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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE TRANSITION PERIOD FROM________ TO________
Commission file number 1-7179
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SONAT INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<C> <C>
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1997 -- $4,599,759,442.
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1997 -- 86,417,161
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 19, 1997,
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, 1996
<TABLE>
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ITEM PAGE
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PART I
Item 1. Business.................................................... I-1
Exploration and Production.................................. I-2
Consolidated Wells and Acreage.............................. I-6
Consolidated Exploratory and Development Wells.............. I-6
Consolidated Net Production................................. 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-7
Customer Settlement......................................... I-8
Storage Fields.............................................. I-8
Markets -- Transportation and Sales......................... I-9
Markets -- System Expansions................................ I-10
Gas Supplies................................................ I-11
Potential Royalty Claims.................................... I-11
Sea Robin Pipeline Company.................................. I-11
South Georgia Natural Gas Company........................... I-12
Citrus Corp. ............................................... I-12
Florida Gas Transmission Company............................ I-12
Competition and Current Business Conditions................. I-13
Natural Gas and Electric Power Marketing.................... I-15
Sonat Energy Services Company............................... I-15
Sonat Marketing Company L.P. ............................... I-15
Sonat Public Service Company L.L.C. ........................ I-15
Sonat Power Marketing L.P. ................................. I-15
Sonat Power Inc. ........................................... I-15
Sonat Intrastate-Alabama Inc. .............................. I-16
Competition and Current Business Conditions................. I-16
Governmental Regulation..................................... I-16
Exploration and Production.................................. I-16
Transmission and Storage of Natural Gas..................... I-16
Rate and Regulatory Proceedings............................. I-17
Environmental Matters....................................... I-17
Forward-Looking Statements.................................. I-17
Item 2. Properties.................................................. I-18
Item 3. Legal Proceedings........................................... I-18
Item 4. Submission of Matters to a Vote of Security Holders......... I-19
Executive Officers of the Registrant........................ I-19
</TABLE>
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<TABLE>
<CAPTION>
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-43
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-45
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>
<PAGE> 4
PART I
ITEM 1. BUSINESS
Sonat Inc. ("Sonat" or the "Company") 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 the ninth largest independent oil and gas producer 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 47 percent of Sonat's consolidated operating income
for 1996.
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 49 percent of Sonat's consolidated operating
income for 1996. 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 AGL Resources, Inc., an unaffiliated company
("AGL Resources"). At year-end 1996 Marketing was one of the ten largest natural
gas marketers in the United States. Energy Services owns 65 percent of Sonat
Power Marketing L.P. ("Power Marketing"), which markets electric power
throughout much of the United States. AGL Resources owns the other 35 percent of
Power Marketing. Energy marketing activities contributed approximately three
percent of Sonat's consolidated operating income for 1996, inclusive of the
minority interests.
Sonat was incorporated under the laws of Delaware in 1973 in connection
with a reorganization of Southern. At March 1, 1997, Sonat and its subsidiaries
employed approximately 1,940 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 also has offices in Tyler and
Midland, 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, 1996,
Exploration had operations or properties in 13 states. Exploration had working
interests in approximately 2.4 million gross acres or 1.7 million net acres
onshore as of December 31, 1996. 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, 50 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 2.0
trillion cubic feet of natural gas equivalent at the end of 1996. Approximately
85 percent of Exploration's proved reserves are natural gas.
In 1996 Exploration focused more of its resources on development and
exploratory drilling activities to more fully exploit the exploratory and
development drilling prospects it has developed on the substantial acreage it
had acquired. As a result, expenditures for exploration and development drilling
activities in 1996 exceeded expenditures for producing property acquisitions for
the first time in nine years. Exploration expects to focus more on exploratory
and development drilling and expanding its land positions through leasing rather
than on property acquisitions for future growth.
In 1996 Exploration participated in the drilling of 315 development wells,
of which 97 percent were successful. Exploration also participated in the
drilling of 13 exploratory wells in 1996, eight of which were successful. Of the
total of 328 wells in which Exploration participated in drilling in 1996, it
operated 221. Exploration increased net proved reserves during 1996 by
approximately 365 Bcf of natural gas equivalent through drilling and producing
operations.
Exploration is also continuing to expand and 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 49 horizontal wells in this trend during 1996, of which 47 were
successful.
During 1996 Exploration acquired approximately 110 Bcf of proved natural
gas equivalent reserves in 44 separate transactions totaling $48 million, for an
average acquisition cost of $.44 per thousand cubic feet equivalent. Through
these acquisitions, Exploration increased its position in the Gulf of Mexico and
North Louisiana.
In July 1995 Exploration and Taurus Exploration U.S.A. Inc. ("Taurus"), a
wholly owned subsidiary of Energen Corporation, an unaffiliated company, entered
into an agreement pursuant to which Taurus joined Exploration in its regular oil
and gas reserve acquisition program through December 31, 1998. Exploration
anticipates that Taurus will invest up to $25 million to $50 million annually to
acquire working interests. Pursuant to the agreement, Taurus may acquire up to a
maximum of 40 percent of the working interest acquired by Exploration in
property acquisitions that may be made during this period. Development drilling
on the acquired properties could involve additional investment by Taurus.
Exploration will operate all properties acquired.
As of December 31, 1996, Exploration's net proved reserves totaled 51
million barrels of crude oil, condensate, and natural gas liquids and 1,692 Bcf
of natural gas. As of December 31, 1995, Exploration's net proved reserves
amounted to 44 million barrels of crude oil, condensate, and natural gas liquids
and 1,506 Bcf of natural gas. For additional information concerning reserves,
see Note 13 of the Notes to Consolidated Financial Statements in Part II of this
report.
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Exploration's total exploration and production capital expenditures in 1996
were $368 million compared with $416 million in 1995. While Exploration will
continue to make producing property acquisitions in 1997, it has shifted to a
reserve replacement and growth strategy more focused on low-risk exploration and
aggressive development drilling. Capital spending in 1997 is expected to be
approximately $395 million. While maintaining an active drilling 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 nonstrategic oil and
gas interests in 1996 in the states of Texas, Louisiana, Arkansas, Oklahoma, and
the Gulf of Mexico. These properties were sold for a total of approximately $37
million and included net proved reserves of approximately 60 Bcf of 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.
The following tables detail the gross lease acreage of both producing and
nonproducing onshore properties and offshore lease blocks in which Exploration
had an interest at December 31, 1996. The map following the tables generally
depicts the areas in which Exploration had significant lease interests as of
that date.
I-3
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SONAT EXPLORATION COMPANY
ONSHORE GROSS LEASE ACREAGE
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STATE PRODUCING NON-PRODUCING TOTAL
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<S> <C> <C> <C>
Alabama................................................ 6,445 35,199 41,644
Arkansas............................................... 281,979 40,774 322,753
Louisiana.............................................. 168,140 661,161 829,301
Oklahoma............................................... 228,973 63,220 292,193
Texas.................................................. 348,566 497,841 846,407
Other.................................................. 24,932 3,198 28,130
--------- --------- ---------
Total........................................ 1,059,035 1,301,393 2,360,428
========= ========= =========
</TABLE>
OFFSHORE GROSS LEASE BLOCKS
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AREA PRODUCING NON-PRODUCING TOTAL
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Mustang Island.............................................. 3 2 5
High Island(1).............................................. 11 0 11
Sabine Pass................................................. 4 0 4
West Cameron(2)............................................. 14 0 14
East Cameron(3)............................................. 10 1 11
Eugene Island............................................... 4 0 4
Ship Shoal.................................................. 3 1 4
Mississippi Canyon(4)....................................... 4 0 4
-- - --
Total............................................. 53 4 57
== ==
</TABLE>
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(1) In one of the producing blocks, High Island 139, Exploration only has an
overriding interest.
