsidiary, Sonat Marketing Company L.P.
("Marketing"), sells natural gas throughout much of the United States. Marketing
is 65-percent owned by a subsidiary of Energy Services, with the remaining
interest owned by a subsidiary of Atlanta Gas Light Company. It is responsible
for the sale of most of Exploration's natural gas production and at year-end
1995 was the tenth largest natural gas marketer in the United States. In April
1995 Energy Services formed a new subsidiary, Sonat Power Marketing Inc. ("Power
Marketing"), to market electric power. Energy marketing activities contributed
approximately four percent of Sonat's consolidated operating income for 1995,
inclusive of the minority interest.
Sonat was incorporated under the laws of Delaware in 1973 in connection
with a reorganization of Southern. At March 1, 1996, Sonat and its subsidiaries
employed approximately 1,850 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.
I-1
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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, 1995,
Exploration had operations or properties in 13 states. Exploration had working
interests in approximately 2.1 million gross acres or 1.4 million net acres
onshore as of December 31, 1995. Of this onshore acreage, approximately 1.1
million gross or 600,000 net acres were producing oil or gas. In addition, as of
such date, Exploration had a working interest in 53 federal offshore blocks in
the Gulf of Mexico and one state offshore block, totaling approximately 200,000
gross acres or 100,000 net acres. Of these blocks, 45 were producing oil or gas.
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 from 250
billion cubic feet ("Bcf") of natural gas equivalent to approximately 1.8
trillion cubic feet of natural gas equivalent at the end of 1995. Approximately
85 percent of Exploration's proved reserves are natural gas.
In 1995 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 1995 Exploration acquired approximately 350 Bcf of proved natural
gas equivalent reserves in 59 separate transactions totaling $209 million, for
an average acquisition cost of $.60 per thousand cubic feet equivalent. Through
these acquisitions, Exploration increased its position in North Louisiana and
the Texas Panhandle area.
In July 1995 Exploration and Taurus Exploration U.S.A. Inc. ("Taurus"), a
wholly owned subsidiary of Energen Corporation, entered into an agreement
pursuant to which Taurus joined Exploration in its regular oil and gas reserve
acquisition program through December 31, 1998. Taurus expects to invest $25
million to $50 million annually to acquire working interests up to a maximum of
40 percent of the working interest acquired by Exploration in property
acquisitions made during this period. Development drilling on the acquired
properties will involve additional investment by Taurus. Exploration will
operate all properties acquired.
Through March 1 Exploration has closed six acquisitions in 1996 for a total
purchase price of approximately $34 million. Proved reserves added from these
transactions are approximately 72 Bcf equivalent. The largest transaction was
Exploration's acquisition for approximately $24 million of all the interests of
Pennzoil Exploration and Production Company in five fields located in the Gulf
of Mexico. Proved reserves from this acquisition are estimated at 46 Bcf
equivalent. Pursuant to its arrangement with Taurus described above, Exploration
will transfer a portion of the interests acquired from Pennzoil to Taurus in
exchange for a proportionate share of the purchase price. Exploration will be
the operator for all of the purchased properties.
In 1995 Exploration continued its aggressive drilling program,
participating in the drilling of 296 development wells, of which 97 percent were
successful. Exploration also participated in the drilling of one exploratory
well in 1995, which was successful. Of the total of 297 wells in which
Exploration participated in drilling in 1995, it operated 180. Exploration
increased net proved reserves during 1995 by approximately 269 Bcf of natural
gas equivalent through drilling and producing operations.
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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 24
horizontal wells in this trend during 1995, all of which were successful.
As of December 31, 1995, Exploration's net proved reserves totaled 44
million barrels of crude oil, condensate, and natural gas liquids and 1,506 Bcf
of natural gas. As of December 31, 1994, Exploration's net proved reserves
amounted to 32 million barrels of crude oil, condensate, and natural gas liquids
and 1,367 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.
Exploration's total exploration and production capital expenditures in 1995
were $416 million compared with $390 million in 1994. Exploration will continue
to emphasize producing property acquisitions and development drilling in 1996,
when capital spending is expected to be approximately $323 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
operating and other costs, Exploration disposed of certain non-strategic oil and
gas interests in 1995 in the states of Arkansas, Colorado, Louisiana, and Texas.
These properties were sold for a total of approximately $105 million and
included net proved reserves of approximately 189 Bcf natural gas equivalent.
Exploration expects that it will continue to upgrade its asset base through
disposal of non-strategic properties in the future.
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 with respect to losses 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, 1995. 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................................................ 84,634 38,998 123,632
Arkansas............................................... 293,307 34,299 327,606
Louisiana.............................................. 137,186 626,615 763,801
Oklahoma............................................... 221,397 69,452 290,849
Texas.................................................. 335,851 188,021 523,872
Other.................................................. 26,041 2,901 28,942
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Total........................................... 1,098,416 960,286 2,058,702
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OFFSHORE GROSS LEASE BLOCKS
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AREA PRODUCING NON-PRODUCING TOTAL
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Mustang Island.............................................. 4 2 6
High Island................................................. 5 0 5
Sabine Pass................................................. 5 0 5
West Cameron(1)............................................. 14 0 14
East Cameron................................................ 9 2 11
Eugene Island(2)............................................ 3 1 4
Ship Shoal.................................................. 2 2 4
Main Pass................................................... 0 3 3
Mississippi Canyon(3)....................................... 4 0 4
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Total.................................................. 46 10 56
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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 14 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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(MAP)
I-5
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CONSOLIDATED NET PRODUCTION
Exploration had interests in production from 2,929 producing wells onshore
and 131 producing wells offshore as of December 31, 1995. 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 1993 to 1995 and the average sales prices for those years
(including transfers). The average production (lifting) costs per unit of oil
and gas was $.38 in each of 1995, 1994, and 1993. 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 57 percent of Exploration's revenues in
1995 and 65 percent in 1994.
During 1993 Marketing entered into agreements with Exploration pursuant to
which Marketing purchases substantially all of Exploration's natural gas
production that is not sold under pre-existing term dedications. The purchase
prices for natural gas covered by these agreements is based on representative
index prices agreed upon by Exploration and Marketing as representing the market
value of the gas. 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 its production to reduce the risks
associated with spot-market price volatility. See Note 3 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,
1995.
<TABLE>
<CAPTION>
TOTAL NO. OF
PRODUCTIVE NO. OF
WELLS WELLS
------------- DEVELOPED UNDEVELOPED BEING
OIL GAS ACRES ACRES DRILLED
--- ----- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Gross........................................ 360(1) 2,700(2) 1,292,357 1,007,424 98
Net.......................................... 242 1,528 765,465 815,706 64
</TABLE>
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(1) One of these wells is a multiple completion.
(2) 203 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 1993 through 1995.
<TABLE>
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NET EXPLORATORY NET DEVELOPMENT
WELLS DRILLED WELLS DRILLED
----------------------- ----------------------------
1993 1994 1995 1993 1994 1995
---- ----- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Productive.............................. 3.71 0 0.50 145.22 180.00 187.05
Dry..................................... 6.00 13.70 0 20.15 43.79 9.40
</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, marketers, and individual producers or
operators.
Exploration's realized natural gas prices averaged $1.52 per thousand cubic
feet in 1995, down from $1.83 in 1994. Oil and condensate prices were higher in
1995, averaging $17.61 per barrel versus $15.91 per barrel in 1994. Natural gas
prices were depressed during most of 1995 as the 1994-95 winter season was mild
and natural gas storage levels after the winter heating season were left much
higher than the prior year. Natural gas prices rebounded sharply in late 1995,
however, as winter weather caused local distribution companies to seek
additional supplies of natural gas in order to preserve their storage supplies.
In addition, natural gas drilling was down while demand was up from 1994 levels,
thereby bringing supply and demand for natural gas closer into balance. Prices
for natural gas began 1996 at levels significantly higher than during the same
months in 1995 as cold winter weather created the need for additional gas
supplies. Exploration hedged a substantial majority of its first quarter 1996
natural gas production at prices that were below the current spot market.
Nevertheless, Exploration will realize a substantial increase in gas prices over
the first quarter of 1995. A small portion of Exploration's natural gas
production is hedged beyond the first quarter of 1996. Exploration is unable to
predict price levels for oil or natural gas in 1996 or beyond, but if actual
prices for 1996 continue at levels approximating the natural gas futures prices
as of March 15, 1996, Exploration's profitability should improve in 1996 over
1995.
TRANSMISSION AND STORAGE 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 9,322 miles of interstate pipeline and 454
miles of intrastate pipeline. Its interstate pipeline system has a certificated
daily delivery capacity of 2.4 billion cubic feet of natural gas. Southern's
interstate 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-16.
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 and Storage 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. Southern has a comprehensive safety program
to address these risks and has consistently ranked at or near the top of its
industry peer group in safety performance. Sonat maintains broad insurance
coverage on behalf of Southern insuring against financial loss resulting from
these operating risks.
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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 provide services. 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. Various parties have appealed the Order to the
Court of Appeals for the District of Columbia Circuit.
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.
As of December 31, 1995, Southern had either paid or accrued $263 million
in GSR costs (including 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 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, 1995, Southern had incurred $83 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 had
generally opposed 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. In an order issued on September 29, 1995 (the
"Settlement Order"), the FERC approved a comprehensive settlement (the "Customer
Settlement") that Southern had filed on March 15, 1995. Several parties that
opposed the Customer Settlement have filed with the FERC requests for rehearing
of the Settlement Order. The FERC has not yet ruled on those rehearing
petitions. The Customer Settlement resolves, as to the parties supporting the
settlement, all of Southern's pending rate proceedings and proceedings to
recover GSR and other transition costs associated with the implementation of
Order No. 636. The Customer Settlement was supported initially by Southern, the
FERC staff, customers representing approximately 95 percent of the firm
transportation capacity on Southern's system, and other parties.
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On November 20, 1995, Southern and one of the initial contesting parties to
the Customer Settlement filed a settlement with the FERC pursuant to which that
party became a supporting party to the Customer Settlement. The November 20
settlement, which was not opposed, was approved by the FERC on February 2, 1996.
With that addition, the Customer Settlement is now supported by customers
representing approximately 97 percent of the firm transportation capacity on
Southern's system.
The Customer Settlement resolves, as to the supporting parties, all issues
in Southern's current and prior rate cases. These four major rate cases cover
consecutive periods beginning September 1, 1989, January 1, 1991, September 1,
1992, and May 1, 1993, respectively. Southern will credit in the aggregate the
full amount of Southern's rate reserves as of February 28, 1995 (approximately
$155 million), less certain amounts withheld for potential rate refunds to
contesting parties, to reduce the GSR costs borne by Southern's customers.
Southern implemented reduced settlement rates for parties that supported the
Customer Settlement effective March 1, 1995. 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.
The Settlement Order also included authorizations for Southern to construct
approximately $27 million of additional facilities to improve its existing level
of transportation service and to expand service to Atlanta Gas Light Company and
South Carolina Pipeline Corporation and its affiliate under firm contracts with
terms of at least three years.
In addition to approving the Customer Settlement, the Settlement Order
decided on the merits all cost of service (including rate of return and the
recovery of costs associated with Southern's Mississippi Canyon pipeline), cost
allocation, and rate design issues in Southern's current rate case for the
period beginning May 1, 1993. These rulings included a reversal of a 1994
administrative law judge determination that Southern could not include in its
rates any portion of the approximately $45 million cost of a pipeline that
Southern constructed in 1992 to connect gas reserves developed by Exxon
Corporation in the Mississippi Canyon and Ewing Bank Area Blocks, offshore
Louisiana. The Settlement Order also applied the merits determination concerning
the recovery of Southern's Mississippi Canyon pipeline costs to the rate period
beginning September 1, 1992. These determinations form the basis of FERC's
approval of Southern's current rates to the contesting parties and refunds due
them with respect to certain past rate periods. The contesting parties' requests
for rehearing of the Settlement Order included challenges to many of the
substantive rate determinations in the Settlement Order, such as the cost
recovery of Southern's Mississippi Canyon pipeline, Southern's rate of return on
equity, IT rate design, the appropriate IT and FT billing units used for
designing rates, and the allocation of storage costs.
Many of the other issues in the rate cases beginning September 1, 1989,
January 1, 1991, and September 1, 1992, have previously been settled with the
contesting parties. Thus, if the Customer Settlement and the rates
determinations made in the Settlement Order are upheld on rehearing, there
remains to be litigated, as to the contesting parties, the GSR cost recovery
discussed below and only certain cost allocation and rate design issues, which
would not be material even if such rate issues are determined adversely to
Southern. The Customer Settlement continues to be contested by certain
interruptible customers and firm customers representing approximately three
percent of Southern's firm transportation capacity.
The Settlement Order also permits the contesting parties to litigate the
issue of the recovery of Southern's GSR and other Order No. 636 transition costs
with the results to be applied only to such parties. The Settlement Order
decided the level of Southern's rates to contesting parties for the period
beginning March 1, 1995, and, as described above, ruled on numerous other rate
issues for the pre-March 1, 1995, periods.
In the event that the FERC on rehearing does not uphold the Customer
Settlement and reverses or materially modifies its prior determinations of the
substantive rate issues decided in the Settlement Order, then all parties would
be permitted to challenge Southern's recovery of GSR and other transition costs
and Southern's current rates would be affected by such ruling. In such event,
Southern is unable to predict the outcome of any such transition costs recovery
litigation or any modification of the FERC's prior rate determination, but the
effect in the aggregate could be material.
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If the FERC denies the contesting parties' rehearing requests, the
Settlement Order will be subject to appeal to the courts. Although there can be
no assurances, Southern believes that rehearing of the Settlement Order,
including the challenges to the rate determinations in that order, should be
denied by the FERC and that the Settlement Order should be upheld on any
judicial appeal.
In accordance with the cost-sharing mechanism adopted in the Customer
Settlement, pursuant to which Southern will absorb an agreed-upon portion of its
total GSR costs, Southern is now at the level of GSR costs that requires it to
absorb 50 percent of all additional GSR costs incurred. In the fourth quarter of
1994, Sonat recognized a $29 million charge associated with the Customer
Settlement, which included anticipated amounts for GSR costs that Southern would
not recover from its customers, and a $28 million charge for a provision
relating to regulatory assets that may not be recovered as a result of the
Customer Settlement, including amounts for a corporate restructuring undertaken
in 1994. In the fourth quarter of 1995, Southern recognized an additional $11
million charge, reflecting expensed GSR costs not expected to be recovered from
customers, based on its estimate of total GSR costs at December 31, 1995.
The amount of GSR costs that Southern 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, contract renegotiations that have occurred, and price differential costs
actually incurred, the amount of GSR costs was estimated at December 31, 1995,
to be approximately $366 million on a present-value basis.
Storage Fields. 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 had
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 as part
of the Customer Settlement. Southern agreed to review, in the fall of 1995 and
1996, the amount of storage at Muldon that had been reclassified to cushion gas
and to report its conclusions to its customers. If, as a result of either
review, Southern determines that additional working storage capacity may be made
available to its customers, it must promptly offer such capacity to them.
Otherwise, the reclassification of 21 Bcf of working storage gas to cushion gas
at Muldon cannot be challenged until Southern files a new general rate case. In
January 1996 Southern informed its customers that the results of its 1995 review
supported the reclassification and that Southern proposed no adjustment to the
total level of working storage gas at Muldon at this time.
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 65 Bcf of gas, half of which is committed to
Southern. At December 31, 1995, Bear Creek's gross facilities cost was
$247,329,000, its net facilities cost was $159,348,000, and its participants'
equity was $96,008,000. Southern had an investment in Bear Creek, including its
equity in undistributed earnings, of $48,004,000 at December 31, 1995.
Under the terms of Order No. 636, 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 are now used for such services.
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 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.
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Transportation service is rendered by Southern for its distribution
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. During 1995
Southern transported gas to nine gas distribution companies, to 113 municipal
distributors and gas districts, to eight connecting interstate pipeline
companies, and to 56 industrial end-users. The principal industries served
directly by Southern's pipeline system and indirectly through its customers'
distribution systems include the chemical, pulp and paper, textile, primary
metals, stone, clay, and glass industries.
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
reservation charge designed so that the customer pays for a significant portion
of the service each month based on a transportation 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.
Transportation volumes in 1995 for Southern and all of its subsidiaries
were 1,016 Bcf, compared with transportation volumes in 1994 of 886 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1995 sales of 93 Bcf and 1994 sales of 103 Bcf. With the exception
of eight Bcf of sales made by Sonat Intrastate-Alabama Inc. in 1995, the volumes
associated with the 1995 and 1994 sales are not accounted for as sales volumes,
but rather 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.
Pursuant to the Customer Settlement, Southern's largest customer, Atlanta
Gas Light Company, and its subsidiary, Chattanooga Gas Company, have amended
their 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 will remain under
its current term to April 30, 2007. Also pursuant to the Customer Settlement,
South Carolina Pipeline Corporation has amended one of its firm transportation
contracts totaling 28 million cubic feet per day to extend its primary term for
a period of three years beginning March 1, 1995. Such extension is in addition
to the remaining 160 million cubic feet per day of South Carolina's firm
transportation services that remain in effect under terms extending from 1999
through 2003. Alabama Gas Corporation, Southern's second largest customer, had
earlier executed firm transportation contracts for 393 million cubic feet per
day under terms extending through October 31, 2008. Southern's other customers
have contracted for firm transportation services for terms ranging from one to
ten or more years. As a result, substantially all of the firm transportation
capacity currently available in Southern's two largest market areas is fully
subscribed.
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 the cost of gas under some of these contracts
is in excess of current spot-market prices, Southern currently is incurring no
take-or-pay liabilities under any of these contracts. 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 under contracts that
have been extended through November 30, 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 described above, Southern will
recover in accordance with the Customer Settlement or, pending final 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.
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Transportation and sales by Southern, combined with sales by Marketing, to
one distribution customer, Atlanta Gas Light Company and its subsidiary,
Chattanooga Gas Company, accounted for approximately 11 percent of Sonat's 1995
consolidated revenues. Atlanta was the only customer that accounted for ten
percent or more of Sonat's consolidated revenues for 1995.
Southern continues to pursue growth opportunities to expand its pipeline
system in its traditional market area and to connect new gas supplies. Southern
filed an application on January 24, 1996, with the FERC seeking approval to
extend its pipeline system to provide firm gas transportation service to
customers in North Alabama. Most of the proposed 76 million cubic feet per day
expansion is supported by long-term firm transportation agreements with four
customers, including the cities of Huntsville and Decatur, which have executed
20-year service agreements for 40 million cubic feet per day and 25 million
cubic feet per day, respectively. The $53 million project includes 118 miles of
new pipeline and additional compression on Southern's existing system. The
proposed expansion, which requires FERC approval, is scheduled to be in service
by November 1997. The company that currently provides transportation service to
the city of Huntsville has filed suit against Southern and Huntsville seeking to
have Southern's service agreement with Huntsville set aside as violative of
Alabama's competitive bid laws and the Alabama Constitution. See Item 3. Legal
Proceedings below. This company has also opposed the system expansion
application at the FERC. Southern cannot predict the outcome of this litigation
or the FERC proceeding.
In April 1995 Southern received authorization from the FERC to construct a
21-mile pipeline extension to a delivery point near Chattanooga, Tennessee, to
deliver natural gas to a group of new customers who signed 10-year contracts for
firm transportation volumes totaling approximately 14 million cubic feet per
day. This $11 million project was placed in service November 1, 1995. Southern
also received approval from the FERC on December 5, 1995, to expand its north
main pipeline system to provide approximately 27 million cubic feet per day of
additional firm transportation. This increase in capacity is supported by
10-year firm transportation agreements with 15 customers in Alabama, Georgia,
and Tennessee. The in-service date of this $13 million expansion project is
expected to be November 1996.
In addition, in October 1995 Southern received FERC approval for a
production area expansion project with a capital cost of $15 million. Southern
plans to install 9,400 horsepower of additional compression at its Toca,
Louisiana compressor station south of New Orleans and to install certain receipt
and delivery point facilities in order to increase its capacity to transport gas
supplies on its offshore Louisiana supply system through Toca by 140 million
cubic feet per day. This expansion, which is supported by a 10-year firm
transportation agreement with Shell Offshore Inc., is expected to be in service
in early 1997.
In early 1995 Southern initiated an open season to obtain customer
commitments to expand its system in order to meet the growing demand for natural
gas in the Southeast. In the open season, Southern sought requests for
additional firm transportation services. Southern received requests for
additional firm transportation services in its largest market area totaling
approximately 35 million cubic feet per day. Southern is studying the economic
feasibility of an expansion of its system to serve these requests and
anticipates that it will file an application for authorization to construct and
operate the necessary facilities later this year. If FERC approval is received,
the in-service date for the firm transportation service is expected to be
November 1997.
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.
Gas Supplies. During 1995 Southern reduced the number of its existing
long-term gas supply contracts from 31 to 15. As a result of the prohibition in
Order No. 636 against interstate pipelines providing bundled merchant services,
Southern does not anticipate at this time that it will enter into new gas
purchase contracts in order to continue to provide a merchant sales service.
Except for the sales of its remaining gas supply described above, Southern's
participation in gas supply activities will be limited to the purchase and sale
of minimal volumes of gas from time to time as may be required for system
management purposes, and activities related to the attachment of new gas
supplies to its system so that the shippers on Southern's system will have the
opportunity to purchase those supplies in order to meet their requirements.
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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 several
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 a portion 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-16. Sea Robin is a transportation-only
pipeline that has restructured in compliance with FERC Order No. 636. Sea Robin
transported approximately 302 Bcf of natural gas in 1995 compared to 282 Bcf in
1994. These Sea Robin volumes are included within the Southern transportation
volumes discussed earlier.
In January 1995 Sea Robin filed with the FERC a petition for a declaratory
order that its pipeline system is engaged in the gathering of natural gas and
is, therefore, exempt from FERC regulation under the Natural Gas Act. In June
1995 the FERC denied Sea Robin's petition on the basis that the primary function
of the Sea Robin system is the interstate transportation of gas. Sea Robin's
request for rehearing of that ruling is pending before the FERC. In addition to
their protests in the gathering proceeding, several of the shippers on Sea
Robin's pipeline system filed with the FERC in February 1995 a complaint against
Sea Robin under Section 5 of the NGA claiming that Sea Robin's rates are unjust
and unreasonable and should be reduced. In its answer, Sea Robin asked the FERC
to dismiss the complaint or to find that its rates continue to be just and
reasonable based on the data it presented. Any reduction in Sea Robin's rates as
a result of this complaint 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 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-16. SIA's throughput in 1995
was approximately 28 Bcf compared to 38 Bcf in 1994.
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-16. As described above, South
Georgia has restructured pursuant to Order No. 636 and is a transportation-only
pipeline. South Georgia transported approximately 38 Bcf of natural gas in 1995
compared to 34 Bcf in 1994. 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.
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During 1995 Southern Energy conducted an open season seeking requests from
customers for a new LNG service that would be provided through its LNG
facilities in Savannah. Southern Energy is evaluating the requests received from
potential customers during the open season to determine whether it is
economically feasible to reactivate its LNG facilities. If sufficient
commitments are obtained and the necessary regulatory approvals are received,
the in-service date for the LNG service is expected to be in 1998.
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., an unaffiliated company, 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
1.5 billion cubic feet per day. See the map on page I-16. Florida Gas is the
primary pipeline transporter of natural gas in the state of Florida and the sole
pipeline transporter to peninsular Florida. In 1995 Florida Gas transported 487
Bcf of natural gas, compared to 325 Bcf in 1994.
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 substantially all of 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 placed in service on March 1, 1995, a project 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 1.5 Bcf 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 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 was more than the originally estimated cost of $900
million. While Florida Gas believes that all of the costs of the Phase III
expansion were prudently incurred, Florida Gas' customers have the right under
general rate-making principles to challenge any of these costs as imprudently
incurred.
The FERC's Division of Audits has completed a compliance review of Florida
Gas' books and records for the period January 1, 1991, through December 31,
1994. Among other things, the FERC auditors have proposed adjustments to the
capitalization by Florida Gas of Allowance for Funds Used During Construction
("AFUDC") during construction of its Phase III expansion facilities that, if
made, would result in a reduction of earnings by Florida Gas of approximately
$44 million after-tax. Management of Florida Gas has advised Sonat that it
believes that its method of capitalizing AFUDC on Phase III was proper; however,
the final outcome of this matter cannot be determined.
At December 31, 1995, Citrus' gross pipeline and facilities cost was
$2,797,051,000 and its net cost was $2,401,847,000. Sonat had an investment in
Citrus, including its equity in undistributed earnings, of $319,896,000 at
December 31, 1995. For additional information regarding Citrus, see Management's
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Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II of this report, and the Consolidated Financial Statements
of Citrus 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, has been at certain
times in the past, 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.
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 revenues,
earnings, and cash flows of interstate pipelines, including Southern and Florida
Gas, for the foreseeable future when compared to what was experienced prior to
1994. 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.
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(MAP)
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NATURAL GAS AND ELECTRIC POWER MARKETING
SONAT ENERGY SERVICES COMPANY
Energy Services, which is a wholly owned subsidiary of Sonat, acts as a
holding company for three of Sonat's largely non-FERC-regulated companies
engaged in unregulated natural gas marketing, electric power marketing, and
power generation.
Sonat Marketing Company L.P. Marketing is 65-percent owned by a wholly
owned subsidiary of Energy Services, with the remaining interest owned by a
wholly owned subsidiary of Atlanta Gas Light Company. Marketing's principal
offices are in Birmingham, Alabama and Houston, Texas. It also has regional
offices in Tyler, Texas and Oklahoma City, Oklahoma. It purchases natural gas
from gas producers, interstate pipelines, and other marketing companies and
resells the gas to industrial and commercial users, gas distribution companies,
gas pipelines, and other marketing companies throughout the Gulf Coast,
Southeast, Midwest, and Northeast United States. Marketing also offers a variety
of risk-management, transportation, and storage services to its customers.
Marketing continues to expand its natural gas marketing business. During
1995 Marketing sold 722 Bcf of natural gas compared to 1994 sales of 482 Bcf,
which represented a 50-percent increase. Marketing's average daily sales volumes
reached 2.3 Bcf of natural gas per day at the end of 1995 versus 1.6 Bcf per day
at the end of 1994, making it the tenth largest natural gas marketer in the
country. Much of this growth occurred in the Northeast and Midwest. These market
areas now account for approximately 60 percent of Marketing's sales. Marketing
is continuing its efforts to expand in these and other areas.
Marketing purchases at index-based prices all of the natural gas production
of Exploration that is not sold under pre-existing term dedications. Marketing
remarkets this gas as part of its marketing operations. Marketing executes
Exploration's risk management program as agent for Exploration.
Sonat Power Marketing Inc. Sonat Power Marketing Inc. ("Power Marketing"),
a wholly owned subsidiary of Energy Services, was formed in April 1995 to market
electric power. Significant changes are under way in the electric industry that
create new opportunities. The FERC has initiated, and more than half of the
states are considering, regulatory changes to promote competition and give
purchasers of electricity choices other than their traditional utilities,
similar to the unbundling that occurred in natural gas with Order No. 636. Power
Marketing was created to take advantage of these opportunities. Sonat and
Atlanta Gas Light Company are engaged in discussions regarding the acquisition
by Atlanta Gas Light of a 35-percent interest in Power Marketing.
Power Marketing received its authorization to purchase and sell power in
the wholesale electric power market at market-based rates from the FERC in
August 1995. It began buying and selling power in November 1995. Power Marketing
has entered into enabling agreements for purchases, sales, or transmission of
power with more than 100 investor-owned utilities, municipal systems, and rural
electric cooperative members. These agreements allow the companies to enter into
power transactions on an hourly, daily, monthly, or yearly basis. Power
Marketing is still building its staff and developing the infrastructure
necessary for increased volumes of electricity trading. It is focusing its
activities on increasing its wholesale business as retail opportunities are
limited until regulatory changes are made. Power Marketing is also concentrating
on leveraging relationships already established by Marketing. Its goal is to
achieve an average trading volume of 500 megawatts per hour by the end of 1996.
Sonat Power Inc. Sonat Power Inc. is a wholly owned subsidiary of Energy
Services. In June 1992 Sonat and The AES Corporation announced the formation of
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
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currently planned to be completed by early 1999 and would require an equity
investment from Sonat in the range of approximately $10-15 million.
COMPETITION AND CURRENT BUSINESS CONDITIONS
Competition in the gas marketing and power marketing businesses is intense
and is expected to remain so due to the large number of industry participants,
although 1995 evidenced a growing trend toward consolidation in the gas
marketing industry.
Marketing's operating income declined in 1995 as a result of lower margins
due to increases in competitive pressure, a low gas price environment, and low
price volatility. Market conditions have been much better thus far in 1996, with
higher gas prices and greater price volatility creating greater profit
opportunities for marketers. There is no assurance that current favorable market
conditions will continue for the remainder of 1996.
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.
The transportation rates charged by Sonat Texas Gathering Company, a wholly
owned subsidiary of Exploration, on a small gathering system in South Texas that
it operates, are regulated by the Texas Railroad Commission.
TRANSMISSION AND STORAGE 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
I-18
<PAGE> 22
resale. Gas sold by Marketing and other marketing companies is not regulated by
the FERC. Transportation rates of interstate pipeline companies remain fully
regulated. The maximum transportation rates for gas delivered by SIA into
interstate commerce are also regulated by the FERC. As necessary, Southern, its
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.
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, including SIA, 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 operating 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 $8 million in 1995 compared to $13 million in 1994. Southern
anticipates that such expenditures will be approximately $11 million in 1996.
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), which was approved by the
FERC in a Settlement Order issued September 29, 1995 (described above), that
would resolve all outstanding rate 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.
FORWARD LOOKING STATEMENTS
This report, including the information incorporated by reference herein,
contains forward looking statements regarding Sonat's future plans, objectives,
and expected performance. These statements are based on assumptions that Sonat
believes are reasonable, but are subject to a wide range of risks, and there is
no assurance that actual results may not differ materially. Important factors
that could cause actual results to differ include changes in oil and gas prices
and underlying demand, which would affect profitability and might cause Sonat to
alter its plans, the timing and results of oil and gas drilling and acquisition
programs, which determine production levels and reserves, the results of Sonat's
hedging activities, and the success of management's cost reduction activities.
Realization of Sonat's objectives and expected performance can also be adversely
affected by the actions of customers and competitors, changes in governmental
regulation of Sonat's businesses, and changes in general economic conditions and
the state of domestic capital markets.
ITEM 2. PROPERTIES
A description of Sonat's and its subsidiaries' principal properties is
included under Item 1. Business above and is hereby incorporated by reference
herein.
I-19
<PAGE> 23
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 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.
Alabama-Tennessee Natural Gas Company v. Southern Natural Gas Company and
City of Huntsville was filed in February 1996 in state court in Jefferson
County, Alabama. In this lawsuit, Alabama-Tennessee Natural Gas Company, which
currently provides natural gas transportation service to the city of Huntsville,
Alabama, is seeking to have a 20-year service agreement Southern entered into
with Huntsville to provide 40 million cubic feet per day of firm transportation
service set aside as violative of Alabama's competitive bid laws and the Alabama
Constitution. The service agreement with Huntsville supports a proposed 76
million cubic feet per day, $53 million expansion project for which Southern has
filed an application seeking FERC approval. Management believes that Southern's
service agreement with Huntsville is exempt from the Alabama competitive bid
laws and Huntsville has previously requested and obtained an opinion of the
Attorney General of Alabama to such effect. Management, however, is unable to
predict the outcome of this litigation.
A. L. Briggs, et al. v. Sonat Exploration Company, et al. was filed in
October 1995 in state court in Panola County, Texas against Exploration and its
wholly owned subsidiary, Stateline Gas Gathering Company, by nine royalty
interest owners ("Plaintiffs"). The petition challenges the appropriateness of
certain post-production charges (e.g., gathering, transportation, compression,
and marketing) that had been deducted from Plaintiffs' proportionate share of
the amount Exploration has realized upon the sale of gas attributable to their
royalty interests and alleges numerous violations of law. Relief sought by
Plaintiffs includes actual damages, damages under the Deceptive Trade Practices
Act, exemplary damages, declaratory relief, an accounting, attorneys' fees, and
prejudgment interest. The petition also requests the court to certify a
nationwide class of plaintiffs. In an amended complaint Plaintiffs have also
asserted that certain marketing fees deducted by Marketing in calculating the
amount it paid Exploration for gas volumes purchased by Marketing since
approximately July 1, 1992, are not authorized by law or the applicable leases,
are not necessary, and have not been disclosed in accordance with law; and that
Exploration has breached its contractual duties to royalty owners to obtain the
highest sales price and to account to the royalty owners for their share of the
proceeds attributable to the sale of Exploration's gas. Plaintiffs demanded that
Exploration pay the proper amounts allegedly due them according to their
respective leases, overriding royalty assignments, division orders, and
operating agreements. Exploration intends to defend the litigation vigorously
and to resist Plaintiffs' demands. Management is unable to predict the outcome
of this litigation or the demands made by Plaintiffs or to estimate the amount
or range of potential loss in the event of an unfavorable outcome.
I-20
<PAGE> 24
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.
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 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER OFFICE AGE
- ----------------------------------- -------------------------------------------------- ---
<S> <C> <C>
Ronald L. Kuehn, Jr. .............. Chairman of the Board, President, and Chief 60
Executive Officer
Donald G. Russell.................. Executive Vice President 64
William A. Smith................... Executive Vice President 51
Richard B. Bates................... Senior Vice President 42
James E. Moylan, Jr. .............. Senior Vice President 45
James A. Rubright.................. Senior Vice President and General Counsel 49
Thomas W. Barker, Jr. ............. Vice President -- Finance and Treasurer 51
Beverley T. Krannich............... Vice President -- Human Resources and Secretary 45
William L. Johnson................. Controller 51
</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.
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.
William A. Smith was elected Executive Vice President of Sonat effective
March 1, 1991, and currently serves in that capacity. During the past five years
Mr. Smith has served as an officer of Sonat, Exploration, Southern, and Energy
Services.
Richard B. Bates was elected Senior Vice President of Sonat effective May
1, 1995, and currently serves in that capacity. Mr. Bates has served as
President of Energy Services and Marketing since January 1, 1994. During the
past five years Mr. Bates has served as an officer of Exploration, Energy
Services, and Marketing.
James E. Moylan, Jr. was elected Senior Vice President of Sonat effective
May 1, 1995, and currently serves in that capacity. Mr. Moylan has served as
President of Southern since April 1, 1994. Mr. Moylan served as Vice President
and Controller of Sonat from June 15, 1984, to April 1, 1994.
James A. Rubright was elected Senior Vice President and General Counsel of
Sonat effective April 1, 1995, and currently serves in that capacity. Mr.
Rubright also serves as Executive Vice President and General Counsel of
Exploration, Southern, and Energy Services and as the chief accounting officer
of Sonat. During the five years prior to 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
I-21
<PAGE> 25
Vice President -- Finance and Assistant Treasurer of Exploration and Treasurer
of Southern and Energy Services.
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.
William L. Johnson was elected Controller of Sonat effective August 1,
1995, and currently serves in that capacity. During the past five years Mr.
Johnson has served as an officer of Sonat and Sonat Services Inc.
I-22
<PAGE> 26
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-41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... II-2
Item 8. Financial Statements and Supplementary Data.............................. II-17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................. II-43
</TABLE>
---------------------
The financial data following on pages II-2 through II-42 is reproduced
from, and the Table of Contents below is taken from, the Sonat Inc. Annual
Report to Stockholders for 1995. 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.......................................................................... 27
Report of Management.................................................................. 41
Report of Ernst & Young LLP, Independent Auditors..................................... 41
Consolidated Financial Statements..................................................... 42
Consolidated Balance Sheets...................................................... 42
Consolidated Statements of Income................................................ 44
Consolidated Statements of Changes in Stockholders' Equity....................... 45
Consolidated Statements of Cash Flows............................................ 46
Notes to Consolidated Financial Statements............................................ 47
Selected Consolidated Financial Data.................................................. 66
</TABLE>
II-1
<PAGE> 27
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
OPERATING INCOME
Business segment operating results for Sonat Inc. and its subsidiaries (the
Company) are presented in the table below. The table also shows unusual items
that affect operating income and net income comparisons. Each significant
unusual item is discussed in the respective segment discussions in the
following pages. The table is presented because management believes this
information enhances the analysis of results of operations.
<TABLE>
<CAPTION>
(In Millions)
- ----------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income (Loss):
Exploration and Production $ 23 $ 64 $ 86
Natural Gas Transmission 158 88 145
Energy Marketing 7 12 (1)
Other 1 5 3
- ----------------------------------------------------------------------
189 169 233
- ----------------------------------------------------------------------
Unusual Items (Expense)
Income Included Above:
Exploration and Production
Termination of gas
sales contracts 37 - -
Asset impairment (23) - -
Reduction in force - (2) -
Tax adjustments - - (1)
Natural Gas Transmission
Rate settlement and GSR costs (11) (29) -
Reduction in force and other - (34) -
Tax adjustments - - (2)
Other
Tax adjustments - - (1)
- ----------------------------------------------------------------------
3 (65) (4)
- ----------------------------------------------------------------------
Operating Income Excluding
Unusual Items $186 $234 $237
======================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Millions,
Except Per-Share Amounts)
- ---------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As Reported $193 $141 $261
- ---------------------------------------------------------------------
Unusual Items (Expense)
Income Included Above:
Exploration and Production
Termination of gas
sales contracts 24 - -
Property sales (20) - -
Sale of Sonat
Offshore stock 110 - -
Asset impairment (15) - -
Loss on futures contracts (5) - -
Reduction in force - (1) -
IRS settlement - 8 14
Natural Gas Transmission
Rate settlement
and GSR costs (7) (18) -
Reduction in force
and other - (21) -
IRS settlement - 2 (5)
Tax adjustments - - (3)
Other
Sale of Baker Hughes stock (8) - -
IRS settlement - 10 12
Sale of Sonat Offshore stock - - 100
Tax adjustments - - (2)
- --------------------------------------------------------------------
79 (20) 116
- --------------------------------------------------------------------
Extraordinary Item - - (4)
- --------------------------------------------------------------------
Net Income Excluding
Unusual Items $ 114 $ 161 $ 149
====================================================================
Earnings Per Share of
Common Stock $2.24 $1.62 $3.01
====================================================================
Earnings Per Share of Common
Stock Excluding Unusual Items $1.32 $1.85 $1.72
====================================================================
</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 reserve
and production growth through the acquisition of oil and gas properties with
future development potential and low-risk exploration. Proved reserves have
grown to approximately 1.8 trillion cubic feet of
27
II-2
<PAGE> 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
natural gas equivalent at December 31, 1995, from 250 billion cubic feet of
natural gas equivalent since implementing this strategy in 1988.
During 1995, Sonat Exploration acquired oil and gas interests and
properties for a total of $209 million, which added proved reserves of
approximately 350 billion cubic feet of natural gas equivalent. Through these
acquisitions, Sonat Exploration increased its position in northern Louisiana
and the Texas Panhandle area.
Developmental drilling programs continue to be successful. During 1995,
Sonat Exploration completed 296 gross development wells. Sonat Exploration
increased net proved reserves by approximately 269 billion cubic feet of
natural gas equivalent through drilling and producing operations.
In order to focus its activities and minimize operating and other costs,
Sonat Exploration disposed of certain non-strategic oil and gas interests
during 1995 for approximately $105 million in the states of Arkansas,
Colorado, Louisiana, and Texas and offshore Louisiana. Net proved reserves
related to these properties were approximately 189 billion cubic feet of
natural gas equivalent. Sonat Exploration expects that it will continue to
upgrade its asset base through disposal of non-strategic properties in the
future.
The decline in natural gas prices that began in 1994 continued until the
fourth quarter of 1995. As a consequence, Sonat Exploration's earnings and
cash flow for 1995 were adversely impacted (see discussion below).
Total capital expenditures for Sonat Exploration are expected to
approximate $323 million in 1996. Sonat Exploration plans to increase its
development and exploration activities in anticipation of natural gas prices
being higher than the average 1995 levels. Approximately $186 million of the
1996 capital budget is expected to be spent on development expenditures, as
compared to $177 million in 1995.
In July 1995, Sonat Exploration and Taurus Exploration U.S.A. Inc.
(Taurus), a wholly owned subsidiary of Energen Corporation, entered into an
agreement pursuant to which Taurus joined Sonat Exploration in its regular
oil and gas reserve acquisition program through December 31, 1998. Taurus
expects to invest $25 million to $50 million annually to acquire working
interest up to a maximum of 40 percent of the working interest acquired by
Sonat Exploration in property acquisitions made during this period.
Development drilling on the acquired properties will involve additional
investment by Taurus. Sonat Exploration will operate all properties acquired.
Natural gas production is marketed primarily in the spot-market by Sonat
Marketing Company L.P. (Sonat Marketing), a 65 percent-owned subsidiary of
the Company operating in the Energy Marketing segment. Sonat Exploration,
through Sonat Marketing, uses derivative financial instruments to manage the
risks associated with price volatility for its production. (See Other
Income-Other, Market Risk Management and Note 3 of the Notes to Consolidated
Financial Statements.)
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sales to others $ 175 $ 145 $ 198
Intersegment sales 228 268 155
- --------------------------------------------------------------------------
Total Revenues 403 413 353
- --------------------------------------------------------------------------
Costs and Expenses:
Operating and
maintenance 66 63 52
Exploration expense 9 12 7
General and
administrative 48 46 43
Depreciation, depletion
and amortization 239 207 149
Taxes, other
than income 18 21 16
- --------------------------------------------------------------------------
380 349 267
- --------------------------------------------------------------------------
Operating Income $ 23 $ 64 $ 86
==========================================================================
Equity in Earnings
of Unconsolidated
Affiliates $ 1 $ - $ 5
==========================================================================
Proved Reserves:
Net gas (Bcf) 1,506 1,367 1,187
Net liquids (MBbls) 44,228 31,627 27,094
==========================================================================
Net Sales Volumes:
Gas (Bcf) 183 182 150
Oil and
condensate (MBbls) 3,973 4,155 3,052
Natural gas
liquids (MBbls) 1,496 1,227 726
==========================================================================
Average Sales Prices:
Gas ($/Mcf) $ 1.52 $ 1.83 $ 1.99
Oil and
condensate ($/Bbl) 17.61 15.91 17.42
Natural gas
liquids ($/Bbl) 9.29 8.90 7.96
==========================================================================
</TABLE>
28
II-3
<PAGE> 29
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
1995 VERSUS 1994. Absent the effect of the unusual items identified
earlier, operating income decreased by $57 million primarily due to lower
prices for natural gas.
The price for natural gas averaged 17 percent lower in 1995 compared to
1994, which had the impact of lowering revenues by $58 million. Oil and
condensate prices improved 11 percent to an average price of $17.61 per
barrel in 1995. Total production during 1995 was 216 billion cubic feet of
natural gas equivalent, compared with 214 billion cubic feet of natural gas
equivalent during 1994. Production in 1995 was restrained due to producing
property sales and involuntary curtailments. The Company's hedging program
had the effect of increasing operating revenue in 1995 by $7.1 million (see
Other Income-Other for a discussion of a loss related to natural gas futures
contracts for 1996 periods that ceased to qualify for accounting as hedges).
Two unusual items recognized in 1995 by Sonat Exploration affected
revenues and operating expenses. Revenues included an unusual item of $37
million related to the termination of two long-term gas sales contracts.
Depreciation, depletion and amortization expense included a $23 million
impairment provision related to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 121.
Excluding the impairment provision, operating expenses increased
slightly in 1995 compared to 1994. Operating and maintenance expenses were
higher due to the acquisition of additional properties in early 1995. General
and administrative expenses were slightly higher than 1994 due to an increase
in stock-based compensation expense. Depreciation, depletion and amortization
increased from 1994 primarily due to slightly higher production and a change
in production mix with more production coming from higher amortization
fields.
1994 VERSUS 1993. Operating income for 1994 declined $21 million
excluding unusual items when compared to 1993, primarily due to lower natural
gas prices and higher expenses, particularly depreciation, depletion and
amortization expense.
Revenues for 1994 were up by $60 million over 1993 primarily due to a 21
percent increase in natural gas production and a 36 percent increase in oil
and condensate production resulting from the acquisition and development
program. Natural gas liquids production increased 69 percent over 1993,
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 million cubic feet compared to $2.06
for the fourth quarter of 1993, a 23 percent decrease.
Depreciation, depletion and 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 production in 1994, which was
predominantly oil, condensate and natural gas liquids. 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 in 1994
reflects Sonat Exploration's acquisition of the remaining interest in the
Sonat/P Anadarko Limited Partnership in late 1993.
NATURAL GAS TRANSMISSION
The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company and its subsidiaries (Southern), and Citrus
Corp. (a 50 percent-owned company).
Southern continues to pursue opportunities to expand its pipeline system
in its traditional market area and to connect new gas supplies. Southern
filed an application on January 24, 1996, with the Federal Energy Regulatory
Commission (FERC) seeking approval to extend its pipeline system to provide
firm gas transportation service to customers in North Alabama. Most of the
proposed 76-million-cubic-feet-per-day expansion is supported by long-term
firm transportation agreements with four customers, including the cities of
Huntsville and Decatur which have executed 20-year service agreements for 40
million cubic feet per day and 25 million cubic feet per day, respectively.
The $53 million project includes 118 miles of new pipeline and additional
compression on Southern's existing system. The proposed expansion, which
requires FERC approval, is scheduled to be in service by November 1997. The
company that currently provides transportation service to the city of
Huntsville has filed suit against Southern and Huntsville seeking to have
Southern's service agreement with Huntsville set aside as violative of
29
II-4
<PAGE> 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
Alabama's public bid laws and the Alabama Constitution. This company has
also opposed the system expansion application at the FERC. Southern cannot
predict the outcome of this litigation or the FERC proceeding.
In April 1995, Southern received authorization from the FERC to
construct a 21-mile pipeline extension to a delivery point near Chattanooga,
Tennessee, to deliver natural gas to a group of new customers that signed
10-year contracts for firm transportation volumes totaling approximately 14
million cubic feet per day. This $11 million project was placed in service
November 1, 1995. Southern also received approval from the FERC on December
5, 1995, to expand its north main pipeline system to provide approximately 27
million cubic feet per day of additional firm capacity. This project is
supported by 10-year firm transportation agreements with 15 customers in
Alabama, Georgia and Tennessee. The in-service date of this $13 million
expansion project is expected to be November 1996.
In addition, on October 16, 1995, Southern received FERC approval for a
production-area expansion project with a capital cost of $15 million.
Southern plans to install 9,400 horsepower of additional compression at its
Toca, Louisiana, compressor station south of New Orleans and to install
certain receipt and delivery point facilities in order to increase its
capacity to transport gas supplies on its offshore Louisiana supply system
through Toca by 140 million cubic feet per day. This expansion, which is
supported by a 10-year firm transportation agreement with Shell Offshore
Inc., is expected to be in service in early 1997.
In early 1995, Southern initiated an open season to obtain customer
commitments to expand its system in order to meet the growing demand for
natural gas in the Southeast. In the open season, Southern sought requests
for additional firm transportation services and for a new liquefied natural
gas (LNG) service. Southern received requests for additional firm
transportation services in its largest market area totaling approximately 35
million cubic feet per day. Southern is studying the economic feasibility of
an expansion of its system to serve these requests and anticipates that it
will file an application for authorization to construct and operate the
necessary facilities later this year. If FERC approval is received, the
in-service date for the firm transportation service is expected to be
November 1997. Requests for LNG service are still being evaluated. If
sufficient commitments are obtained and the necessary regulatory approvals
are received, the in-service date for the LNG service is expected to be in
1998. The LNG service would be provided at an existing LNG storage terminal
near Savannah, Georgia, that is owned by Southern Energy Company, a wholly
owned subsidiary of Southern. The LNG facility was constructed in 1978 but was
taken out of service in 1980.
In January 1995, Sea Robin Pipeline Company, a wholly owned subsidiary
of Southern, filed a petition with the FERC requesting it be declared an
unregulated gas gathering system. In February 1995, several of Sea Robin's
shippers filed with the FERC a complaint against Sea Robin under Section 5 of
the Natural Gas Act claiming that Sea Robin's rates are unjust and
unreasonable. The FERC denied Sea Robin's petition in an order issued on June
16, 1995. Sea Robin filed for rehearing of this denial on July 17, 1995. Sea
Robin cannot predict the outcome of these proceedings.
Florida Gas Transmission Company, a wholly owned subsidiary of Citrus,
placed its Phase III expansion project into service on March 1, 1995,
increasing its system capacity by 530 million cubic feet per day to 1.5
billion cubic feet per day. 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 this expansion, Florida Gas
acquired an interest in an existing pipeline connected to its system in the
Mobile Bay area that has been expanded to provide over 300 million cubic feet
per day to Florida Gas.
NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>
(In Millions)
- ---------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income (Loss):
Southern Natural
Gas Company $159 $93 $147
Other (1) (5) (2)
- ---------------------------------------------------------------------------
Total Operating Income $158 $88 $145
===========================================================================
</TABLE>
30
II-5
<PAGE> 31
Sonat Inc. and Subsidiaries
- ------------------------------------------------------------------
SOUTHERN NATURAL GAS
COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In Millions)
- ------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Gas sales $195 $234 $541
Market transportation
and storage(1) 325 321 170
Supply transportation 51 37 50
Other 91 135 72
- ------------------------------------------------------------------
Total Revenues 662 727 833
- ------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 191 229 364
Transition cost recovery
and gas purchase contract
settlement costs 58 116 52
Operating and maintenance 96 151 103
General and administrative 86 72 85
Depreciation and
amortization(1) 52 47 64
Taxes, other than income 20 19 18
- ------------------------------------------------------------------
503 634 686
- ------------------------------------------------------------------
Operating Income $159 $ 93 $147
==================================================================
Equity in Earnings of
Unconsolidated Affiliates $ 9 $ 9 $ 9
==================================================================
(Billion Cubic Feet)
- ------------------------------------------------------------------
Volumes(2):
Intrastate gas sales 8 - -
Interstate gas sales
(excludes storage gas) - - 73
Market transportation 636 551 435
- ------------------------------------------------------------------
Total Market Throughput 644 551 508
Supply transportation 372 335 328
- ------------------------------------------------------------------
Total Volumes 1,016 886 836
==================================================================
Transition gas sales 85 103 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) Volumes for 1995 include 38 billion cubic feet of gas associated with
three subsidiaries of Sonat Inc. that were transferred to Southern on
January 1, 1995, which were not included in Southern's 1994 or 1993
volumes.
CITRUS CORP.
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in Earnings (Loss) of
Citrus Corp. $ 28 $ 29 $ (6)
==========================================================================
(Billion Cubic Feet)
- --------------------------------------------------------------------------
Florida Gas Volumes (100%):
Gas sales - - 15
Market transportation 461 303 269
- --------------------------------------------------------------------------
Total Market Throughput 461 303 284
Supply transportation 26 22 45
- --------------------------------------------------------------------------
Total Volumes 487 325 329
==========================================================================
</TABLE>
1995 VERSUS 1994. Absent the effect of the unusual items identified
earlier, operating income increased by $18 million primarily due to improved
operating results at Southern.
SOUTHERN NATURAL GAS - Operating results, excluding the unusual items
discussed below, increased 11 percent in 1995 due to lower operating expenses
and the sale of previously unsubscribed firm transportation capacity. The
unusual item in 1995 of $11 million increased operating and maintenance
expense in recognition of Southern's share of gas supply realignment (GSR)
costs that will not be recoverable.
The unusual items in 1994 included in Southern's operating expenses
consisted of a $27 million charge associated with recognition of the
comprehensive customer rate settlement (the Customer Settlement) and a $34
million provision primarily relating to regulatory assets not recoverable as
a result of the Customer Settlement, including $19 million attributable to a
corporate restructuring undertaken in 1994. See Rate Matters for a discussion
of the Customer Settlement.
Southern's gas sales revenues and gas costs in 1995 and 1994 represent
recognition of gas sales made from supply remaining under contract after the
implementation of Order No. 636. The volumes associated with these sales are
not accounted for as sales volumes, but rather are included in transportation
volumes because all sales are now made at the wellhead, as required by Order
No. 636.
Market transportation and storage revenues increased in 1995 due in part
to a $16 million revenue reserve provision in 1994 relating to a retroactive
reduction in certain depreciation rates. The effect on operating revenue of
this reduction was partially offset by lower settlement rates that were
placed into effect on March 1, 1995. Supply transportation
31
II-6
<PAGE> 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
revenues increased 38 percent due to increased volumes under Southern's new
transportation contract with Florida Gas. Other Revenue and Transition Cost
Recovery decreased due to declining billings and lower recovery rates for GSR
costs in 1995.
Operating and maintenance expense, excluding the unusual items discussed
above, decreased 6 percent in 1995 reflecting lower fuel costs and the impact
of the 1994 fourth quarter restructuring. General and administrative expense
increased 19 percent in 1995 primarily due to higher employee benefit
expenses related to 1993 and 1994 special early retirement options (SEROs)
and higher stock-based compensation. Depreciation and amortization expense
increased in 1995 due to the $16 million retroactive adjustment in 1994
partially offset by lower depreciation rates as a result of the Customer
Settlement.
Equity in earnings of unconsolidated affiliates primarily represents the
Company's share of earnings from Bear Creek Storage Company. Equity in
earnings from Bear Creek was esentially flat when comparing 1995 to 1994.
CITRUS - Equity in earnings of Citrus decreased slightly in 1995 to $28
million. Earnings were lower on the Phase III expansion project, excluding
the effect of a $6.7 million positive effect of adjustments to allowance for
funds used during construction (AFUDC) on Phase III in 1995, due to the
completion of Phase III 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. This was partially offset by higher margins at Citrus' gas
marketing affiliate, including higher results on a gas supply contract with
one of its major customers that was restructured during 1994. Throughput on
the Florida Gas pipeline system increased 50 percent, reflecting the first 10
months of Phase III operations.
1994 VERSUS 1993. Exclusive of unusual items, operating income increased $4
million in 1994 due to improved operating results at Southern.
SOUTHERN NATURAL GAS - Excluding unusual items, Southern's operating
income for 1994 increased 3 percent when compared with 1993 as a result of
higher transportation revenue resulting primarily 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. 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.
Equity in earnings of Bear Creek for 1994 was unchanged from 1993.
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.
TRANSPORTATION CONTRACTS
Pursuant to the Customer Settlement (described in Note 9 of the Notes
to Consolidated Financial Statements), Southern's largest customer, Atlanta Gas
Light Company, and its subsidiary, Chattanooga Gas Company, have amended their
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 will remain under its
current term to April 30, 2007. Also pursuant to the Customer Settlement, South
Carolina Pipeline Corporation (SCPC) has amended one of its firm transportation
contracts totaling 28 million cubic feet per day, to extend its primary term
for a period of three years beginning March 1, 1995. Such extension is in
addition to the remaining 160 million cubic feet per day of SCPC's firm
transportation services that remain in effect under terms extending from 1999
through 2003. Alabama Gas Corporation, Southern's second largest customer, had
earlier executed firm transportation contracts for 393 million cubic feet per
day under terms extending through October 31, 2008. Southern's other customers
have contracted for firm transportation services for terms ranging from one to
ten or
32
II-7
<PAGE> 33
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
more years. As a result, substantially all of the firm transportation
capacity currently available in Southern's two largest market areas is fully
subscribed.
NATURAL GAS SALES AND SUPPLY
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 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 the cost of gas under some of
these contracts is in excess of current spot-market prices, Southern
currently is incurring no take-or-pay liabilities under any of these
contracts. Two market-priced contracts entered into with Exxon Corporation in
1995 as part of a settlement of certain other gas purchase contracts account
for 76 percent and 72 percent in 1996 and 1997, respectively, of the purchase
commitments described below. Of such purchase commitments, the percent that
is priced in excess of current spot-market prices is 19 percent in 1996, 23
percent in 1997, and substantially all of the volumes for years thereafter.
(See Note 9 of the Notes to Consolidated Financial Statements for a
discussion of price differential GSR costs.) Pending the termination of these
remaining supply contracts, Southern has sold a portion of its remaining gas
supply to a number of its firm transportation customers under contracts that
have been extended through November 30, 1997. The remainder of Southern's gas
supply will continue to be sold on a month-to-month basis.
Southern's purchase commitments under its remaining gas supply contracts
for the years 1996 through 2000 are estimated as follows:
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------------
Estimated Purchase Commitments
- --------------------------------------------------------------------------------
<S> <C>
1996 $154
1997 137
1998 38
1999 35
2000 31
- --------------------------------------------------------------------------------
</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.
See Note 9 of the Notes to Consolidated Financial Statements for a
discussion regarding Southern's rate proceedings to recover its GSR costs.
RATE MATTERS
The Customer Settlement resolves as to the parties supporting the settlement,
all of Southern's pending rate proceedings and proceedings to recover GSR and
other transition costs associated with the implementation of Order No. 636.
The Customer Settlement resulted in reducing Southern's filed rates to more
competitive levels, reduced somewhat reported revenues and reduced
depreciation expense in 1995. Southern implemented reduced settlement rates
for parties that supported the Customer Settlement effective March 1, 1995,
pursuant to interim agreements with its customers pending final FERC action
on petition for rehearing of the Customer Settlement filed by contesting
parties. (See Note 9 of the Notes to Consolidated Financial Statements for a
discussion of the Customer Settlement and other rate matters.)
CITRUS CORP.
The Florida Gas Phase III expansion project has been in operation since March
1995. The earnings of the Phase III expansion, combined with Florida Gas'
Order No. 636 restructuring and Citrus' successful renegotiation in 1994 of
an unfavorable contract with one of its major customers, should result in
more stable revenues, earnings and cash flow at Citrus for the foreseeable
future than experienced prior to 1994, but at lower levels than in 1994 and
1995.
Florida Gas has terminated substantially all of 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.
Citrus generally obtains its own financing independent of its parent
companies. Current debt financing by Citrus with outside parties is
nonrecourse to its parent companies.
33
II-8
<PAGE> 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
ENERGY MARKETING
The Company's natural gas marketing business is conducted by Sonat Marketing
Company L.P. (Sonat Marketing). Sonat Marketing is 65 percent owned by a
subsidiary of Sonat Energy Services, a wholly owned subsidiary of the
Company, with the remaining share owned by Atlanta Gas Light Company. (See
Note 2 of the Notes to Consolidated Financial Statements.)
Sonat Marketing's average daily sales volumes reached 2.3 billion cubic
feet per day at the end of 1995 compared to 1.6 billion cubic feet per day at
the end of 1994, primarily due to its rapid expansion into the Northeastern
and Midwestern markets. Sonat Marketing markets almost all of the natural gas
production of Sonat Exploration that is not sold under pre-existing term
dedications, and executes Sonat Exploration's risk management program.
Sonat Marketing uses natural gas futures contracts, options, and gas
price swap agreements to hedge the effects of spot-market price volatility on
its operating results. These instruments are used to lock in prices of Sonat
Exploration's future production and margins on Sonat Marketing's gas
transactions. Sonat Marketing also uses futures derivatives to enable it to
offer fixed-price contracts to its suppliers and customers. (See Market Risk
Management and Note 3 of the Notes to Consolidated Financial Statements.)
In April 1995, Sonat Energy Services formed a new subsidiary, Sonat
Power Marketing Inc., to market electric power. Sonat Power Marketing was
authorized by the FERC in August 1995 to purchase and sell electricity in the
wholesale power market at market-based rates. It offers services to
utilities, municipalities and other electricity suppliers and remarketers.
Sonat and Atlanta Gas Light Company are engaged in discussions regarding the
acquisition by Atlanta Gas Light of a 35 percent interest in Sonat Power
Marketing.
ENERGY MARKETING
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sonat Marketing $1,250 $927 $620
Other - 15 15
- --------------------------------------------------------------------------------
Total Revenues $1,250 $942 $635
================================================================================
Operating Income (Loss):
Sonat Marketing $ 8 $ 11 $ 2
Other (1) 1 (3)
- --------------------------------------------------------------------------------
$ 7 $ 12 $ (1)
================================================================================
(Billion Cubic Feet)
- --------------------------------------------------------------------------------
Gas Sales Volumes 722 482 285
================================================================================
</TABLE>
Substantially all of the operations of the Energy Marketing segment are
conducted through Sonat Marketing. Sonat Power Marketing's impact was
immaterial in 1995. Pipeline subsidiaries that contributed in prior years
were moved to the Natural Gas Transmission segment in 1995.
1995 VERSUS 1994. Sonat Marketing's operating income of $8 million was
$3 million less than 1994. While sales volumes rose 50 percent to 722 billion
cubic feet, margins were sharply lower ($.03 in 1995 compared to $.05 in
1994) due to the lower margins that were prevalent for gas marketers during
most of 1995. In addition, certain transportation related margin
opportunities available in early 1994 following the implementation of Order
No. 636 became much more competitive and less profitable during late 1994 and
1995. Higher costs related to expanding operations and an increase in
stock-based compensation expense also reduced operating income.
1994 VERSUS 1993. 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 Midwestern and Northeastern markets
through the purchase of additional third-party volumes. In addition, average
margins per MMBtu increased from $.03 in 1993 to $.05 in 1994 due to greater
concentration on value-added services.
34
II-9
<PAGE> 35
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
(In Millions)
- ----------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME - EQUITY
IN EARNINGS OF
UNCONSOLIDATED AFFILIATES:
Exploration and Production $ 1 $ - $ 5
Natural Gas Transmission 37 38 2
Other 8 6 5
- ----------------------------------------------------------------------------
$ 46 $ 44 $ 12
============================================================================
</TABLE>
Equity in earnings of unconsolidated affiliates in the Exploration and
Production and Natural Gas Transmission segments was discussed earlier.
1995 VERSUS 1994. The increase in Other reflects improved results for
Sonat Offshore Drilling Inc. prior to its disposition. The Company disposed
of its 40 percent ownership in Sonat Offshore on July 26, 1995. (See Note 2
of the Notes to Consolidated Financial Statements.)
1994 VERSUS 1993. Results reported for Sonat Offshore 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.
<TABLE>
<CAPTION>
(In Millions)
- ---------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME (LOSS) - OTHER $(45) $16 $14
</TABLE>
1995 VERSUS 1994. Other Income is down due to losses of $29 million on
the sale of oil and gas properties in 1995 versus gains of $2 million in
1994, a loss of $13 million on the sale of the Company's investment in Baker
Hughes Incorporated preferred stock in June 1995, and a loss by Sonat
Exploration in December 1995 of $8 million on natural gas futures contracts
that ceased to qualify for accounting as hedges due to the loss of
correlation between the New York Mercantile Exchange (NYMEX) futures market for
natural gas and the price of natural gas in certain parts of the country. In
addition, 1995 reflects $6 million of dividends on the Baker Hughes stock
versus $12 million in 1994 that are no longer being received and minority
interest in earnings of Sonat Marketing of $.9 million.
1994 VERSUS 1993. Other Income increased in 1994 due to higher gains on
the disposal of oil and gas properties by Sonat Exploration compared to 1993.
Both periods reflect the receipt of $12 million in dividends on the Baker
Hughes stock.
<TABLE>
<CAPTION>
(In Millions)
- ------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EXPENSE, NET $90 $73 $47
</TABLE>
1995 VERSUS 1994. Net interest expense for 1995 included a $4 million
favorable adjustment on income tax related interest. 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. Excluding
these adjustments, net interest expense on debt increased from 1994 due to
higher average interest rates slightly offset by lower average debt levels.
Interest on revenue reserves increased due to higher average reserve balances.
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 average debt levels.
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME TAXES $ 95 $ 16 $ 103
</TABLE>
1995 VERSUS 1994. Income tax expense in 1995 increased due to taxes from
the gain on the sale of the Company's remaining interest in Sonat Offshore
stock (see Note 2 of the Notes to Consolidated Financial Statements) and
lower nonconventional fuel tax credits and other tax preference items. In
addition, the 1994 period included a favorable settlement relating to the
examination of the Company's federal income tax returns for 1986-1988 which
reduced reported income tax expense.
35
II-10
<PAGE> 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
1994 VERSUS 1993. Income tax expense in 1994 decreased as compared to
1993 due to lower pretax income. Pretax income in 1993 included the gain on
the IPO of Sonat Offshore common stock. 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.
<TABLE>
<CAPTION>
(In Millions)
- ------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------
<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 71/4 Percent Zero Coupon,
Subordinated Convertible Notes which were due September 6, 2005.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
(In Millions)
- ---------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES $184 $511 $454
</TABLE>
1995 VERSUS 1994. Several factors contributed to the $327 million
decrease in cash flows from operations in 1995 compared to 1994. A $45
million payment to Exxon and the funding of a $42 million GSR liability were
the principal expenditures responsible for the $99 million change in net
payments for gas supply realignment costs. On March 1, 1995, Southern
implemented reduced rates and ceased collection of additional revenues, which
is reflected in the $64 million reduction in cash flows from regulatory
reserves. In 1994 Southern completed recovery of its take-or-pay costs, which
resulted in the $19 million reduction in recoveries of take-or-pay costs. The
growth in both accounts receivable and accounts payable is primarily
attributable to the expanding business of Sonat Marketing. Cash flow from
operations in 1995 was also negatively impacted by the payment of $112
million in taxes on the sale of the Company's remaining interest in Sonat
Offshore stock. Partly offsetting was the recognition of $72 million of tax
benefits consisting of the utilization of Section 29 tax credits and net
operating losses. In addition, cash from operations was adversely affected by
margin requirements of $23 million in December 1995 associated with the
Company's hedging program and the rapid rise of futures prices for first
quarter 1996 futures contracts.
The caption Other in the Consolidated Statement of Cash Flows includes
certain significant non-cash items that did not impact cash flow from
operations. In 1995, Other includes $37 million related to the termination of
two long-term gas sales contracts, while Other in 1994 includes a $57 million
provision for the Customer Settlement discussed in Note 9 of the Notes to
Consolidated Financial Statements. The remainder of the amount included in
Other in 1995 is primarily certain transition costs deferred for collection
in future periods. In addition to the Customer Settlement provision in 1994,
Other includes a gas prepayment received by Sonat Exploration and deferred
revenue credits.
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 Southern's GSR 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 Southern completed 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 the $57 million non-cash provision
for the Customer Settlement, while the amount in Other in 1993 reflects $52
million in non-cash accruals for GSR settlements. The remainder of 1994 Other
is primarily a gas prepayment and deferred transition costs. Another
significant gas prepayment received by Sonat Exploration in 1993 accounts for
most of the remaining amount in Other in the previous year.
36
II-11
<PAGE> 37
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions)
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES $ 92 $(601) $(189)
</TABLE>
1995 VERSUS 1994. Net cash from investing activities increased $693
million from 1994. The increase was attributable to the receipt of $326
million from the sale of the Company's remaining interest in Sonat Offshore
stock, $167 million from the sale of four million shares of Baker Hughes
convertible preferred stock, and $105 million in proceeds from the sale of
Sonat Exploration properties. Also contributing to the increase were the net
advances made to Citrus in 1994 of $159 million. Partially offsetting the
increase was an increase in capital expenditures of $39 million.
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.
<TABLE>
<CAPTION>
(In Millions)
- -------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES $(248) $ 89 $(312)
</TABLE>
1995 VERSUS 1994. Sonat used $248 million of cash in its financing
activities in 1995, primarily due to repayments of floating rate facilities.
This represented a change of $337 million from the 1994 period. Proceeds from
the Sonat Offshore stock sale and the Baker Hughes stock sale were used in
the 1995 repayments. Other includes the $32 million contributed by Atlanta Gas
Light as an investment in Sonat Marketing (see Note 2 of the Notes to
Consolidated Financial Statements).
The Company utilizes its $500 million long-term revolving credit
agreement in managing its working capital requirements. During 1995, the
Company borrowed $2.9 billion and repaid $3.3 billion under this agreement.
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 95/8 Percent
Notes.
CAPITAL EXPENDITURES
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
(In Millions)
- -------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production $ 416 $ 390 $ 431
Natural Gas Transmission 63 51 60
Energy Marketing 3 3 1
Other 6 4 24
- -------------------------------------------------------------------------
Total $ 488 $ 448 $ 516
=========================================================================
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates were as follows:
<TABLE>
<CAPTION>
(In Millions)
- -------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production $ 1 $ - $ 11
Natural Gas Transmission 100 398 18
Other 1 1 3
- -------------------------------------------------------------------------------
Total $ 102 $ 399 $ 32
===============================================================================
</TABLE>
The Company's capital expenditures (including its $13 million share of
unconsolidated affiliates' expenditures) for 1996 are expected to be $457
million.
CAPITAL RESOURCES
At December 31, 1995, the Company had lines of credit and a revolving credit
agreement with a total capacity of $750 million. Of this, $531 million was
available. The amount available under the lines of credit has been
reduced by the amount of commercial paper outstanding of $210 million 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 agreement.
In 1993 Sonat filed a shelf registration with the Securities and
Exchange Commission (SEC) for up to $500 million in debt securities. On June
12, 1995, Sonat issued $200 million of 67/8 Percent Notes due 2005 under this
shelf registration, leaving $300 million unissued. The proceeds from the sale
of the Notes were used to repay floating rate debt. Southern also has a shelf
registration with the SEC for up to $200 million in debt securities, of which
$100 million has been issued. Southern expects to issue the $100 million
remaining under the shelf registration in either late 1996 or early 1997.
Also, in October 1995 the Board of Directors of the
37
II-12
<PAGE> 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- -------------------------------------------------------------------------------
Company extended the Company's stock repurchase program to April 30,
1997, and authorized the purchase of an additional one million shares of the
Company's common stock. This brings the total number of shares authorized to
three million shares. Through December 31, 1995, the Company has purchased
1,585,000 shares and will continue to purchase shares from time-to-time on
the open market or in privately negotiated transactions. Shares purchased
under the authorization are being reissued in connection with employee stock
option and restricted stock programs.
Cash flow from operations and borrowings in the public or private
markets provide the Company with the means to fund operations and currently
planned investment and capital expenditures.
MARKET AND FINANCIAL RISK MANAGEMENT
The Company's primary market risk exposure is the volatility of spot-market
natural gas and oil prices, which affect operating results of Sonat
Exploration and Sonat Marketing.
Sonat Exploration, through Sonat Marketing, uses futures contracts,
options, and oil and natural gas price swap agreements to hedge its commodity
price risk. Sonat Exploration's hedging objective is to lock in the price of
a portion of its expected oil and gas production when it believes that prices
are at an acceptable level.
Sonat Marketing uses derivative instruments to reduce the risk of price
changes and location differences when it buys or sells natural gas. 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.
The Company also has exposure to financial market risks. On January 22,
1996, Southern entered into a forward rate agreement to hedge the interest rate
risk of an anticipated future borrowing under its shelf registration. The
base treasury rate for this future borrowing has been hedged at approximately
5.78 percent. This is the first such hedge transaction for Southern.
The Company's use of these derivative instruments is implemented under a
set of policies approved by the Board of Directors. These policies prohibit
speculative transactions not matched by physical commodity positions in the
case of Sonat Exploration or corresponding trading positions in the
case of Sonat Marketing and determine approval levels for each
transaction. For commodity price hedges, these policies set limits regarding
volumes 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 are distributed to
management. In addition, all hedge activities are internally reviewed to
ensure compliance with all policies. (See Note 3 of the Notes to Consolidated
Financial Statements.)
INFLATION AND THE EFFECT OF
CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the past
several years and has not significantly affected the profitability of the
Company. In prior periods of high general inflation, oil and gas prices
generally increased at comparable rates; however, there is no assurance that
this will be the case in the current environment or in possible future
periods of high inflation. Southern's Customer Settlement prohibits it from
filing a general rate case to be effective before March 1, 1998, which would
be necessary for it to recover higher costs of operations (see Note 9 of the
Notes to Consolidated Financial Statements). Margins in the Energy Marketing
segment are highly sensitive to competitive pressures and may not reflect the
effects of inflation. The results of operations in the Company's three major
business segments will be affected by future changes in oil and gas prices
and the interrelationship between oil, gas and other energy prices.
CORPORATE RESTRUCTURING
In late 1994 and early 1995, the Company completed a reduction in staffing
levels through a combination of SEROs and involuntary terminations. The SEROs
and terminations, which involved 340 employees, or approximately 15 percent
of the Company's workforce, occurred primarily in field locations, but also
included significant reductions in office employees. The total cost of the
program, which was recognized in 1994, amounted to $21 million. The majority
of the charge represented accelerated retirement costs, with the remainder
being primarily cash severance payments.
38
II-13
<PAGE> 39
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
Southern and Sonat Exploration have been notified that one of them is or
may be a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) in connection
with a total of eight Superfund sites. In these cases, the Company has
determined that the aggregate maximum amount of loss reasonably likely to be
named by it, after giving effect to likely contributions by other PRPs would
not be material to its financial position or results of operations. However,
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
maximum amounts estimated by the Company.
In the operation of their natural gas pipeline systems, Southern and its
wholly owned subsidiary, South Georgia Natural Gas Company, 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 the environment and to 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 has determined that its pipeline meters may in the past have
been the source of small releases of elemental mercury. As a result, Southern
undertook the characterization of 443 sites across the system during 1995.
Approximately 190 remaining sites are scheduled to be characterized in the
first quarter of 1996, all of which are in Mississippi. After Southern
evaluates the results of the characterization, it plans to remediate
contaminated sites within Georgia during 1996, with remediation of sites
elsewhere to be scheduled thereafter. Southern is unable to estimate the cost
of mercury remediation 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 Environmental Protection Agency
nor any state in which Southern operates has yet issued cleanup levels or
guidelines with respect to contamination from past releases or spills of
mercury; however, Southern has received informal guidance from the State of
Louisiana with respect to cleanup standards in that state that will also be
used for remediation in other states absent specific guidelines. Based on its
experience with other remediation projects, industry experience to date with
remediation of mercury, and its preliminary analysis of the possible extent
of the contamination, Southern believes that the cost of its characterization
and remediation of any mercury contamination will not be material to its
financial position or results of operations.