(2) 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.
(3) In one of the producing blocks, East Cameron 33, Exploration only has an
overriding interest. Exploration is not a lessee of two of the ten
producing blocks, East Cameron 352 and 353, but these blocks have been
unitized with a producing lease block in the area in which Exploration has
a working interest.
(4) 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.
I-4
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(MAP)
I-5
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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,
1996.
<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........................................ 228 2,841(1) 1,251,000 1,325,000 66
Net.......................................... 147 1,591 778,000 1,032,000 38
</TABLE>
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(1) 124 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 1994 through 1996.
<TABLE>
<CAPTION>
NET EXPLORATORY WELLS DRILLED NET DEVELOPMENT WELLS DRILLED
----------------------------- -----------------------------
1994 1995 1996 1994 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Productive............................ 0 0.50 6.39 180.00 187.05 205.69
Dry................................... 13.70 0 4.00 43.79 9.40 5.44
</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 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.
CONSOLIDATED NET PRODUCTION
Exploration had interests in production from 2,957 producing wells onshore
and 112 producing wells offshore as of December 31, 1996. 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 1994 to 1996 and the average sales prices for those years
(including transfers). The average production (lifting) costs per unit of oil
and gas was $.35 in 1996 and $.38 in each of 1995 and 1994. 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 73 percent of Exploration's revenues in
1996 and 57 percent in 1995.
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-
I-6
<PAGE> 10
market price volatility. See Note 3 of the Notes to Consolidated Financial
Statements contained in Part II of this report.
COMPETITION AND CURRENT BUSINESS CONDITIONS
The oil and gas business is highly competitive in the search for and
acquisition of additional reserves and in the marketing of oil and natural gas.
Exploration's competitors include the major and intermediate size oil companies,
independent oil and gas concerns, and individual producers or operators.
Exploration's realized natural gas prices averaged $2.20 per thousand cubic
feet in 1996, up from $1.52 in 1995. Oil and condensate prices were also higher
in 1996, averaging $19.25 per barrel versus $17.61 per barrel in 1995.
Exploration hedged a portion of its 1996 production, which reduced its realized
price for natural gas and oil by $.10 per Mcf and $2.44 per Bbl, respectively.
See Note 3 of the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II of this report for a discussion of oil and gas production
hedged in the future.
Exploration plans to spend approximately $395 million in capital
expenditures in 1997, which includes allocations of approximately $257 million
for development drilling, $86 million for exploration, including leasing and
seismic, and $14 million for acquisitions. Actual expenditures for such
activities may vary from these estimates for a number of reasons, including
those discussed under the caption Forward-Looking Statements contained below in
this Part I of this report.
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 9,055 miles of interstate 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-14.
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.
Order No. 636 Restructuring. In 1992 the FERC issued its Order No. 636,
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, which included separating (unbundling) their
sales, transportation, and storage services. Interstate pipeline companies,
including Southern, incurred, and in certain limited instances are continuing to
incur, certain costs ("transition costs") as a result of Order No. 636, the
principal one being costs related to amendment or termination of, or purchases
of gas at above-market prices under, existing gas purchase contracts, which are
referred to as gas supply realignment ("GSR") costs.
I-7
<PAGE> 11
As of December 31, 1996, Southern had either paid or accrued $276 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, 1996, Southern had incurred $85 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 Order No. 636. Southern's customers had
generally opposed its recovery of its GSR costs in these proceedings based on
both eligibility and prudence grounds.
Customer Settlement. In an order issued on September 29, 1995 (the
"Settlement Order"), the FERC approved a comprehensive settlement (the "Customer
Settlement") that is effective as to all of Southern's customers, except one
customer representing approximately two percent of the firm transportation
capacity on Southern's system. The Customer Settlement resolved all of
Southern's previously pending rate proceedings and proceedings to recover GSR
and other transition costs associated with the implementation of Order No. 636.
The four major rate cases resolved by the Customer Settlement cover consecutive
periods beginning September 1, 1989. In May 1996 the Customer Settlement became
final, and Southern credited in the aggregate the full amount of Southern's rate
reserves as of February 28, 1995, plus interest, less certain amounts withheld
for potential refunds to contesting parties, to reduce the GSR costs borne by
Southern's customers. The total credit recorded in May 1996 amounted to $164
million. Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1,
1999. The Customer Settlement also provides for Southern to recover $363 million
of GSR costs incurred or reserved as of December 31, 1996, and 50 percent of GSR
costs that Southern may incur thereafter. The Company believes that future GSR
costs that may be borne by it will not be material to its financial position or
results of operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (the "April 11 Order"). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the one remaining contesting party concern the recoverability of
certain GSR and other transition costs under Order No. 636, which would not be
material even if such issues were determined adversely to Southern. The
contesting party, and one other entity that may potentially compete with
Southern in providing storage services, have each appealed the April 11 Order
and the Settlement Order to the D.C. Circuit Court of Appeals. Although there
can be no assurances, the Company believes that the Settlement Order and the
April 11 Order should be upheld on appeal.
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 had determined that additional working storage capacity could
have been made available to its customers, it would have been required promptly
to offer such capacity to them. In January of 1996 and 1997, however, Southern
informed its customers that the results of its 1995 and 1996 reviews supported
the reclassification and that Southern proposed no adjustment to the total level
of working storage gas at Muldon. Consequently, 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.
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<PAGE> 12
Bear Creek Storage Company ("Bear Creek"), an unincorporated joint venture
between wholly owned subsidiaries of Southern and Tennessee Gas Pipeline Company
("Tennessee"), a subsidiary of El Paso Energy Corporation, an unaffiliated
company, 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, Tennessee, 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, 1996, Bear
Creek's gross facilities cost was $247,785,000, its net facilities cost was
$154,388,000, and its participants' equity was $97,677,000. Southern had an
investment in Bear Creek, including its equity in undistributed earnings, of
$48,838,000 at December 31, 1996.
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. 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.
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 1996
Southern transported gas to nine gas distribution companies, to 101 municipal
distributors and gas districts, to eight connecting interstate pipeline
companies, and to 69 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 1996 for Southern and all of its subsidiaries
were 983 Bcf, compared with transportation volumes in 1995 of 1,016 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1996 sales of 77 Bcf and 1995 sales of 93 Bcf. With the exception of
eight Bcf of sales made by Sonat Intrastate-Alabama Inc., a wholly owned
subsidiary of Southern prior to January 1, 1997, in each of 1996 and 1995, the
volumes associated with the 1996 and 1995 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.
Southern has firm transportation contracts with its largest customer,
Atlanta Gas Light Company, and its subsidiary, Chattanooga Gas Company, for an
aggregate of 787 million cubic feet per day under primary terms extending for
various periods through February 28, 1999, to April 30, 2007. Alabama Gas
Corporation, Southern's second largest customer, has executed firm
transportation contracts for a total of 393 million cubic feet per day under
primary terms extending for various periods through October 31, 1998, to October
31, 2008. Southern has firm transportation contracts with South Carolina
Pipeline Corporation, its third largest customer, for a total of 188 million
cubic feet per day under primary terms extending for various periods through
March 31, 1999, to October 31, 2003. 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.
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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.
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 seven percent of Sonat's
1996 consolidated revenues. Atlanta was the only customer that accounted for as
much as seven percent of Sonat's consolidated revenues for 1996.
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.
Markets -- System Expansions. Southern is aggressively attempting to
expand its pipeline system in its traditional market area and to connect new gas
supplies. Southern received approval from the FERC in December 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 $16 million
expansion project was November 1, 1996.
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 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 during the winter of
1997-98. The company that currently provides transportion service to the City of
Huntsville has filed suit against Southern and Huntsville seeking to have
Southern's service agreement with Huntsville set aside, alleging that the
parties violated Alabama's competitive bid law since the contract was not
subjected to competitive bidding in accordance with such law. Southern's
position that the competitive bid law does not apply to the contract was upheld
by the trial court, whose summary judgment decision in favor of Southern and the
City of Huntsville is now on appeal to the Alabama Supreme Court. See Item 3.
Legal Proceedings below. This company has also opposed the system expansion
application at the FERC. Although there is no assurance that Southern will
prevail in either forum, Southern believes that its position in the state court
proceeding will be upheld and that the FERC should grant approval of its
application.
In October 1995 Southern received FERC approval for a production area
expansion project with a capital cost of $14 million. Southern installed 9,400
horsepower of additional compression at its Toca, Louisiana compressor station
south of New Orleans and 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 is
supported by a 10-year firm transportation agreement with Shell Offshore Inc.
The necessary compression facilities for this project have been completed, but
certain of the receipt-point facilities are not expected to be completed before
April 1, 1997.
In early 1995 Southern initiated an open season to obtain customer
commitments to expand its system in order to meet increased demand for natural
gas in the Southeast. As a result of the open season, Southern executed
contracts for additional firm transportation services totaling approximately 46
million cubic feet per day with 11 customers in Georgia and Tennessee. Southern
filed an application for authorization to construct and operate the necessary
facilities for this $36 million project in May 1996. If timely FERC approval is
received, the in-service date for the firm transportation service is expected to
be November 1997.
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In December 1996 Southern, Amoco Pipeline Company, and Shell Gas Pipeline
Company announced their intent to construct the Destin Pipeline, a $300 million
project that will begin offshore in Main Pass Block 260 and extend northward
into Mississippi, intersecting five interstate pipelines, including Southern and
Florida Gas. This pipeline will be owned equally by Southern and affiliates of
Amoco Pipeline and Shell Gas Pipeline and will have one billion cubic feet of
daily capacity when completed. Subject to receipt of the necessary FERC
approval, construction is scheduled to begin in late 1997 and the system could
begin service as early as mid-1998. When the system is completed, Southern will
operate the pipeline. The execution of definitive agreements is expected to
occur in early 1997.
In December 1996 Southern also concluded a systemwide open season to obtain
customer commitments to expand its system. Southern currently has received firm
transportation commitments totaling 65 million cubic feet of natural gas per day
from 15 customers in eastern Tennessee, Georgia, and Alabama and additional
customers may join this project. Therefore, the capital investment associated
with this project is uncertain. Additionally, existing customers will be given
the option to release firm capacity that comes up for renewal during the next
three years to meet the needs of this project. The necessary FERC approval will
be sought in an application that is expected to be filed in May 1997, with the
project scheduled to go in service in November 1998.
Gas Supplies. During 1996 Southern reduced the number of its existing
long-term gas supply contracts from 15 to seven. 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.
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 by 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 and one independent storage company. See the system map on page I-14.
Sea Robin is a transportation-only pipeline that has restructured in compliance
with FERC Order No. 636. Sea Robin transported approximately 243 Bcf of natural
gas in 1996 compared to 302 Bcf in 1995. 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 was denied by the FERC on June 26, 1996.
Sea Robin filed a petition with the Fifth Circuit Court of Appeals on August 15,
1996, for judicial review of the orders denying its petition.
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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. On August 2, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed
settlement of the complaint proceeding pursuant to which it would voluntarily
reduce its transportation rates by $.0042 per Dekatherm, calculated on a 100
percent load factor basis, effective January 1, 1997. The settlement is
supported by the FERC Staff and one of two groups of active intervenors, but is
opposed by the complainant shippers, who are the other group of active
intervenors. By order dated February 7, 1997, the Presiding Administrative Law
Judge certified the settlement to the FERC Commissioners. Sea Robin is unable to
predict the outcome of this proceeding, but if the proposed settlement is not
approved, any reduction in Sea Robin's rates can be implemented only on a
prospective basis and any such change is not expected to be material to the
Company's financial position or results of operations.
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-14. As described above, South
Georgia has restructured pursuant to Order No. 636 and is a transportation-only
pipeline. South Georgia transported approximately 37 Bcf of natural gas in 1996
compared to 38 Bcf in 1995. These South Georgia volumes are included within the
Southern transportation volumes discussed earlier.
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.
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-14. Florida Gas is the
primary pipeline transporter of natural gas in the state of Florida and the sole
pipeline transporter to peninsular Florida. In 1996 Florida Gas transported 457
Bcf of natural gas, compared to 487 Bcf in 1995.
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.
On March 1, 1995, Florida Gas placed in service 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.
The FERC's Division of Audits ("DOA") has completed a compliance review of
Florida Gas' books and records for the period January 1, 1991, through December
31, 1994. Pursuant to an agreement in principle among Florida Gas, FERC staff,
and customer intervenors, Florida Gas filed a settlement agreement on July 30,
1996, which was approved by FERC order issued September 27, 1996. The settlement
resolves all issues resulting from that audit and provides for a reduction of
$18.75 million in Florida Gas' Account No. 101, Gas Plant in Service. The
settlement is without prejudice to Florida Gas seeking FERC approval to recover
the $18.75 million, which was required to be removed from its plant account, in
the rate case filed by
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Florida Gas on August 30, 1996, in Docket No. RP96-366-000. The outcome of this
matter cannot be determined at this time. Florida Gas' management believes,
however, that the ultimate resolution of this settlement will not have a
material adverse effect on its financial position or results of operations.
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. The DOA and the Enforcement Division of the FERC are also conducting a
review of Florida Gas' books and records as to the construction costs of the
Phase III expansion. Florida Gas' customers also have the right under general
rate-making principles to challenge any of these costs as imprudently incurred.
While Florida Gas' management believes that all costs were prudently and
properly charged and incurred and that the results of these audits will not have
a material adverse effect on its financial position or results of operations, it
is possible that certain of the costs could be disallowed and that fines or
penalties could be imposed. By order issued November 27, 1996, the FERC
consolidated the Phase III construction review with Florida Gas' rate case in
Docket No. RP96-366-000.
At December 31, 1996, Citrus' gross pipeline and facilities cost was
$2,790,000,000, and its net cost was $2,362,000,000. Sonat had an investment in
Citrus, including its equity in undistributed earnings, of $342,797,000 at
December 31, 1996. For additional information regarding Citrus, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II of this report, and the 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.
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 three largest customers are all 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 Sonat's largely non-FERC-regulated companies engaged in
unregulated natural gas and electric power marketing, power generation, and
intrastate natural gas transmission.
Sonat Marketing Company L.P. Marketing is one of the ten largest natural
gas marketers in the United States. Its principal offices are in Birmingham,
Alabama and Houston, Texas. It also has regional offices in Tyler, Texas,
Oklahoma City, Oklahoma, Boston, Massachusetts, and Pittsburgh, Pennsylvania.