Sonat Inc. 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 Customer Settlement prevents Southern from filing a
general rate case to be effective prior to March 1, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company
elected to adopt the Statement's provisions in the fourth quarter of 1995 and
recognized an impairment loss of $23 million on certain oil and gas
properties in that period.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, which will become effective for years beginning
after December 15, 1995. This Statement will require that financial
statements include certain disclosures about stock-based employee
39
II-14
<PAGE> 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- -------------------------------------------------------------------------------
compensation and allows, but does not require, a fair value-based method
of accounting for such compensation. The Company believes that this fair
value-based method of accounting, if adopted, would not have a material
effect on the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis and the information provided
elsewhere in this Annual Report contain forward looking statements regarding
the Company's future plans, objectives, and expected performance. These
statements are based on assumptions that the Company believes are reasonable,
but are subject to a wide range of risks, and there is no assurance that
actual results may not differ materially. Important factors that could cause
actual results to differ include changes in oil and gas prices and underlying
demand, which would affect profitability and might cause the Company to alter
its plans, the timing and results of oil and gas drilling and acquisition
programs, which determine production levels and reserves, the results of the
Company's hedging activities, and the success of management's cost reduction
activities. Realization of the Company's objectives and expected performance
can also be adversely affected by the actions of customers and competitors,
changes in governmental regulation of the Company's businesses, and changes in
general economic conditions and the state of domestic capital markets.
40
II-15
<PAGE> 41
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
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's accounting systems include 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 internal accounting
controls should not exceed the related benefits. An integral part of the
internal accounting controls is 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 other procedures 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,
approves 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 internal accounting 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.
/s/ James A. Rubright
James A. Rubright
Senior Vice President and General Counsel
February 22, 1996
- -----------------------------------------------------------------------------
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, in 1995
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
Ernst & Young LLP
Birmingham, Alabama
January 18, 1996
41
II-16
<PAGE> 42
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In Thousands)
- ---------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,289 $ 9,131
Accounts receivable 349,441 279,553
Inventories (Note 4) 23,956 26,722
Gas imbalance receivables 16,556 35,091
Federal income taxes 12,979 4,572
Other 54,210 31,772
- ---------------------------------------------------------------------------------------------------
Total Current Assets 494,431 386,841
- ---------------------------------------------------------------------------------------------------
Investments and Advances:
Unconsolidated affiliates (Note 5) 386,081 486,329
Other investments (Notes 2 and 3) 46,688 217,979
- ---------------------------------------------------------------------------------------------------
432,769 704,308
- ---------------------------------------------------------------------------------------------------
Plant, Property and Equipment, successful efforts method of accounting used
for oil and gas properties (Notes 6 and 13) 4,822,879 4,741,296
Less Accumulated Depreciation, Depletion and Amortization 2,545,320 2,497,691
- ---------------------------------------------------------------------------------------------------
2,277,559 2,243,605
- ---------------------------------------------------------------------------------------------------
Deferred Charges and Other:
Gas supply realignment costs (Note 9) 199,073 160,850
Other 107,609 35,082
- ---------------------------------------------------------------------------------------------------
306,682 195,932
- ---------------------------------------------------------------------------------------------------
$3,511,441 $3,530,686
===================================================================================================
</TABLE>
See accompanying notes.
42
II-17
<PAGE> 43
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year (Note 7) $ 18,750 $ 19,250
Unsecured notes (Note 7) 218,900 200,000
Accounts payable 297,660 208,751
Accrued state income taxes 10,579 22,029
Accrued interest 27,115 36,825
Gas imbalance payables 21,444 42,975
Other 45,677 40,371
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 640,125 570,201
- ------------------------------------------------------------------------------------------------------------
Long-Term Debt (Note 7) 770,313 963,378
- ------------------------------------------------------------------------------------------------------------
Deferred Credits and Other:
Deferred income taxes (Note 8) 213,122 187,957
Reserves for regulatory matters (Note 9) 181,798 183,343
Other 223,441 233,921
- ------------------------------------------------------------------------------------------------------------
618,361 605,221
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, $1.00 par, 400,000,000 shares authorized;
87,244,476 and 87,252,015 shares issued in 1995 and 1994, respectively (Note 10) 87,244 87,252
Other capital 39,795 42,311
Retained earnings 1,387,137 1,287,339
- ------------------------------------------------------------------------------------------------------------
1,514,176 1,416,902
- ------------------------------------------------------------------------------------------------------------
Less treasury stock at cost, 1,077,480 and 870,967 shares in 1995
and 1994, respectively (Note 10) (31,534) (25,016)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,482,642 1,391,886
- ------------------------------------------------------------------------------------------------------------
$3,511,441 $3,530,686
============================================================================================================
</TABLE>
See accompanying notes.
43
II-18
<PAGE> 44
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Note 12) $1,990,141 $1,735,967 $1,741,147
- -------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 1,090,756 795,025 794,254
Transition cost recovery and gas purchase contract settlement costs 58,010 116,159 51,827
Operating and maintenance 171,973 222,901 249,801
General and administrative 140,511 133,138 148,738
Depreciation, depletion and amortization 298,714 257,759 225,989
Taxes, other than income 41,244 41,546 37,623
- -------------------------------------------------------------------------------------------------------------
1,801,208 1,566,528 1,508,232
- -------------------------------------------------------------------------------------------------------------
Operating Income 188,933 169,439 232,915
- -------------------------------------------------------------------------------------------------------------
Other Income (Loss), Net:
Equity in earnings of unconsolidated affiliates (Note 5) 46,258 44,319 12,365
Sale of stock of subsidiary (Notes 2 and 5) 188,012 - 155,836
Other (45,478) 16,348 13,884
- -------------------------------------------------------------------------------------------------------------
188,792 60,667 182,085
- -------------------------------------------------------------------------------------------------------------
Interest:
Interest income 6,413 7,403 39,331
Interest expense (102,797) (86,982) (90,704)
Interest capitalized 6,540 6,692 4,101
- -------------------------------------------------------------------------------------------------------------
(89,844) (72,887) (47,272)
- -------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item and Income Taxes 287,881 157,219 367,728
Income Taxes (Note 8) 94,993 15,812 102,659
- -------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item 192,888 141,407 265,069
Extraordinary Loss, Net of Income Tax Benefit of $1,972,000 (Note 7) - - (3,829)
- -------------------------------------------------------------------------------------------------------------
Net Income $ 192,888 $ 141,407 $ 261,240
=============================================================================================================
Earnings Per Share of Common Stock: (Note 10)
Earnings before extraordinary item $ 2.24 $ 1.62 $ 3.05
Extraordinary loss - - (.04)
- -------------------------------------------------------------------------------------------------------------
Earnings Per Share $ 2.24 $ 1.62 $ 3.01
=============================================================================================================
Weighted Average Shares Outstanding (Note 10) 86,270 87,119 86,703
Dividends Paid Per Share (Note 10) $ 1.08 $ 1.08 $ 1.04
=============================================================================================================
</TABLE>
See accompanying notes.
44
II-19
<PAGE> 45
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock, $1.00 Par,
400,000,000 Shares Authorized
(Note 10):
Balance at beginning of year 87,252 $ 87,252 87,158 $ 87,158 86,077 $ 86,077
Issued (canceled) (8) (8) 94 94 1,081 1,081
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 87,244 87,244 87,252 87,252 87,158 87,158
- -------------------------------------------------------------------------------------------------------------------
Other Capital:
Balance at beginning of years 42,311 36,074 17,339
Benefit plans transactions (2,516) 6,237 18,735
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 39,795 42,311 36,074
- -------------------------------------------------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year 1,287,339 1,239,983 1,068,904
Net income 192,888 141,407 261,240
Cash dividends at $1.08 per share
for 1995 and 1994, and
$1.04 per share for 1993 (93,090) (94,051) (90,161)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,387,137 1,287,339 1,239,983
- -------------------------------------------------------------------------------------------------------------------
Treasury Stock, at cost:
Balance at beginning of year (871) (25,016) - - - -
Purchased (645) (19,230) (940) (27,005) - -
Issued 439 12,712 69 1,989 - -
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,077) (31,534) (871) (25,016) - -
- -------------------------------------------------------------------------------------------------------------------
86,167 $1,482,642 86,381 $1,391,886 87,158 $1,363,215
===================================================================================================================
</TABLE>
See accompanying notes.
45
II-20
<PAGE> 46
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 192,888 $ 141,407 $ 261,240
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 298,714 257,759 225,989
Deferred income taxes 25,165 1,607 49,635
Equity in earnings of unconsolidated affiliates, less distributions (34,265) (31,740) 1,532
Gain on sale of stock of subsidiary and loss on disposal of assets (144,969) (3,554) (158,592)
Reserves for regulatory matters (1,545) 62,542 16,845
Gas supply realignment costs (38,223) 18,736 (127,986)
Funding of gas supply realignment cost liability (42,330) - -
Natural gas purchase contract settlement costs - 18,535 51,947
Change in:
Accounts receivable (66,470) (22,533) (60,687)
Inventories 2,766 3,174 50,535
Accounts payable 85,516 15,368 44,921
Accrued interest and income taxes, net (29,379) (46,758) 5,199
Other current assets (3,808) 16,490 10,446
Other current liabilities (16,508) (18,072) (2,325)
Other (43,218) 97,671 84,823
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 184,334 510,632 453,522
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Plant, property and equipment additions (487,564) (448,314) (516,466)
Net proceeds from sale of subsidiary stock and disposal of assets 592,838 18,832 343,610
Investments in unconsolidated affiliates and other (12,959) (171,660) (16,185)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 92,315 (601,142) (189,041)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 3,103,000 4,448,000 880,676
Payments of long-term debt (3,296,565) (4,327,835) (1,237,694)
Changes in short-term borrowings 18,900 87,154 112,846
- ----------------------------------------------------------------------------------------------------------------
Net changes in debt (174,665) 207,319 (244,172)
Dividends paid (93,090) (94,051) (90,161)
Other 19,264 (24,449) 22,667
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (248,491) 88,819 (311,666)
- ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 28,158 (1,691) (47,185)
Cash and Cash Equivalents at Beginning of Year 9,131 10,822 58,007
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 37,289 $ 9,131 $ 10,822
================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid For:
Interest (net of amount capitalized) $ 81,900 $ 80,310 $ 66,793
Income taxes, net 96,455 44,061 71,398
================================================================================================================
</TABLE>
See accompanying notes.
46
II-21
<PAGE> 47
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION AND
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - The Consolidated Financial Statements of Sonat Inc.
(Sonat) and its subsidiaries (the Company) reflect operations in the
Exploration and Production, Natural Gas Transmission, and Energy Marketing
segments. The Exploration and Production segment is engaged in exploration,
development and production of domestic oil and natural gas. The Natural Gas
Transmission segment is primarily engaged in the interstate transmission of
natural gas. The Energy Marketing segment is primarily engaged in the
marketing of natural gas. For further description of business segments, see
Note 12. For a description of financial instruments, credit risk and
contingencies, see Notes 3 and 9.
PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements
include the accounts of Sonat 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 1994 and 1993 Consolidated Financial Statements
have been reclassified to conform with the 1995 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - In
preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - Cash equivalents are typically money-market
investments in the form of repurchase agreements, certificates of deposit and
time deposits with maturities of three months or less at the time of
purchase. These investments are accounted for at cost.
INVENTORIES - At December 31, 1995, 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 segment recognizes revenue from natural
gas transportation in the period the service is provided. Reserves are
provided on revenues collected subject to refund when appropriate. Revenue is
recognized in the Energy Marketing segment in the period the transaction
occurs.
ENVIRONMENTAL EXPENDITURES - The Company provides 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
(see Note 2).
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 3.) Gains and losses are included in deferred liabilities or assets,
respectively, until they are recognized in operating revenue when the hedged
transaction is recorded. If the derivative instrument ceases to qualify as a
hedge for accounting purposes, the associated gain or loss is immediately
recognized and included as a component of Other Income (Loss), Net in the
Consolidated Statements of Income. Cash flows from operating activities are
recognized in the same section of the Consolidated Statements of Cash Flows
as the hedged transaction.
NEW ACCOUNTING PRONOUNCEMENTS - In 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Company elected to adopt the Statement's
47
II-22
<PAGE> 48
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION AND
SIGNIFICANT ACCOUNTING POLICIES
(continued)
provisions in the fourth quarter of 1995 and recognized a pretax impairment
loss of $23 million on certain oil and gas properties in that period. (See Note
6.)
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which will become effective
for years beginning after December 15, 1995. This Statement will require that
financial statements include certain disclosures about stock-based employee
compensation and allows, but does not require, a fair value-based method of
accounting for such compensation. The Company believes that this fair
value-based method of accounting, if adopted, would not have a material effect
on the Consolidated Financial Statements.
2. CHANGES IN OPERATIONS
Sonat Marketing Company L.P. (Sonat Marketing) was formed in September 1995
and is jointly owned by the Company and Atlanta Gas Light Company (Atlanta).
Sonat's wholly owned subsidiary, Sonat Marketing Company, contributed all of
its assets and liabilities except $32 million of accounts receivable and
Atlanta contributed $32 million in cash to Sonat Marketing in exchange for a
35 percent ownership interest. Atlanta has certain rights to resell to the
Company its interest in Sonat Marketing, including a right until August 31,
2000, to receive the greater of fair market value or a formula price. As a
result, the pretax gain on the transaction of approximately $23 million has
been deferred. Minority interest in earnings of $.9 million is reflected in
Other Income in the Consolidated Statements of Income.
In June 1995, the Company sold back to Baker Hughes Incorporated for
$167 million the four million shares of Baker Hughes convertible preferred
stock that the Company received as partial consideration for its sale of
Teleco Oilfield Services Inc. to Baker Hughes in 1992. The sale resulted in
an $8 million after-tax loss, or $.09 per share.
On June 4, 1993, the initial public offering (IPO) of approximately 60
percent of Sonat Offshore Drilling Inc.'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 $340 million. The Company
recognized an after-tax gain of $99.7 million, or $1.15 per share, from the
combined transactions.
In July 1995, the Company made a capital contribution of its remaining
shares of Sonat Offshore common stock to Sonat Exploration Company. On July 26,
1995, Sonat Exploration sold in an underwritten public offering these shares of
Sonat Offshore common stock at $30.25 per share. The net proceeds after
underwriters' discounts and commissions were $326 million, which resulted in a
pretax gain of $188 million. The Company realized an after-tax gain of $110
million, or $1.27 per share, on the transaction.
3. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company, through its subsidiary Sonat Marketing, uses natural gas futures
contracts, options, and oil and gas price swap agreements to reduce the
effects of spot-market commodity price volatility on operating results. The
Sonat Board of Directors has established policies that prohibit speculation
with derivatives and limit swap agreements to counterparties with
appropriate credit standings that have been approved by the Sonat Board of
Directors. The Sonat Board of Directors has a similar policy regarding
financial derivatives and their use to hedge financial market risks. No such
hedges were placed during 1995.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. The correlation of indices and prices is regularly
evaluated to ensure that the instruments continue to be effective hedges. In
the event that correlation falls below allowable levels, the gains or losses
associated with the hedging instruments are immediately recognized to the
extent that correlation was lost. In the fourth quarter of 1995, Sonat
Exploration recognized a pretax loss of $8.4 million due to the loss of
correlation of the New York Mercantile Exchange (NYMEX) futures market for
natural gas with the price for natural gas in certain parts of the country.
The maturity of derivative instruments is timed to coincide with the
hedged transaction. If the hedged transaction is terminated early or if an
anticipated transaction fails to occur, the deferred gain or loss associated
with the derivative instrument is recognized in the current period, and the
hedge is closed.
FUTURES - Natural gas futures contracts and options on natural gas
futures contracts are traded on the NYMEX. Contracts are for fixed units of
10,000 MMBtu and are available for up to 36 months in the future. Sonat
Marketing uses futures contracts to reduce exposure to price risk when gas is
not bought and sold simultaneously. At December 31, 1995, Sonat Marketing had
a total of 486 net contracts open (1,210 long and 724 short futures
contracts) and a deferred gain of $1.0 million, representing unrealized gains
on contracts that
48
II-23
<PAGE> 49
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
will mature throughout 1996. Option activity during 1995 was immaterial.
NYMEX requires 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. Brokers mark open positions to market daily and require
additional assets to be maintained on deposit when significant unrealized
losses are experienced or allow deposits to be reduced when unrealized gains
are experienced. At December 31, 1995, Sonat Marketing had $11 million on
deposit with brokers for margin calls.
Sonat Exploration uses futures contracts to lock in the price for a
portion of its expected future natural gas production when it believes that
prices are at acceptable levels. The majority of the contracts have been sold
no more than six months into the future. At December 31, 1995, Sonat
Exploration had 3,266 short futures contracts open, all of which are traded by
Sonat Marketing on Sonat Exploration's behalf. The related deferred loss is $11
million and relates to unrealized losses on contracts that will mature through
October 1996.
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 (fixed-price swap) or two variable prices (basis
swap) for a notional volume specified by the contract. Sonat Exploration uses
swap agreements to hedge exposure to changes in spot-market prices on the
amount of production covered in the agreement. Sonat Marketing uses swaps to
lock in a margin on its gas transactions.
Sonat Exploration has one swap price agreement for 1996 which hedges
approximately 90 percent of its forecasted oil and condensate production from
proven and behind pipe reserves and sets a fixed price of $18.00 per barrel.
This swap is ineffective during days when the market price falls below $16.39
per barrel.
Sonat Marketing had a total of nine fixed-price swap agreements and 40
variable-price swap agreements at December 31, 1995, to exchange payments based
on a total notional volume of 74 TBtu of natural gas over periods ranging from
one month to seven years. Sonat Marketing also has a gas price collar agreement
which provides it a floor price of $1.80 on notional volumes of 52 TBtu and
sets a ceiling price of $2.56 on notional volumes of 42 TBtu. In 1995, a gain
of $5.2 million was recognized under this agreement.
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, 1995, the
market value of the Company's fixed-price favorable swaps was $.3 million. The
net position of all fixed-price swaps, both favorable and unfavorable, was $1.3
million unfavorable. The market value of the basis swaps is not material. The
market value of the gas price collar agreement is $2.2 million unfavorable.
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments,
other than derivatives, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------
Carrying
December 31, 1995 Amounts Fair Value
- -----------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $37,289 $37,289
Investment in Debt Securities 38,944 39,098
Gas Supply Realignment Costs 199,073 199,073
Unsecured Notes Payable 218,900 218,900
Long-Term Debt 789,063 862,123
(In Thousands)
- -----------------------------------------------------
Carrying
December 31, 1994 Amounts Fair Value
- -----------------------------------------------------
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
</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 AND
UNSECURED NOTES PAYABLE - The carrying amount reported in the Consolidated
Balance Sheets approximates its fair value.
INVESTMENT SECURITIES - The fair value for equity securities in 1994 was
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 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
receivable and GSR costs which the Company expects to recover from its
customers.
The Company's cash equivalents and short-term investments represent
securities placed with various high invest-
49
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<PAGE> 50
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. FINANCIAL INSTRUMENTS (continued)
ment 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 segment relate
to business conducted with gas distribution companies, municipalities, gas
districts, industrial customers and interstate pipeline companies in the
Southeast. Accounts receivable of the Energy Marketing segment relate to
trading with other marketing companies, industrial end users and local
distribution companies, with primary concentration in the Southeastern,
Northeastern and Midwestern markets.
The Company performs ongoing credit evaluations of its customers'
financial condition and, in some circumstances, requires collateral from its
customers. Accounts receivable are stated net of valuation allowances of
$10.2 million in 1995 and $9.1 million in 1994.
4. INVENTORIES
The table below shows the values of various categories of the Company's
inventories by segment.
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------
<S> <C> <C>
Exploration and Production:
Materials and supplies $ 2,311 $ 3,725
Natural Gas Transmission:
Materials and supplies 21,625 21,267
Energy Marketing:
Gas stored underground 19 1,695
Other 1 35
- --------------------------------------------------
$23,956 $26,722
==================================================
</TABLE>
5. UNCONSOLIDATED AFFILIATES
At December 31, 1995, the Company's investments in unconsolidated affiliates
totaled $386.1 million, and the Company's share of underlying equity in net
assets of the investees was $449.5 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, 1995, the Company's cumulative
equity in earnings of these unconsolidated affiliates was $252.1 million
and cumulative dividends received from them totaled $153.4 million.
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
(In Thousands)
- -----------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
COMPANY'S SHARE OF REPORTED
EARNINGS (LOSSES)
Exploration and Production:
Sonat/P Anadarko $ - $ - $ 4,163
Other 615 245 502
- -----------------------------------------------------------
615 245 4,665
- -----------------------------------------------------------
Natural Gas Transmission:
Citrus Corp. 26,813 27,554 (8,066)
Amortization of
Citrus basis difference 1,383 1,383 1,738
Bear Creek Storage 9,596 8,954 8,638
Other (239) (60) -
- -----------------------------------------------------------
37,553 37,831 2,310
- -----------------------------------------------------------
Energy Marketing (5) (151) (121)
- -----------------------------------------------------------
Other:
Sonat Offshore Drilling 6,734 5,049 4,497
Other 1,361 1,345 1,014
- -----------------------------------------------------------
8,095 6,394 5,511
- -----------------------------------------------------------
$46,258 $44,319 $12,365
===========================================================
</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.
NATURAL GAS TRANSMISSION 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.
50
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<PAGE> 51
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following is summarized financial information for Citrus:
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $682,387 $477,462 $574,302
Expenses (Income):
Natural gas cost 362,635 294,670 405,920
Operating expenses 94,647 71,871 71,754
Depreciation
and amortization 81,227 63,737 59,896
Allowance for funds
used during
construction (41,881) (98,114) (2,712)
Interest and other 98,315 55,702 50,935
Income taxes 33,818 34,487 4,641
- -------------------------------------------------------------------
Income (Loss) Reported $ 53,626 $ 55,109 $(16,132)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current $ 107,093 $ 161,779
Net transmission plant
and property 2,401,847 2,235,137
Other 72,272 103,887
- ------------------------------------------------------------------
$2,581,212 $2,500,803
==================================================================
LIABILITIES AND EQUITY
Current $ 186,943 $ 126,815
Long-term debt and
other liabilities 1,627,567 1,660,912
Stockholders' equity 766,702 713,076
- ------------------------------------------------------------------
$2,581,212 $2,500,803
==================================================================
</TABLE>
Florida Gas' Phase III expansion, which began in 1994, was completed
during February 1995, resulting in a significant decrease in allowance for
funds used during construction in 1995.
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>
(In Thousands)
- ------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Revenues $36,167 $35,655 $36,566
Expenses:
Operating expenses 5,408 5,303 6,137
Depreciation 5,399 5,396 5,397
Other expenses, net 6,167 7,048 7,756
- ------------------------------------------------------------
Income Reported $19,193 $17,908 $17,276
============================================================
<CAPTION>
(In Thousands)
- ------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------
ASSETS
Current $ 7,438 $ 6,968
Net plant and property 159,348 164,257
Other 434 533
- ------------------------------------------------------------
$167,220 $171,758
============================================================
<S> <C> <C>
LIABILITIES AND EQUITY
Current $ 8,554 $ 8,356
Long-term debt and
other liabilities 62,658 69,587
Participants' equity 96,008 93,815
- ------------------------------------------------------------
$167,220 $171,758
============================================================
</TABLE>
On October 31, 1995, Southern executed a Capital Contribution Agreement
in connection with the project financing for Bear Creek from The Prudential
Insurance Company of America. In the event that Bear Creek does not refinance
the remaining principal, this agreement provides that Southern and its
partner will contribute $21 million each to Bear Creek on October 31, 2000,
to provide funds to enable Bear Creek to make a principal payment due under
the financing.
CONTRACT DRILLING AFFILIATE - In June 1993, the Company reduced its
ownership of Sonat Offshore, which provides offshore drilling services, from
100 percent to approximately 40 percent and subsequently accounted for its
investment on the equity method. In July 1995, the Company disposed of its
remaining shares of Sonat Offshore (see Notes 2 and 12).
6. PLANT, PROPERTY AND EQUIPMENT
AND DEPRECIATION
Plant, property and equipment, by business segment, is shown in the following
table:
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------
<S> <C> <C>
Exploration and Production $2,436,283 $2,383,355
Natural Gas Transmission 2,315,002 2,241,972
Energy Marketing 6,772 57,439
Other 64,822 58,530
- -------------------------------------------------------
$4,822,879 $4,741,296
=======================================================
</TABLE>
Plant, property and equipment includes construction work in progress of
$43.6 million and $37.5 million at December 31, 1995 and 1994, respectively.
Plant, property and equipment also includes $130.2 million and $141.8 million
of gas stored underground at December 31, 1995 and 1994, respectively.
51
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<PAGE> 52
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. PLANT, PROPERTY AND EQUIPMENT
AND DEPRECIATION (CONTINUED)
The accumulated depreciation, depletion and amortization amounts, by
business segment, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
- ----------------------------------------------------------------------
December 31, 1995 1994
<S> <C> <C>
Exploration and Production $1,008,815 $ 991,621
Natural Gas Transmission 1,504,086 1,460,649
Energy Marketing 1,449 20,894
Other 30,970 24,527
- ----------------------------------------------------------------------
$2,545,320 $2,497,691
======================================================================
</TABLE>
The annual depreciation rates or useful productive lives, by business
segment, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission:
Mainline transmission
property 2.8% 2.8% 2.8%
Gas supply 4.4% 4.4% 5.1%
Gas gathering 2.8% 2.8% 6.25%
Underground
storage facilities 3.3% 3.3% 3.3%
Liquefied natural
gas facilities 3.2% 3.2% 3.2%
Other 3-20 yrs. 5-20 yrs. 5-20 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.
Primarily due to downward reserve revisions for certain properties in
its year-end reserve report, the Company, in accordance with SFAS No. 121,
reevaluated the recorded value of its oil and gas assets. Based on this
evaluation, the Company determined that assets with a net book value of $98
million were impaired and therefore adjusted their fair value by an estimate
of future net cash flows discounted at a market rate of interest. This $23
million impairment adjustment is included in Depreciation, Depletion and
Amortization on the 1995 Consolidated Statement of Income.
7. DEBT AND LINES OF CREDIT
LONG-TERM DEBT - Long-term debt consisted of:
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Sonat Inc.
Revolving Credit Agreement at
rates based on prime,
international or money-market
lending rates expiring on
December 31, 1998 $ - $375,000
6-7/8% Notes due June 1, 2005 200,000 -
9-1/2% Notes due
August 15, 1999 100,000 100,000
8.65% Notes due through
July 29, 1997 18,572 27,857
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
through December 31, 2000 10,900 13,900
Southern Natural Gas Company
7.85% Notes due
January 15, 2002 100,000 100,000
8-5/8% Notes due May 1, 2002 100,000 100,000
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 1,760 2,640
7.80% Term Loan due
through December 31, 1997 800 1,200
Southern Energy Company
Promissory Note
(an effective rate of 6.75%
at December 31, 1995)
due through April 1999 20,000 25,000
Capital Leases 2,031 2,031
- -------------------------------------------------------------------------------------------
Total Outstanding 789,063 982,628
Less Long-Term Debt Due
Within One Year 18,750 19,250
- -------------------------------------------------------------------------------------------
$770,313 $963,378
===========================================================================================
</TABLE>
52
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<PAGE> 53
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Annual maturities of long-term debt at December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
- ----------------------------------------------
Years
- ----------------------------------------------
<S> <C>
1996 $ 18,750
1997 53,257
1998 7,213
1999 107,224
2000 2,135
2001-2005 600,484
- ----------------------------------------------
$ 789,063
==============================================
</TABLE>
During 1995, Sonat borrowed $2.9 billion and repaid $3.3 billion under
its long-term revolving credit agreement, resulting in no amounts outstanding
and the full amount of $500 million available at December 31, 1995.
Borrowings are available through December 31, 1998.
On June 12, 1995, Sonat issued $200 million of 67/8 Percent Notes due
June 1, 2005. The proceeds from the sale of the Notes were used to repay
floating rate debt.
UNSECURED NOTES - Loans outstanding under all short-term credit facilities
are for a duration of less than three months.
On July 30, 1995, Sonat's $300 million 364-day revolving credit
agreement with several banks expired in accordance with the terms of the
agreement and was not renewed. At December 31, 1994, $100 million was
outstanding at a rate of 6.33 percent under this agreement.
Sonat had $210 million and $100 million in commercial paper outstanding
at an average rate of 6.12 percent and 6.30 percent at December 31, 1995 and
1994, respectively.
On May 29, 1995, 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 28, 1996, 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, 1995, $8.9 million was outstanding under Sonat's agreement at a
rate of 6.68 percent and no amounts were outstanding under Southern's
agreement. At December 31, 1994, no amounts were outstanding under either
agreement.
EXTRAORDINARY ITEM - On March 15, 1993, Sonat redeemed all of its
outstanding 71/4 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-tax of $3.8
million, or $.04 per share, on the redemption.
8. INCOME TAXES
An analysis of the Company's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In Thousands)
- ----------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $71,827 $ 4,619 $ 46,230
Foreign 44 - 3,305
State (2,043) 10,930 6,446
- ----------------------------------------------------------------------------
69,828 15,549 55,981
- ----------------------------------------------------------------------------
Deferred:
Federal 21,936 13,188 40,435
Foreign - - 649
State 3,229 (12,925) 5,594
- ----------------------------------------------------------------------------
25,165 263 46,678
- ----------------------------------------------------------------------------
Income Tax Expense $94,993 $15,812 $102,659
============================================================================
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
(In Thousands)
- -----------------------------------------------------------------------------------------------
December 31, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $294,789 $279,619
GSR and other transition costs 26,052 3,067
Investments 4,003 58,841
Inventories 11,572 11,571
Other 2,261 2,686
- -----------------------------------------------------------------------------------------------
Total deferred tax liabilities 338,677 355,784
- -----------------------------------------------------------------------------------------------
Deferred Tax Assets:
Revenue reserves 74,876 76,829
Non-conventional fuel tax credits 5,620 32,334
Employee benefits 11,084 11,880
Other accounting accruals 20,763 24,191
Interest on income taxes 3,700 6,047
Other 9,512 16,546
- -----------------------------------------------------------------------------------------------
Total deferred tax assets 125,555 167,827
- -----------------------------------------------------------------------------------------------
Net Deferred Tax Liabilities $213,122 $187,957
===============================================================================================
</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.
53
II-28
<PAGE> 54
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES (continued)
Consolidated income tax expense is different from the amount computed by
applying the U.S. federal income tax rate to income before income tax. The
reasons for this difference are as follows:
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense at Statutory Federal Income Tax Rates $100,758 $ 55,027 $128,705
Increases (Decreases) Resulting From:
State income taxes, net of federal income tax benefit 771 (3,634) 4,899
Non-conventional fuel tax credits (11,380) (14,217) (19,242)
Refunds and adjustment of accrued tax position 14,639 (7,881) (9,319)
Dividend exclusion (11,248) (12,440) (2,412)
Effect of change in statutory rate on deferred taxes - - 1,342
Other 1,453 (1,043) (1,314)
- -------------------------------------------------------------------------------------------
Income Tax Expense $94,993 $ 15,812 $102,659
===========================================================================================
</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.
CUSTOMER SETTLEMENT - In an order issued on September 29, 1995 (the
Settlement Order), the FERC approved a comprehensive settlement (the Customer
Settlement) that Southern had filed on March 15, 1995. Several parties that
opposed the Customer Settlement have filed with the FERC requests for
rehearing of the Settlement Order. The FERC has not yet ruled on those
rehearing petitions. The Customer Settlement resolves as to the parties
supporting the settlement, all of Southern's pending rate proceedings and
proceedings to recover GSR and other transition costs associated with the
implementation of Order No. 636 (described below). The Customer Settlement
was supported initially by Southern, the FERC staff, customers representing
approximately 95 percent of the firm transportation capacity on Southern's
system, and other parties.
On November 20, 1995, Southern and one of the initial contesting parties
to the Customer Settlement filed a settlement with the FERC pursuant to which
that party became a supporting party to the Customer Settlement. The November
20 settlement, which was not opposed, was approved by the FERC on February 2,
1996. With that addition, the Customer Settlement is now supported by customers
representing approximately 97 percent of the firm transportation capacity on
Southern's system. The Customer Settlement resolves, as to the supporting
parties, all issues in Southern's current and prior rate cases. These four major
rate cases cover consecutive periods beginning September 1, 1989, January 1,
1991, September 1, 1992 and May 1, 1993, respectively. Southern will credit in
the aggregate the full amount of Southern's rate reserves as of February 28,
1995 (approximately $155 million), less certain amounts withheld for potential
rate refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. Southern implemented reduced settlement rates for parties that
supported the Customer Settlement effective March 1, 1995. 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 Settlement Order also included authorizations for Southern to
construct approximately $27 million of additional facilities to improve its
existing level of transportation service and to expand service to Atlanta Gas
Light Company and South Carolina Pipeline Corporation and its affiliate under
firm contracts with terms of at least three years.
In addition to approving the Customer Settlement, the Settlement Order
decided on the merits all cost of service (including rate of return and the
recovery of costs associated with Southern's Mississippi Canyon pipeline),
cost allocation, and rate design issues for Southern's current rate case for
the period beginning May 1, 1993. These rulings included a reversal of a 1994
administrative law judge determination that Southern could not include in its
rates any portion of the approximately $45 million cost of a pipeline that
Southern constructed in 1992 to connect gas reserves developed by Exxon
Corporation in the Mississippi Canyon and Ewing Bank Area Blocks, offshore
Louisiana. The Settlement Order
54
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<PAGE> 55
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
also applied the merits determination concerning the recovery of Southern's
Mississippi Canyon costs to the rate period beginning September 1, 1992. These
determinations form the basis of FERC's approval of Southern's current rates to
the contesting parties and refunds due them with respect to certain past rate
periods. The contesting parties' requests for rehearing of the Settlement Order
included challenges to many of the substantive rate determinations in the
Settlement Order, such as the cost recovery of Southern's Mississippi Canyon
pipeline, Southern's rate of return on equity, IT rate design, the appropriate
IT and FT billing units used for designing rates, and the allocation of storage
costs.
Many of the other issues in the rate cases beginning September 1, 1989,
January 1, 1991, and September 1, 1992, have previously been settled with the
contesting parties. Thus, if the Customer Settlement and the rates
determinations made in the Settlement Order are upheld on rehearing, there
remains to be litigated, as to the contesting parties, the GSR cost recovery
discussed below and only certain cost allocation and rate design issues,
which would not be material even if such rate issues are determined adversely
to Southern. The Customer Settlement continues to be contested by certain
interruptible customers and firm customers representing approximately 3
percent of Southern's firm transportation capacity.
The Settlement Order also permits the contesting parties to litigate the
issue of the recovery of Southern's GSR and other Order No. 636 transition
costs with the results to be applied only to such parties. The Settlement
Order decided the level of Southern's rates to contesting parties for the
period beginning March 1, 1995, and ruled on numerous other rate issues for
the pre-March 1, 1995, periods.
In the event that the FERC on rehearing does not uphold the Customer
Settlement and reverses or materially modifies its prior determinations of
the substantive rate issues decided in the Settlement Order, then all parties
would be permitted to challenge Southern's recovery of GSR and other
transition costs and Southern's current rates would be affected by such
ruling. In such event, Southern is unable to predict the outcome of any such
transition costs recovery litigation or any modification of the FERC's prior
rate determination, but the effect in the aggregate could be material.
If the FERC denies contesting parties' rehearing requests, the
Settlement Order will be subject to appeal to the courts. Although there can
be no assurances, the Company believes that rehearing of the Settlement
Order, including the challenges to the rate determinations in that Order,
should be denied by the FERC and that the Settlement Order should be upheld
on any judicial appeal.
In the fourth quarter of 1994, the Company recognized a $29 million
charge associated with the Customer Settlement, which included anticipated
amounts for costs that Southern would not recover from its customers, and also a
$28 million charge for a provision relating to regulatory assets that may not be
recovered as a result of the Customer Settlement, including amounts for a
corporate restructuring undertaken in 1994. As discussed below, Southern also
incurred an additional $11 million charge in the fourth quarter of 1995 related
to GSR costs not expected to be recovered.
SEA ROBIN - In January 1995, Sea Robin Pipeline Company, a subsidiary of
Southern, filed with the FERC a petition for a declaratory ruling that the
Sea Robin pipeline system is engaged in the gathering of natural gas and is,
therefore, exempt from FERC regulation under the Natural Gas Act. In June
1995, the FERC denied Sea Robin's petition on the basis that the primary
function of the Sea Robin system is the interstate transportation of gas. Sea
Robin's request for rehearing of that ruling is pending before the FERC.
Following the filing of Sea Robin's petition for a gathering exemption,
several of the shippers on the Sea Robin system filed with the FERC in
February 1995 a complaint against Sea Robin under Section 5 of the Natural
Gas Act claiming that Sea Robin's rates are unjust and unreasonable. In its
answer, Sea Robin asked the FERC to dismiss the complaint or to find that its
rates continue to be just and reasonable based on the data it presented. Sea
Robin is unable to predict the outcome of this proceeding, but any reduction
in Sea Robin's rates as a result of this complaint could be implemented only
on a prospective basis.
GAS PURCHASE CONTRACTS - 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 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 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 amend-
55
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<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
(continued)
ments or terminations of the contracts. Various parties have appealed the
Order to the Circuit Courts of Appeal.
On February 17, 1995, Southern reached an agreement to resolve its
remaining high-cost supply contracts with 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 became effective in October 1995 upon the Customer
Settlement becoming effective. Additionally, Southern is a party to an
agreement under which another high-cost contract price is reduced in exchange
for monthly payments. Southern entered into a payment agreement on October
20, 1995, with a financial institution, pursuant to which Southern made a
one-time payment of $42.3 million to the institution, which agreed to make
these monthly payments. Including the above, as of December 31, 1995,
Southern had either paid or accrued $263 million in GSR costs (including
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 to its GSR costs relating to termination or amendment of its
remaining gas purchase 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, 1995, Southern had incurred $83 million in price differential costs.
As described above, Southern's Customer Settlement resolves 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. Additionally, Southern will absorb an agreed-upon portion
of its total GSR costs, an estimate of which was reflected in the provision
for the Customer Settlement made in the fourth quarter of 1994. In the
fourth quarter of 1995, Southern expensed GSR costs not expected to be
recovered from customers based on its estimate of total GSR costs at December
31, 1995.
The amount of GSR costs that Southern 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, contract renegotiations that have occurred, and price differential costs
actually incurred, the amount of GSR costs was estimated at December 31, 1995,
to be approximately $366 million on a present-value basis.
BRIGGS V. SONAT EXPLORATION - On October 9, 1995, a petition was filed
against Sonat Exploration and its wholly owned subsidiary, Stateline Gas
Gathering Company, by nine royalty interest owners (Plaintiffs) in a lawsuit
styled A. L. Briggs, et al. v. Sonat Exploration Company, et al., in state
court in Panola County, Texas. The petition challenges the appropriateness of
certain post-production charges (e.g., gathering, transportation, and
compression) that had been deducted from Plaintiffs' proportionate share of
the amount Sonat Exploration has realized upon the sale of gas attributable
to their royalty interest and alleges numerous violations of law. Relief
sought by Plaintiffs includes actual damages, damages under the Deceptive
Trade Practices Act, exemplary damages, declaratory relief, an accounting,
attorneys' fees, and prejudgment interest. The petition also requests the
court to certify a nationwide class of plaintiffs. In an amended complaint
Plaintiffs have also asserted that certain marketing fees deducted by Sonat
Marketing in calculating the amount it paid Sonat Exploration for gas volumes
purchased by Sonat Marketing since approximately July 1, 1992, are not
authorized by law or the applicable leases, are not necessary, and have not
been disclosed in accordance with law; and that Sonat Exploration has
breached its contractual duties to royalty owners to obtain the highest sales
price and to account to the royalty owners for their share of the proceeds
attributable to the sale of Sonat Exploration's gas. Plaintiffs demanded that
Sonat Exploration pay the proper amounts allegedly due them according to
their respective leases, overriding royalty assignments, division orders, and
operating agreements. Sonat Exploration intends vigorously to defend the
litigation and to resist Plaintiffs' demands. Management is unable to predict
the outcome of this litigation or the demands made by Plaintiffs or to estimate
the amount or range of potential loss in the event of an unfavorable outcome.
FERC AUDIT OF FLORIDA GAS - The FERC's Division of Audits has completed
a compliance review of Florida Gas' books and records for the period January
1, 1991, through December 31, 1994. Among other things, the FERC auditors
have proposed adjustments to the capitalization by Florida Gas of AFUDC
during construction of its Phase III expansion facilities that, if made,
would result in a charge to earnings by Florida Gas of approximately $44
million after-tax. Management of Florida Gas has advised the Company that it
believes that its method of capitalizing AFUDC on Phase III was proper;
however, the final outcome of this matter cannot be determined.
56
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<PAGE> 57
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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>
(In Thousands)
- ----------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------
<S> <C> <C> <C>
Non-Affiliated
Operating Leases $18,152 $18,709 $16,892
Affiliated Operating
Leases 3,635 3,669 3,589
- ----------------------------------------------------
$21,787 $22,378 $20,481
====================================================
</TABLE>
At December 31, 1995, future minimum payments for non-cancelable
operating leases for the years 1996 through 2000 are $11 million or less per
year. Future minimum rentals to be received under subleases for the years
1996 through 2000 are approximately $1 million per year.
10. CAPITAL STOCK
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
<TABLE>
<CAPTION>
(Unaudited)
- ---------------------------------------------------------
Quarter 1995 1994
- ---------------------------------------------------------
<S> <C> <C>
Price Range High-Low
First $30 3/8 - 26 $33 - 26
Second 33 - 29 3/4 32 1/4 - 26 7/8
Third 33 1/2 - 29 1/4 34 7/8 - 30 1/4
Fourth 36 1/4 - 27 3/4 33 1/2 - 26 3/8
=========================================================
Dividends Paid
First $ .27 $ .27
Second .27 .27
Third .27 .27
Fourth .27 .27
- ---------------------------------------------------------
$ 1.08 $ 1.08
=========================================================
Shareholders of
Record at Year-End 12,928 12,697
=========================================================
</TABLE>
The Company had no restrictions on the payment of dividends at December
31, 1995.
The Company has a Stockholder Rights Plan (the 1985 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 were 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,
1995, 95,350,681 shares of common stock were reserved for issuance under this
plan. The Company has adopted a Stockholder Rights Plan under an agreement
dated January 8, 1996, which has the same purposes as the 1985 Plan. The new
plan provides for the issuance of one right with respect to each outstanding
share of common stock upon the expiration of the rights outstanding under the
1985 Plan. The rights issued under the new plan are redeemable at any time by
the Company before their expiration on February 3, 2006, unless certain
triggering events have occurred. The rights outstanding under the plan are
excercisable for one one-hundreth of a share of Series A Participating
Preference Stock, par value $1.00, with each share having substantially the
rights and preferences of 100 shares of common stock.
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. In November 1995, the
Company issued, in tandem with its regular stock options, SARs that are
exercisable only in the event of a change in control. No other SARs have been
issued since 1990. At December 31, 1995, 340,234 SARs relating to the earlier
periods were outstanding. The Company issued 35,700 shares of restricted stock
to employees during 1995. 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, 1995, 71,698 of the 354,700 cumulative
restricted shares issued have vested. A new plan was authorized during 1995
which made an additional four million shares available for issuance.
57
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<PAGE> 58
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. CAPITAL STOCK (continued)
The following table summarizes option activities in the Executive Award
Plan:
Number of Shares Under Option
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of Year 4,358,820 3,518,595 3,889,154
Granted 682,300 990,700 989,700
Exercised (450,020) (122,842) (1,332,661)
Forfeited (12,500) (27,633) (27,598)
- --------------------------------------------------------------------------------------------
End of Year 4,578,600 4,358,820 3,518,595
============================================================================================
Exercisable 2,566,520 2,637,880 2,245,556
============================================================================================
Outstanding Option Prices $12.0625-32.25 $12.0625-30.00 $12.0625-30.00
============================================================================================
Exercised Option Prices $12.0625-30.00 $12.0625-25.75 $12.0625-25.75
============================================================================================
Shares Authorized for Future Grants at 4,230,800 946,023 1,999,256
Year-End
============================================================================================
</TABLE>
Stock-based employee compensation decreased pretax income by $7.9
million in 1995, increased pretax income by $1.2 million in 1994 and
decreased pretax income by $12.6 million in 1993.
At December 31, 1995 and 1994, 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 the Company. Full
rights vest over a maximum of five years. The Company issued 967 shares
during 1995. At December 31, 1995, 23,293 of the 37,460 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. In October 1995, the Board of Directors of the Company extended the
Company's stock repurchase program to April 30, 1997, and authorized the
purchase of an additional one million shares of 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, 1995, 1,585,000 shares of common stock had been
purchased and 508,000 shares had been reissued under this program.
11. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT 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.
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. Amounts are being
placed in a trust established to provide benefits under the Supplemental
Plan. However, this trust is not subject to any funding requirements. At
December 31, 1995, this trust had assets with a fair market value of $35
million available to pay benefits. These assets are not considered plan
assets under SFAS No. 87, Employers' Accounting for Pensions.
The Company's net periodic pension (income) cost consists of the
following components:
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Service Cost - Benefits
Earned during
the Period $ 5,756 $ 6,256 $ 9,722
Interest Cost on
Projected Benefit
Obligation 25,822 24,407 25,246
(Gain) Loss on Assets (97,687) 11,982 (60,558)
Net Amortization
and Deferral 61,307 (49,397) 29,607
- ------------------------------------------------------------
$ (4,802) $ (6,752) $ 4,017
============================================================
</TABLE>
58
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<PAGE> 59
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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>
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------------
Plan with Obligations Plan with Obligations
Less than Assets(1) in Excess of Assets(2)
December 31, December 31,
- -------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested benefit obligations $282,993 $225,115 $ 25,552 $ 21,306
Non-vested benefit obligations 8,053 8,195 514 314
- -------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 291,046 233,310 26,066 21,620
Effect of projected future salary increases 54,911 39,102 15,176 9,470
- -------------------------------------------------------------------------------------------------------------------------
Projected benefit obligations 345,957 272,412 41,242 31,090
Plan Assets at Fair Value(3) 433,574 355,106 - -
- -------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligations (in Excess of) or Less than Plan Assets 87,617 82,694 (41,242) (31,090)
Unrecognized Net (Assets) or Obligations at Transition(4) (12,956) (14,686) 307 358
Unrecognized Net (Gain) Loss (68,075) (70,182) 12,788 5,286
Unrecognized Prior Service Cost 5,320 5,936 3,941 4,203
Net Unamortized Deferred Charge from Early Retirement
Termination Benefits(5) 7,851 9,022 1,207 2,523
Adjustment Required to Recognize Minimum Pension Liability - - (1,861) -
- -------------------------------------------------------------------------------------------------------------------------
Net Pension Asset (Liability) Recognized in the Consolidated
Balance Sheets $ 19,757 $ 12,784 $(24,860) $(18,720)
=========================================================================================================================
</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.
The provisions of SFAS No. 87, require recognition in the balance sheet
of an additional minimum liability and related intangible asset for pension
plans with accumulated benefits in excess of plan assets. At December 31,
1995, an additional liability and intangible asset of $1.9 million is
reflected in the Company's Consolidated Balance Sheet.
The assumed rates used to measure the projected benefit obligations and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
- ------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------
<S> <C> <C> <C>
Weighted Average
Discount Rate 7.0% 8.5% 7.0%
Long-Term Rate of Return 9.5% 8.5% 9.0%
Increase in Future
Compensation Levels
(Composite Rate):
Retirement and
Supplemental Plans 5.5% 5.5% 6.0%
==========================================
</TABLE>
OTHER POSTEMPLOYMENT 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 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 annual net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
(In Thousands)
- ---------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 1,672 $ 1,843 $ 2,109
Interest Cost 7,409 7,051 7,567
Return on Plan Assets (3,398) (428) (219)
Net Amortization
and Deferral 5,546 3,200 3,947
- ---------------------------------------------------
$11,229 $11,666 $13,404
===================================================
</TABLE>
59
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<PAGE> 60
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS (continued)
The Company funds postretirement health care benefits for employees of
its regulated subsidiaries in an amount generally equal to the subsidiaries'
annual SFAS No. 106 expense. The regulated subsidiaries currently recover
their portion of postretirement expense through rates. The Company also funds
its Retiree Life Insurance Plan for all its subsidiaries with the amount of
funding determined on a year-to-year basis with the objective of having
assets equal plan liabilities.
The following table sets forth the funded status at December 31, 1995
and 1994, for the Company's postretirement health care and life insurance
plans:
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ 68,353 $ 61,226
Fully eligible active
plan participants 5,446 9,055
Other active plan participants 23,503 22,711
- ------------------------------------------------------------
97,302 92,992
Plan Assets at Fair Value(1) 24,352 17,030
- ------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation in Excess of
Plan Assets (72,950) (75,962)
Unrecognized Transition Obligation 61,140 65,142
Unrecognized Net Gain (7,465) (6,902)
Net Unamortized Deferred Charge
from Early Retirement
Termination Benefits 8,299 10,232
- ------------------------------------------------------------
Accrued Postretirement Benefit Cost $(10,976) $ (7,490)
============================================================
</TABLE>
(1) Retiree Medical Plan assets are comprised of equity securities,
municipal tax exempt bonds and short-term investment funds. Retiree Life
Insurance Plan assets are held in a life insurance reserve account,
which consists primarily of fixed income securities.
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
- -------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 8.5% 7.0%
Long-Term Rate of Return:
Medical assets 5.5% 5.5% 5.5%
Life insurance assets 7.5% 8.5% 7.0%
===========================================
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 9 percent in 1996, decreasing gradually to 5
percent by the year 2000. Increasing the assumed health care cost trend rate
by one percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1995, by approximately $13.1 million and increase
the service cost and interest cost components of the net periodic postretirement
benefit cost by approximately $1.5 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 years ended December 31, 1995 and 1994, $1.0 million and $1.3 million
of expense, respectively, 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 and involuntary
terminations involving 340 employees. The total cost of the program in 1994
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. Essentially all of the
terminations, voluntary and involuntary, were completed by the end of January
1995.
12. BUSINESS SEGMENT ANALYSIS
The Company's consolidated financial statements reflect operations in three
segments: Exploration and Production, Natural Gas Transmission and Energy
Marketing.
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas through its Exploration and
Production segment. The oil and gas properties of the Exploration and
Production segment are located principally onshore in the Southern coastal
states, in various states in the Southwest and Midwest, and in federal waters
offshore Louisiana and Texas. It derives the majority of its revenues through
sales to Sonat Marketing (included in the Energy Marketing segment).
The principal business of the Natural Gas Transmission segment is the
transmission of natural gas in interstate commerce. Its transmission systems
are located in the Southeastern United States. It transports gas to gas
distributing companies, municipalities and gas districts, connecting
interstate pipeline companies and industrial end-users. The principal
industries served directly by the natural gas transmission's pipeline system
and indirectly through its resale customers' distribution systems include the
chemical, pulp and
60
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<PAGE> 61
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
paper, textile, primary metals, stone, clay and glass industries.
The Energy Marketing segment is engaged in natural gas and electric
power marketing for industrial and commercial users, gas distribution
companies, gas producers and gas pipelines throughout the Gulf Coast,
Southeastern, Midwestern and Northeastern United States.
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 5.) Sonat Offshore's results prior to
June 4, 1993, are reported in the Other Business segment. The Company's
remaining shares of Sonat Offshore's common stock were sold in July 1995. The
Company's share of Sonat Offshore's results from June 4, 1993, to July 26, 1995,
is shown as equity in earnings of Sonat Offshore. The Company's only foreign
operations were conducted by Sonat Offshore and were immaterial to the Company's
results in 1993.
The Company's results of operations, revenues from major customers,
capital expenditures and assets by business segment are shown in the
following tables. Intersegment sales are primarily gas sales by the
Exploration and Production segment and are priced at market rates.
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>
(In Thousands)
- ---------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Exploration and production $ 403,488 $ 412,750 $ 353,018
Natural gas transmission 661,597 727,179 832,649
Energy marketing 1,249,903 942,208 635,292
Other 37,122 7,585 113,902
Intersegment revenue (361,969) (353,755) (193,714)
- ---------------------------------------------------------------------------------------------------
$1,990,141 $1,735,967 $1,741,147
==================================================================================================
Depreciation, Depletion and Amortization:
Exploration and production $ 239,167 $ 206,842 $ 149,179
Natural gas transmission 52,274 46,576 63,611
Energy marketing 955 2,954 2,837
Other, including depreciation of corporate equipment 6,318 1,387 10,362
- ---------------------------------------------------------------------------------------------------
$ 298,714 $ 257,759 $ 225,989
==================================================================================================
Operating Profit:
Exploration and production $ 22,967 $ 64,001 $ 86,474
Natural gas transmission 158,329 88,436 144,447
Energy marketing 6,510 11,901 (986)
Other 2,317 2,852 4,477
- ---------------------------------------------------------------------------------------------------
Operating profit 190,123 167,190 234,412
Corporate Expenses, Net (1,190) 2,249 (1,497)
- ---------------------------------------------------------------------------------------------------
Operating income 188,933 169,439 232,915
Equity in Earnings (Losses) of Unconsolidated Affiliates:
Exploration and production 615 245 4,665
Natural gas transmission 37,553 37,831 2,310
Energy marketing (5) (151) (121)
Other 8,095 6,394 5,511
Other Income, Net 142,534 16,348 169,720
Interest Expense, Net (89,844) (72,887) (47,272)
- ---------------------------------------------------------------------------------------------------
Income before Extraordinary Item and Income Taxes $ 287,881 $ 157,219 $ 367,728
===================================================================================================
</TABLE>
61
II-36
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. BUSINESS SEGMENT ANALYSIS (CONTINUED)
Revenues from Major Customers
<TABLE>
<CAPTION>
(In Thousands)
- ---------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Atlanta Gas Light:
Natural gas
transmission $190,209 $250,932 $329,040
Energy marketing 38,342 39,926 35,177
- ---------------------------------------------------------------
$228,551 $290,858 $364,217
===============================================================
Alabama Gas Corporation:
Natural gas
transmission $ 91,635 $118,975 $147,210
Energy marketing 50,134 59,556 57,348
- ---------------------------------------------------------------
$141,769 $178,531 $204,558
===============================================================
</TABLE>
Both of the major customers or their affiliates participate with the
Company in certain joint venture operations.
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>
(In Thousands)
- ------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------
<S> <C> <C> <C>
Consolidated:
Exploration and
production $416,158 $389,766 $430,852
Natural gas
transmission 62,720 51,206 59,907
Energy marketing 2,758 3,200 1,105
Other 5,928 4,142 24,602
- ------------------------------------------------------
487,564 448,314 516,466
- ------------------------------------------------------
Unconsolidated
Affiliates
(Company's Portion):
Exploration and
production 723 101 10,559
Natural gas
transmission 100,489 398,389 18,516
Other 525 452 3,080
- ------------------------------------------------------
101,737 398,942 32,155
- ------------------------------------------------------
$589,301 $847,256 $548,621
======================================================
</TABLE>
Identifiable assets by business segment are those assets that are used
in the Company's operations in each business. Corporate assets are typically
investments, cash and equipment.
Assets by Business Segment
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------
December 31, 1995 1994 1993
- --------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Exploration and
production $1,592,399 $1,488,054 $1,308,189
Natural gas
transmission 1,285,404 1,155,242 1,216,050
Energy marketing 261,751 189,651 184,746
Other 37,850 37,531 42,640
Adjustments and
eliminations (103,579) (70,444) (86,159)
- --------------------------------------------------------
3,073,825 2,800,034 2,665,466
- --------------------------------------------------------
Investments in
Unconsolidated
Affiliates:
Exploration and
production 4,876 6,281 6,345
Natural gas
transmission 368,527 338,608 149,276
Energy
marketing 490 932 793
Other 12,188 140,508 138,807
- --------------------------------------------------------
386,081 486,329 295,221
Corporate Assets 51,535 244,323 253,310
- --------------------------------------------------------
Total Assets $3,511,441 $3,530,686 $3,213,997
========================================================
</TABLE>
13. Oil and Gas Operations (Unaudited)
At December 31, 1995, 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 Insurance Company whereby the partnership was
subsequently dissolved. (See Note 5.)
62
II-37
<PAGE> 63
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Capitalized costs relating to oil and gas producing activities and
related accumulated depreciation, depletion and amortization were as follows:
Capitalized Costs
<TABLE>
<CAPTION>
(In Thousands)
- -------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------
<S> <C> <C>
Oil and Gas Properties:
Proved properties $2,336,264 $2,258,237
Unproved properties 100,019 125,118
- -------------------------------------------------------
2,436,283 2,383,355
Less Accumulated Depreciation,
Depletion and Amortization 1,008,815 991,621
- -------------------------------------------------------
$1,427,468 $1,391,734
=======================================================
</TABLE>
Costs incurred in oil and gas producing activities were as
follows:
Costs Incurred
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------
<S> <C> <C> <C>
Property Acquisition
Costs:
Proved properties $208,866 $142,294 $211,933
Unproved properties 14,767 28,953 62,617
Exploration Costs 12,138 11,284 8,265
Development Costs 183,056 215,205 151,875
- ------------------------------------------------------
Total Costs $418,827 $397,736 $434,690
=======================================================
Sonat's Share of
Sonat/P's Costs of
Property Acquisition,
Exploration, and
Development $ - $ - $ 10,432
=======================================================
</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:
Reserve Data
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Liquids - Gas - Liquids - Gas - Liquids - Gas -
Thousand Billion Thousand Billion Thousand Billion
Bbls. Cu. Ft. Bbls. Cu. Ft. Bbls. Cu. Ft.
- ----------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Proved (Developed and
Undeveloped) Reserves, Net:
Beginning of year 31,627 1,367.3 27,094 1,186.6 19,604 974.9
Revisions of previous estimates 998 48.4 (2,891) 31.3 2,410 (6.2)
Transfer of Sonat/P reserves - - - - 426 39.5
Extensions, discoveries and other additions 6,774 173.8 4,876 107.2 2,470 68.7
Purchases of reserves in place 16,954 248.1 8,059 229.9 6,396 274.7
Sales of reserves in place (6,656) (149.0) (129) (6.0) (468) (18.9)
Production (5,469) (183.1) (5,382) (181.7) (3,744) (146.1)
- ---------------------------------------------------------------------------------------------------------
End of Year 44,228 1,505.5 31,627 1,367.3 27,094 1,186.6
=========================================================================================================
Proved Developed Reserves:
Beginning of year 22,269 1,001.0 19,776 899.6 15,304 696.5
End of year 25,613 1,060.1 22,269 1,001.0 19,776 899.6
=========================================================================================================
Sonat's Proportional Interest in:
Production of Sonat/P - - - - 34 4.2
=========================================================================================================
</TABLE>
63
II-38
<PAGE> 64
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. OIL AND GAS OPERATIONS (Unaudited)
(continued)
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. 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, 1995.
Results of operations from producing activities by fiscal year were as
follows:
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Sales $175,032 $148,530 $200,143
Affiliated sales 228,456 264,220 151,987
- --------------------------------------------------------------------------
Total 403,488 412,750 352,130
Production Costs (81,046) (81,067) (64,548)
Exploration Expenses (9,065) (12,181) (6,678)
Depreciation, Depletion
and Amortization (239,167) (206,842) (149,179)
- --------------------------------------------------------------------------
74,210 112,660 131,725
Income Tax Expense (14,730) (25,031) (27,066)
- --------------------------------------------------------------------------
Results of Operations
from Producing
Activities (Excluding
Corporate Overhead
and Interest Costs) $ 59,480 $ 87,629 $104,659
==========================================================================
Sonat's Share of
Sonat/P's Results of
Operations for
Producing Activities
(before Tax) $ - $ - $ 4,900
==========================================================================
</TABLE>
The standarized 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>
(In Thousands)
- ------------------------------------------------------------------------
December 31, 1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Future Cash Inflows $3,562,789 $2,835,781 $3,051,484
Future Production
and Development
Costs (1,286,074) (1,200,581) (1,044,410)
Future Income
Tax Expenses (354,041) (83,931) (236,632)
- ------------------------------------------------------------------------
Future Net
Cash Flows 1,922,674 1,551,269 1,770,442
10% Annual
Discount for
Estimated
Timing of
Cash Flows (611,206) (465,469) (477,824)
- ------------------------------------------------------------------------
Standardized
Measure of
Discounted
Future Net
Cash Flows $1,311,468 $1,085,800 $1,292,618
==========================================================================
</TABLE>
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 the month of December of each
respective year.
64
II-39
<PAGE> 65
SONAT INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and Transfers of Oil and Gas Produced, Net of Production Costs $(322,442) $(331,683) $(287,583)
Net Changes in Prices and Production Costs 186,034 (327,290) (25,100)
Extensions, Discoveries and Improved Recovery, Less Related Costs 176,080 104,554 87,185
Transfer of Sonat/P Reserves - - 44,209
Changes in Estimated Future Development Costs (15,362) (28,397) (17,179)
Development Costs Incurred During the Period 103,138 68,945 47,278
Revisions of Previous Quantity Estimates 49,129 11,157 8,572
Accretion of Discount 105,288 129,974 103,689
Net Change in Income Taxes (180,223 40,039 (34,751)
Purchases of Reserves in Place 333,260 160,335 317,764
Sales of Reserves in Place (155,952) (5,226) (17,159)
Changes in Production Rates (Timing) and Other (53,282) (29,226) 68,220
- --------------------------------------------------------------------------------------------------------
$ 225,668 $(206,818) $ 295,145
========================================================================================================
</TABLE>
14. QUARTERLY RESULTS (Unaudited)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
- --------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995(1)(3)
Revenues $425,034 $476,344 $509,429 $579,334
Operating Income 55,120 77,740 35,204 20,869
Net Income 37,617 17,341 130,520 7,410
============================================================================================
Earnings Per Share .44 .20 1.51 .09
============================================================================================
1994(2)(3)
Revenues $479,507 $415,015 $411,765 $429,680
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
============================================================================================
</TABLE>
(1) Net income for the second quarter of 1995 includes a loss of $20.0
million, or $.23 per share, related to the sale of properties by the
Company's exploration and production subsidiary; a a gain of $24.4 million,
or $.28 per share, related to terminations of long-term gas sales contracts
by the Company's exploration and production subsidiary; and a loss of $8.2
million or $.09 per share, related to the sale of the Company's investment
in Baker Hughes Incorporated convertible preferred stock.
Net income for the third quarter of 1995 includes income of $110.1
million, or $1.27 per share, related related to the sale of the Company's
remaining shares of Sonat Offshore common stock.
Net income for the fourth quarter of 1995 includes a loss of $15.0
million, or $.17 per share, related related to the impairment of oil and
gas properties associated with the adoption of Statement of Financial
Accounting Standards No. 121; a loss of $6.8 million, or $.08 per share, on
unrecoverable gas contract realignment costs at Southern; and a loss of
$5.5 million, or $.06 per share on natural gas future contracts that
ceased accounting as hedges due to the decoupling of the NYMEX futures
market for natural gas with the price of natural gas in certain parts of
the country.
(2) 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'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.
(3) In accordance with a new FERC policy, certain fuel revenues and fuel
operating costs have been netted. Therefore revenue and operating cost
have been restated for 1995 and 1994.
65
II-40
<PAGE> 66
- -------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,990.1 $ 1,735.9 $1,741.1 $1,484.4
Costs and Expenses 1,801.2 1,566.5 1,508.2 1,273.3
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 188.9 169.4 232.9 211.1
Other Income (Expense), Net(3) 188.8 60.7 182.1 22.0
Interest Expense, Net (89.8) (72.9) (47.3) (96.3)
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Extraordinary Item and Income Taxes 287.9 157.2 367.7 136.8
Income Taxes (Benefits) 95.0 15.8 102.7 35.8
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Cumulative Effect of Accounting Changes 192.9 141.4 265.0 101.0
Income (Loss) from Discontinued Operations(1) - - - 111.4
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) $ 192.9 $ 141.4 $ 261.2 $ 212.4
=============================================================================================================================
Earnings (Loss) Per Share from Continuing
Operations before Extraordinary Item $ 2.24 $ 1.62 $ 3.05 $ 1.17
Earnings (Loss) Per Share $ 2.24 $ 1.62 $ 3.01 $ 2.47
Weighted Average Shares Outstanding (thousands) 86,270 87,119 86,703 85,945
Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.04 $ 1.00
==============================================================================================================================
Assets $ 3,511.4 $ 3,530.7 $3,214.0 $3,165.3
Debt Maturing within One Year $ 237.7 $ 219.3 $ 232.9 $ 20.1
Long-Term Debt 770.3 963.4 741.2 1,175.7
Stockholders' Equity 1,482.6 1,391.9 1,363.2 1,172.3
- -----------------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 2,490.6 $ 2,574.6 $2,337.3 $2,368.1
==============================================================================================================================
</TABLE>
NOTES:
(1) Discontinued operations include the measurement-while-drilling businesses
as of 1991 and the marine transportation and underwater services
businesses as of 1986.
(2) In March 1993, the Company recognized a loss on the redemption of the
Company's 71/4 Percent Zero Coupon, Subordinated Convertible Notes, which
were due September 6, 2005.
(3) In June 1993, the Company reduced its ownership of Sonat Offshore from
100 percent to 40 percent. In July 1995, the Company disposed of its
remaining shares of Sonat Offshore common stock.
66
II-41
<PAGE> 67
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
- --------------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986 1985
<C> <C> <C> <C> <C> <C> <C>
$1,421.0 $1,356.9 $1,659.2 $1,277.3 $1,344.9 $1,628.6 $2,258.6
1,217.5 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3 2,225.2
- --------------------------------------------------------------------------------------------------
203.5 164.7 177.8 134.9 168.4 (300.7) 33.4
14.7 69.8 47.1 12.5 41.5 118.1 5.2
(117.7) (102.6) (75.2) (54.4) (54.6) (77.9) (47.9)
- --------------------------------------------------------------------------------------------------
100.5 131.9 149.7 93.0 155.3 (260.5) (9.3)
22.6 40.7 54.1 40.5 85.2 (144.7) (13.0)
- --------------------------------------------------------------------------------------------------
77.9 91.2 95.6 52.5 70.1 (115.8) 3.7
(11.9) 2.7 (2.0) 2.2 24.9 (73.6) (14.1)
- - - - - - -
- - - - - - 62.4
- - - 13.1 - - -
- --------------------------------------------------------------------------------------------------
$ 66.0 $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4) $ 52.0
==================================================================================================
$ .91 $ 1.07 $ 1.17 $ .65 $ .87 $ (1.43) $ .05
$ .77 $ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34) $ .64
85,771 85,612 81,682 81,238 80,912 80,948 80,916
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .9625
==================================================================================================
$3,208.5 $3,045.1 $2,892.3 $2,969.5 $3,074.4 $3,288.8 $3,413.2
$ 79.2 $ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6 $ 150.7
1,315.1 1,094.0 929.5 859.4 824.8 1,336.3 996.2
1,042.7 1,060.5 1,035.3 1,010.2 1,023.0 1,005.9 1,276.3
- --------------------------------------------------------------------------------------------------
$2,437.0 $2,217.6 $2,120.7 $1,920.0 $2,073.4 $2,446.8 $2,423.2
==================================================================================================
</TABLE>
67
II-42
<PAGE> 68
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-43
<PAGE> 69
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 13, 1996
(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> 70
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-16
Consolidated Balance Sheets at December 31, 1995 and 1994........................ II-17
Consolidated Statements of Income for the years ended December 31, 1995, 1994,
and 1993...................................................................... II-19
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1995, 1994, and 1993............................................. II-20
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994, and 1993................................................................ II-21
Notes to Consolidated Financial Statements....................................... II-22
</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, 1995 listed on Page IV-7............................. IV-7
</TABLE>
Financial Statement Schedules have been omitted as 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>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3-(a) Restated Certificate of Incorporation of Sonat Inc. (Restating the Certificate of
Incorporation as in effect as of April 28, 1994) filed as Exhibit 3(a) to Form 10-Q
of Sonat Inc. for the quarter ended March 31, 1994
3-(b) By-Laws of Sonat Inc. as amended and in effect December 1, 1995, filed herewith
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Rights Agreement dated as of January 8, 1996, between Sonat Inc. and Chemical
Mellon Shareholder Services, L.L.C., as Rights Agent, with exhibits, filed as
Exhibit 99 to Form 8-A of Sonat Inc. dated January 10, 1996
4.2 Form of Indenture dated June 1, 1986, from Sonat Inc. to Manufacturers Hanover
Trust Company, Trustee, filed as Exhibit 4-(1) to Amendment No. 1 to Registration
No. 33-5947 dated June 4, 1986
</TABLE>
- ---------------
(1) Sonat will furnish to requesting security holders any exhibit on this list
upon the payment of a fee of $.10 per page up to a maximum of $5.00 per
exhibit. Requests must be made in writing and should be addressed to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham,
Alabama 35202.
IV-1
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
4.3 Form of Indenture dated June 1, 1987, from Southern Natural Gas Company to
Manufacturers Hanover Trust Company, Trustee, filed as Exhibit 4-(1) to
Registration No. 33-47266 of Southern Natural Gas Company dated April 16, 1992
4.4 $400 Million Note Agreement dated November 3, 1986, between Citrus Corp. and the
Purchasers named therein, filed as Exhibit 4-(5) to Form 10-K of Sonat Inc. for the
year 1990
4.5 Credit Agreement dated as of December 15, 1993, among Sonat Inc., the Banks named
therein, and The Chase Manhattan Bank (National Association), Chemical Bank, and
Morgan Guaranty Trust Company of New York, as Co-Agents, filed as Exhibit 4-(5) to
Form 10-K of Sonat Inc. for the year 1993
4.6 Certificate of Designations of Series A Participating Preference Stock of Sonat
Inc. dated January 8, 1996, as filed with the Secretary of State of the State of
Delaware January 16, 1996, filed herewith
PRINCIPAL SERVICE AGREEMENTS OF SOUTHERN NATURAL GAS COMPANY
10.1 Form of Service Agreements, Nos. 866940, 866941 and S10710, between Southern
Natural Gas Company and Alabama Gas Corporation, effective November 1, 1993, filed
as Exhibit 10-(2) to Form 10-Q of Sonat Inc. for the quarter ended September 30,
1993
10.2 Service Agreements (1) No. S10019, effective November 1, 1993, (2) Nos. 901710 and
901711, effective June 1, 1994, and No. 902516, effective October 1, 1994, (3)
Amendatory Agreements dated March 1, 1995, to Service Agreements (Nos. 901710 and
902516), and (4) Amendatory Agreement dated February 1, 1996, to Service Agreement
No. 901710, between Southern Natural Gas Company and South Carolina Pipeline
Corporation, filed as (1) Exhibit 10-(3) to Form 10-Q of Sonat Inc. for the quarter
ended September 30, 1993, (2) Exhibit 10.5 to Form 10-Q of Sonat Inc. for the
quarter ended September 30, 1994, (3) Exhibit 10.4 to Form 10-Q of Sonat Inc. for
the quarter ended March 31, 1995, and (4), which is filed herewith
10.3(a) Service Agreement No. 902470, effective September 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.6 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(b) Service Agreement No. 904460, effective November 1, 1994, and (1) Amendatory
Agreement dated June 1, 1995, between Southern Natural Gas Company and Atlanta Gas
Light Company, filed as Exhibit 10.7 to Form 10-Q of Sonat Inc. for the quarter
ended September 30, 1994, except (1), which was filed as Exhibit 10 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1995
10.3(c) Service Agreement No. 904461, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.8 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(d) Service Agreement No. 904480, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.9 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(e) Service Agreement No. 904481, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.10 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(f) Service Agreement No. S20150, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.11 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
10.3(g) Service Agreement No. S20140, effective November 1, 1994, between Southern Natural
Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.12 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1994
</TABLE>
IV-2
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
10.3(h) Amendatory Agreement dated March 1, 1995, to Service Agreements (Nos. 904480,
904481, and S20140) between Southern Natural Gas Company and Atlanta Gas Light
Company, filed as Exhibit 10.2 to Form 10-Q of Sonat Inc. for the quarter ended
March 31, 1995
10.3(i) Amendatory Agreement dated March 1, 1995, to Service Agreements (No. 902470) and
(Nos. 904460, 904461, and S20150) effective November 1, 1994, between Southern
Natural Gas Company and Atlanta Gas Light Company, filed as Exhibit 10.3 to Form
10-Q of Sonat Inc. for the quarter ended March 31, 1995
COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.4 Supplemental Benefit Plan of Sonat Inc. as Amended and Restated effective February
25, 1993, (1) amendment dated April 28, 1994, and (2) amendment dated December 1,
1995, filed as Exhibit 10-(4) to Form 10-K of Sonat Inc. for year 1993, except (1),
which was filed as Exhibit 10.2 to Form 10-Q of Sonat Inc. for quarter ended
September 30, 1994, and (2), which is filed herewith
10.5 Executive Award Plan of Sonat Inc. as Amended and Restated as of December 1, 1995,
filed herewith
10.6 Restricted Stock Plan for Directors of Sonat Inc. (as Amended and Restated as of
September 15, 1993), and (1) amendment dated December 1, 1995, filed as Exhibit
10-(6) to Form 10-K of Sonat Inc. for the year 1993, except (1), which is filed
herewith
10.7 Performance Award Plan of Sonat Inc. effective as of January 27, 1994, and (1)
amendment dated December 1, 1995, filed as Exhibit 10-(7) to Form 10-K of Sonat
Inc. for the year 1993, except (1), which is filed herewith
10.8 Cash Bonus Plan of Sonat Inc. effective as of January 27, 1994, and (1) amendment
dated December 1, 1995, filed as Exhibit 10-(8) to Form 10-K of Sonat Inc. for the
year 1993, except (1), which is filed herewith
10.9 Sonat Inc. Retirement Plan for Directors as Amended and Restated as of December 2,
1994, and (1) amendment dated December 1, 1995, filed as Exhibit 10.9 to Form 10-K
of Sonat Inc. for the year 1994, except (1), which is filed herewith
10.10(a) Executive Severance Agreement dated December 1, 1995, between Sonat Inc. and Ronald
L. Kuehn, Jr. and schedule identifying substantially identical Executive Severance
Agreements between Sonat Inc. and other parties, filed herewith
10.10(b) Executive Severance Agreement dated December 1, 1995, between Sonat Inc. and Donald
G. Russell, filed herewith
10.11 Directors' Fees Deferral Plan of Sonat Inc. effective as of August 15, 1985, filed
as Exhibit 10-(14) to Form 10-K of Sonat Inc. for the year 1990 and amendment dated
December 1, 1995, which is filed herewith
10.12 Indemnity Agreement dated December 4, 1987, between Sonat Inc. and Ronald L. Kuehn,
Jr. and schedule identifying substantially identical indemnity agreements between
Sonat Inc. and other directors of Sonat Inc. and (1) Indemnity Agreement dated
September 1, 1994, between Sonat Inc. and Adrian M. Tocklin, (2) Indemnity
Agreement dated September 22, 1994, between Sonat Inc. and Donald G. Russell, and
(3) Indemnity Agreement dated November 1, 1995, between Sonat Inc. and Max L.