Marketing plans to open offices in Atlanta, Georgia and Chicago, Illinois in
1997. 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 continued to expand its natural gas
marketing business in 1996, when it sold 968 Bcf of natural gas compared to
sales of 722 Bcf in 1995, which represented a 34-percent increase.
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 uses
derivative financial instruments to manage the risks associated with its own
trading activities and the price volatility associated with Exploration's
natural gas and oil production.
Sonat Public Service Company L.L.C. Sonat Public Service Company L.L.C.
("Sonat Public Service") was formed in December 1996 as a joint venture of
Marketing and PSNC Production Corporation, a wholly owned subsidiary of Public
Service Company of North Carolina, Inc., an unaffiliated company. Sonat Public
Service, which is headquartered in Charlotte, North Carolina, markets natural
gas and related services to small industrial and large commercial customers
throughout the Mid-Atlantic region, including the District of Columbia and the
states of North Carolina, South Carolina, Maryland, and Virginia. In addition,
Sonat Public Service provides gas supply management services to municipalities
in the Mid-Atlantic region.
Sonat Power Marketing L.P. Power Marketing, which is headquartered in
Birmingham, Alabama, 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.
Power Marketing grew rapidly during 1996. It more than doubled its staff
and increased its average trading volume from under five megawatts per hour at
the end of 1995 to 530 megawatts per hour at the end of 1996. Power Marketing
continues to focus its activities on increasing its wholesale business as retail
opportunities are limited until state regulatory changes are made.
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, known as the Hunter's
Point Project. If this project goes forward, a subsidiary of The AES Corporation
would construct and operate the plant. Energy Services would be responsible for
the negotiation of the gas supply and transportation contracts needed in
connection with the project. Because of regulatory and other developments, the
current outlook for and timing of this project are uncertain. If it were to go
forward, this project would require an equity investment from Sonat in the range
of approximately $10-15 million.
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Sonat Intrastate-Alabama Inc. Sonat Intrastate-Alabama Inc. ("SIA"), a
wholly owned subsidiary of Energy Services, 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-14. SIA's throughput in 1996
was approximately 38 Bcf compared to 35 Bcf in 1995.
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 and 1996 evidenced a growing trend toward consolidation in the gas
marketing industry.
Marketing's operating income rose in 1996, with greater price volatility
creating greater profit opportunities for marketers during the first quarter.
During the remainder of 1996 competition was intense and margins declined
accordingly. Marketing expects margins to remain under pressure in 1997.
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 various matters
affecting Exploration's oil and gas production, including the drilling and
spacing of wells, conservation, forced pooling, and protection of correlative
rights among interest owners.
The operations of Exploration under federal oil and gas leases are subject
to certain statutes and regulations of the U.S. Department of the Interior that
currently impose liability upon lessees for the cost of clean-up of pollution
resulting from their operations. Royalty obligations on all federal leases are
regulated by the MMS, which has promulgated valuation guidelines for the payment
of royalty by producers. To the extent the MMS finally determines valuation
based on a method other than actual sales proceeds received, producers could be
required to pay royalties at a rate higher than actual sales proceeds.
Other federal, state, and local laws and regulations relating to the
protection of the environment may affect Exploration's oil and gas operations,
both directly and indirectly, through their effect on the construction and
operation of facilities, drilling operations, production, or the delay or
prevention of future offshore lease sales. Sonat maintains substantial insurance
on behalf of Exploration for oil pollution liability. Exploration is also
subject to various governmental safety regulations in the jurisdictions in which
it operates.
TRANSMISSION AND STORAGE OF NATURAL GAS
Southern, its interstate transmission subsidiaries, and Florida Gas are
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").
The NGA, modified by the DOE Act, grants to the FERC authority to regulate
the construction and operation of pipeline and related facilities utilized in
the transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities. Southern, its
interstate transmission subsidiaries, and Florida Gas hold required certificates
of public convenience and necessity issued by the FERC authorizing them to
construct and operate all pipelines, facilities, and properties now in operation
for which certificates are required, and to transport and sell natural gas in
interstate commerce.
The FERC also has authority to regulate the transportation of natural gas
in interstate commerce and the sale of natural gas in interstate commerce for
resale. Although the FERC still retains jurisdiction over their resale rates,
following the implementation of Order No. 636, Southern, Florida Gas, and other
interstate pipeline companies are now permitted to charge market-based rates for
gas sold in interstate commerce for resale. Gas sold by Marketing and other
marketing companies is not regulated by the FERC. Transportation rates 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
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interstate transmission subsidiaries, Florida Gas, and SIA 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 and LNG 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, Florida Gas, and SIA
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. Each of them has 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 both 1996 and 1995. Southern
anticipates that such expenditures will be approximately $12 million in 1997.
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, 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 resolves all of
Southern's previously pending rate proceedings and proceedings to recover GSR
and other transition costs associated with the implementation of Order No. 636,
except for one contesting party that represents approximately two percent of
Southern's firm transportation volumes.
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
From time to time the Company may make or publish forward-looking
statements relating to such matters as anticipated financial performance,
business plans and prospects, objectives, future projects, and similar matters.
This report, including the information incorporated by reference herein,
contains such forward-looking statements. These forward-looking statements are
based on assumptions that the Company believes are reasonable. A variety of
factors, however, could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements.
Important factors that could cause actual results to differ include the
timing and extent of 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, the pace of deregulation of retail natural gas and electricity
markets in the United States, 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.
The success and growth of the Company's exploration and development
programs are dependent upon a number of factors that cannot be predicted with
certainty. These factors include the Company's ability to expand its leased land
positions in desirable areas, which often are subject to intensely competitive
leasing conditions such as currently exist in the Cotton Valley Reef Trend; the
results of future wells, especially those in the Cotton Valley Reef Trend and
the Austin Chalk, which are key prospective areas for the Company; and
I-17
<PAGE> 21
the ability of the Company to identify and precisely locate prospective geologic
structures and to drill and successfully complete wells in those structures. In
addition, the Company's expectations for continued growth in the Cotton Valley
Reef Trend are based in part on seismic surveys. Some of the available data is
based on 2D seismic surveys. While 2D seismic data is helpful in identifying
prospects, there is no basis to predict how many prospects identified by 2D
seismic data will be confirmed by 3D seismic surveys. The Company plans to drill
only Reef prospects that are confirmed by 3D seismic data. Furthermore, 3D
seismic data alone cannot confirm that economically productive hydrocarbons will
be present in the reefs and current limitations on such technology are such that
there is no assurance that the Company will be able to locate and penetrate the
reef formations. In addition, in certain other areas, such as the Austin Chalk,
the Company's exploratory and development activities are not aided by seismic
data because of the nature of the targeted reservoirs.
The success of the Company's expansion projects in its natural gas
transmission segment is dependent on obtaining both the necessary number of
customer commitments for a project and regulatory approval of the project, which
may encounter opposition by the staff of the FERC, environmental groups, and
other customers of the Company or its local distribution customers. The
Company's regulated natural gas transmission subsidiaries recover substantially
all of their fixed costs, a return on equity, and income taxes in the capacity
reservation component of their firm transportation rates. There can be no
assurance, however, that the existing customers of the Company's natural gas
transmission subsidiaries will extend their firm service agreements at the same
levels when their current service agreements expire.
Competition in the Company's energy marketing segment is intense, which
will affect the Company's efforts to expand its presence into other natural gas
markets, including those in the north and midwest. There can be no assurance
that the Company will achieve any additional strategic alliances with other gas
or electric marketers, producers, generators, or local distribution companies or
that any such additional alliances will be profitable. A factor in the level of
margins achieved by marketers, both gas and electric, is market volatility,
which cannot be predicted, and which may not recur in the future either with the
same frequency or at the same level as it has in the past.