Lukens, filed as Exhibit 10-(11) to Form 10-K of Sonat Inc. for the year 1992,
except (1), which was filed as Exhibit 10.3 to Form 10-Q of Sonat Inc. for the
quarter ended September 30, 1994, (2), which was filed as Exhibit 10.4 to Form 10-Q
of Sonat Inc. for the quarter ended September 30, 1994, and (3), which is filed
herewith
10.13 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A.
for Section 415 Retirement Plan Benefits and Vesting Benefits under the
Supplemental Benefit Plan and Early Retirement Benefits under the Executive
Severance Agreements, filed as Exhibit 10-(15) to Form 10-K of Sonat Inc. for the
year 1991
</TABLE>
IV-3
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- -------- -----------------------------------------------------------------------------------
<S> <C>
10.14 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A.
for Section 415 Stock Purchase Plan Benefits under the Supplemental Benefit Plan,
filed as Exhibit 10- (16) to Form 10-K of Sonat Inc. for the year 1991
10.15 Trust Agreement dated December 19, 1986, between Sonat Inc. and AmSouth Bank N.A.
for Benefits under the Retirement Plan for Directors, filed as Exhibit 10-(17) to
Form 10-K of Sonat Inc. for the year 1991
10.16 Form of Sonat Inc. Executive Life Insurance Program Split Dollar Agreement,
Collateral Assignment Agreement, and Program Description, each dated as of July 1,
1990, with (1) schedule identifying the persons participating in such Programs,
filed as Exhibit 10-(20) to Form 10-K of Sonat Inc. for the year 1990, except (1),
which is filed herewith
OTHER MATERIAL CONTRACTS
10.17 Restated and Amended Joint Venture Agreement dated September 1, 1981, between
Tennessee Storage Company and Southern Gas Storage Company forming Bear Creek
Storage Company (with Appendices A-G), filed as Exhibit 10-(22) to Form 10-K of
Sonat Inc. for the year 1991
10.18 Service Agreement dated June 1, 1981, with Bear Creek Storage Company, and FERC Gas
Tariff of Bear Creek Storage Company, effective July 1, 1981, filed as Exhibit
10-(23) to Form 10-K of Sonat Inc. for the year 1991
10.19 Parents Agreement dated September 15, 1981, from Southern Natural Gas Company and
Tenneco Inc. in favor of Manufacturers Hanover Trust Company and T. C. Crane, filed
as Exhibit 10-(25) to Form 10-K of Sonat Inc. for the year 1991
10.20 Capital Stock Agreement among Sonat Inc., Enron Corp., Houston Natural Gas
Corporation, and Citrus Corp. dated June 30, 1986, filed as Exhibit 10-(26) to Form
10-K of Sonat Inc. for the year 1991
10.21 Standby Note Purchase Agreement among Sonat Inc., Credit Lyonnais New York Branch,
as Administrative Agent for the Banks party to the Revolving Credit 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, filed as Exhibit 10-(23) to Form 10-K of Sonat Inc. for
the year 1993
OTHER EXHIBITS
11 Sonat Inc. and Subsidiaries Computation of Earnings Per Share, filed herewith
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 13, 1996, which is not to be deemed
"filed" as part of this Form 10-K, except to the extent incorporated by reference
under Items 10, 11, 12 and 13 of Part III of this Form 10-K, filed herewith
23 Consent of Ernst & Young LLP, Independent Auditors, dated March 18, 1996, filed
herewith
24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Thomas W. Barker, Jr.; James
A. Rubright; and John C. Griffin to sign the Sonat Inc. Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, on behalf of certain directors and
officers of the registrant, filed herewith
27 Financial Data Schedule for the period ended December 31, 1995, filed herewith
</TABLE>
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are hereby
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.
IV-4
<PAGE> 74
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, 1995.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-5
<PAGE> 75
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 21, 1996
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 21, 1996
- --------------------------------------------- President and Chief
(RONALD L. KUEHN, JR.) Executive Officer
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Vice President -- Finance March 21, 1996
- --------------------------------------------- and Treasurer
(THOMAS W. BARKER, JR.)
Principal Accounting Officer:
/s/ JAMES A. RUBRIGHT Senior Vice President March 21, 1996
- --------------------------------------------- and General Counsel
(JAMES A. RUBRIGHT)
(iii) Directors:*
RONALD L. KUEHN, JR. JOHN J. PHELAN, JR.
WILLIAM O. BOURKE JEROME J. RICHARDSON
JOHN J. CREEDON DONALD G. RUSSELL
ROBERTO C. GOIZUETA L. EDWIN SMART
ROBERT J. LANIGAN ADRIAN M. TOCKLIN
MAX L. LUKENS JAMES B. WILLIAMS
CHARLES MARSHALL JOE B. WYATT
BENJAMIN F. PAYTON
*Signed on behalf of each of these persons:
By /s/ JAMES A. RUBRIGHT
------------------------------------------
JAMES A. RUBRIGHT
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
AS AUTHORIZED BY CERTAIN POWERS OF
ATTORNEY DATED FEBRUARY 22, 1996,
AND ONE DATED FEBRUARY 27, 1996,
ALL OF WHICH ARE FILED HEREWITH
AS EXHIBIT 24
</TABLE>
IV-6
<PAGE> 76
CITRUS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Report of Ernst & Young LLP, Independent Auditors
<TABLE>
<S> <C> <C>
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> 77
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Birmingham, Alabama
February 29, 1996
IV-8
<PAGE> 78
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31,
-------------
(In Thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 2,985 $ 78,068
Trade and other receivables
Customers, net 62,296 45,628
Affiliated companies 385 752
Contract reformation costs, net 33,584 29,749
Commodity adjustment costs 5,411 5,399
Materials and supplies 2,379 1,955
Other 53 228
------------ ------------
Total Current Assets 107,093 161,779
------------ ------------
Deferred Charges
Unamortized debt expense 8,737 9,736
Contract reformation costs, net - 32,832
Commodity adjustment costs 40,217 45,628
Other 23,318 15,691
------------ ------------
Total Deferred Charges 72,272 103,887
------------ ------------
Property, Plant and Equipment, at cost 2,797,051 2,593,533
Less - accumulated depreciation and amortization 395,204 358,396
------------ ------------
Net Property, Plant and Equipment 2,401,847 2,235,137
------------ ------------
TOTAL ASSETS $ 2,581,212 $2,500,803
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-9
<PAGE> 79
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31,
-------------
(In Thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 70,000 $ -
Accounts payable
Trade 43,172 36,015
Affiliated companies 7,727 27,018
Accrued liabilities
Interest 18,088 18,342
Income taxes 2,065 4,856
Other taxes 3,381 1,341
TCR deferred revenues 37,392 21,258
Other 5,118 17,985
----------- -----------
Total Current Liabilities 186,943 126,815
----------- -----------
Long-Term Debt 1,125,000 1,125,000
----------- -----------
Deferred Credits
Deferred income taxes 466,030 444,250
TCR deferred revenues - 45,034
Other 36,537 46,628
----------- -----------
Total Deferred Credits 502,567 535,912
----------- -----------
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 634,271 634,271
Retained earnings 132,430 78,804
----------- -----------
Total Stockholders' Equity 766,702 713,076
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,581,212 $ 2,500,803
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-10
<PAGE> 80
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gas sales $377,218 $305,350 $407,977
Gas transportation 305,169 172,112 141,725
Other - - 24,600
-------- -------- --------
682,387 477,462 574,302
-------- -------- --------
Costs and Expenses
Natural gas purchased 362,635 294,670 405,920
Operations and maintenance 79,880 63,365 63,228
Depreciation and amortization 81,227 63,737 59,896
Taxes - other than income taxes 14,767 8,506 8,526
-------- -------- --------
538,509 430,278 537,570
-------- -------- --------
Operating Income 143,878 47,184 36,732
-------- -------- --------
Other Income (Expense)
Interest expense, net (98,887) (55,760) (51,842)
Allowance for funds used during construction 41,881 98,114 2,712
Other, net 572 58 907
-------- -------- --------
(56,434) 42,412 (48,223)
-------- -------- --------
Income (Loss) Before Income Taxes 87,444 89,596 (11,491)
Income Tax Expense 33,818 34,487 4,641
-------- -------- --------
Net Income (Loss) 53,626 55,109 (16,132)
Retained Earnings, Beginning of Year 78,804 23,695 39,827
-------- -------- --------
Retained Earnings, End of Year $132,430 $ 78,804 $ 23,695
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-11
<PAGE> 81
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 53,626 $ 55,109 $ (16,132)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 81,227 63,737 59,896
Deferred income taxes 21,780 25,577 4,641
Allowance for funds used during construction (41,881) (98,114) (2,712)
Changes in assets and liabilities
Trade and other receivables (16,301) (1,494) 9,763
Materials and supplies (424) 3,326 4,270
Accounts payable (12,134) (29,421) 11,040
Accrued liabilities (1,005) 13,230 771
Other current assets and liabilities (12,692) 9,081 (3,175)
Contract reformation settlements and
adjustments (3,917) (8,169) (18,802)
Other, net (18,599) (49,960) (22,442)
---------- ----------- -----------
Net Cash Provided by (Used in) Operating Activities 49,680 (17,098) 27,118
---------- ----------- -----------
Cash Flows From Investing Activities
Additions to property, plant and equipment (208,627) (855,832) (110,615)
Allowance for funds used during construction 41,881 98,114 2,712
Disposition of property, plant and equipment, net 883 (2,024) (696)
---------- ----------- -----------
Net Cash Used in Investing Activities (165,863) (759,742) (108,599)
---------- ----------- -----------
Cash Flows From Financing Activities
Short-term bank borrowings, net 70,000 (275,000) 120,000
Proceeds from issuance of long-term debt - 790,000 -
Payment of long-term debt - (90,000) (30,000)
TCR sale proceeds - 86,313 -
TCR remittances (28,900) (20,021) -
Hedging proceeds - 36,161 -
Equity contribution from stockholders - 318,000 -
---------- ----------- -----------
Net Cash Provided by Financing Activities 41,100 845,453 90,000
---------- ----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents (75,083) 68,613 8,519
Cash and Cash Equivalents, Beginning of Year 78,068 9,455 936
---------- ----------- -----------
Cash and Cash Equivalents, End of Year $ 2,985 $ 78,068 $ 9,455
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Additional cash flow information:
The company made the following interest and income tax payments:
Interest (net of amounts capitalized) $ 104,348 $ 58,180 $ 54,510
Income taxes paid (received) 14,160 4,054 (2,149)
</TABLE>
IV-12
<PAGE> 82
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) REPORTING ENTITY
Citrus Corp. (the Company), a holding company formed in 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 extending from South
Texas to South Florida, is engaged in the interstate transmission 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, the
majority of which are in the state of Florida.
(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. Interest-rate
swaps made in 1994 have been closed and the termination gain has been
deferred in other deferred credits in the consolidated balance sheets
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 1.41%, .75% and
3.06% for 1995, 1994 and 1993, 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> 83
(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 required Trading to make approximately $55
million in deposits on the customers behalf over sixteen months.
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.
Transmission 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.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt outstanding at December 31, 1995 and 1994 was as
follows (in thousands):
<TABLE>
<S> <C>
Citrus Corp.
------------
11.10% Notes due 1998-2006 $ 175,000
8.49% Notes due 2007-2009 90,000
------------
265,000
------------
Transmission
------------
7.75% Notes due 1997 100,000
9.30% Notes due 1998 25,000
8.14% Notes due 1999 200,000
9.75% Notes due 1999-2008 65,000
8.63% Notes due 2004 250,000
10.11% Notes due 2009-2013 70,000
9.19% Notes due 2005-2024 150,000
------------
860,000
------------
Total Long-Term Debt $ 1,125,000
============
</TABLE>
IV-14
<PAGE> 84
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued)
Annual maturities and sinking fund requirements on long-term debt
outstanding as of December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 --
1997 100,000
1998 44,250
1999 225,750
2000 25,750
Thereafter 729,250
------------
$ 1,125,000
============
</TABLE>
The Company has a note agreement that contains certain
restrictions which, among other things, limit 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, 1995.
Transmission has a committed line of credit of $70.0 million at an
average rate of 6.26% which was fully utilized at December 31, 1995,
and uncommitted facilities for up to $30.0 million which were
available at December 31, 1995.
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 revenues on the consolidated balance sheets 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, 1995 and 1994 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryforward $ 498 $ 5,013
Other 21,595 29,077
----------- -----------
22,093 34,090
----------- -----------
Deferred income tax liabilities
Depreciation and amortization 460,058 436,712
Contract reformation costs 23,500 37,181
Other 4,565 4,447
----------- -----------
488,123 478,340
----------- -----------
Net deferred income tax liabilities $ 466,030 $ 444,250
=========== ===========
</TABLE>
IV-15
<PAGE> 85
(4) INCOME TAXES (continued)
Total income tax expense for the years ended December 31, 1995,
1994 and 1993 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ---------
<S> <C> <C> <C>
Payable currently
Federal $10,138 $ 7,000 $ --
State 1,900 1,910 --
------- ------- ---------
12,038 8,910 --
------- ------- ---------
Payment deferred
Federal 18,867 21,882 (5,091)
State 2,913 3,695 (347)
------- ------- ---------
21,780 25,577 (5,438)
------- ------- ---------
Effect of tax rate increase on
deferred tax liability -- -- 10,079
------- ------- ---------
Total income tax expense $33,818 $34,487 $ 4,641
======= ======= =========
</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, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- ---------
<S> <C> <C> <C>
Statutory federal income tax provision $ 30,605 $ 31,359 $ (4,022)
Net state income taxes 3,128 3,063 (226)
Tax rate increase -- -- 10,079
Revision of prior years' tax estimates -- -- (1,200)
Other 85 65 10
-------- ---------- ---------
Income tax expense $ 33,818 $ 34,487 $ 4,641
======== ========== =========
</TABLE>
The Company has a consolidated net operating loss (NOL)
carryforward for tax purposes of approximately $1.3 million. The NOL
will be available until 2008, at which time it will expire. The
Company also has an alternative minimum tax (AMT) credit of
approximately $17.5 million which can be used to offset regular income
taxes payable in future years. The AMT credit has an indefinite
carryforward period. For financial statement purposes, the Company
has recognized the benefit of the NOL and AMT credit carryforward as
a reduction of deferred tax liabilities.
(5) EMPLOYEE BENEFIT PLANS
The employees of Citrus Corp. and its subsidiaries are covered
under Enron's 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 were
entitled to retirement benefits based on a formula that uses a
percentage of final average pay and years of service. In connection
with a change to the retirement benefit formula, Enron amended the
Enron Plan in 1995 providing, among other things, that all employees
became fully vested in retirement benefits earned through December 31,
1994. The formula in place prior to January 1, 1995 was suspended and
replaced with a benefit accrual of 5% of annual base pay. Pension
expenses charged by Enron were immaterial for 1995, 1994 and 1993.
IV-16
<PAGE> 86
(5) EMPLOYEE BENEFIT PLANS (continued)
Enron also 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 accounts within
the ESOP exceed accrued benefits under the Enron Plan. At December
31, 1995, all shares included in the ESOP had been allocated to the
employee accounts.
As of September 30, 1995, 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
greater than the plan net assets by approximately $19.3 million. The
assumed discount rate and rate of return on plan assets used in
determining the actuarial present value of projected plan benefits
were 7.5% 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, Citrus adopted the provisions of SFAS
No. 106 "Employers Accounting for Postretirement Benefits Other Than
Pensions" (SFAS 106). SFAS 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.
Citrus 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 $.9, $.8 and $.7
million for 1995, 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 7.5% discount rate and a health care cost
trend rate of 11.7% in 1995 decreasing to 5% by the year 2006 and
beyond. The APBO exceeded plan assets by $120.8 million as of its most
recent valuation date of December 31, 1995.
(6) MAJOR CUSTOMERS
Revenues from individual customers exceeding 10% of total
revenues for the years ended December 31, 1995, 1994 and 1993 were
approximately as follows (in thousands):
<TABLE>
<CAPTION>
Customers 1995 1994 1993
--------- ------------- --------- -----------
<S> <C> <C> <C>
Florida Power & Light Co. $ 343,000 $ 267,000 $ 263,000
Enron Capital and Trade Resources 65,000 -- --
</TABLE>
At December 31, 1995, the Company's subsidiaries had receivables
of approximately $30.9 and $4.5 million from Florida Power & Light Co.
and Enron Capital and Trade Resources, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company incurs certain corporate administrative expenses
including employee benefit costs from Enron and its affiliates. The
Company was charged approximately $11.6, $17.4 and $14.8 million for
these expenses for the years ended December 31, 1995, 1994 and 1993,
respectively.
IV-17
<PAGE> 87
(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 $66.1, $9.1 and
$13.0 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company's subsidiaries purchased gas from
affiliates of Sonat of approximately $84.1, $22.0 and $10.8 million
for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company's subsidiaries also purchased gas from affiliates of Enron
of approximately $186.7, $139.4 and $31.1 million for the years ended
December 31, 1995, 1994 and 1993, 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. By order issued May 31, 1995, the FERC
authorized Transmission to eliminate this volumetric surcharge and
recover any remaining Southern Fixed Charges balances pursuant to
mutually agreed-upon arrangements between Transmission and its
customers with remaining balances. All such balances have been
resolved.
The Company has been authorized by the FERC to recover certain
transition costs incurred through the reformation of gas supply
contracts related to the Company's jurisdictional sales services. On
November 1, 1993, the Company's Order No. 636 restructuring settlement
went into effect. In addition to the existing recovery mechanism, the
settlement allows the Company to recover 100% of any transition
payments from $106 million up to $160 million. Furthermore, 75% of
payments after the $160 million level would be recoverable.
The Company has certain gas purchase contracts which provide
for take-or-pay obligations which have not yet been terminated.
Certain suppliers have made claims for payment under the take-or-pay
provision of these contracts. As the Company completes the
termination of its remaining gas purchase contracts, it is possible
that additional payments to suppliers may be made to resolve these
contract issues. To the extent additional payments are made, the
Company believes that these costs will be 100% recoverable through
existing tariff mechanisms.
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, as well as certain
operational tariff modifications. 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. An Interim
Stipulation and Agreement was reached on March 23, 1995 that, among
other things, provided for: 1) the suspension of the procedural
schedule while Transmission and the other parties to the proceeding
undertook negotiations with respect to the proposed operational
modifications, and 2) the agreement that Transmission would not move
into effect the new rates pending such negotiations. On August 24,
1995, a Settlement was filed resolving all issues in the proceeding
and resulted in the withdrawal of the rate increase initially proposed
on December 30, 1994. The Settlement became effective December 1,
1995 pursuant to Commission order issued October 11, 1995. As a result
of the August 24, 1995 Settlement and the Settlement filed August 25,
1992, in Docket Nos. CP92-182, et al, Transmission will make a Section
4 rate filing for both its pre-expansion system and the Phase III
expansion on or before September 1, 1996.
IV-18
<PAGE> 88
(9) COMMITMENTS AND CONTINGENCIES
The FERC's Division of Audits completed a compliance review of
Transmission's books and records for the period of January 1, 1991
through December 31, 1994. 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 and have proposed adjustments totaling $44 million after
tax to the capitalization by Transmission of AFUDC of its Phase III
expansion facilities. The Company's management believes that the
method of capitalizing AFUDC was proper; however, the final outcome of
this matter can not be determined.
(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 the state of 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, 1995 and 1994, are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Contract reformation costs, net $ 33,584 $ 33,584 $ 62,581 $ 62,581
TCR deferred revenues 37,392 37,392 66,292 66,292
Notes payable to banks 70,000 70,000 -- --
Long-term debt 1,125,000 1,325,276 1,125,000 1,156,375
</TABLE>
The carrying amount of contract reformation costs, notes payable
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 provided a hedge on 41,000 MMBtu of natural gas and 5,000
barrels of residual fuel oil per day. The agreement required 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 swap
agreement expired July 31, 1995.
Additionally, in May 1994, the Company entered into an offsetting
swap agreement with an affiliate of Enron, the term of which coincided
with the remaining life of the previously referenced swap and also
expired July 31, 1995.
The Company's after-tax results of operations for the years ended
December 31, 1995, 1994 and 1993 included net gains of $.3, $5.5 ($2.4
million of this amount is from an affiliate of Enron) and $4.6
million, respectively, related to these agreements. Under the swap
agreements, Trading effectively paid a fixed price of $13.75 per
barrel and received a fixed price of $20.135 per barrel for residual
fuel, and paid a fixed price of $2.381 per mcf and received a fixed
price of $2.042 mcf for natural gas.
IV-19
<PAGE> 89
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1995
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
- ---- --------------------------------------------------------------------------------------
<C> <S>
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-16 Map of the Southeastern United States showing the approximate location of the pipeline
systems of Southern, Sea Robin, SIA, South Georgia, and Florida Gas (as described on
pages I-7, I-13, I-13, I-13, and I-14, respectively), the underground storage
facilities of Southern (as described on page I-10), and Southern Energy's LNG terminal
(as discussed on page I-13).
</TABLE>
<PAGE> 1
EXHIBIT 3-(b)
BY-LAWS
OF
SONAT INC.
AMENDED AND IN EFFECT DECEMBER 1, 1995
ARTICLE 1
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of stockholders for the
purpose of electing directors and an Auditor and of transacting such other
business as may come before it shall be held at such time as may be specified
by resolution of the Board of Directors.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be
called in the manner provided in Section (6), Article FIFTH of the Certificate
of Incorporation.
SECTION 3. PLACE OF MEETING. Every meeting of the stockholders shall be
held at the principal office of the Corporation in the City of Birmingham,
Alabama; except that the Board of Directors may provide for the holding of any
meeting of the stockholders at such other place, within or without the State of
Alabama, as the Board shall by resolution determine.
SECTION 4. NOTICE OF MEETINGS. It shall be the duty of the Secretary or
an Assistant Secretary to cause a notice of each meeting of the stockholders of
the Corporation to be mailed at least ten and not sooner than fifty days before
the meeting, unless a different period is prescribed by law, to each
stockholder entitled to vote at such meeting at his address as it appears upon
the books of the Corporation.
Unless the Certificate of Incorporation otherwise provides, any previously
scheduled meeting of the stockholders may be postponed and any special meeting
of the stockholders may be cancelled, by resolution of the Board of Directors
upon public notice given prior to the date previously scheduled for such
meeting of stockholders.
SECTION 5. QUORUM. At any meeting of the stockholders, the holders
present in person or by proxy of a majority of the outstanding shares of
capital stock entitled to vote shall constitute a quorum of the stockholders
for all purposes (unless the representation of a larger number of shares shall
be required by law or by the Certificate of Incorporation, in which case the
representation of the number of shares so required shall constitute a quorum).
<PAGE> 2
The Chairman of the meeting or a majority of the shares so represented may
adjourn the meeting from time to time, whether or not there is such a quorum.
No notice of the time and place of adjourned meetings need be given except as
required by law.
SECTION 6. ORGANIZATION AND CONDUCT OF MEETINGS. The Chairman of the
Board shall call meetings of stockholders to order and shall act as Chairman of
such meetings. In the absence of the Chairman of the Board at any meeting, the
President or, in his absence, any Vice President designated by the Board to
perform the duties of the Chairman of the Board shall act as Chairman. In the
absence of the Chairman of the Board, the President and any such Vice President
at any meeting, the holders of a majority of the shares of capital stock
entitled to vote present in person or by proxy at such meeting shall elect a
Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but, in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting.
It shall be the duty of the Secretary to prepare and make, at least ten
days before every meeting of stockholders, a complete list of stockholders
entitled to vote at said meeting, arranged in alphabetical order and showing
the address of each stockholder and the number of shares registered in his
name. Such list shall be open to the examination of any stockholder for any
purpose germane to the meeting, during ordinary business hours, for the ten
days preceding the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
Proceedings at every meeting of stockholders shall, at the election of the
Chairman, comply with Roberts' Rules of Order (latest published edition).
SECTION 7. NOTICE OF STOCKHOLDER BUSINESS. All business properly brought
before an annual meeting shall be transacted at such meeting. Business shall
be deemed properly brought only if it is (i) specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (iii) brought before the meeting by a
stockholder of record entitled to vote at such meeting if written notice of
such stockholder's intent to bring such business before such meeting is
delivered to, or mailed, postage prepaid, and received by, the Secretary of the
Corporation at the principal executive offices of the Corporation not later
than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the
- 2 -
<PAGE> 3
date of the annual meeting is more than 30 days before or more than 60
days after such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 90th day prior to
such annual meeting and not later than the close of business on the later of
the 60th day prior to such annual meeting or the 10th day following the day on
which public announcement of a meeting date is first made by the Corporation
(the "Notice Deadline"). For purposes of this By-Law, and Section 2 of Article
II hereof, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In no event
shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a stockholder's notice as
described above. Each notice given by such stockholder shall set forth: (A) a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and the beneficial owner,
if any, on whose behalf the proposal is made; (B) a representation that the
stockholder giving the notice is a holder of record of stock of the Corporation
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 of such meeting) and
intends to appear in person or by proxy at such meeting to propose such
business; (C) any material interest of the stockholder or such beneficial owner
in such business; and (D) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and the number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner. The Chairman of the meeting may refuse to transact any
business at any meeting made without compliance with the foregoing procedure.
SECTION 8. VOTING. Subject to the provisions of the Certificate of
Incorporation or of law, every holder of common stock of the Corporation which
is entitled to vote shall be entitled to one vote for each share of such stock
registered in the name of such stockholder upon the books of the Corporation.
Subject to the provisions of the Certificate of Incorporation or of law, every
holder of a share of Serial Preference Stock of each series of the Corporation
which is entitled to vote shall be entitled to the number of votes specified in
the resolutions adopted by the Board of Directors providing for the issue of
such series for each share of Serial Preference Stock of such series registered
in the name of such stockholder upon the books of the Corporation. Shares of
common stock and Serial Preference Stock may be voted in person or by proxy,
but no proxy shall be voted on after three years from its date, unless the
proxy provides for a longer
- 3 -
<PAGE> 4
period. All elections for directors shall be decided by plurality vote; all
other questions shall be decided by majority vote of the holders of shares of
capital stock entitled to vote who are present in person or by proxy, except
as otherwise provided in Article VII of these By-Laws, the Certificate of
Incorporation or the laws of the State of Delaware.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
the number of such directors to be determined solely by resolution of the Board
of Directors, acting by not less than a majority of the directors then in
office (subject to the provisions of Section (1), Article FIFTH of the
Certificate of Incorporation). Each director shall be elected to a three-year
term of office (subject to the provisions of Sections (2) and (7), Article
FIFTH of the Certificate of Incorporation and Section 3 of this Article) to
serve until his successor shall have been elected and shall have qualified
(subject to the provisions of Section (A)(7), Article FOURTH of the Certificate
of Incorporation).
SECTION 2. NOTIFICATION OF NOMINATIONS. Subject to the rights of the
holders of any one or more series of Serial Preference Stock then outstanding,
nominations for the election of directors may be made by the Board of Directors
or by any stockholder entitled to vote for the election of directors. Any
stockholder entitled to vote for the election of directors at an annual meeting
or a special meeting called for the purpose of electing directors may nominate
persons for election as directors at such meeting only if written notice of
such stockholder's intent to make such nomination is delivered to, or mailed,
postage prepaid, and received by, the Secretary of the Corporation at the
principal executive offices of the Corporation, in the case of an annual
meeting, not later than the Notice Deadline, and in the case of a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting, not earlier than the close of business on the
90th day prior to such special meeting and not later than the close of business
on the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. Notwithstanding the immediately preceding sentence,
in the event that the number of directors to be elected to the Board of
Directors of the Corporation is increased and there is no public announcement
by the Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
required by this By-Law shall also be considered timely, but only with respect
to nominees for any new positions created by such increase, if it shall be
delivered to
- 4 -
<PAGE> 5
the Secretary at the principal executive offices of the Corporation not
later than the close of business on the 10th day following the day on which
such public announcement is first made by the Corporation. In no event shall
the public announcement of an adjournment of an annual or special meeting
commence a new time period for the giving of a stockholder's notice as
described above. Each notice given by such stockholder shall set forth: (A)
as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the nominations are made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are
owned beneficially and of record by such stockholder and such beneficial owner;
(B) a representation that the stockholder is a holder of record of stock of the
Corporation 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 or beneficial owner 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 or beneficial owner; (D) as to each person whom the stockholder
proposes to nominate for election or re-election as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act and
Rule 14a-11 thereunder; and (E) the consent of each nominee to be named in the
proxy statement as a nominee and to serve as a director of the Corporation if
so elected. The Chairman of the meeting may refuse to acknowledge the
nomination of any person made without compliance with the foregoing procedure.
SECTION 3. VACANCIES AND REMOVAL. Vacancies occurring in the Board of
Directors shall be filled as provided in Section (3), Article FIFTH of the
Certificate of Incorporation. The removal of any director or the entire Board
of Directors shall be as provided in Section (7), Article FIFTH of the
Certificate of Incorporation.
SECTION 4. PLACE OF MEETING, ETC. The Board of Directors may hold its
meetings and may have an office and keep the books of the Corporation (except
as may be otherwise provided by law) in such place or places in the State of
Delaware or outside the State of Delaware as the Board from time to time shall
determine.
SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board shall determine. No notice
shall be required for any regular meeting of the Board of Directors; but a
notice of the
- 5 -
<PAGE> 6
fixing or changing of the time or place of regular meetings shall be mailed
to every director at least five days before the first meeting held pursuant
to the notice.
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by the direction of the Chairman of the Board,
the President, or by not less than one-third of the directors in office at the
time.
The Secretary or an Assistant Secretary shall give notice to each director
of the time and place of holding each special meeting by mailing the notice at
least thirty-six hours before the meeting or by causing the same to be
transmitted by other means at least twenty-four hours before the meeting.
Unless otherwise indicated in the notice thereof, any and all business may be
transacted at any special meeting, subject to the provisions of Article VII of
these By-Laws.
SECTION 7. QUORUM. A quorum for the transaction of business shall
consist of no fewer than one-half of the total number of directors, and except
as otherwise provided in the Certificate of Incorporation or in these By-Laws,
the act of a majority of the directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of said Board there be less than a quorum present,
a majority of those present may adjourn the meeting from time to time, and no
notice need be given of any such adjourned session of the meeting.
SECTION 8. COMPENSATION OF DIRECTORS. The amount, if any, which each
director shall be entitled to receive as compensation for his services as such
shall be fixed from time to time by resolution of the Board of Directors. If
any director shall serve as a member of any committee of the Board or perform
special services at the instance of the Board, such director may be paid such
additional compensation as the Board of Directors may determine. Each director
shall be entitled to reimbursement for traveling expenses incurred by him in
attending any meeting of the Board of Directors or of a committee. Such
compensation and reimbursement shall be payable even though there be an
adjournment because of the absence of a quorum.
SECTION 9. CONDUCT OF MEETINGS. At all meetings of the Board of
Directors business shall be transacted in such order as the Board may
determine.
The Chairman of the Board shall preside at all meetings of the Board of
Directors. In the absence of the Chairman of the Board, the President shall
preside at all meetings of the Board of Directors. In the absence of the
President, a Chairman of the meeting shall be elected from the directors
present. The Secretary of the Corporation shall act as Secretary of all
meetings of the directors, but in the absence of the Secretary, the Chairman of
the meeting may appoint any person to act as Secretary of the meeting.
- 6 -
<PAGE> 7
SECTION 10. ACTION WITHOUT MEETING. Nothing contained in the By-Laws
shall be deemed to restrict the power of the directors or members of any
committee to take any action required or permitted to be taken by them, without
a meeting, in accordance with applicable provisions of law.
SECTION 11. CONTRACTS. No contract or other transaction between the
Corporation and one or more of the directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if (1) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of
Directors or the committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or (2) the material
facts as to his relationship or interest and as to the contract or transaction
are disclosed or are known to the shareholders entitled to vote thereon, and
the contract or transaction is specifically approved in good faith by vote of
the shareholders; or (3) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the Board
of Directors, a committee thereof, or the shareholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
The Board of Directors of the Corporation in its discretion may submit for
approval, ratification or confirmation by the stockholders any contract,
transaction or act of the Board of Directors or any committee thereof or of any
officer, agent or employee of the Corporation, and any such contract,
transaction or act which shall have been so approved, ratified or confirmed by
the holders of a majority of the issued and outstanding stock entitled to vote
shall be as valid and binding upon the Corporation and upon the stockholders
thereof as though it had been approved and ratified by each and every
stockholder of the Corporation.
ARTICLE III
COMMITTEES
The Board of Directors may by resolution or resolutions passed by a
majority of the whole Board designate one or more committees, each committee to
consist of two or more of the directors of the Corporation, which to the extent
provided in
- 7 -
<PAGE> 8
the resolution or resolutions shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs of the
Corporation, and may have power to authorize the seal of the Corporation to be
affixed to all papers which may require it. Such committee or committees shall
have such name or names as may be determined from time to time by resolution or
resolutions adopted by the Board of Directors. If provision be made for any
such committee or committees, the members thereof shall be appointed by the
Board of Directors and shall serve during the pleasure of the Board of
Directors. A majority of the members of a committee shall constitute a quorum
for the transaction of business. The Board of Directors may designate one or
more directors of the Corporation as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee
and who, in such event, shall be counted in determining the presence of a
quorum. Vacancies in such committees shall be filled by the Board of
Directors; provided, however, that in the absence or disqualification of any
member of such committee or committees, the member or members thereof present
at any meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board of Directors may at its pleasure discontinue any such
committee or committees.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman
of he Board, a President, a Chief Financial Officer, one or more Vice
Presidents (one President), a Treasurer and a Secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may from time to time
appoint such other officers, including Vice Chairmen, Assistant Vice
Presidents, Comptroller, Assistant Treasurers, Assistant Comptrollers,
Assistant Secretaries and officers of divisions of the Corporation, as the
Board may deem advisable, and such officers shall have such authority and shall
perform such duties as from time to time may be prescribed by the Board of
Directors. In the event of an office becoming vacant due to removal,
resignation or other reason, the Board of Directors may fill the vacancy at
such time as it may determine. The Chairman of the Board shall be a member of
the Board of Directors; the other officers may but need not be directors.
Except where otherwise expressly provided in a written contract duly
authorized by the Board of Directors, all officers, agents and employees shall
be subject to removal at any time by the affirmative vote of a majority of the
directors in office at the time. Any agent or employee other than one elected
or appointed by the Board of Directors shall also be subject to removal at any
time by the officer or by the committee appointing him.
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<PAGE> 9
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of stockholders and at all meetings of the Board of
Directors. The Chairman of the Board shall perform such other duties as shall
from time to time be assigned to him by these By-Laws, the Board of Directors
or the President. In the absence of the Chairman of the Board or in the event
that the office is for any reason vacant, the President shall perform all
duties of the Chairman of the Board, including presiding at all meetings of
stockholders and at all meetings of the Board of Directors.
SECTION 3. THE PRESIDENT. The President shall be the chief executive
officer of the Corporation and, subject only to the control of the Board of
Directors, shall have general management and control of its affairs and
business, shall perform all other duties and exercise all other powers commonly
incident to his office, or which are or may at any time be authorized or
required by law. In the event that the President is unavailable or
incapacitated, either the Chairman of the Board or, upon designation by the
Board of Directors, a Vice President designated by the Board, shall perform the
duties of the President.