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.
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 11th Circuit Court of Appeals.
The FERC denied the requests for rehearing in an order issued on November 26,
1996, and Atlanta and another customer have also filed petitions for review of
that order in the 11th Circuit Court of Appeals. 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.
I-18
<PAGE> 22
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 January of 1996 Southern entered into a 20-year service
agreement with the City of Huntsville, Alabama to provide 40 million cubic feet
per day of firm transportation service. In its lawsuit, Alabama-Tennessee
Natural Gas Company, which currently provides natural gas transportation service
to Huntsville, is seeking to have this agreement set aside, alleging that the
parties violated Alabama's competitive bid law since the contract was not
subjected to competitive bidding in accordance with such law. 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. Southern's position was upheld by the trial court, whose summary
judgment decision in favor of Southern and the City of Huntsville is now on
appeal to the Alabama Supreme Court, which has granted expedited consideration
to the appeal.
Southern Natural Gas Company and its wholly owned subsidiary, Sea Robin
Pipeline Company, are two of seventy defendants named in Jack J. Grynberg, ex
rel. v. Alaska Pipeline Company, et al.,which was filed in the United States
District Court for the District of Columbia. The defendants include
substantially all of the interstate pipelines in the United States. Grynberg
filed suit on behalf of the United States Government under 31 U.S.C. sec.3729,
et seq., commonly known as the False Claims Act, alleging that the methods used
by the defendants to measure the heating content and volume of natural gas
purchased by them have caused producers of natural gas to underpay royalties
owed by the producers to the United States. The complaint seeks recovery of
actual damages based upon the unpaid royalties, the amount of which is not
specified in the complaint. Such damages may be trebled under Section 3729.
Southern and Sea Robin intend to defend the suit vigorously.
The settlement in the case styled A. L. Briggs, et al. v. Sonat Exploration
Company, et al., which was described in Item 1. Legal Proceedings in Part II of
the Company's Report on Form 10-Q for the quarterly period ended September 30,
1996, became final on December 26, 1996, as a result of the passage of time.
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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER OFFICE AGE
------- ------ ---
<S> <C> <C>
Ronald L. Kuehn, Jr....................... Chairman of the Board, President and Chief 61
Executive Officer
Donald G. Russell......................... Executive Vice President 65
William A. Smith.......................... Executive Vice President 52
Richard B. Bates.......................... Senior Vice President 43
James E. Moylan, Jr....................... Senior Vice President 46
James A. Rubright......................... Senior Vice President and General Counsel 50
Thomas W. Barker, Jr...................... Vice President -- Finance and Treasurer 52
Beverley T. Krannich...................... Vice President -- Human Resources and Secretary 46
</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
I-19
<PAGE> 23
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 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.
I-20
<PAGE> 24
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-43
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-45
</TABLE>
---------------------
The financial data following on pages II-2 through II-44 is reproduced
from, and the Table of Contents below is taken from, the Sonat Inc. Annual
Report to Stockholders for 1996. 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........................................ 40
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........................ 68
</TABLE>
II-1
<PAGE> 25
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
in 1995 and 1994 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, 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Operating Income:
Exploration and Production $161.9 $ 23.0 $ 64.0
Natural Gas Transmission 165.6 158.3 88.4
Energy Marketing 10.2 6.5 11.9
Other 3.6 1.1 5.1
- ----------------------------------------------------------------
341.3 188.9 169.4
- ----------------------------------------------------------------
Unusual Items (Expense)
Income Included Above:
Exploration and Production
Termination of gas sales
contracts - 37.5 -
Asset impairment - (23.0) -
Reduction in work force - - (1.9)
Natural Gas Transmission
Rate settlement and GSR costs - (11.1) (29.0)
Reduction in work
force and other - - (33.5)
Other
Reduction in work force - - (0.3)
- ---------------------------------------------------------------
- 3.4 (64.7)
- ---------------------------------------------------------------
Operating Income
Excluding Unusual Items $341.3 $185.5 $234.1
===============================================================
</TABLE>
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As Reported $201.2 $192.9 $141.4
- -----------------------------------------------------------------------
Unusual Items (Expense) Income
Included Above:
Exploration and Production
Termination of gas
sales contracts - 24.4 -
Property sales - (20.0) -
Sale of Sonat Offshore stock - 110.1 -
Asset impairment - (14.9) -
Loss on futures contracts - (5.5) -
Reduction in work force - - (1.2)
IRS settlement - - 8.1
Natural Gas Transmission
Rate settlement and GSR costs - (6.8) (17.9)
Reduction in work force
and other - - (20.6)
IRS settlement - - 1.8
Other
Sale of Baker Hughes stock - (8.2) -
IRS settlement - - 10.4
Reduction in work force - - (0.2)
- -------------------------------------------------------------------------
- 79.1 (19.6)
- -------------------------------------------------------------------------
Net Income Excluding
Unusual Items $201.2 $113.8 $161.0
=========================================================================
Earnings Per Share of
Common Stock $ 2.33 $ 2.24 $ 1.62
=========================================================================
Earnings Per Share of
Common Stock Excluding
Unusual Items $ 2.33 $ 1.32 $ 1.85
=========================================================================
</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. From 1988 through 1995, Sonat Exploration's reserve growth
strategy was based on acquiring properties that had additional exploitation
drilling potential, developing those properties and conducting low-risk
exploration activities. In 1996 the Company made a strategic shift to increase
exploratory activity due to the size of the acreage position it has established
II-2
27
<PAGE> 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- --------------------------------------------------------------------------------
and its increased use of technology, such as three-dimensional (3-D) seismic
surveys.
During 1996, Sonat Exploration added 364.8 billion cubic feet of
natural gas equivalent (Bcfe) to proved reserves through its drilling program,
including eight successful exploratory wells, which added proved reserves of
140.9 Bcfe. Most of the reserves added through exploration activities were from
wells drilled in the Cotton Valley Pinnacle Reef trend in east Texas, an area
showing significant growth potential for Sonat Exploration. Early in the second
quarter of 1996, the Company had a significant find in Leon County, Texas,
where it completed its first Cotton Valley Pinnacle Reef trend discovery, the
Fountain No. 1 well, in which Sonat Exploration has a 64 percent working
interest. In the third quarter, Sonat Exploration announced completion of its
second discovery in the Reef trend, the Scurlock No. 1 well. Sonat Exploration
has a 67 percent working interest in this well. During the fourth quarter,
Sonat Exploration completed its most significant exploratory well in the Reef
trend thus far, the Blanton No. 1. Sonat Exploration has a 100 percent working
interest in this well. Sonat Exploration plans to drill at least 19 wells in
the Cotton Valley Pinnacle Reef trend during 1997 and has increased the number
of rigs drilling there to five rigs. Exploratory activity in the Pinnacle Reef
trend added total proved reserves of 125.5 Bcfe in 1996. Sonat Exploration also
completed two significant wells in High Island Block 39 in the Gulf of Mexico,
one exploratory and one development. Total reserves added from these two wells
in 1996 were 20.5 Bcfe. Sonat Exploration has a 100 percent working interest in
these wells.
Sonat Exploration maintained an active development drilling program in
1996, participating in the completion of 315 gross development wells of which
307 were successful. The eastern Austin Chalk trend was again the most active
drilling area for Sonat Exploration. During 1996, Sonat Exploration more than
doubled its drilling program in the area from three rigs to seven rigs and
drilled 49 wells, of which 47 are commercial.