SECTION 4. THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer (who
may have such additional titles as shall from time to time be assigned to him
by these By-Laws or by the Board of Directors) shall be the principal financial
officer of the Corporation and shall have such powers and perform such duties
as shall from time to time be assigned to him by these By-Laws, the Board of
Directors or the President.
SECTION 5. THE VICE PRESIDENTS. Each Vice President shall have such
powers and perform such duties as shall from time to time be assigned to him by
these By-Laws or by the Board of Directors and shall have and may exercise such
powers of the President as may from time to time be assigned to him by the
President.
SECTION 6. THE TREASURER. The Treasurer shall have custody of all the
funds and securities of the Corporation which may come into his hands, and
shall deposit the same with such bank or banks or other depositary or
depositaries as the Board of Directors from time to time shall determine; he
may endorse on behalf of the Corporation for collection checks, notes and other
obligations and shall deposit the same to the credit of the Corporation in such
bank or banks or depositary or depositaries as the Board of Directors may
designate; he may sign all receipts and vouchers for payments made to the
Corporation; he may sign with the Chairman of the Board or the President or a
Vice President certificates for
- 9 -
<PAGE> 10
shares of the capital stock; he shall enter or cause to be entered regularly
in the books of the Corporation kept for the purpose full and accurate accounts
of all moneys received and paid on account of the Corporation and whenever
required by the Board of Directors shall render statements of such accounts;
he shall, at all reasonable times, exhibit his books and accounts to the
Auditor or to any director of the Corporation upon application at the office
of the Corporation during business hours; and he shall perform all acts
incident to the office of Treasurer, subject to the control of the Board of
Directors.
SECTION 7. THE SECRETARY. The Secretary shall keep in books provided
for that purpose the minutes of all meetings of the Board of Directors and of
all committees of the Board of Directors and the minutes of all meetings of the
stockholders; he shall attend to the giving or serving of all notices of the
Corporation; he may sign with the Chairman of the Board or the President or a
Vice President, in the name of the Corporation, all contracts when authorized
so to do either generally or in specific instances by the Board of Directors or
by any committee of the Board of Directors having the requisite authority and,
when so ordered by the Board of Directors or such committee, he shall affix the
seal of the Corporation thereto; he may sign with the Chairman of the Board,
the President or a Vice President certificates for shares of the capital stock;
he shall have charge of the stock certificate books, transfer books and stock
ledgers and such other books and papers as the Board of Directors shall direct,
all of which shall at all reasonable times be open to the examination of the
Auditor or any director, upon application at the office of the Corporation
during business hours; and he shall in general perform all the duties incident
to the office of Secretary, subject to the control of the Board of Directors.
SECTION 8. GIVING OF BOND BY OFFICERS. Any officer of the Corporation,
if required to do so by the Board of Directors, shall furnish a bond to the
Corporation for the faithful performance of his duties, in such penalties and
with such conditions and security or surety or sureties as the Board shall
require.
SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board of
Directors, the Chairman of the Board or the President, or any other officer of
the Corporation designated by the Chairman of the Board or the President, shall
have full power and authority on behalf of the Corporation to attend and to act
and to vote in person or by proxy at any meeting of the holders of securities
of any corporation in which the Corporation may own or hold stock or other
securities, and at any such meeting shall possess and may exercise in person or
by proxy any and all rights, powers and privileges incident to the ownership of
such stock or other securities which the Corporation, as the owner or holder
thereof, might have possessed and exercised if present. The Chairman of the
Board, the President or any other officer of the Corporation designated by the
Chairman of the Board or the President, may also execute and deliver on behalf
of the Corporation powers of attorney, proxies, waivers of notice and other
instruments relating to the stocks
- 10 -
<PAGE> 11
or securities owned or held by the Corporation. The Board of Directors may,
from time to time, by resolution confer like powers upon any other person
or persons.
SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE V
CAPITAL STOCK - SEAL - FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES. The certificates for shares of the
capital stock of the Corporation shall be in such form as is prescribed by law
and approved by the Board of Directors.
SECTION 2. LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person
claiming a stock certificate in lieu of one alleged to have been lost, stolen
or destroyed shall give the Corporation or its agent an affidavit as to his
ownership of the certificate and of the facts which go to prove that it has
been lost, stolen or destroyed. If required by the Board of Directors, he also
shall give the Corporation a bond, in such form as may be approved by the Board
of Directors, sufficient to indemnify the Corporation against any claim that
may be made against it or on account of the alleged loss, theft or destruction
of the certificate or the issuance of a new certificate.
SECTION 3. TRANSFER OF SHARES. Shares of the capital stock of the
Corporation shall be transferred on the books of the Corporation by the holder
thereof in person or by his attorney duly authorized in writing, upon surrender
and cancellation of certificates for the number of shares to be transferred,
except as provided in the preceding section. Books for the transfer of shares
of the capital stock shall be kept by the Corporation or by one or more
transfer agents appointed by it.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the Corporation.
SECTION 5. FIXING OF RECORD DATES. The powers of the Board of Directors
with respect to the fixing of record dates shall be as provided by the laws of
the State of Delaware at the time in effect.
SECTION 6. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors,
a duplicate of
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<PAGE> 12
the seal may be kept and be used by any officer of the Corporation
designated by said Board.
SECTION 7. FISCAL YEAR. The fiscal year of the Corporation shall begin
on the first day of January in each year and terminate on the thirty-first day
of December in each year.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS, NOTES, CONTRACTS, ETC. Checks and other orders for
the payment of money shall be signed by such person or persons as the Board of
Directors shall from time to time by resolution determine. Contracts and other
instruments or documents may be signed in the name of the Corporation by the
Chairman of the Board or the President or by any other officer authorized to
sign such contract, instrument or document by the Board of Directors, and such
authority may be general or confined to specific instances.
Checks and other orders for the payment of money made payable to the
Corporation may be endorsed for deposit to the credit of the Corporation, with
a depositary authorized by resolution of the Board of Directors, by the Chief
Financial Officer or Treasurer or such other persons as the Board of Directors
may from time to time by resolution determine.
SECTION 2. LOANS. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized so to do by the Board of Directors, any officer or
agent of the Corporation may effect loans and advances for the Corporation from
any bank, trust company or other institution or from any firm, corporation or
individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds or other evidences of indebtedness of the Corporation.
When authorized so to do by the Board of Directors, any officer or agent of the
Corporation may pledge, hypothecate or transfer, as security for the payment of
any and all loans, advances, indebtedness and liabilities of the Corporation,
any and all stocks, securities and other personal property at any time held by
the Corporation, and to that end may endorse, assign and deliver the same. Such
authority may be general or confined to specific instances.
SECTION 3. WAIVERS OF NOTICE. Whenever notice is required to be given
under any provision of law or of the Certificate of Incorporation or of these
By-Laws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting of stockholders or of directors or
of a
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<PAGE> 13
committee shall constitute waiver of notice of such meeting, except where
otherwise provided by law.
ARTICLE VII
AMENDMENTS
The By-Laws and any amendments thereof may be altered, amended, changed
or repealed, or new By-Laws may be adopted, by the Board of Directors at any
regular or special meeting by the affirmative vote of all the members of the
Board, or at any regular or special meeting the notice of which shall have
stated the amendment of the By-Laws as one of the purposes of the meeting, by
the affirmative vote of a majority of all the members of said Board; but these
By-Laws and any amendments thereof, including By-Laws adopted by the Board of
Directors, may be altered, amended, changed or repealed and other By-Laws may
be enacted by the stockholders in accordance with the provisions of Section
(10), Article FIFTH of the Certificate of Incorporation.
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<PAGE> 1
EXHIBIT 4.6
CERTIFICATE OF DESIGNATIONS
of
SERIES A PARTICIPATING PREFERENCE STOCK
of
SONAT INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Sonat Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on December 1, 1995:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Certificate of Incorporation, the Board of Directors hereby creates a series of
Serial Preference Stock, par value $1.00 per share (the "Preference Stock"), of
the Corporation and hereby states the designation and number of shares, and
fixes the relative rights, preferences, and limitations thereof, in addition to
the provisions set forth in the Restated Certificate of Incorporation of the
Corporation which are applicable to Preference Stock of all series as follows:
Series A Participating Preference Stock:
Section I. Designation and Amount. The shares of such series shall be
designated as "Series A Participating Preference Stock" (the "Series A
Preference Stock") and the number of shares constituting the Series A
Preference Stock shall be 1,000,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series A Preference Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preference Stock.
Section II. Dividends and Distributions.
<PAGE> 2
A. Subject to the rights of the holders of any shares of any series of
Preference Stock (or any similar stock) ranking prior and superior to the
Series A Preference Stock with respect to dividends, the holders of shares of
Series A Preference Stock, in preference to the holders of Common Stock, par
value $l.00 per share (the "Common Stock"), of the Corporation, and of any
other junior stock, shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preference Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $l or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since
the immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preference Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preference Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
B. The Corporation shall declare a dividend or distribution on the Series
A Preference Stock as provided in paragraph (A) of this Section immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A
Preference Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
C. Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preference Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which
<PAGE> 3
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares
of Series A Preference Stock entitled-to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preference Stock in an amount less than the
total amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preference Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section III. Voting Rights. The holders of shares of Series A Preference
Stock shall have the following voting rights:
A. Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preference Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes per share to which holders of shares
of Series A Preference Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
B. Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preference Stock or any similar stock, or by
law, the holders of shares of Series A Preference Stock and the holders of
shares of Common Stock and any other capital stock of the Corporation having
general voting rights shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
C. Except as set forth in the Restated Certificate of Incorporation or
herein, or as otherwise provided by law, holders of Series A Preference Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
<PAGE> 4
Section IV. Reacquired Shares. Any shares of Series A Preference Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference
Stock subject to the conditions and restrictions on issuance set forth herein,
in the Restated Certificate of Incorporation, or in any other Certificate of
Designations creating a series of Preference Stock or any similar stock or as
otherwise required by law.
Section V. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preference Stock
unless, prior thereto, the holders of shares of Series A Preference Stock shall
have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Series A Preference Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preference Stock, except distributions made ratably on the Series A Preference
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Series A Preference Stock were entitled immediately prior to such event under
the proviso in clause (l) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section VI. Consolidation. Merger etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preference Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock
<PAGE> 5
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preference Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section VII. No Redemption. The shares of Series A Preference Stock shall
not be redeemable.
Section VIII. Rank. The Series A Preference Stock shall be of equal rank
in respect of the preference as to dividends and to payments upon the
liquidation, dissolution or winding up, whether voluntary or involuntary, of
the Corporation, with all shares of Preference Stock of all series.
Section IX. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preference
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preference
Stock, voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Corporation by its Chairman of the Board and attested by its Secretary
this 8th day of January, 1996.
/s/ Ronald L. Kuehn, Jr.
Chairman of the Board
Attest: /s/ Beverly T. Krannich
Secretary
<PAGE> 1
EXHIBIT 10.2
AMENDATORY AGREEMENT
This amendment is entered into this 1st day of February, 1996, between
SOUTHERN NATURAL GAS COMPANY ("Company") and SOUTH CAROLINA PIPELINE
CORPORATION ("Shipper").
W I T N E S S E T H:
WHEREAS, Company and Shipper are parties to a firm transportation
agreement dated June 1, 1994, as amended, (#901710) for an aggregate
Transportation Demand of 77,217 Mcf per day ("FT Agreement");
WHEREAS, on January 19, 1996, Company posted a notice on its electronic
bulletin board soliciting capacity for a proposed expansion of its pipeline
system; and
WHEREAS, by letter dated January 30, 1996, Shipper notified Company that
it desires to extend the term of the FT Agreement to March 31, 1999, for
55,000 Mcf per day of Transportation Demand.
NOW THEREFORE, in consideration for the premises and the mutual promises
and covenants contained herein, the parties agree as follows:
1. Section 4.1 of the FT Agreement shall be deleted in its entirety and
the following Section 4.1 substituted therefor:
4.1 Subject to the provisions hereof, this
Agreement shall become effective as of the
date first hereinabove written and shall
be in full force and effect for a primary
term through the following dates: October
31, 2003, for 17,217 Mcf per day of
Transportation Demand, October 31, 2000,
for 5,000 Mcf per day of Transportation
Demand, and March 31, 1999 for 55,000
Mcf per day of Transportation Demand; and
shall continue and remain in force and
effect for successive terms of one year
each after the end of each primary term
for the specified volume, unless and until
cancelled with respect to the associated
volume by either party giving 180 days
written notice to the other party prior to
the end of the specified primary term or
any yearly extension thereof.
<PAGE> 2
Amendatory Agreement
Page 2
2. Except as provided herein, the FT Agreement shall remain in full force
and effect as written.
3. This Amendment is subject to all applicable, valid laws, orders, rules
and regulations of any governmental entity having jurisdiction over the parties
or the subject matter hereof.
WHEREFORE, the parties have executed this Amendment through their duly
authorized representatives to be effective as of the date first written above.
ATTEST: SOUTHERN NATURAL GAS COMPANY
By: /s/ R. David Hendrickson By: /s/ James E. Moylan, Jr.
---------------------------- ----------------------------
Title: Secretary Title: President
---------------------------- ----------------------------
ATTEST: SOUTH CAROLINA PIPELINE CORPORATION
By: /s/ Dara A. Davis By: /s/ H. Thomas Arthur
---------------------------- ---------------------------
Title:Assistant Secretary Title: Vice President and
---------------------------- General Counsel
---------------------------
<PAGE> 1
EXHIBIT 10.4
AMENDMENT TO THE
SONAT INC. SUPPLEMENTAL BENEFIT PLAN
Sonat Inc. hereby amends the Sonat Inc. Supplemental Benefit Plan (the
"Plan") as follows, effective as of December 1, 1995:
1. Section 4.3 of the Plan is hereby amended to read in its entirety
as follows:
4.3 DEFINITION OF CHANGE OF CONTROL
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
<PAGE> 2
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or
of the action of the Board of Directors, providing for such Business
Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of
December 1, 1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
-------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.5
EXECUTIVE AWARD PLAN
OF
SONAT INC.
(AS AMENDED AND RESTATED AS OF DECEMBER 1, 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 "Exchange Act"). 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
<PAGE> 2
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 and Limited Stock Appreciation
Rights which may be issued in tandem with such Options, (iii) shares of
Restricted Stock, and (iv) Supplemental Payments which may be awarded with
respect to Options, Stock Appreciation Rights, Limited Stock Appreciation
Rights, and Restricted Stock, or (v) any combination of the foregoing.
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, Limited 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 or
Limited 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
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<PAGE> 3
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> 4
(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(a)) 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 the 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, but in no event beyond the term of the Option
established pursuant to Section 2.1(b).
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 or Limited
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. A
Limited Stock Appreciation Right may be exercised only within 60 days after the
occurrence of an SAR Change of Control (as defined in Section 4.9(b)). A Stock
Appreciation Right or a Limited Stock Appreciation Right may only be exercised
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 or Limited 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 or Limited Stock
Appreciation Right is exercised. Similarly, when an Option is exercised, the
Stock Appreciation Rights or Limited 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.
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<PAGE> 5
(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 after the occurrence of an SAR 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 an SAR Change of Control, exceeds the fair market value of a share of
Common Stock on the date of exercise of the Stock Appreciation Right, 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.
(d) Upon exercise of a Limited Stock Appreciation Right, the holder shall
receive, for each share with respect to which the Limited Stock Appreciation
Right is exercised, the sum of (i) the Appreciation, as defined in Section
2.2(b); (ii) any Supplemental Payment (as defined in Section 2.3) to which the
holder is entitled with respect to the Appreciation; (iii) 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 Limited 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 an SAR Change of Control, exceeds the fair market value
of a share of Common Stock on the date of exercise of the Limited Stock
Appreciation Right; and (iv) 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 (iii) of this sentence. All of such amounts shall be
paid within 30 days of the exercise of the Limited Stock Appreciation Right,
and shall be paid solely in cash if the Limited Stock Appreciation Right has
been outstanding at least six months, and solely in Common Stock in all other
cases.
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<PAGE> 6
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 or Limited 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 or Limited 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 or Limited 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 Limited 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, Limited 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:
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<PAGE> 7
(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 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
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<PAGE> 8
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.
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<PAGE> 9
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.
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<PAGE> 10
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) A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (1) the then outstanding
shares of common stock of the Company (the "Outstanding Common Stock") or
(2) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"); provided, however, that for
purposes of this subsection (i), the following acquisitions shall not
constitute a Change of Control: (A) any acquisition directly from the
Company, (B) any acquisition by the Company, (C) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (D) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the
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<PAGE> 11
then outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the
Outstanding Common Stock and Outstanding Voting Securities, as the case
may be, (B) no Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such corporation
except to the extent that such ownership existed prior to the Business
Combination and (C) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors, providing for such
Business Combination.
(b) An "SAR 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
(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
-11-
<PAGE> 12
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 incorporates into a single document the provisions of the
Plan as amended and restated as of December 1, 1995.
IN WITNESS WHEREOF, this document has been executed as of December 1,
1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
-12-
<PAGE> 1
EXHIBIT 10.6
AMENDMENT TO THE
RESTRICTED STOCK PLAN FOR DIRECTORS
OF SONAT INC.
Sonat Inc. hereby amends the Restricted Stock Plan for Directors of Sonat
Inc. (the "Plan") as follows, effective as of December 1, 1995:
1. Section 13 of the Plan is hereby amended to read in its entirety as
follows:
13. CHANGE OF CONTROL
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or
<PAGE> 2
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or
of the action of the Board of Directors, providing for such Business
Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of December
1, 1995.
SONAT INC.
By: /s/ Ronald L. Kuehn, Jr.
--------------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.7
AMENDMENT TO THE
PERFORMANCE AWARD PLAN
OF SONAT INC.
Sonat Inc. hereby amends the Performance Award Plan of Sonat Inc.
(the "Plan") as follows, effective as of December 1, 1995:
1. Section 3.6 of the Plan is hereby amended to read in its
entirety as follows:
3.6 CHANGE OF CONTROL
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened
<PAGE> 2
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors, providing for
such Business Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of
December 1, 1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.8
AMENDMENT TO THE
CASH BONUS PLAN
OF SONAT INC.
Sonat Inc. hereby amends the Cash Bonus Plan of Sonat Inc. (the
"Plan") as follows, effective as of December 1, 1995:
1. Section 4.6 of the Plan is hereby amended to read in its entirety
as follows:
4.6 CHANGE OF CONTROL
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
<PAGE> 2
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or
of the action of the Board of Directors, providing for such Business
Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of
December 1, 1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.9
AMENDMENT TO THE
SONAT INC.
RETIREMENT PLAN FOR DIRECTORS
Sonat Inc. hereby amends the Sonat Inc. Retirement Plan for Directors
(the "Plan") as follows, effective as of December 1, 1995:
1. Paragraph 8 of the Plan is hereby amended to read in its entirety
as follows:
8. CHANGE OF CONTROL
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
<PAGE> 2
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors, providing for
such Business Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of
December 1, 1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.10a
EXECUTIVE SEVERANCE AGREEMENT, dated as of December 1, 1995, by and
between Sonat Inc., a Delaware corporation ("Sonat"), and Ronald L. Kuehn, Jr.
("Executive").
WHEREAS, the Executive Compensation Committee of the Board of Directors of
Sonat has recommended, and the Board of Directors has approved, that Sonat
enter into severance agreements with key executives of Sonat who are from time
to time designated by the Executive Compensation Committee;
WHEREAS, Executive is a key executive of Sonat and has been selected by
the Executive Compensation Committee and the Board of Directors to enter into a
severance agreement with Sonat;
WHEREAS, should Sonat become subject to any proposed or threatened Change
of Control (as hereinafter defined), the Board of Directors believes it
imperative that Sonat and the Board of Directors be able to rely upon Executive
to continue in his position, and that Sonat be able to receive and rely upon
his advice, if requested, as to the best interests of Sonat and its
stockholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal or threat; and
WHEREAS, should Sonat receive any such proposals, in addition to
Executive's regular duties, he may be called upon to assist in the assessment
of such proposals, advise management and the Board of Directors as to whether
such proposals would be in the best interests of Sonat and its stockholders,
and to take such other actions as the Board of Directors might determine to be
appropriate;
NOW, THEREFORE, Sonat and Executive agree as follows:
1. SERVICES DURING CERTAIN EVENTS. In the event a third person begins a
tender or exchange offer, circulates a proxy to stockholders, or takes other
steps to effect a Change of Control, Executive agrees that he will not
voluntarily leave the employ of Sonat, and will render the services
contemplated in the recitals to this Agreement, until the third person has
abandoned or terminated his efforts to effect a Change of Control or until a
Change of Control has occurred.
2. TERMINATION FOLLOWING CHANGE OF CONTROL. Except as provided in Section
4 hereof, Sonat will provide or cause to be provided to Executive the rights
and benefits described in Section 3 hereof in the event that Executive's
employment by Sonat is terminated:
<PAGE> 2
(a) at any time within three years following a Change of Control by
Sonat for reasons other than for "cause" (as such term is defined in
Section 4 hereof) or other than as a consequence of Executive's death,
permanent disability or retirement at or after the normal retirement date
as provided under the Sonat Inc. Retirement Plan (the "Retirement Plan")
as in effect immediately preceding such date ("Normal Retirement Date");
(b) at any time within three years following a Change of Control by
Executive following the occurrence of any of the following events without
Executive's written consent:
(i) the assignment of Executive to any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities or status immediately preceding such Change of
Control, or a change in his reporting responsibilities or titles in
effect at such time resulting in a reduction of his
responsibilities or position at Sonat;
(ii) the reduction of Executive's annual salary (including
any deferred portions thereof) or level of benefits or supplemental
compensation; or
(iii) the transfer of Executive to a location requiring a
change in his residence or a material increase in the amount of
travel normally required of Executive in connection with his
employment by Sonat; or
(c) by Executive for any reason during the 30-day period immediately
following the first anniversary of the date of the Change of Control.
For purposes of this Agreement, "Change of Control" shall mean:
A. The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding shares of common stock of Sonat (the
"Outstanding Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Sonat entitled to vote generally in the
election of directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this subsection A, the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from Sonat, (ii)
any acquisition by Sonat, (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Sonat or any corporation controlled by
Sonat or (iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection C; or
-2-
<PAGE> 3
B. Individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors; provided, however that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by Sonat's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors; or
C. Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of Sonat (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which as a
result of such transaction owns Sonat or all or substantially all of Sonat's
assets either directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Common Stock and Outstanding Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of
Sonat or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board of Directors,
providing for such Business Combination.
3. RIGHTS AND BENEFITS UPON TERMINATION. In the event of the termination
of Executive's employment under any of the circumstances set forth in Section 2
hereof ("Termination"), Sonat agrees to provide or cause to be provided to
Executive the following rights and benefits:
-3-
<PAGE> 4
(A) SALARY AND OTHER PAYMENT AT TERMINATION. Executive shall be
entitled to receive within 30 days of Termination a lump-sum payment in
cash in the amount of three times Executive's highest Earnings (as such
term is defined in this Section 3(a)) with respect to any 12 consecutive
month period during the three years ending with the date of Termination;
provided, however, that if there are fewer than 36 months remaining from
the date of Termination to Executive's Normal Retirement Date, the amount
calculated pursuant to this paragraph will be reduced by multiplying such
amount by a fraction, the numerator of which is the number of months
(including any fraction of a month) so remaining to Executive's Normal
Retirement Date and the denominator of which is 36.
For purposes of this Agreement, "Earnings" shall mean the sum of
(1) all base pay (including Before-Tax Contributions (as defined in
Sonat's Savings Plan) made on behalf of Executive under Sonat's Savings
Plan, and before-tax contributions by Executive to a plan established
under Section 125 of the Internal Revenue Code, as amended (the "Code"),
and sponsored by Sonat), overtime, cash bonuses (including bonuses paid
under Sonat's Performance Award Plan, Cash Bonus Plan, Performance Award
and Cash Bonus Plan, and All-Employee Incentive Program) and commissions
paid to Executive for personal service rendered to Sonat and its
subsidiaries and (2) workers' compensation payments or other comparable
payments required to be made by law, received in lieu of base pay, but
only to the extent that such payments do not exceed the rate of base pay
of Executive immediately prior to the commencement of such payments.
Notwithstanding the provisions of the foregoing sentence,
Earnings shall not include (1) severance pay, bonuses, workers'
compensation payments, payment for unused vacation, and payments similar
to any of the foregoing, received after or on account of Executive's
Termination, (2) any income attributable to restricted stock, options,
stock appreciation rights, supplemental payments, or dividends on
restricted stock, acquired pursuant to Sonat's Executive Award Plan, or
(3) any Choice Dollars (as defined in Sonat's Choice Benefits Plan)
allocated to Executive under Sonat's Choice Benefits Plan, regardless of
whether any Choice Dollars are paid to Executive in cash.
(B) RETIREMENT BENEFITS. If Executive (i) has at Termination
attained the age of 50 and (ii) at Termination is not otherwise entitled
to receive an early retirement benefit under the terms of a qualified
retirement plan of Sonat or its subsidiaries, Sonat shall pay in cash to
Executive a monthly benefit for life (a "Severance Retirement Benefit")
in an amount equal to the difference between (i) the monthly benefit
calculated under the early retirement provisions of the Retirement Plan
(as in effect immediately prior to the Change of Control), using the
early retirement benefit reduction factors applicable as of the later of
-4-
<PAGE> 5
age 55 or the Executive's actual age at his date of Termination, and (ii)
the monthly benefit payable to Executive under the Retirement Plan (as in
effect on the date of Executive's Termination), assuming the following
for purposes of clauses (i) and (ii): (A) the benefit is payable in the
form of a single life annuity as of the later of the date Executive
attains age 55 and the date of Termination; (B) the benefit is calculated
based on Executive's actual service and actual earnings history at the
date of Termination; (C) Executive is fully vested in the benefit; and
(D) the benefit is calculated under the assumption that Code Sections
401(a)(17) and 415 are nonexistent and the provisions of the Retirement
Plan incorporating such Sections are inoperative. The Severance
Retirement Benefit shall be paid commencing on the first day of the month
following the later of the date Executive attains age 55 and the date of
Termination, and shall not be affected by the settlement option or date
of commencement of any benefits actually payable under the Retirement
Plan or the Sonat Inc. Supplemental Benefit Plan.
(C) SURVIVORS' BENEFITS. If Executive is entitled to receive a
Severance Retirement Benefit under Section 3(b) and Executive is survived
by one or more Eligible Family Members (as such term is defined in the
Retirement Plan as in effect immediately prior to the Change of Control),
Sonat shall pay in cash to each such Eligible Family Member a monthly
survivors' benefit (the "Severance Survivors' Benefit") in an amount
equal to the excess of (i) over (ii), where
(i) is the monthly survivors benefit that would have been
payable to such Eligible Family Member under the Retirement Plan
(as in effect immediately prior to the Change of Control) with
respect to Executive if Executive's retirement benefit were
calculated under the early retirement provisions of such plan,
using the early retirement benefit reduction factors applicable as
of the later of age 55 or Executive's actual age at his date of
Termination, and assuming (A) the retirement benefit is payable in
the form of a single life annuity as of the later of the date
Executive attains age 55 and the date of Termination; (B) the
retirement benefit is calculated based on Executive's actual
service and actual earnings history at the date of Termination;
(C) Executive is fully vested in the retirement benefit; and (D)
the retirement benefit is calculated under the assumption that Code
Sections 401(a)(17) and 415 are nonexistent and the provisions of
the Retirement Plan incorporating such Sections are inoperative; and
(ii) is the amount actually paid to such Eligible Family
Member for such month as a Survivors' Benefit under the Retirement
Plan and as an Excess Retirement Plan Benefit under the Sonat Inc.
Supplemental Benefit Plan.
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Payment of the Severance Survivors' Benefit shall commence on the first day of
the month following the death of Executive.
(D) INSURANCE AND OTHER SPECIAL BENEFITS. To the extent Executive
is eligible thereunder, Executive shall continue to be covered by the
life and dependent life insurance, medical and dental insurance, and
accident and disability insurance plans of Sonat and its subsidiaries or
any successor plan or program in effect at Termination for employees in
the same class or category as Executive, subject to the terms of such
plans and to Executive's making any required contributions thereto. In
the event Executive is ineligible to continue to be so covered under the
terms of any such benefit plan or program, or, in the event Executive is
eligible but the benefits applicable to Executive are not substantially
equivalent to the benefits applicable to Executive immediately prior to
Termination, then, for a period of 36 months following Termination (or
until Executive's Normal Retirement Date, whichever is sooner), Sonat
shall provide such substantially equivalent benefits, or such additional
benefits as may be necessary to make the benefits applicable to Executive
substantially equivalent to those in effect before Termination, through
other sources; provided, however, that if during such period Executive
should enter into the employ of another company or firm which provides
substantially similar benefit coverage, Executive's participation in the
comparable benefit provided by Sonat either directly or through such
other sources shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of Executive's
coverage under any plan or program of Sonat or any of its subsidiaries or
any successor plan or program thereto to which Executive is entitled
under the terms of such plan or program, whether at the end of the
aforementioned 36-month period or at any other time.
(E) RELOCATION ASSISTANCE. Should Executive move his residence in
order to pursue other business opportunities within three years of the
date of Termination (or until his Normal Retirement Date, whichever is
sooner), Sonat shall reimburse him for any expenses incurred in that
relocation (including taxes payable on the reimbursement) which are not
reimbursed by another employer; provided, however, that Executive shall
be entitled to such reimbursement with respect to only one such
relocation, it being agreed that in the event of more than one such
relocation, Executive shall be entitled to specify the relocation for
which reimbursement hereunder is to be made. Benefits under this
provision will include the assistance, at no cost to Executive, in
selling his home and other assistance which was customarily provided to
executives transferred within Sonat or between Sonat and its subsidiaries
prior to the Change of Control.
(F) OTHER BENEFITS PLANS. The specific arrangements referred to in
this Section 3 are not intended to exclude Executive's participation in
other benefit
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plans in which Executive currently participates or which are available
to executive personnel generally in the class or category of Executive
or to preclude other compensation or benefits as may be authorized by
the Board of Directors from time to time.
(G) DUTY TO MITIGATE. Executive's entitlement to benefits hereunder
shall not be governed by any duty to mitigate his damages by seeking
further employment nor offset by any compensation which he may receive
from future employment.
(H) PAYMENT OBLIGATIONS ABSOLUTE. Sonat's obligation to pay or
cause to be paid to Executive the benefits and to make the arrangements
provided in this Section 3 shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
setoff, counterclaim, recoupment, defense or other right, which Sonat may
have against Executive or anyone else. All amounts payable by or on
behalf of Sonat hereunder shall be paid without notice or demand. Each
and every payment made hereunder by or on behalf of Sonat shall be final
and Sonat and its subsidiaries shall not, for any reason whatsoever, seek
to recover all or any part of such payment from Executive or from
whomever shall be entitled thereto.
4. CONDITIONS TO THE OBLIGATIONS OF SONAT. Sonat shall have no obligation
to provide or cause to be provided to Executive the rights and benefits
described in Section 3 hereof if either of the following events shall occur:
(A) TERMINATION FOR CAUSE. Sonat shall terminate Executive's
employment for "cause". For purposes of this Agreement, termination of
employment for "cause" shall mean termination solely for dishonesty,
conviction of a felony, or willful unauthorized disclosure of
confidential information of Sonat.
(B) RESIGNATION AS DIRECTOR. Executive shall not, promptly after
Termination and upon receiving a written request to do so, resign as a
director and/or officer of each subsidiary and affiliate of Sonat of
which he is then serving as a director and/or officer.
5. CONFIDENTIALITY; NON-SOLICITATION; COOPERATION.
(A) CONFIDENTIALITY. Executive agrees that at all times following
Termination, he will not, without the prior written consent of Sonat, disclose
to any person, firm or corporation any confidential information of Sonat or its
subsidiaries which is now known to him or which hereafter may become known to
him as a result of his employment or association with Sonat and which could be
helpful to a competitor, unless such disclosure is required under the terms of
a valid and effective subpoena
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or order issued by a court or governmental body; provided, however,
that the foregoing shall not apply to confidential information which becomes
publicly disseminated by means other than a breach of this Agreement.
(B) NON-SOLICITATION. Executive agrees that for a period of three years
following the date of Termination (or until Executive's Normal Retirement Date,
whichever is sooner) he will not induce, either directly or indirectly, any
employee of senior to manager level of Sonat or any of its subsidiaries to
terminate his or her employment.
(C) COOPERATION. Executive agrees that, at all times following
Termination, he will furnish such information and render such assistance and
cooperation as may reasonably be requested in connection with any litigation or
legal proceedings concerning Sonat or any of its subsidiaries (other than any
legal proceedings concerning Executive's employment). In connection with such
cooperation, Sonat will pay or reimburse Executive for reasonable expenses.
(D) REMEDIES FOR BREACH. It is recognized that damages in the event of
breach of this Section 5 by Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that Sonat, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and Executive hereby waives any and all defenses he
may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this
right shall not preclude Sonat from pursuing any other rights and remedies at
law or in equity which Sonat may have.
6. CERTAIN ADDITIONAL PAYMENTS BY SONAT. (a) Anything in this
Agreement to the contrary notwithstanding and except as set forth below, in the
event it shall be determined that any payment or distribution by Sonat to or
for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 6) (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties are incurred by Executive with
respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax"),
then Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Executive of all federal
income taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any federal income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the
foregoing provisions of this Section 6(a), if it shall be determined that
Executive is entitled to a Gross-Up
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Payment, but that Executive, after taking into account the Payments and
the Gross-Up Payment, would not receive a net after-tax benefit of at least
$50,000 (taking into account both federal income taxes and any Excise Tax) as
compared to the net after-tax proceeds to Executive resulting from an
elimination of the Gross-Up Payment and a reduction of the Payments, in the
aggregate, to an amount (the "Reduced Amount") such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall
be made to Executive and the Payments, in the aggregate, shall be reduced to
the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations required
to be made under this Section 6, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Ernst & Young LLP
or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to Sonat and Executive within 15 business days of the receipt
of notice from Executive that there has been a Payment or such earlier time as
is requested by Sonat. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting a Change of
Control, Executive shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be
paid by Sonat to Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be
binding upon Sonat and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by Sonat should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that Sonat exhausts its remedies pursuant to Section
6(c) and Executive thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by Sonat to or for
the benefit of Executive.
(c) Executive shall notify Sonat in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by Sonat of a
Gross-Up Payment. Such notification shall be given as soon as practicable but
no later than ten business days after Executive is informed in writing of such
claim and shall apprise Sonat of the nature of such claim and the date on which
such claim is requested to be paid. Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which it gives
such notice to Sonat (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Sonat notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
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(i) give Sonat any information reasonably requested by Sonat
relating to such claim,
(ii) take such action in connection with contesting such claim as
Sonat shall reasonably request in writing from time to time, including
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Sonat,
(iii) cooperate with Sonat in good faith in order effectively to
contest such claim, and
(iv) permit Sonat to participate in any proceedings relating to such
claim;
provided, however, that Sonat shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or federal income tax (including interest
and penalties with respect thereto) imposed as a result of such representation
and payment of costs and expenses. Without limitation on the foregoing
provisions of this Section 6(c), Sonat shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or to contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Sonat shall determine;
provided, however, that if Sonat directs Executive to pay such claim and sue
for a refund, Sonat shall advance the amount of such payment to Executive, on
an interest-free basis, and shall indemnify and hold Executive harmless on an
after-tax basis, from any Excise Tax or federal income tax (including interest
or penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment
of taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, Sonat's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder, and Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to Sonat's complying with the
requirements of Section 6(c)) promptly pay to Sonat the amount of such refund
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(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and Sonat does not notify
Executive in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
7. TERM OF AGREEMENT. This Agreement shall terminate on April 30, 1996;
provided, however, that this Agreement shall automatically renew for successive
one-year terms unless the Board of Directors notifies Executive in writing at
least 30 days prior to an April 30 expiration date that it does not desire to
renew the Agreement for an additional term; and provided further, however, that
this Agreement shall terminate prior to April 30, 1996 or, in the event of a
renewal of this Agreement, any subsequent April 30, if and when the Executive
Compensation Committee determines that Executive is no longer a key executive
for purposes of being a party to an executive severance agreement with Sonat
and so notifies Executive, except that such determination shall not be made,
and if made shall have no effect, (i) within three years after a Change of
Control or (ii) during any period of time when Sonat has reason to believe that
any third person has begun a tender or exchange offer, circulated a proxy to
stockholders, or taken other steps or formulated plans to effect a Change of
Control, such period of time to end when, in the opinion of the Executive
Compensation Committee, the third person has abandoned or terminated his
efforts or plans to effect a Change of Control.
8. EXPENSES. Sonat shall pay or reimburse Executive for all costs and
expenses, including, without limitation, court costs and attorneys' fees,
incurred by Executive as a result of any claim, action or proceeding
(including, without limitation, a claim, action or proceeding by Executive
against Sonat) arising out of, or challenging the validity or enforceability
of, this Agreement or any provision hereof.
9. MISCELLANEOUS.
(A) ASSIGNMENT. No right, benefit or interest hereunder shall be subject
to assignment, anticipation, alienation, sale, encumbrance, charge, pledge,
hypothecation or set-off in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process; provided, however, that
Executive may assign any right, benefit or interest hereunder if such
assignment is permitted under the terms of any plan or policy of insurance or
annuity contract governing such right, benefit or interest.
(B) CONSTRUCTION OF AGREEMENT. Nothing in this Agreement shall be
construed to amend any provision of any plan or policy of Sonat. This
Agreement is
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not, and nothing herein shall be deemed to create, a commitment of
continued employment of Executive by Sonat or any of its subsidiaries.
(C) AMENDMENT. This Agreement may not be amended, modified or cancelled
except by written agreement of the parties.
(D) WAIVER. No provision of this Agreement may be waived except by a
writing signed by the party to be bound thereby.
Executive may at any time or from time to time waive any or all of the
rights and benefits provided for herein which have not been received by
Executive at the time of such waiver. In addition, prior to the last day of
the calendar year in which Executive's Termination occurs, Executive may waive
any or all rights and benefits provided for herein which have been received by
Executive; provided that prior to the end of such year Executive repays to
Sonat (or, if the benefit was received from an employee benefit plan trust, to
such trust) the amount of the benefit received together with interest thereon
at the minimum rate required to avoid imputed income. Any waiver of benefits
pursuant to this paragraph shall be irrevocable. If Executive waives a right
or benefit provided for herein and such waiver is determined by the Internal
Revenue Service not to be effective, Sonat shall indemnify Executive for any
federal income and excise taxes he incurs as a result of that determination, so
as to put Executive in the position he would have been in had the waiver been
given effect.
(E) SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason,
the remaining provisions of this Agreement shall remain in full force and
effect to the fullest extent permitted by law.
(F) SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of Executive and his personal representative and heirs, and Sonat and
any successor organization or organizations which shall succeed to
substantially all of the business and property of Sonat, whether by means of
merger, consolidation, acquisition of substantially all of the assets of Sonat
or otherwise, including by operation of law.
(G) TAXES. Any payment or delivery required under this Agreement shall be
subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and Sonat shall use its best efforts to
satisfy promptly all such requirements.
(H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.
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(I) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding of the parties hereto with respect to the matters covered hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st
day of December, 1995.
SONAT INC.
by: /s/ William A. Smith
------------------------
William A. Smith
Executive Vice President
/s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
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SCHEDULE
SONAT INC. EXECUTIVES SIGNING NEW SEVERANCE
AGREEMENTS
The following executives of Sonat Inc. executed severance
agreements substantially identical to the Executive Severance
Agreements dated December 1, 1995, between Sonat Inc. and Ronald L.
Kuehn, Jr.:
Thomas W. Barker, Jr.
Richard B. Bates
Beverley T. Krannich
James E. Moylan, Jr.
James A. Rubright
William A. Smith
<PAGE> 1
EXHIBIT 10.10B
EXECUTIVE SEVERANCE AGREEMENT, dated as of December 1, 1995, by and
between Sonat Inc., a Delaware corporation ("Sonat"), and Donald G. Russell
("Executive").
WHEREAS, the Executive Compensation Committee of the Board of Directors of
Sonat has recommended, and the Board of Directors has approved, that Sonat
enter into severance agreements with key executives of Sonat who are from time
to time designated by the Executive Compensation Committee;
WHEREAS, Executive is a key executive of Sonat and has been selected by
the Executive Compensation Committee and the Board of Directors to enter into a
severance agreement with Sonat;
WHEREAS, should Sonat become subject to any proposed or threatened Change
of Control (as hereinafter defined), the Board of Directors believes it
imperative that Sonat and the Board of Directors be able to rely upon Executive
to continue in his position, and that Sonat be able to receive and rely upon
his advice, if requested, as to the best interests of Sonat and its
stockholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal or threat; and
WHEREAS, should Sonat receive any such proposals, in addition to
Executive's regular duties, he may be called upon to assist in the assessment
of such proposals, advise management and the Board of Directors as to whether
such proposals would be in the best interests of Sonat and its stockholders,
and to take such other actions as the Board of Directors might determine to be
appropriate;
NOW, THEREFORE, Sonat and Executive agree as follows:
1. SERVICES DURING CERTAIN EVENTS. In the event a third person begins a
tender or exchange offer, circulates a proxy to stockholders, or takes other
steps to effect a Change of Control, Executive agrees that he will not
voluntarily leave the employ of Sonat, and will render the services
contemplated in the recitals to this Agreement, until the third person has
abandoned or terminated his efforts to effect a Change of Control or until a
Change of Control has occurred.
2. TERMINATION FOLLOWING CHANGE OF CONTROL. Except as provided in Section
4 hereof, Sonat will provide or cause to be provided to Executive the rights
and benefits described in Section 3 hereof in the event that Executive's
employment by Sonat is terminated:
<PAGE> 2
(a) at any time within three years following a Change of Control by
Sonat for reasons other than for "cause" (as such term is defined in
Section 4 hereof) or other than as a consequence of Executive's death,
permanent disability or retirement at or after the Executive attains age
67 ("Normal Retirement Date") as provided under the Sonat Inc. Retirement
Plan (the "Retirement Plan");
(b) at any time within three years following a Change of Control by
Executive following the occurrence of any of the following events without
Executive's written consent:
(i) the assignment of Executive to any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities or status immediately preceding such Change of
Control, or a change in his reporting responsibilities or titles in
effect at such time resulting in a reduction of his
responsibilities or position at Sonat;
(ii) the reduction of Executive's annual salary (including any
deferred portions thereof) or level of benefits or supplemental
compensation; or
(iii) the transfer of Executive to a location requiring a
change in his residence or a material increase in the amount of
travel normally required of Executive in connection with his
employment by Sonat; or
(c) by Executive for any reason during the 30-day period immediately
following the first anniversary of the date of the Change of Control.
For purposes of this Agreement, "Change of Control" shall mean:
A. The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20% or more
of either (i) the then outstanding shares of common stock of Sonat (the
"Outstanding Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Sonat entitled to vote generally in the
election of directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this subsection A, the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from Sonat, (ii)
any acquisition by Sonat, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by Sonat or any corporation
controlled by Sonat or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection C; or
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B. Individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors; provided, however that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by Sonat's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors; or
C. Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of Sonat (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which as a
result of such transaction owns Sonat or all or substantially all of Sonat's
assets either directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Common Stock and Outstanding Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of
Sonat or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board of Directors,
providing for such Business Combination.
3. RIGHTS AND BENEFITS UPON TERMINATION. In the event of the termination
of Executive's employment under any of the circumstances set forth in Section 2
hereof ("Termination"), Sonat agrees to provide or cause to be provided to
Executive the following rights and benefits:
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(A) SALARY AND OTHER PAYMENT AT TERMINATION. Executive shall be
entitled to receive within 30 days of Termination a lump-sum payment in
cash in the amount of three times Executive's highest Earnings (as such
term is defined in this Section 3(a)) with respect to any 12 consecutive
month period during the three years ending with the date of Termination;
provided, however, that if there are fewer than 36 months remaining from
the date of Termination to Executive's Normal Retirement Date, the amount
calculated pursuant to this paragraph will be reduced by multiplying such
amount by a fraction, the numerator of which is the number of months
(including any fraction of a month) so remaining to Executive's Normal
Retirement Date and the denominator of which is 36.
For purposes of this Agreement, "Earnings" shall mean the sum of
(1) all base pay (including Before-Tax Contributions (as defined in
Sonat's Savings Plan) made on behalf of Executive under Sonat's Savings
Plan, and before-tax contributions by Executive to a plan established
under Section 125 of the Internal Revenue Code, as amended (the "Code"),
and sponsored by Sonat), overtime, cash bonuses (including bonuses paid
under Sonat's Performance Award Plan, Cash Bonus Plan, Performance Award
and Cash Bonus Plan, and All-Employee Incentive Program) and commissions
paid to Executive for personal service rendered to Sonat and its
subsidiaries and (2) workers' compensation payments or other comparable
payments required to be made by law, received in lieu of base pay, but
only to the extent that such payments do not exceed the rate of base pay
of Executive immediately prior to the commencement of such payments.
Notwithstanding the provisions of the foregoing sentence,
Earnings shall not include (1) severance pay, bonuses, workers'
compensation payments, payment for unused vacation, and payments similar
to any of the foregoing, received after or on account of Executive's
Termination, (2) any income attributable to restricted stock, options,
stock appreciation rights, supplemental payments, or dividends on
restricted stock, acquired pursuant to Sonat's Executive Award Plan, or
(3) any Choice Dollars (as defined in Sonat's Choice Benefits Plan)
allocated to Executive under Sonat's Choice Benefits Plan, regardless of
whether any Choice Dollars are paid to Executive in cash.
(B) RETIREMENT BENEFITS. If Executive (i) has at Termination
attained the age of 50 and (ii) at Termination is not otherwise entitled
to receive an early retirement benefit under the terms of a qualified
retirement plan of Sonat or its subsidiaries, Sonat shall pay in cash to
Executive a monthly benefit for life (a "Severance Retirement Benefit")
in an amount equal to the difference between (i) the monthly benefit
calculated under the early retirement provisions of the Retirement Plan
(as in effect immediately prior to the Change of Control), using the
early retirement benefit reduction factors applicable as of the later of
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age 55 or the Executive's actual age at his date of Termination, and (ii)
the monthly benefit payable to Executive under the Retirement Plan (as in
effect on the date of Executive's Termination), assuming the following
for purposes of clauses (i) and (ii): (A) the benefit is payable in the
form of a single life annuity as of the later of the date Executive
attains age 55 and the date of Termination; (B) the benefit is calculated
based on Executive's actual service and actual earnings history at the
date of Termination; (C) Executive is fully vested in the benefit; and
(D) the benefit is calculated under the assumption that Code Sections
401(a)(17) and 415 are nonexistent and the provisions of the Retirement
Plan incorporating such Sections are inoperative. The Severance
Retirement Benefit shall be paid commencing on the first day of the month
following the later of the date Executive attains age 55 and the date of
Termination, and shall not be affected by the settlement option or date
of commencement of any benefits actually payable under the Retirement
Plan or the Sonat Inc. Supplemental Benefit Plan.
(C) SURVIVORS' BENEFITS. If Executive is entitled to receive a
Severance Retirement Benefit under Section 3(b) and Executive is survived
by one or more Eligible Family Members (as such term is defined in the
Retirement Plan as in effect immediately prior to the Change of Control),
Sonat shall pay in cash to each such Eligible Family Member a monthly
survivors' benefit (the "Severance Survivors' Benefit") in an amount
equal to the excess of (i) over (ii), where
(i) is the monthly survivors benefit that would have been
payable to such Eligible Family Member under the Retirement Plan
(as in effect immediately prior to the Change of Control) with
respect to Executive if Executive's retirement benefit were
calculated under the early retirement provisions of such plan,
using the early retirement benefit reduction factors applicable
as of the later of age 55 or Executive's actual age at his date
of Termination, and assuming (A) the retirement benefit is payable
in the form of a single life annuity as of the later of the date
Executive attains age 55 and the date of Termination; (B) the
retirement benefit is calculated based on Executive's actual
service and actual earnings history at the date of Termination;
(C) Executive is fully vested in the retirement benefit; and
(D) the retirement benefit is calculated under the assumption that
Code Sections 401(a)(17) and 415 are nonexistent and the provisions
of the Retirement Plan incorporating such Sections are inoperative;
and
(ii) is the amount actually paid to such Eligible Family
Member for such month as a Survivors' Benefit under the Retirement
Plan and as an Excess Retirement Plan Benefit under the Sonat Inc.
Supplemental Benefit Plan.
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<PAGE> 6
Payment of the Severance Survivors' Benefit shall commence on the first day of
the month following the death of Executive.
(D) INSURANCE AND OTHER SPECIAL BENEFITS. To the extent Executive
is eligible thereunder, Executive shall continue to be covered by the
life and dependent life insurance, medical and dental insurance, and
accident and disability insurance plans of Sonat and its subsidiaries or
any successor plan or program in effect at Termination for employees in
the same class or category as Executive, subject to the terms of such
plans and to Executive's making any required contributions thereto. In
the event Executive is ineligible to continue to be so covered under the
terms of any such benefit plan or program, or, in the event Executive is
eligible but the benefits applicable to Executive are not substantially
equivalent to the benefits applicable to Executive immediately prior to
Termination, then, for a period of 36 months following Termination (or
until Executive's Normal Retirement Date, whichever is sooner), Sonat
shall provide such substantially equivalent benefits, or such additional
benefits as may be necessary to make the benefits applicable to Executive
substantially equivalent to those in effect before Termination, through
other sources; provided, however, that if during such period Executive
should enter into the employ of another company or firm which provides
substantially similar benefit coverage, Executive's participation in the
comparable benefit provided by Sonat either directly or through such
other sources shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of Executive's
coverage under any plan or program of Sonat or any of its subsidiaries or
any successor plan or program thereto to which Executive is entitled
under the terms of such plan or program, whether at the end of the
aforementioned 36-month period or at any other time.
(E) RELOCATION ASSISTANCE. Should Executive move his residence in
order to pursue other business opportunities within three years of the
date of Termination (or until his Normal Retirement Date, whichever is
sooner), Sonat shall reimburse him for any expenses incurred in that
relocation (including taxes payable on the reimbursement) which are not
reimbursed by another employer; provided, however, that Executive shall
be entitled to such reimbursement with respect to only one such
relocation, it being agreed that in the event of more than one such
relocation, Executive shall be entitled to specify the relocation for
which reimbursement hereunder is to be made. Benefits under this
provision will include the assistance, at no cost to Executive, in
selling his home and other assistance which was customarily provided to
executives transferred within Sonat or between Sonat and its subsidiaries
prior to the Change of Control.
(F) OTHER BENEFITS PLANS. The specific arrangements referred to in
this Section 3 are not intended to exclude Executive's participation in
other benefit
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<PAGE> 7
plans in which Executive currently participates or which are available
to executive personnel generally in the class or category of Executive
or to preclude other compensation or benefits as may be authorized by
the Board of Directors from time to time.
(G) DUTY TO MITIGATE. Executive's entitlement to benefits hereunder
shall not be governed by any duty to mitigate his damages by seeking
further employment nor offset by any compensation which he may receive
from future employment.
(H) PAYMENT OBLIGATIONS ABSOLUTE. Sonat's obligation to pay or
cause to be paid to Executive the benefits and to make the arrangements
provided in this Section 3 shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
setoff, counterclaim, recoupment, defense or other right, which Sonat may
have against Executive or anyone else. All amounts payable by or on
behalf of Sonat hereunder shall be paid without notice or demand. Each
and every payment made hereunder by or on behalf of Sonat shall be final
and Sonat and its subsidiaries shall not, for any reason whatsoever, seek
to recover all or any part of such payment from Executive or from
whomever shall be entitled thereto.
4. CONDITIONS TO THE OBLIGATIONS OF SONAT. Sonat shall have no
obligation to provide or cause to be provided to Executive the rights and
benefits described in Section 3 hereof if either of the following events shall
occur:
(A) TERMINATION FOR CAUSE. Sonat shall terminate Executive's
employment for "cause". For purposes of this Agreement, termination of
employment for "cause" shall mean termination solely for dishonesty,
conviction of a felony, or willful unauthorized disclosure of
confidential information of Sonat.
(B) RESIGNATION AS DIRECTOR. Executive shall not, promptly after
Termination and upon receiving a written request to do so, resign as a
director and/or officer of each subsidiary and affiliate of Sonat of
which he is then serving as a director and/or officer.
5. CONFIDENTIALITY; NON-SOLICITATION; COOPERATION.
(A) CONFIDENTIALITY. Executive agrees that at all times following
Termination, he will not, without the prior written consent of Sonat, disclose
to any person, firm or corporation any confidential information of Sonat or its
subsidiaries which is now known to him or which hereafter may become known to
him as a result of his employment or association with Sonat and which could be
helpful to a competitor, unless such disclosure is required under the terms of
a valid and effective subpoena
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<PAGE> 8
or order issued by a court or governmental body; provided, however,
that the foregoing shall not apply to confidential information which becomes
publicly disseminated by means other than a breach of this Agreement.
(B) NON-SOLICITATION. Executive agrees that for a period of three years
following the date of Termination (or until Executive's Normal Retirement Date,
whichever is sooner) he will not induce, either directly or indirectly, any
employee of senior to manager level of Sonat or any of its subsidiaries to
terminate his or her employment.
(C) COOPERATION. Executive agrees that, at all times following
Termination, he will furnish such information and render such assistance and
cooperation as may reasonably be requested in connection with any litigation or
legal proceedings concerning Sonat or any of its subsidiaries (other than any
legal proceedings concerning Executive's employment). In connection with such
cooperation, Sonat will pay or reimburse Executive for reasonable expenses.
(D) REMEDIES FOR BREACH. It is recognized that damages in the event of
breach of this Section 5 by Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that Sonat, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and Executive hereby waives any and all defenses he
may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this
right shall not preclude Sonat from pursuing any other rights and remedies at
law or in equity which Sonat may have.
6. CERTAIN ADDITIONAL PAYMENTS BY SONAT. (a) Anything in this
Agreement to the contrary notwithstanding and except as set forth below, in the
event it shall be determined that any payment or distribution by Sonat to or
for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 6) (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties are incurred by Executive with
respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax"),
then Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Executive of all federal
income taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any federal income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the
foregoing provisions of this Section 6(a), if it shall be determined that
Executive is entitled to a Gross-Up
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<PAGE> 9
Payment, but that Executive, after taking into account the Payments and
the Gross-Up Payment, would not receive a net after-tax benefit of at least
$50,000 (taking into account both federal income taxes and any Excise Tax) as
compared to the net after-tax proceeds to Executive resulting from an
elimination of the Gross-Up Payment and a reduction of the Payments, in the
aggregate, to an amount (the "Reduced Amount") such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall
be made to Executive and the Payments, in the aggregate, shall be reduced to
the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations required
to be made under this Section 6, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Ernst & Young LLP
or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to Sonat and Executive within 15 business days of the receipt
of notice from Executive that there has been a Payment or such earlier time as
is requested by Sonat. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting a Change of
Control, Executive shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be
paid by Sonat to Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be
binding upon Sonat and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by Sonat should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that Sonat exhausts its remedies pursuant to Section
6(c) and Executive thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by Sonat to or for
the benefit of Executive.
(c) Executive shall notify Sonat in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by Sonat of a
Gross-Up Payment. Such notification shall be given as soon as practicable but
no later than ten business days after Executive is informed in writing of such
claim and shall apprise Sonat of the nature of such claim and the date on which
such claim is requested to be paid. Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which it gives
such notice to Sonat (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Sonat notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
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<PAGE> 10
(i) give Sonat any information reasonably requested by Sonat
relating to such claim,
(ii) take such action in connection with contesting such claim as
Sonat shall reasonably request in writing from time to time, including
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Sonat,
(iii) cooperate with Sonat in good faith in order effectively to
contest such claim, and
(iv) permit Sonat to participate in any proceedings relating to such
claim;
provided, however, that Sonat shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or federal income tax (including interest
and penalties with respect thereto) imposed as a result of such representation
and payment of costs and expenses. Without limitation on the foregoing
provisions of this Section 6(c), Sonat shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or to contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Sonat shall determine;
provided, however, that if Sonat directs Executive to pay such claim and sue
for a refund, Sonat shall advance the amount of such payment to Executive, on
an interest-free basis, and shall indemnify and hold Executive harmless on an
after-tax basis, from any Excise Tax or federal income tax (including interest
or penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment
of taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, Sonat's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder, and Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to Sonat's complying with the
requirements of Section 6(c)) promptly pay to Sonat the amount of such refund
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<PAGE> 11
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and Sonat does not notify
Executive in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
7. TERM OF AGREEMENT. This Agreement shall terminate on April 30, 1996;
provided, however, that this Agreement shall automatically renew for successive
one-year terms unless the Board of Directors notifies Executive in writing at
least 30 days prior to an April 30 expiration date that it does not desire to
renew the Agreement for an additional term; and provided further, however, that
this Agreement shall terminate prior to April 30, 1996 or, in the event of a
renewal of this Agreement, any subsequent April 30, if and when the Executive
Compensation Committee determines that Executive is no longer a key executive
for purposes of being a party to an executive severance agreement with Sonat
and so notifies Executive, except that such determination shall not be made,
and if made shall have no effect, (i) within three years after a Change of
Control or (ii) during any period of time when Sonat has reason to believe that
any third person has begun a tender or exchange offer, circulated a proxy to
stockholders, or taken other steps or formulated plans to effect a Change of
Control, such period of time to end when, in the opinion of the Executive
Compensation Committee, the third person has abandoned or terminated his
efforts or plans to effect a Change of Control.
8. EXPENSES. Sonat shall pay or reimburse Executive for all costs and
expenses, including, without limitation, court costs and attorneys' fees,
incurred by Executive as a result of any claim, action or proceeding
(including, without limitation, a claim, action or proceeding by Executive
against Sonat) arising out of, or challenging the validity or enforceability
of, this Agreement or any provision hereof.
9. MISCELLANEOUS.
(A) ASSIGNMENT. No right, benefit or interest hereunder shall be subject
to assignment, anticipation, alienation, sale, encumbrance, charge, pledge,
hypothecation or set-off in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process; provided, however, that
Executive may assign any right, benefit or interest hereunder if such
assignment is permitted under the terms of any plan or policy of insurance or
annuity contract governing such right, benefit or interest.
(B) CONSTRUCTION OF AGREEMENT. Nothing in this Agreement shall be
construed to amend any provision of any plan or policy of Sonat. This
Agreement is
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<PAGE> 12
not, and nothing herein shall be deemed to create, a commitment of
continued employment of Executive by Sonat or any of its subsidiaries.
(C) AMENDMENT. This Agreement may not be amended, modified or cancelled
except by written agreement of the parties.
(D) WAIVER. No provision of this Agreement may be waived except by a
writing signed by the party to be bound thereby.
Executive may at any time or from time to time waive any or all of the
rights and benefits provided for herein which have not been received by
Executive at the time of such waiver. In addition, prior to the last day of
the calendar year in which Executive's Termination occurs, Executive may waive
any or all rights and benefits provided for herein which have been received by
Executive; provided that prior to the end of such year Executive repays to
Sonat (or, if the benefit was received from an employee benefit plan trust, to
such trust) the amount of the benefit received together with interest thereon
at the minimum rate required to avoid imputed income. Any waiver of benefits
pursuant to this paragraph shall be irrevocable. If Executive waives a right
or benefit provided for herein and such waiver is determined by the Internal
Revenue Service not to be effective, Sonat shall indemnify Executive for any
federal income and excise taxes he incurs as a result of that determination, so
as to put Executive in the position he would have been in had the waiver been
given effect.
(E) SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason,
the remaining provisions of this Agreement shall remain in full force and
effect to the fullest extent permitted by law.
(F) SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of Executive and his personal representative and heirs, and Sonat and
any successor organization or organizations which shall succeed to
substantially all of the business and property of Sonat, whether by means of
merger, consolidation, acquisition of substantially all of the assets of Sonat
or otherwise, including by operation of law.
(G) TAXES. Any payment or delivery required under this Agreement shall be
subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and Sonat shall use its best efforts to
satisfy promptly all such requirements.
(H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.
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<PAGE> 13
(I) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding of the parties hereto with respect to the matters covered hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st
day of December, 1995.
SONAT INC.
By: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
/s/ Donald G. Russell
------------------------
Donald G. Russell
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<PAGE> 1
EXHIBIT 10.11
AMENDMENT TO THE
SONAT INC.
DIRECTOR'S FEES DEFERRAL PLAN
Sonat Inc. hereby amends the Sonat Inc. Director's Fees Deferral Plan
(the "Plan") as follows, effective as of December 1, 1995:
1. The definition of "Change of Control" in the Plan is hereby
amended to read in its entirety as follows:
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors; provided, however, that
any individual becoming a director subsequent to such date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors; or
<PAGE> 2
(iii) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of
the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (C)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement,
or of the action of the Board of Directors, providing for such Business
Combination.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of
December 1, 1995.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.12
INDEMNITY AGREEMENT
AGREEMENT, dated as of November 1, 1995, by and between Sonat Inc. (the
"Company") and the undersigned director of the Company (the "Director").
The Company's Certificate of Incorporation provides that the Company
shall indemnify the Directors to the full extent permitted by the laws of the
State of Delaware as from time to time in effect. Section 145 of the General
Corporation Law of Delaware (relating to the indemnification of officers,
directors, employees and agents) provides that the indemnification afforded by
that section shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. Section 145 also
expressly empowers the Company to purchase and maintain insurance on behalf of
the Director.
In exercising the discretion with respect to indemnification given it
by the Company's Certificate of Incorporation, the Board of Directors of the
Company has considered the following, among other factors:
(a) It is essential to the Company to attract and retain as
directors the most capable persons available.
(b) The substantial increase in corporate litigation that may
subject directors to litigation costs and risks and the recent
limitations on the availability of director's liability insurance have
made and will make it increasingly difficult for the Company to attract
and retain such persons.
(c) When obtainable, insurance policies relating to indemnification
are often subject to retentions by the insured, co-insurance
requirements, exclusions and other limitations on coverage.
<PAGE> 2
2.
In view of the foregoing and the fact that the Director is rendering
valuable services to the Company and desires to continue to provide such
services provided he receives assurance that the Company will indemnify him to
the full extent permitted by its Certificate of Incorporation, the Board of
Directors has determined to provide such assurance.
In consideration of the Director's continued service to the Company,
the Company hereby agrees with the Director as follows:
Section 1. General Right to Indemnification. Notwithstanding any
other provision of this Agreement except for Section 8, the Company shall
indemnify the Director to the full extent permitted by the laws of the State of
Delaware as from time to time in effect. Without limiting the generality of
the foregoing, the Company shall indemnify the Director in accordance with the
provisions set forth below.
Section 2. Actions, Suits or Proceedings Other Than by or in the Right
of the Company. The Company shall indemnify the Director in the event that he
was or is a party or is threatened to be made a party to, or otherwise requires
representation by counsel in connection with, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) by
reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of the Company, or is or was serving or has agreed
to serve as a director, officer, employee or agent of any corporation,
partnership, joint venture or other entity of which the Company owns 50% or
more of the voting or equity interest (an "Affiliate") or any employee benefit
plan of the Company or an Affiliate, or by reason of any action alleged to have
been taken or omitted in such capacity, against costs, charges, expenses
(including attorneys' fees),
<PAGE> 3
3.
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the Director did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
Section 3. Actions or Suits by or in the Right of the Company. The
Company shall indemnify the Director in the event that he was or is a party or
is threatened to be made a party to, or otherwise requires representation by
counsel in connection with, any threatened, pending or completed action or suit
by or in the right of the Company to procure a judgment in its favor by reason
of the fact that he is or was or has agreed to become a director, officer,
employee or agent of the Company, or is or was serving or has agreed to serve
as a director, officer, employee or agent of any Affiliate or any employee
benefit plan of the Company or an Affiliate, or by reason of any action alleged
to have been taken or omitted in such capacity, against costs, charges and
expenses (including attorneys' fees) actually and reasonably incurred by him or
on his behalf in connection with the defense or settlement of such action or
suit and any appeal therefrom, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company except that no indemnification shall be made in
<PAGE> 4
4.
respect of any claim, issue or matter as to which such Director shall have been
adjudged to be liable to the Company unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of such
liability but in view of all the circumstances of the case, such Director is
fairly and reasonably entitled to indemnity for such costs, charges and
expenses which the Court of Chancery or such other court shall deem proper.
Section 4. Indemnification for Costs, Charges and Expenses of
Successful Party. Notwithstanding the other provisions of this Agreement, to
the extent that the Director has been successful on the merits or otherwise,
including, without limitation, the dismissal of an action without prejudice, in
defense of any action, suit or proceeding covered by this Agreement, or in
defense of any claim, issue or matter therein, he shall be indemnified against
all costs, charges and expenses (including attorneys' fees) actually and
reasonably incurred by him or on his behalf in connection therewith.
Section 5. Adverse Finding. Any indemnification under Sections 2 and
3 of this Agreement (unless ordered by a court) shall be paid by the Company,
in accordance with the procedures set forth in Section 7 of this Agreement,
unless a determination is made within the 90-day period set forth in Section 7
(A) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (B) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (C) by the stockholders, that indemnification of the Director is
not proper in the circumstances because he has not met the applicable standard
of conduct set forth in Sections 2 and 3 of this Agreement.
<PAGE> 5
5.
Section 6. Advances. Costs, charges, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement incurred by the Director
covered by Sections 1 and 2 of this Agreement in defending any pending,
threatened or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, and costs, charges and expenses (including
attorneys' fees) incurred by the Director covered by Section 3 of this
Agreement in defending an action by or in the right of the Company shall be
paid by the Company in advance of the determination of the Director's
entitlement to indemnification promptly upon receipt by the Company of evidence
of the Director's obligation to pay such costs, charges, expenses, judgments,
fines or amounts paid in settlement (as the case may be); provided, however,
that such payment shall be made in advance of the determination of the
Director's entitlement to indemnification only with the undertaking of the
Director (which the Director hereby gives) that the Director shall repay all
amounts so advanced in the event that it shall ultimately be determined that
the Director is not entitled to be indemnified by the Company as authorized in
this Agreement. The Board of Directors may, upon approval of the Director,
authorize the Company's counsel to represent the Director, in any action, suit
or proceeding, whether or not the Company is a party to such action, suit or
proceeding.
Section 7. Procedure for Indemnification. After the final disposition
of any action, suit or proceeding covered by this Agreement, the Director shall
send to the Company a written request for any indemnification sought under this
Agreement. No later than 90 days following receipt by the Company of such
request, the Company shall cause the indemnification provided hereunder to be
authorized and paid, unless during such 90-day period, with respect to
indemnification under Section 1 of this Agreement, a finding by the Company
that the
<PAGE> 6
6.
indemnification requested is not permitted by the laws of the State of Delaware
then in effect is made and with respect to indemnification under Section 2 or 3
of this Agreement, the adverse finding described in Section 5 of this Agreement
is made pursuant to such Section. The burden of proving that such standard has
not been met shall be on the Company. The Director shall be given an
opportunity to be heard and to present evidence on his behalf in connection
with consideration by the Board of Directors, independent legal counsel, or the
stockholders, as the case may be, of any findings required by applicable law.
If the Company (A) does not pay the indemnification requested by the Director
within 90 days after the receipt of such request, or (B) does not pay promptly
an advance in accordance with Section 6, the Director's right to
indemnification or to any advance and the Company's right to the repayment of
any advance shall be enforceable in any court of competent jurisdiction. In
any such action, neither the failure of the Company (including its Board of
Directors, its independent legal counsel, and its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the Director is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 2 or 3 of this Agreement, nor the fact
that the Company has made an adverse finding pursuant to Section 5 of this
Agreement, shall be a defense to the action or create a presumption that the
Director has not met the applicable standard of conduct. However, it shall be
a defense to the action (other than an action brought to enforce a claim for an
advance) if it is established that the Director has not met the applicable
standard of conduct set forth in Section 2 or 3 of this Agreement. The
Director's costs and expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification
(including his right to indemnification in the event he shall have been
adjudged to be liable to the
<PAGE> 7
7.
Company under Section 3 of this Agreement) or any advance, in whole or in part,
in any such action shall also be indemnified by the Company. Any action
instituted by the Company or by the Director under this Agreement may be
maintained as to the Company and the Director in any court of competent
jurisdiction, including but not limited to the courts of the State of Delaware.
The Company and the Director each consents to the exercise of jurisdiction over
it or him, as the case may be, by the Court of Chancery of Delaware.
Section 8. Voluntary Proceedings. The Company shall not indemnify the
Director or pay any advance to the Director in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, voluntarily commenced by such Director against
the Company, any affiliate or any other director, officer, employee or agent of
the Company or any Affiliate or any employee benefit plan of the Company or an
Affiliate unless the institution of such action, suit or proceeding was
authorized prior to its commencement by a majority vote of the Board of
Directors or the Director is successful on the merits in such action, suit or
proceeding.
Section 9. Notice to Company. The Director must provide prompt
written notice to the Company of any pending or threatened action, suit or
proceeding in connection with which the Director may assert a right to be
indemnified hereunder; however, failure to provide such notice shall not be
construed as a waiver of any right to an advance or indemnification hereunder.
Section 10. Other Rights; Continuation of Right to Indemnification.
The indemnification and advances provided by this Agreement shall not be deemed
exclusive of any other rights to which a Director seeking indemnification may
be entitled under any law (common or
<PAGE> 8
8.
statutory), provision of the Company's Certificate of Incorporation or By-Laws,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
office or while employed by or acting as agent for the Company, and shall
continue as to a person who has ceased to be a Director, and shall inure to the
benefit of the estate, heirs, executors and administrators of the Director.
Section 11. Amendments. This Agreement may not be amended without the
agreement in writing of the Company and the Director.
Section 12. Savings Clause. If this Agreement or any portion hereof
shall be deemed invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby, and the Company shall
nevertheless indemnify the Director as to costs, charges and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
with respect to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or in the right of the
to the full extent permitted by any applicable portion of this Agreement that
shall not have been invalidated and to the full extent permitted by applicable
law.
Section 13. Survival Clause. The Company acknowledges that in
continuing to provide services to the Company, the Director is relying on this
Agreement. Accordingly, the Company agrees that its obligations hereunder will
survive (a) any actual or purported termination of this Agreement by the
Company or its successors or assigns whether by operation of law or otherwise,
and (b) termination of the Director's services to the Company, whether such
services were terminated by the Company or the Director, with respect to any
<PAGE> 9
9.
claim, action, suit or proceeding covered by Section 1, 2 or 3 hereof, whether
or not such claim is made or action, suit or proceeding is threatened or
commenced before or after the actual or purported termination of this Agreement
or the termination of the Director's services to the Company.
Section 14. Successors and Assigns. This Agreement shall be binding
on the successors and assigns of the Company whether by operation of law or
otherwise and shall inure to the benefit of the estate, heirs and personal
representatives of the Director.
Section 15. Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware (without giving effect to the provisions thereof relating to
conflicts of law).
IN WITNESS WHEREOF, this Agreement has been executed by the parties
thereto, in the case of the Company, by a duly authorized officer thereof on
its behalf.
SONAT INC.
By: /s/ Ronald L. Kuehn, Jr.
------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and
Chief Executive Officer
/s/ Max L. Lukens
------------------------
Max L. Lukens
Signature page of Indemnity Agreement dated as of November 1, 1995,
between Sonat Inc. and above named Director.
<PAGE> 1
EXHIBIT 10.16
SCHEDULE OF PARTICIPANTS
SONAT INC. EXECUTIVE LIFE INSURANCE PROGRAMS
The following are participants in the Sonat Inc. Executive Life Insurance
Programs, form of which is filed as Exhibit 10-(20) to the Sonat Inc. Annual
Report of Form 10-K for the year ended December 31, 1990:
Thomas W. Barker, Jr.
Richard B. Bates
Beverley T. Krannich
Ronald L. Kuehn, Jr.
James E. Moylan, Jr.
James A. Rubright
Donald G. Russell
William A. Smith
<PAGE> 1
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(In Thousands Except
Per-Share Amounts)
<S> <C> <C> <C>
Primary Earnings Per Share (1)
Earnings:
Income before Extraordinary Item $192,888 $141,407 $265,069
Extraordinary Loss - - (3,829)
-------- -------- --------
Net Income $192,888 $141,407 $261,240
======== ======== ========
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,270 87,119 86,703
Common Stock Equivalents Applicable
to Outstanding Stock Options 832 951 994
-------- -------- --------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,102 88,070 87,697
======== ======== ========
Primary Earnings Per Share:
Income before Extraordinary Item $ 2.21 $ 1.61 $ 3.02
Extraordinary Loss - - (.04)
-------- -------- --------
$ 2.21 $ 1.61 $ 2.98
======== ======== ========
</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,
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $282,497 $154,871 $364,198 $133,728 $ 98,374
Fixed charges (see computation below) 165,154 127,909 129,160 156,428 175,980
Less allowance for interest capitalized (6,540) (6,692) (4,101) (8,422) (7,951)
-------- -------- -------- -------- --------
Total Earnings Available for Fixed Charges $441,111 $276,088 $489,257 $281,734 $266,403
======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $157,653 $120,295 $122,204 $149,165 $168,510
Rentals(b) 7,501 7,614 6,956 7,263 7,470
-------- -------- -------- -------- --------
$165,154 $127,909 $129,160 $156,428 $175,980
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.7 2.2 3.8 1.8 1.5
======== ======== ======== ======== ========
</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, 1996
<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 AMERICAS INC. Delaware 100%
SONAT ENERGY SERVICES COMPANY Delaware 100%
Sonat Marketing Company Delaware 100%
Sonat Marketing Company L. P.(c) Delaware 65%
JV Trading Inc. (d) Delaware 100%
Keystone Trading Company Delaware 100%
Vail Trading Company Delaware 100%
Sonat Power Inc. (e) Delaware 100%
Pacific Gas Power Inc. Delaware 100%
Sonat Power Marketing Inc. Delaware 100%
SONAT EXPLORATION COMPANY (f) Delaware 100%
Field Gas Gathering Inc. 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.)