The Company completed several acquisitions in 1996 at a net cost of
$48.1 million that added 109.8 Bcfe. Sales of producing properties of $36.8
million during 1996 decreased proved reserves by 60.4 Bcfe. Total proved
reserves at December 31, 1996, were 2.0 trillion cubic feet of natural gas
equivalent, up 229.4 Bcfe from year-end 1995.
Most of Sonat Exploration's natural gas production is sold to Sonat
Marketing Company L.P. (Sonat Marketing), the Company's affiliate operating in
the Energy Marketing segment.
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Sales to others $155.3 $175.1 $ 145.1
Intersegment sales 410.4 228.4 267.6
- -----------------------------------------------------------------
Total Revenues 565.7 403.5 412.7
- -----------------------------------------------------------------
Costs and Expenses:
Operating and maintenance 66.0 65.5 63.1
Exploration expense 21.7 9.1 12.2
General and administrative 53.9 48.4 45.7
Depreciation, depletion and
amortization 236.4 239.2 206.8
Taxes, other than income 25.8 18.3 20.9
- -----------------------------------------------------------------
403.8 380.5 348.7
- -----------------------------------------------------------------
Operating Income $161.9 $ 23.0 $ 64.0
=================================================================
Equity in Earnings of
Unconsolidated Affiliates $ 0.4 $ 0.6 $ 0.2
=================================================================
Proved Reserves:
Net gas (Bcf) 1,692 1,506 1,367
Net liquids (MBbls) 51,437 44,228 31,627
=================================================================
Net Sales Volumes:
Gas (Bcf) 205 183 182
Oil and condensate (MBbls) 5,145 3,973 4,155
Natural gas liquids (MBbls) 2,161 1,496 1,227
=================================================================
Average Sales Prices:
Gas ($/Mcf) $ 2.20 $ 1.52 $ 1.83
Oil and condensate ($/Bbl) 19.25 17.61 15.91
Natural gas liquids ($/Bbl) 12.03 9.29 8.90
=================================================================
</TABLE>
1996 VERSUS 1995. Operating income increased $153.4 million, after
excluding the recognition of $37.5 million of operating revenue from the
termination of two long-term gas sales contracts and a $23.0 million charge to
depreciation, depletion and amortization expense for an impairment pro-
28 II-3
<PAGE> 27
Sonat Inc. and Subsidiaries
vision related to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 121 in 1995. The increase was primarily due to higher natural gas
prices. Increases in oil prices and gas and oil production also added
substantially to operating results. Average realized natural gas prices
increased to $2.20 per Mcf in 1996 from $1.52 per Mcf in 1995, an increase of
45 percent. Natural gas production increased by 12 percent in the current
period. Realized oil prices rose to an average of $19.25 per barrel in 1996
from $17.61 per barrel in 1995, and oil and condensate production increased by
29 percent primarily due to the successful development drilling program in the
Austin Chalk trend. Operating income for 1996 was reduced by the cost of the
judgment and plaintiffs' attorney's fees in the total amount of $11.65 million
for settlement of the Briggs, et al. v. Sonat Exploration litigation.
Costs and expenses were higher in 1996, excluding the SFAS No. 121
adjustment, due to several factors. Exploration expense, which includes
seismic, lease write-offs, dry hole costs and delay rentals, increased $12.6
million due to the higher level of exploration activity in 1996. General and
administrative expense increased $5.5 million due to higher employee related
costs, including stock-based compensation expense. Other tax expense increased
$7.5 million due to higher severance taxes related to higher revenues.
Depreciation, depletion and amortization expense increased $20.2 million, as
higher production levels offset a lower amortization rate.
1995 VERSUS 1994. Absent the effect of the 1995 unusual items
identified earlier, operating income decreased by $57.4 million primarily due
to lower prices for natural gas. The average price for natural gas was 17
percent lower in 1995 compared to 1994, which reduced revenues by $57.8
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 Bcfe, compared
with 214 Bcfe during 1994. Production in 1995 was restrained due to producing
property sales and involuntary curtailments.
Excluding the impairment provision in 1995, operating expenses
increased slightly in 1995 compared to 1994. Operating and maintenance expenses
were $2.4 million higher due to the acquisition of additional properties in
early 1995. General and administrative expenses were $2.7 million higher due to
an increase in stock-based compensation expense. Depreciation, depletion and
amortization increased $9.4 million, excluding the impairment provision,
primarily due to slightly higher production and a change in production mix with
more production coming from fields with a higher amortization rate.
HEDGING ACTIVITIES - Sonat Exploration, through Sonat Marketing, uses
derivative financial instruments to manage the risks associated with price
volatility for both its natural gas production and its oil production, which it
sells in the spot market. (See Market Risk Management and Note 3 of the Notes
to Consolidated Financial Statements.) Gains or losses experienced on Sonat
Exploration's hedging transactions are offset by the related gains or losses
recognized on the sale of the commodity. Natural gas revenues were reduced by
$24.7 million in the 1996 period and increased by $3.0 million and $9.6 million
in the 1995 and 1994 periods, respectively, relating to hedging activities. Oil
revenues were reduced by $12.5 million in the 1996 period relating to hedging
activities. The effect of hedging activities on oil revenues in the 1995 and
1994 periods was immaterial.
A portion of Sonat Exploration's future production is hedged. Gas
production in 1997 through 2000 in the aggregate amount of 218.1 TBtus is
hedged at a weighted average price of $2.05 per MMBtu. Of this amount, 62.6
TBtu at a weighted average price of $2.11 relates to 1997 production, which
represents approximately 26 percent of expected production. Oil production of
approximately 1.3 million barrels, or 20 percent of expected production, is
hedged in 1997 at a weighted average price of $20.63 per barrel. (See Note 3 of
the Notes to Consolidated Financial Statements.)
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).
II-4 29
<PAGE> 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
Southern continues to pursue opportunities to expand its pipeline
system in its traditional market area and to connect new gas supplies. In late
1995 Southern's East Tennessee expansion was placed in service. This $11
million project provides approximately 14 million cubic feet per day of firm
transportation volumes to a group of new customers that signed 10-year
contracts. Additionally, in November 1996, Southern placed in service a $16
million expansion providing approximately 27 million cubic feet per day of
additional firm capacity to 15 customers in Alabama, Georgia and Tennessee.
Southern also completed another project in 1996 that enhances its customers'
ability to access new supplies being developed offshore Louisiana. This $14
million project added 140 million cubic feet per day of firm capacity, making
it a very low-cost way for producers to transport their growing Gulf of Mexico
natural gas production into the U.S. pipeline grid.
Southern filed an application on January 24, 1996, with the Federal
Energy Regulatory Commission (FERC) seeking approval to expand its pipeline
system to provide firm gas transportation service to three existing customers
and to two new customers in North Alabama. Most of the proposed
76-million-cubic-feet-per-day expansion is supported by long-term firm
transportation agreements with 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 earliest in-service date for the proposed expansion, which requires FERC
approval, would be November 1997. The company currently providing
transportation service to the cities of Huntsville and Decatur has challenged
this project in Alabama state court proceedings and with the FERC. Southern's
position was upheld by the trial court in the state court proceedings, whose
summary judgment decision in favor of Southern and the City of Huntsville is
now on appeal to the Alabama Supreme Court, which has granted expedited
consideration to the appeal.
In May 1996, Southern filed an application with the FERC to expand its
pipeline system in the eastern portion (Zone 3) of its market area. This $36
million expansion will enable Southern to provide additional firm
transportation services totaling 46 million cubic feet per day to 11 customers
in Georgia and Tennessee. If FERC approval is received, the in-service date for
this firm transportation service is expected to be November 1997.
In December 1996, Southern, Amoco Pipeline Company, and Shell Gas
Pipeline Company announced their intent to construct the Destin Pipeline, a
$300 million project that will begin offshore in Main Pass Block 260 and extend
northward into Mississippi, intersecting five interstate pipelines, including
Southern and Florida Gas Transmission Company. This pipeline will be owned
equally by Southern and affiliates of Amoco Pipeline and Shell Gas Pipeline and
will have one billion cubic feet of daily capacity when completed. Construction
is scheduled to begin in late 1997, and the system could begin service as early
as mid-1998, subject to necessary governmental approvals. When the system is
completed, Southern will operate the pipeline. The execution of definitive
agreements is expected to occur in early 1997.
Southern currently has firm transportation commitments totaling 65
million cubic feet of natural gas per day from 15 customers in eastern
Tennessee, Georgia and Alabama that will result in an expansion of its
facilities that serve these areas. Additional customers may join this project,
thus the capital investment associated with this project is uncertain.
Additionally, existing customers will be given the option to release firm
capacity that comes up for renewal during the next three years to meet the
needs of this project. The necessary FERC approval will be sought in an
application that is expected to be filed in May 1997, with the project
scheduled to go in service in November 1998.
Natural Gas Transmission
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income (Loss):
Southern Natural Gas
Company and subsidiaries $165.9 $159.1 $92.8
Other (0.3) (0.8) (4.4)
- ------------------------------------------------------------------------------
Total Operating Income $165.6 $158.3 $88.4
==============================================================================
</TABLE>
30 II-5
<PAGE> 29
Sonat Inc. and Subsidiaries
Southern Natural Gas Company and Subsidiaries
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Gas sales $210.0 $195.2 $233.7
Market transportation
and storage 323.2 324.5 321.0
Supply transportation 46.6 50.6 36.8
Other 196.5 91.3 135.7
- ------------------------------------------------------------------------------
Total Revenues 776.3 661.6 727.2
- ------------------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 206.8 191.3 229.1
Transition cost recovery and
natural gas purchase
contract settlement costs 170.7 58.0 116.2
Operating and maintenance 83.9 96.1 151.7
General and administrative 82.6 85.4 72.0
Depreciation and amortization 48.3 52.3 46.6
Taxes, other than income 18.1 19.4 18.8
- -------------------------------------------------------------------------------
610.4 502.5 634.4
- -------------------------------------------------------------------------------
Operating Income $165.9 $159.1 $ 92.8
===============================================================================
Equity in Earnings of
Unconsolidated Affiliates $ 9.6 $ 9.4 $ 9.0
===============================================================================
<CAPTION>
(Billion Cubic Feet)
<S> <C> <C> <C>
Volumes (Note):
Intrastate gas sales 8 8 -
Market transportation 660 636 551
- -------------------------------------------------------------------------------
Total Market Throughput 668 644 551
Supply transportation 315 372 335
===============================================================================
Total Volumes 983 1,016 886
===============================================================================
Transition gas sales 69 85 103
===============================================================================
</TABLE>
Note: 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 volumes
Citrus Corp.
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in Earnings of Citrus Corp. $22.9 $28.2 $28.9
===============================================================================
Florida Gas Volumes (100%):
Market transportation 428 461 303
Supply transportation 29 26 22
- -------------------------------------------------------------------------------
Total Volumes 457 487 325
===============================================================================
</TABLE>
1996 VERSUS 1995. Absent the effect of an unusual item (see discussion
below), operating income for the Natural Gas Transmission segment decreased 2
percent in 1996 due to lower operating results at Southern.
Southern Natural Gas - Operating income, excluding the unusual item
discussed below, decreased slightly in 1996 primarily due to the receipt of
incremental revenues in 1995 from the sale of firm transportation capacity
prior to revised rates going into effect on March 1, 1995. Also included in
1995 are positive adjustments to reflect actual interruptible transportation
revenue and cost recovery in the first year of post Order No. 636 operations,
the reduction of a take-or-pay liability and the accrual of gas supply
realignment (GSR) interest on larger recovery balances compared to 1996. These
were partially offset by lower costs and additional firm transportation
revenues in 1996. The unusual item in 1995 of $11.1 million increased operating
and maintenance expense in recognition of Southern's share of GSR costs that
were not recoverable.
Southern's gas sales revenues and gas costs 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.
Gas sales revenues and natural gas cost increased compared with the
1995 period reflecting higher gas prices on transition gas sales from supply
remaining under contract. Other revenue and transition cost recovery in 1996
increased by $163.9 million as a result of the offset of rate reserves against
GSR costs as provided in Southern's comprehensive customer rate settlement (the
Customer Settlement). Otherwise, other revenue and transition cost recovery
decreased primarily due to declining billings and lower recovery rates for GSR
costs. The items discussed in this paragraph had no net impact on operating
income.
Certain other items affected operating income. Supply transportation
revenues decreased due to lower supply-area transportation volumes resulting
from lower throughput at
II-6 31
<PAGE> 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
Sea Robin. Operating and maintenance expense in 1995 included the $11.1 million
of GSR expense which was discussed earlier. General and administrative expense
decreased due to lower employee related expenses despite higher stock-based
compensation expense. Depreciation and amortization decreased in 1996 primarily
due to lower rates implemented March 1, 1995, as a part 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 flat compared to 1995.
Citrus - Equity in earnings of Citrus was $5.3 million lower than in
1995. 1996 results reflect revenues and operating costs relating to the first
full year of operation of the Phase III expansion project while 1995 results
include accruing allowance for funds used during construction (AFUDC) for the
first two months of the year and the AFUDC adjustment discussed below. Also
contributing to the decline were lower margins due to lower interruptible
transportation volumes as a result of lower prices from competing fuels and
lower margins at Citrus' gas marketing affiliate. These were partly offset by a
gain on the sale of facilities in 1996 and the effect of out-of-period expense
adjustments in 1996 and 1995.
1995 VERSUS 1994. Absent the effect of the unusual items identified
earlier, operating income of the Natural Gas Transmission segment increased by
$18.5 million primarily due to improved operating results at Southern.
Southern Natural Gas - Operating income, 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 $11.1 million increased operating and maintenance
expense in recognition of Southern's share of GSR costs that was not
recoverable.
Unusual items included in Southern's 1994 operating expenses consisted
of a $27.0 million charge associated with recognition of the Customer
Settlement and a $33.5 million provision primarily relating to regulatory
assets not recoverable as a result of the Customer Settlement, including $18.9
million attributable to a corporate restructuring undertaken in 1994.
Market transportation and storage revenues increased in 1995 due in
part to a $15.8 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 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 expense. Depreciation and amortization expense
increased in 1995 due to the $15.8 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 the
Company's share of earnings from Bear Creek, was essentially flat when
comparing 1995 to 1994.
Citrus - Equity in earnings of Citrus decreased slightly in 1995 to
$28.2 million. Earnings were lower on the Phase III expansion project,
excluding the $6.7 million effect of a positive adjustment to 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.