Sonat Texas Gathering Company Delaware 100%
Sonat Oil Transmission Inc. Delaware 100%
Stateline Gas Gathering Company Delaware 100%
SONAT SERVICES INC. Alabama l00%
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. (g)(h) Delaware 100%
Sonat NGV Technology Inc. (i) Delaware 100%
South Georgia Natural Gas Company Delaware l00%
Southern Deepwater Pipeline Company (j) Delaware l00%
Southern Energy Company Delaware l00%
Southern Gas Storage Company (k) Delaware l00%
Southern Offshore Pipeline Company (j) Delaware 100%
THE SONAT FOUNDATION INC. Alabama 100%
</TABLE>
- 2 -
<PAGE> 3
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, Citrus Energy Services, Inc. and Citrus
Interstate Pipeline Company. Houston Natural Gas Company, a wholly owned
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 Marketing Company is a 65-percent participant and General Partner
in Sonat Marketing Company L. P., a limited partnership; the remaining
35-percent interest is held by AGL Energy Services, Inc., a wholly owned
subsidiary of Atlanta Gas Light Company, as the Limited Partner.
(d) JV Trading Inc. has a 50-percent partnership interest in Seminole Gas
Marketing; the remaining 50-percent partnership interest of which is held
by Suwannee Gas Marketing, Inc., a subsidiary of Lykes Energy, Inc.
(e) Sonat Power Inc. is a 50-percent participant in AES/Sonat Power L.L.C.,
a limited liability company, the remaining 50-percent interest of which is
held by AES Gas Power, Inc., a wholly owned subsidiary of The AES
Corporation.
(f) Sonat Exploration Company 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.
(g) Sonat Ventures Inc. is a 50-percent participant in Monarch CNG, an
Alabama general partnership, the remaining 50-percent interest of which is
held by Midtown NGV, Inc., a subsidiary of Energen Corporation.
(h) Sonat Ventures Inc. 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 subsidiary of Lykes
Energy, Inc.
(i) Sonat NGV Technology Inc. is a one-third participant in NGV Southeast
Technology Center, L.L.C., a Georgia limited liability company, the
remaining interests of which are held by Georgia Energy Company, a
subsidiary of Atlanta Gas Light Company, and Natural Gas Vehicle
Development Company Southeast, Inc., a subsidiary of NGV Systems, Inc.
(j) Southern Deepwater Pipeline Company and Southern Offshore Pipeline
Company each have a 50-percent interest in Sea Robin Pipeline Company, an
unincorporated joint venture.
(k) 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 Tennessee Storage Company, a wholly owned subsidiary
of Tenneco Inc. Bear Creek Storage Company has a l00-percent interest in
Bear Creek Capital Corporation.
- 3 -
<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 25, 1996
To Our Stockholders:
The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation,
will be held at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza,
Birmingham, Alabama at 9:00 a.m., local time, on Thursday, April 25, 1996, for
the following purposes:
1. To elect five Directors as members of the Board of Directors of the
Company, to serve until the 1999 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 LLP, the present
Auditor, for election as Auditor (Proposal No. 1).
3. 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 8,
1996, 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,
[SIG]
BEVERLEY T. KRANNICH
Secretary
Birmingham, Alabama
March 13, 1996
- --------------------------------------------------------------------------------
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 25, 1996
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 25, 1996 at 9:00 a.m. at the AmSouth Upper Lobby Auditorium,
AmSouth/Harbert Plaza, Birmingham, Alabama. Mailing of the Proxy Statement and
the accompanying proxy card to the stockholders is expected to commence on or
about March 18, 1996.
VOTING SECURITIES
As of January 31, 1996, the Company had outstanding 85,966,323 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 8, 1996, 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 five nominees
for Director and "FOR" Proposal No. l. 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). Five Class I 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 five nominees for election as Class I Directors are William O. Bourke,
Roberto C. Goizueta, Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles
Marshall. 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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" WILLIAM O. BOURKE, ROBERTO
C. GOIZUETA, RONALD L. KUEHN, JR., ROBERT J. LANIGAN AND CHARLES MARSHALL AS
CLASS I DIRECTORS.
<PAGE> 3
NOMINEES FOR DIRECTOR -- CLASS I -- TERMS TO EXPIRE 1999
<TABLE>
<S> <C>
WILLIAM O. BOURKE, age 68, is Chairman of the Executive Committee of
- ----------------------- the Board of Directors and a Director of Reynolds Metals Company, an
PHOTO aluminum and consumer products company. He has served as a Director
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 64, is Chairman of the Board and Chief
- ----------------------- Executive Officer of The Coca-Cola Company, the principal business
PHOTO 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
- ----------------------- of Eastman Kodak Company, Ford Motor Company, SunTrust Banks, Inc.,
SunTrust Banks of Georgia, Inc. and SunTrust Bank, Atlanta 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.
- ----------------------------------------------------------------------------------------------
RONALD L. KUEHN, JR., age 60, is Chairman of the Board, President
- ----------------------- and Chief Executive Officer of the Company. He has served as a
PHOTO Director of the Company since 1981. Mr. Kuehn is also a Director of
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.
- ----------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
ROBERT J. LANIGAN, age 67, is Chairman Emeritus of the Board of
- ----------------------- Directors of Owens-Illinois, Inc., the principal business of which
PHOTO is the manufacture and sale of packaging products. He has served as
a Director of the Company since 1983. Mr. Lanigan is also a Director
- ----------------------- of Chrysler Corporation,The Coleman Company, Inc., Sonat Offshore
Drilling 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 66, is the former Vice Chairman of the Board
- ----------------------- of American Telephone and Telegraph Company. He has served as a
PHOTO Director of the Company since 1982. Mr. Marshall is also a Director
of Ceridian Corporation, GATX Corporation, Hartmarx Corporation and
- ----------------------- Sundstrand Corporation. Prior to his retirement, Mr. Marshall served
as an executive officer of American Telephone and Telegraph Company.
- ----------------------------------------------------------------------------------------------
</TABLE>
CONTINUING DIRECTORS -- CLASS II -- TERMS TO EXPIRE 1997
<TABLE>
<S> <C>
JEROME J. RICHARDSON, age 59, is Owner/Founder of the NFL Carolina
- ----------------------- Panthers. He has served as a Director of the Company since 1991. Mr.
PHOTO Richardson is also a Director of NCAA Foundation and Comp
Containment Inc., a trustee of Wofford College and a Member of the
- ----------------------- Board of Visitors of Duke University Medical Center. During the past
five years prior to his retirement in May 1995, Mr. Richardson
served as an executive officer of Flagstar Companies, Inc. and
Flagstar Corporation.
- ----------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
DONALD G. RUSSELL, age 64, is Executive Vice President of the
- ----------------------- Company and Chairman of the Board and Chief Executive Officer of
PHOTO Sonat Exploration Company (a wholly-owned subsidiary of the
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 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 44, is President -- Diversified Operations of
- ----------------------- CNA Insurance Companies, the principal business of which is property
PHOTO and casualty insurance. On July 28, 1994, she was elected as a
Director by the Board of Directors, effective as of September 1,
- ----------------------- 1994. She is also Director and Chairman of the Board of First
Insurance Company of Hawaii. Ms. Tocklin was President and a
Director of The Continental Corporation until its merger with CNA
Insurance Companies in May 1995. During the past five years, Ms.
Tocklin has served as an executive officer of The Continental
Corporation and CNA Insurance Companies.
- ----------------------------------------------------------------------------------------------
JAMES B. WILLIAMS, age 62, is Chairman of the Board and Chief
- ----------------------- Executive Officer of SunTrust Banks, Inc. He has served as a
PHOTO Director of the Company since 1987. Mr. Williams is also a Director
of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine
- ----------------------- Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC,
Inc. During the past five years, Mr. Williams has served as an
executive officer of SunTrust Banks, Inc. and certain of its
subsidiaries.
- ----------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
JOE B. WYATT, age 60, is Chancellor, Chief Executive Officer and
- ----------------------- Trustee of Vanderbilt University, a position he has held during the
PHOTO past five years. He has served as a Director of the Company since
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>
CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 1998
<TABLE>
<S> <C>
JOHN J. CREEDON, age 71, is the former President and Chief Executive
- ----------------------- Officer of Metropolitan Life Insurance Company. He has served as a
PHOTO Director of the Company since 1987. Mr. Creedon is also a Director
of Metropolitan Life Insurance Company, 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.
- ----------------------------------------------------------------------------------------------
MAX L. LUKENS, age 47, is President and Chief Operating Officer of
- ----------------------- Baker Hughes Incorporated, the principal business of which is the
PHOTO provision of products and services to the petroleum and continuous
process industries. On September 28, 1995, he was elected as a
- ----------------------- Director by the Board of Directors, effective as of November 1,
1995. He is also a Director of Baker Hughes Incorporated and Sonat
Offshore Drilling Inc. During the past five years, Mr. Lukens has
served as an executive officer of Baker Hughes Incorporated.
- ----------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
BENJAMIN F. PAYTON, age 63, is President of Tuskegee University, a
- ----------------------- position he has held during the past five years. He has served as a
PHOTO Director of the Company since 1992. Dr. Payton is also a Director of
AmSouth Bancorporation, ITT Corporation, Liberty Corporation,
- ----------------------- Morrison's, Inc., Praxair, Inc., Ruby Tuesday, Inc. and ITT Sheraton
Corporation.
- ----------------------------------------------------------------------------------------------
JOHN J. PHELAN, JR., age 64, is the former Chairman of the Board and
- ----------------------- Chief Executive Officer of the New York Stock Exchange. He has
PHOTO served as a Director of the Company since 1990. Mr. Phelan is also a
Director of Eastman Kodak Company, Merrill Lynch & Co., Inc. and
- ----------------------- Metropolitan Life Insurance Company and a Senior Advisor to The
Boston Consulting Group. 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>
L. Edwin Smart, who is currently a Class III Director, will retire from the
Board of Directors on April 25, 1996, in accordance with the Board's retirement
policy.
BOARD MEETINGS AND COMMITTEES
During 1995 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 the Director served.
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 1995.
6
<PAGE> 8
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, Chairman, and Mr. Bourke, Dr. Payton, Mr. Phelan,
Mr. Richardson and Mr. Williams. The Committee met six times during 1995.
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 chairman of the administrative committee
of the 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 1995.
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.
Lukens, Mr. Smart and Mr. Wyatt. The Committee met five times during 1995.
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. Lukens, Mr. Richardson and Mr. Smart. The Committee
met three times during 1995.
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 twice during
1995.
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. Lukens, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Mr. Smart, Ms.
Tocklin, Mr. Williams and Mr. Wyatt. The Committee met four times during 1995.
7
<PAGE> 9
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.
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.
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, 1996.
8
<PAGE> 10
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)
--------------------------------------------------------- -----------------------
<S> <C>
Richard B. Bates......................................... 45,234(2)
William O. Bourke........................................ 5,000
John J. Creedon.......................................... 13,900(3)
Roberto C. Goizueta...................................... 3,600
Ronald L. Kuehn, Jr...................................... 672,045(2 and 4)
Robert J. Lanigan........................................ 6,040
Max L. Lukens............................................ 967
Charles Marshall......................................... 7,600
James E. Moylan, Jr...................................... 64,934(2 and 5)
Benjamin F. Payton....................................... 2,546
John J. Phelan, Jr....................................... 2,660
Jerome J. Richardson..................................... 5,050
James A. Rubright........................................ 33,307(2)
Donald G. Russell........................................ 207,376(2)
L. Edwin Smart........................................... 3,600
William A. Smith......................................... 217,415(2)
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)........................................... 1,410,154(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, 1996, each such
individual beneficially owned less than 0.8% 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 1.6% of the
outstanding shares of the Company's Common Stock.
The number of shares shown includes 1,200 shares of restricted stock for
each of Mr. Bourke, Mr. Goizueta, Mr. Lanigan, Mr. Marshall, Dr. Payton, Mr.
Phelan, Mr. Richardson, Ms. Tocklin, Mr. Williams and Mr. Wyatt, 967 shares of
restricted stock for Mr. Lukens, 800 shares of restricted stock for Mr. Creedon,
and 400 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, 1996. 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,
1996, 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, 7,256 phantom
shares; Mr. Kuehn, 11,615 phantom shares; Mr. Marshall, 1,840 phantom shares;
Mr. Russell, 5,969 phantom shares; Ms. Tocklin, 696 phantom shares; and Mr.
Williams, 2,427 phantom shares.
NOTE 2: The number of shares shown for Messrs. Bates, Kuehn, Moylan,
Rubright, Russell and Smith includes 8,100 shares, 95,200 shares, 9,500 shares,
11,700 shares, 32,000 shares and 14,300 shares, respectively, of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1996. 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
9
<PAGE> 11
disposition of, such shares until such shares are vested pursuant to the terms
of such plan. The number of shares shown for Messrs. Bates, Kuehn, Moylan,
Rubright, Russell and Smith also includes (a) 7,570 shares, 44,781 shares, 9,713
shares, 107 shares, 10,180 shares and 15,281 shares, respectively, held by the
Trustee under the Company's Savings Plan as of January 31, 1996; and (b) 26,800
shares, 510,000 shares, 43,800 shares, 21,500 shares, 160,200 shares and 175,000
shares, respectively, covered by options under the Company's Executive Award
Plan which were exercisable within sixty days after January 31, 1996.
NOTE 3: 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 4: The number of shares shown for Mr. Kuehn includes 8,500 shares
owned by his wife, 20 shares owned by his children, and 1,500 shares held in
trust for one of his children, of which shares he disclaims any beneficial
ownership.
NOTE 5: The number of shares shown for Mr. Moylan includes 1,237 shares
owned by his wife, of which shares he disclaims any beneficial ownership.
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.
NOTE 7: The number of shares shown includes 182,100 shares of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1996; 104,642 shares held by the Trustee under the
Company's Savings Plan as of January 31, 1996; 1,004,740 shares covered by
options under the Company's Executive Award Plan which were exercisable within
sixty days after January 31, 1996; and 14,167 shares of restricted stock granted
under the Company's Restricted Stock Plan for Directors, which shares had not
vested as of January 31, 1996.
CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS
James B. Williams, a Director of the Company, is Chairman and Chief
Executive Officer of SunTrust Banks, Inc. ("SunTrust"). SunTrust Bank, Atlanta,
a subsidiary of SunTrust ("SunTrust Atlanta"), has extended a short-term credit
facility to the Company permitting the borrowing of $25,000,000. During 1995,
there were periodic borrowings and repayments under this facility and, at
December 31, 1995, there was $8,900,000 principal amount outstanding thereunder.
In addition, the Company, one of its wholly-owned subsidiaries and one of its
affiliates were permitted to borrow an aggregate of $47,926,000 pursuant to
long-term loan agreements, and were indebted to SunTrust Atlanta in the
principal amount thereunder of an aggregate of $12,926,000 at December 31, 1995.
A subsidiary of SunTrust also serves as an investment manager for trusts that
fund the Company's retirement and retiree medical benefits programs.
In October 1995, Southern Natural Gas Company, a wholly-owned subsidiary of
the Company ("Southern Natural"), and SunTrust entered into a Payment Agreement
pursuant to which SunTrust, in exchange for a payment from Southern Natural of
$42,300,000, will make monthly payments to one of Southern Natural's suppliers
through December 2001 in settlement of certain of Southern Natural's gas
purchase obligations. The Board of Directors believes that the terms of the
Payment Agreement are fair and reasonable and as favorable as those which could
have been obtained from unrelated third parties.
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 nonemployee Directors, administers the
Company's executive compensation
10
<PAGE> 12
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 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 1995 compensation for corporate executives consisted 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 oilfield services (the "Corporate Peer Group").
The aggregate asset mix of the companies included in the Corporate Peer Group
approximated 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 oilfield
services.
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 1995 were slightly above 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 5.9%, effective April 1,
1995. Mr. Kuehn has been in his current position for approximately 11 1/2 years
and his salary for 1995 was above the median of 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
11
<PAGE> 13
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 1995 bonus opportunity was based on the level
of achievement of certain financial goals, corporate and subsidiary goals, and
individual goals, as described below. The goals for each executive's bonus
opportunity were weighted as follows: financial goals -- 40% for Mr. Kuehn and
30-40% for the other named executive officers; corporate and subsidiary goals --
45% for Mr. Kuehn and 45-55% for the other named executive officers; and
individual goals -- 15% for all executives.
The financial goals included in the 1995 bonus opportunities were the
Company's 1995 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 corporate and subsidiary goals included in the 1995 bonus opportunities
included earnings goals, operating, marketing and strategic goals relating to
each major business segment, and goals relating to safety and the environment,
human resources, and corporate citizenship. 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 1995 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 1996, the Committee reviewed in detail the extent to which the
1995 performance goals had been achieved. The Company's EPS was below the
minimum payout level, 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 was 93% of the bonus opportunity for the cash
flow return on assets goal; no payout was made with respect to the bonus
opportunity for the EPS goal.
The level of achievement of corporate and subsidiary goals varied
considerably among the Company's business segments. The Sonat Pipeline Group
significantly exceeded its earnings target, while Sonat Exploration Company and
Sonat Marketing Company had earnings below the minimum target levels. In
general, there was substantial achievement of most of the other corporate and
subsidiary goals. The payout percentage for corporate and subsidiary goals
ranged from 62% to 89%.
Including individual performance, the total bonus payout percentages under
the 1995 annual incentive program ranged from 52% to 95%. Mr. Kuehn's total
bonus payout percentage for 1995 was 65% 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 November
12
<PAGE> 14
1995. In addition, the Committee may make special awards to individual
executives during the year on a discretionary basis.
In 1995, 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 1995, the Company's
weighted annualized three-year total stockholder return was at the median of the
Corporate Peer Group. The November 1995 long-term incentive grants were designed
to reflect that performance and to result in long-term compensation at the
median 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 November 1995, 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 compensate Mr. Kuehn for the performance of the Company's stock
as compared to the Corporate Peer Group and to result in long-term compensation
at the median of the Corporate Peer Group.
STOCK OWNERSHIP GUIDELINES. The Committee has 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 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 with respect to restricted stock and stock
options granted under the Executive Award Plan, and the portion of the Company's
annual cash bonus program that is based on objective financial and operating
measures, will qualify as performance-based compensation.
The Committee feels that it should not use only mechanical formulas in
carrying out its responsibilities for compensating the Company's management.
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.
<TABLE>
<S> <C> <C>
Roberto C. Goizueta William O. Bourke Robert J. Lanigan
Max L. Lukens L. Edwin Smart Joe B. Wyatt
</TABLE>
13
<PAGE> 15
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ending December 31, 1993,
1994 and 1995, 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 COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------------------
----------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING ALL OTHER
NAME AND ANNUAL STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) SARS (2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr., 1995 $710,000 $418,600 $332,396(3) $306,375(4) 79,200 $108,107
Director, Chairman of 1994 $660,000 $450,000 $ 0 $459,938(5) 112,000 $110,064
the Board, President and 1993 $590,000 $504,600 $300,362(3) $420,000(6) 110,000 $113,528
Chief Executive Officer
Richard B. Bates, 1995 $222,500 $ 84,900 $ 0 $ 74,175(4) 18,000 $ 26,100
Senior Vice President 1994 $208,750 $121,400 $ 0 $ 91,988(5) 22,000 $ 25,362
1993 $182,500 $ 93,000 $ 83,758(3) $ 75,000(6) 21,000 $ 13,534
James E. Moylan, Jr., 1995 $226,250 $131,100 $ 0 $ 74,175(4) 18,000 $ 27,284
Senior Vice President 1994 $200,000 $114,300 $ 0 $ 91,988(5) 22,000 $ 25,525
1993 $151,875 $ 65,500 $410,888 $ 75,000(6) 21,000 $ 18,467
James A. Rubright, 1995 $287,750 $117,100 $ 0 $ 74,175(4) 18,000 $ 40,534
Senior Vice President 1994 $240,625 $130,600 $115,572(8) $268,275(5 & 9) 67,500 $ 35,813
and General Counsel(7)
Donald G. Russell, 1995 $465,750 $184,400 $ 0 $161,250(4) 45,000 $ 39,588
Executive Vice President 1994 $430,000 $250,000 $ 0 $278,750(5) 66,000 $ 71,165
1993 $362,500 $250,000 $649,292(3) $300,000(6) 65,000 $102,687
William A. Smith, 1995 $361,250 $135,300 $188,043(10) $ 74,175(4) 18,000 $ 45,560
Executive Vice President 1994 $342,000 $200,000 $ 44,000(11) $167,250(5) 45,000 $ 44,439
1993 $313,500 $200,000 $530,865(3) $180,000(6) 45,000 $ 41,440
</TABLE>
NOTE 1: 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, 1995, and the value of such shares (calculated by
multiplying the closing price of unrestricted shares of the Company's Common
Stock on December 31, 1995 ($35.625) by the number of shares held on such date)
is as follows: Mr. Kuehn, 95,200 shares, $3,391,500; Mr. Bates, 8,100 shares,
$288,563; Mr. Moylan, 9,500 shares, $338,438; Mr. Rubright, 11,700 shares,
$416,813; Mr. Russell, 32,000 shares, $1,140,000; and Mr. Smith, 14,300 shares,
$509,438.
NOTE 2: With respect to 1995, represents the following amounts for each of
Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively: (1)
Company matching contributions to the trust established under the Company's
Savings Plan -- $12,750, $12,750, $12,750, $5,862,
14
<PAGE> 16
$12,750 and $12,750; (2) Company contributions to the Savings Plan accounts
under the Company's Supplemental Benefit Plan -- $45,050, $6,163, $6,481,
$18,597, $26,838 and $17,956; 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 -- $50,307, $7,187, $8,053, $16,075, $0 and $14,854.
NOTE 3: 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.
NOTE 4: Represents the value of 9,500 shares, 2,300 shares, 2,300 shares,
2,300 shares, 5,000 shares and 2,300 shares of restricted stock granted on
November 30, 1995, to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith,
respectively.
NOTE 5: Includes the value of 16,500 shares, 3,300 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, Bates, Moylan, Rubright, Russell and Smith,
respectively.
NOTE 6: Represents the value of 14,000 shares, 2,500 shares, 2,500 shares,
10,000 shares and 6,000 shares of restricted stock granted on December 2, 1993
to Messrs. Kuehn, Bates, Moylan, Russell and Smith, respectively.
NOTE 7: Mr. Rubright was employed by the Company as Vice President and
General Counsel on February 15, 1994.
NOTE 8: 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 9: 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).
NOTE 10: Includes (a) a $119,353 tax-offset "supplemental payment" paid
upon the exercise of stock options granted under the Company's Executive Award
Plan, (b) $59,663 for housing allowances and moving expenses related to Mr.
Smith's relocation from Birmingham, Alabama to Houston, Texas, and (c)
tax-reimbursement payments of $9,027 made with respect to such moving expenses.
NOTE 11: Represents a $44,000 housing allowance related to Mr. Smith's
relocation from Birmingham, Alabama to Houston, Texas.
15
<PAGE> 17
OPTION GRANT TABLE
The following table contains certain information with respect to stock
options (and tandem stock appreciation rights that become exercisable only upon
certain change of control events ("Limited SARs")) granted in 1995 under the
Company's Executive Award Plan to the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM (10
INDIVIDUAL GRANTS YEARS)
-------------------------------------------------------- ------------------------------------
NUMBER OF % OF TOTAL 5% 10%
SECURITIES OPTIONS/SARS (RESULTING (RESULTING
UNDERLYING GRANTED TO EXERCISE COMPANY STOCK COMPANY STOCK
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRICE OF PRICE OF
NAME GRANTED(1) 1995 ($/SHARE)(2) DATE(3) $52.53)(4) $83.65)(4)
- ----------------------------- ------------- ------------- ------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
All Stockholders............. -- -- -- -- $ 1,743,397,030 $ 4,418,669,002
Ronald L. Kuehn, Jr.......... 79,200 11.6% $ 32.25 11/29/05 $ 1,606,176 $ 4,070,880
Richard B. Bates............. 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200
James E. Moylan, Jr.......... 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200
James A. Rubright............ 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200
Donald G. Russell............ 45,000 6.6% $ 32.25 11/29/05 $ 912,600 $ 2,313,000
William A. Smith............. 18,000 2.6% $ 32.25 11/29/05 $ 365,040 $ 925,200
Named Executive Officers' Potential Realizable Value as a
% of All Stockholders' Potential Realizable Value 0.23% 0.23%
</TABLE>
NOTE 1: All stock options shown in the table were granted on November 30,
1995. Each stock option was granted with a tandem Limited SAR that may be
exercised only within 60 days after an SAR Change of Control (as defined under
"Compensation Upon Change of Control" below). On November 30, 1995, the named
executive officers were also granted Limited SARs in tandem with all
then-outstanding previously-granted stock options. For more information on
Limited SARs, see "Compensation Upon Change of Control" below.
The stock options (and tandem Limited SARs) shown in the table become
exercisable in equal installments on each of the first five anniversaries of the
date of grant, provided that the entire grant will become immediately
exercisable if, during any 10 business day period ending prior to November 30,
2000, the average of the closing prices of the Company's Common Stock during
such period is at least $48.375. Any stock options (and tandem Limited SARs)
that have not previously become exercisable are generally forfeited upon
termination of employment, unless such termination occurs by reason of
retirement after age 65 (age 67 for Mr. Russell), death, disability or for the
convenience of the Company (as determined by the Executive Compensation
Committee). Any options (and tandem Limited SARs) 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 (and tandem Limited SARs) are subject to
termination prior to their expiration date in the event of termination of
employment.
NOTE 4: The Resulting Company Stock Price shown in the table 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
potential realizable values shown represent the difference between the $52.53 or
$83.65 Resulting Company Stock Price (as the case may be) and the $32.25
exercise price, multiplied by (a) for all stockholders, the number of
outstanding shares of the Company's Common Stock as of December 31, 1995, and
(b) for each named executive officer, the number of options granted.
16
<PAGE> 18
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 the exercise of stock options (or stock
appreciation rights ("SARs") granted in tandem therewith) during 1995 and
unexercised stock options (and tandem SARs) held as of December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
------------------------------------------------------------------------------
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED,
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FISCAL YEAR END(1) AT FISCAL YEAR END(2)
ON VALUE ------------------------ ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------- ----------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr..... 50,000 $ 482,500 510,000 234,800 $ 8,637,075 $ 1,332,950
Richard B. Bates........ 7,333 $ 109,536 26,800 48,200 $ 238,100 $ 268,025
James E. Moylan, Jr..... 0 $ 0 43,800 48,200 $ 542,350 $ 268,025
James A. Rubright....... 0 $ 0 13,500 72,000 $ 94,625 $ 439,250
Donald G. Russell....... 0 $ 0 160,200 136,800 $ 2,015,362 $ 780,450
William A. Smith........ 18,000 $ 173,250 175,000 81,000 $ 2,682,562 $ 491,625
</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 $35.625 (the closing price of the
Company's Common Stock on December 31, 1995) 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); 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 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.
17
<PAGE> 19
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
1995 the federal tax laws limited annual benefits under the Retirement Plan to
$120,000 (subject to reduction in certain circumstances), and required the
Retirement Plan to disregard any portion of the participant's 1995 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 1995 COVERED RETIREMENT BENEFIT
NAME SERVICE(1) COMPENSATION(2) AT AGE 65(3)
- ---------------------------------------- ----------- ---------------- ------------------
<S> <C> <C> <C>
Ronald L. Kuehn, Jr..................... 25.4 $1,160,000 $742,400
Richard B. Bates........................ 10.8 $ 343,900 $222,159
James E. Moylan, Jr..................... 19.5 $ 340,550 $221,358
James A. Rubright....................... 1.8 $ 418,350 $156,881
Donald G. Russell....................... 7.9 $ 715,750 $138,856
William A. Smith........................ 25.7 $ 561,110 $364,722
</TABLE>
NOTE 1: The number of years of credited service under the Retirement Plan
and Supplemental Benefit Plan as of December 31, 1995.
NOTE 2: The amount of covered compensation under the Retirement Plan and
Supplemental Benefit Plan during 1995.
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 1995 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, 1995, 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)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P NATURAL
(FISCAL YEAR COVERED) SONAT INC. S&P 500 GAS
<S> <C> <C> <C>
12/31/90 100.00 100.00 100.00
12/31/91 74.09 130.34 87.7
12/31/92 113.78 140.25 96.16
12/31/93 141.18 154.32 114.09
12/31/94 142.00 156.42 108.91
12/31/95 186.87 214.99 153.87
</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,
1990, 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., ONEOK Inc., Pacific
Enterprises, Panhandle Eastern Corporation, Peoples Energy Corporation, Sonat
Inc. 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 becomes the owner of (or obtains the right to acquire) 20% or
more of the Company's common stock or outstanding voting securities (with
certain exceptions, as set forth in the plans); (2) the individuals who, as of
December 1, 1995, constituted the Board of Directors (the "Incumbent Board"),
cease to be at least a majority of the Board of Directors (but including as
Incumbent Board members, except as otherwise provided, any director whose
election or nomination was approved by the Incumbent Board); or (3) there is
consummation of a reorganization, consolidation or merger involving the Company,
or sale of all or
19
<PAGE> 21
substantially all of the Company's assets, unless the stockholders and Board of
Directors of the Company before the transaction control the resulting company
after the transaction.
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) 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. 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.
On November 30, 1995, the named executive officers were granted Limited
SARs in tandem with all outstanding options under the Executive Award Plan. Upon
exercise of a Limited SAR or an SAR within 60 days after an SAR Change of
Control (as defined below), the executive officer would receive the difference
between (1) the greater of (a) the highest price of the Company's Common Stock
during the 60-day period before exercise of the Limited SAR or SAR and (b) the
highest price paid for a share of the Company's Common Stock by an acquiring
person during the 60-day period before the SAR Change of Control and (2) the
exercise price of the Limited SAR or SAR. An "SAR 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.
EXECUTIVE SEVERANCE AGREEMENTS
The Company has Executive Severance Agreements with Messrs. Kuehn, Bates,
Moylan, Rubright, Russell and Smith. These agreements provide that if the
executive officer's employment is terminated either (1) 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 normal retirement age (age 65 except for Mr. Russell, for whom
normal retirement age is age 67) 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 (2) by
the executive officer for any reason during the 30-day period immediately
following the first anniversary of the Change of Control, 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
20
<PAGE> 22
officer reaches normal retirement age); (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
normal retirement age, 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. The Executive Severance Agreements also provide that if the executive
officer receives payments that would be subject to the tax imposed by Section
4999 of the Internal Revenue Code, the executive shall be entitled to receive an
additional payment in an amount necessary to put the executive officer in the
same after-tax position as if such tax had not been imposed. Assuming that the
executive officers terminated employment on January 31, 1996, 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, $3,509,384 in cash and $0 in retirement benefits;
Mr. Bates, $1,044,200 in cash and $0 in retirement benefits; Mr. Moylan,
$1,075,800 in cash and $0 in retirement benefits; Mr. Rubright, $1,266,922 in
cash and $0 in retirement benefits; Mr. Russell, $2,146,680 in cash and $6,321
in retirement benefits; and Mr. Smith, $1,699,590 in cash and $65,103 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 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.
21
<PAGE> 23
ELECTION OF AUDITOR (PROPOSAL NO. 1)
Ernst & Young LLP 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 LLP 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 LLP AS AUDITOR (PROPOSAL NO. 1).
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 1997 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 15,
1996.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS. A stockholder who
desires to propose any business at an annual meeting of stockholders must give
the Secretary of the Company written notice which is received not later than the
close of business on the 60th day nor earlier than the close of business on the
90th day before the first anniversary of the preceding year's annual meeting
(the "Notice Deadline"). (Special notice provisions apply if the date of the
annual meeting is more than 30 days before or more than 60 days after such
anniversary date.) Adjournment of an annual meeting shall not commence a new
Notice Deadline. The stockholder's notice must set forth (a) a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and the beneficial owner, if any, on
whose behalf the proposal is made; (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 such
meeting to propose such business; (c) any material interest of the stockholder
in such business; and (d) for both the stockholder giving notice and the
beneficial owner, if any, on whose behalf the proposal is made (1) the name and
address of such stockholder and beneficial owner and (2) the class and number of
shares owned beneficially and of record by such stockholder and beneficial
owner.
STOCKHOLDER NOMINATIONS FOR DIRECTORS. A stockholder who desires to
nominate Directors at a meeting of stockholders must give the Secretary of the
Company written notice within the Notice Deadline (for an annual meeting) or,
for a special meeting at which directors are to be elected pursuant to the
Company's notice of meeting, not earlier than the close of business on the 90th
day before such special meeting and not later than the close of business on the
later of the 60th day before such special meeting or the 10th day after the date
public announcement is made of the date of the special meeting and the nominees
proposed by the Board of Directors to be elected at such meeting. The
stockholder's notice must set forth (a) the name and address of the stockholder
giving the notice and of the beneficial owner, if any, on whose behalf the
nominations are made; (b) the class and number of shares owned beneficially and
of record by such stockholder and such beneficial owner; (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
22
<PAGE> 24
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; (d) a description of all arrangements or understandings between the
stockholder or beneficial owner 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; (e) such other information regarding each nominee proposed by
such stockholder as would have been required to be disclosed in solicitation of
proxies for election of directors pursuant to the proxy rules of the Securities
and Exchange Commission; and (f) the consent of each nominee to be named in the
proxy statement as a nominee and 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.
INSTITUTIONAL OWNERSHIP OF COMMON STOCK
The table below sets forth, as of January 31, 1996, certain information
with respect to each person or entity known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF TITLE OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER CLASS BENEFICIALLY OWNED OF CLASS
- ------------------------------------ ------------- ----------------------- --------
<S> <C> <C> <C>
The Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102.......... Common Stock 4,786,833 5.6 %
</TABLE>
In a report on Schedule 13G filed with the Securities and Exchange
Commission with respect to the ownership of the Company's Common Stock as of
December 31, 1995, The Prudential Insurance Company of America stated that such
stock was acquired in the ordinary course of business and was not acquired for
the purpose of changing or influencing the control of the Company and was not
acquired in connection with or as a participant in any transaction having such a
purpose or effect.
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. 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. 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
23
<PAGE> 25
anticipates that the fees that it will incur for this service, excluding
out-of-pocket expenses, will not exceed $20,000. 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.
The Company is not aware that any matters other than those mentioned above
will be presented for action at the 1996 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.
Beverley T. Krannich
SECRETARY
Birmingham, Alabama
March 13, 1996
24
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration Statement
(Form S-8, No. 33-64367) 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 and Form S-3, No.
33-5947) of Sonat Inc. and the related Prospectus and Prospectus Supplement of
our report dated January 18, 1996, with respect to the consolidated financial
statements of Sonat Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1995.
ERNST & YOUNG LLP
Birmingham, Alabama
March 18, 1996
<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.; 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, 1995, 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
22nd day of February, 1996.
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.; 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, 1995, 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
22nd day of February, 1996.
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.; 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, 1995, 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
22nd day of February, 1996.
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.; 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, 1995, 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
22nd day of February, 1996.
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.; 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, 1995, 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
22nd day of February, 1996.
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.; 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, 1995, 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
22nd day of February, 1996.
Max L. Lukens
<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.; 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, 1995, 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
22nd day of February, 1996.
Charles Marshall
<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.; 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, 1995, 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
22nd day of February, 1996.
Benjamin F. Payton
<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.; 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, 1995, 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
22nd day of February, 1996.
John J. Phelan, Jr.
<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.; 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, 1995, 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
22nd day of February, 1996.
Jerome J. Richardson
<PAGE> 11
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.; 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, 1995, 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
22nd day of February, 1996.
Donald G. Russell
<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.; 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, 1995, 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
22nd day of February, 1996.
L. Edwin Smart
<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.; 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, 1995, 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
22nd day of February, 1996.
Adrian M. Tocklin
<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.; 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, 1995, 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
22nd day of February, 1996.
James B. Williams
<PAGE> 15
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.; 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, 1995, 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
27th day of February, 1996.
Joe B. Wyatt
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 37,289
<SECURITIES> 0
<RECEIVABLES> 349,441
<ALLOWANCES> 0
<INVENTORY> 23,956
<CURRENT-ASSETS> 494,431
<PP&E> 4,822,879
<DEPRECIATION> 2,545,320
<TOTAL-ASSETS> 3,511,441
<CURRENT-LIABILITIES> 640,125
<BONDS> 770,313
0
0
<COMMON> 87,244
<OTHER-SE> 1,395,398
<TOTAL-LIABILITY-AND-EQUITY> 3,511,441
<SALES> 1,360,342
<TOTAL-REVENUES> 1,990,141
<CGS> 1,090,756
<TOTAL-COSTS> 1,320,739
<OTHER-EXPENSES> 298,714
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<INTEREST-EXPENSE> 96,257
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