32 II-7
<PAGE> 31
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 has terminated or renegotiated to market
pricing substantially all of its gas supply contracts through which it had
historically obtained its long-term gas supply. Some of the remaining 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 85 percent of the purchase commitments in 1997 described below. Based on
Southern's current expectations with respect to natural gas prices in the years
following 1997, only a small amount of gas volumes are expected to be at prices
above market. (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 is selling 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 1997 through 2001 are estimated as follows:
<TABLE>
<CAPTION>
Estimated Purchase Commitments (In Millions)
- -------------------------------------------------------------
<S> <C>
1997 $156
1998 21
1999 19
2000 17
2001 18
- -------------------------------------------------------------
</TABLE>
These estimates are subject to significant uncertainty due both to the
number of assumptions inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the three major factors that
determine purchase commitments (underlying reserves, future deliverability and
future price) is known today with certainty.
RATE MATTERS
The Customer Settlement resolves all of Southern's previously pending rate
proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636, except for one contesting
party that represents approximately 2 percent of Southern's firm transportation
volumes. 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, but requires Southern to file a new rate case no later than
September 1, 1999. (See Note 9 of the Notes to Consolidated Financial
Statements for a discussion of the Customer Settlement and other rate matters.)
ENERGY MARKETING
Sonat Energy Services, through its subsidiaries, Sonat Marketing and Sonat
Power Marketing L.P. (Sonat Power Marketing), conducts marketing business in
the natural gas and electric industries, respectively. Sonat Marketing
purchases and resells substantially all of Sonat Exploration Company's natural
gas production.
Sonat Marketing's business continued to grow rapidly in 1996. Total
sales volumes grew 34 percent from 1995. This growth was achieved in large part
by the Company's focus on its strategy of working closely with its customers
and delivering outstanding customer service.
Sonat Marketing is pursuing strategic alliances as a means of expanding
its business. During 1996 it formed Sonat Public Service Company L.L.C., a
joint venture between Sonat Marketing and PSNC Production Corporation. This new
company combines Sonat Marketing's wholesale marketing expertise with Public
Service of North Carolina's retail marketing skills in the mid-Atlantic region.
Sonat Public Service will market natural gas and related services to small
industrial and large commercial customers throughout the mid-Atlantic region,
including the District of Columbia and the states of North Carolina, South
Carolina,
II-8 33
<PAGE> 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- --------------------------------------------------------------------------------
Maryland and Virginia. In addition, Sonat Public Service will provide
gas supply management services to municipalities in the mid-Atlantic region.
Sonat Marketing uses natural gas and oil futures contracts, options, and
gas and oil price swap agreements to hedge the effects of market price
volatility on its operating results. These instruments are used to lock in
margins on Sonat Marketing's gas transactions. Sonat Marketing also uses
futures to enable it to hedge fixed-price contracts to both its suppliers and
its customers. (See Market Risk Management and Note 3 of the Notes to
Consolidated Financial Statements.)
In 1996, Sonat Power Marketing executed electric power purchase, sales
and transmission agreements with numerous companies. Sonat Power Marketing has
focused on expanding its wholesale electric business and it reached sales
volumes of approximately 530 average megawatt hours at the end of the year. A
subsidiary of AGL Resources Inc., which has a 35 percent ownership interest in
Sonat Marketing, also acquired a 35 percent interest in Sonat Power Marketing
in 1996.
ENERGY MARKETING
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,592.7 $1,249.9 $942.2
========================================================================================
Operating Income $ 10.2 $ 6.5 $ 11.9
========================================================================================
Sonat Marketing Gas Sales
Volumes (100%)
(Billion Cubic Feet) 968 722 482
========================================================================================
Sonat Power Marketing
Sales Volumes (100%)
(Thousands of
Megawatt Hours) 2,969 4 -
========================================================================================
</TABLE>
1996 VERSUS 1995. Operating income for 1996 increased $3.7 million
over 1995 levels primarily due to much higher unit gas trading margins in the
first quarter as a result of unusually cold weather in certain of Sonat
Marketing's markets. This created intense demand for natural gas during peak
periods resulting in a volatile price environment which created exceptional
trading opportunities for Sonat Marketing. Since that time, unit trading
margins have been lower. Additionally, general and administrative expense has
increased due to growth in operations. Sonat Marketing's volumes increased
primarily due to a concentration on growth and expansion of the Northeast and
Mid-Continent regions. Sonat Power Marketing also experienced significant
growth in 1996 and reached sales volumes as high as 636 average megawatt hours
during the fourth quarter. However, Sonat Power Marketing's 1996 results were
adversely impacted by start-up costs.
1995 VERSUS 1994. Operating income of $6.5 million was $5.4 million
less than 1994 primarily due to lower margins in 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, the start up of Sonat Power Marketing and an increase in
stock-based compensation expense also reduced operating income.
----------------------------
OTHER INCOME STATEMENT ITEMS
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME (LOSS), NET:
Equity in earnings of
unconsolidated affiliates $34.2 $ 46.3 $44.3
Sale of subsidiary stock - 188.0 -
Minority interest (4.9) (.9) -
Other 6.5 (44.6) 16.4
- -----------------------------------------------------------------------------
$35.8 $188.8 $60.7
=============================================================================
</TABLE>
1996 VERSUS 1995. The decrease in equity in earnings of unconsolidated
affiliates reflects the absence of earnings from the Company's investment in
Sonat Offshore Drilling Inc., the remaining interest of which was sold in July
1995, and a decrease in equity in earnings of Citrus (discussed earlier in the
Natural Gas Transmission section). The 1995 period includes the gain from the
Company's sale of its remaining interest in Sonat Offshore stock. (See Note 2
of the Notes to Consolidated Financial Statements.) Minority interest
34 II-9
<PAGE> 33
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
represents AGL Resources' 35 percent share of earnings in Sonat Marketing and
Sonat Power Marketing. Other for the 1996 period includes a $2.8 million net
gain on the disposal of assets and a $3.9 million gain on partial termination
of an interest rate swap in September 1996. The 1995 period includes a $28.7
million loss on the sale of oil and gas properties, a $13.0 million loss on the
sale of the Company's investment in Baker Hughes Incorporated convertible
preferred stock, and $6.0 million of dividends on the Baker Hughes stock. In
addition, the month of December 1995 included an $8.4 million loss by Sonat
Exploration 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.
1995 VERSUS 1994. The increase in equity in earnings of unconsolidated
affiliates resulted from an improvement in operations at Sonat Offshore
Drilling Components of Other Income in 1995 were discussed above. In 1994 Other
includes $12.0 million of dividends on the Baker Hughes stock and a $3.6
million net gain on asset disposals.
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Expense, Net $82.8 $89.8 $72.9
- ------------------------------------------------------------------------
</TABLE>
1996 VERSUS 1995. Net interest expense decreased in 1996 compared to
1995 due to lower average debt levels and lower average regulatory reserve
balances at Southern. The 1995 period included a $4.4 million favorable
adjustment on income tax related interest.
1995 VERSUS 1994. Net interest expense increased in 1995 compared to
1994 primarily due to higher average interest rates on outside borrowings and
higher average regulatory reserve balances. The 1995 period included a $4.4
million favorable adjustment on income tax related interest, while 1994
included $9.5 million of favorable adjustments related to the settlement of the
Company's federal income tax returns for the years 1986-1988.
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income Taxes $93.1 $95.0 $15.8
- ----------------------------------------------------------------------------
</TABLE>
1996 VERSUS 1995. Excluding income taxes associated with the unusual
items in the 1995 period, primarily the gain on the sale of the Company's
remaining interest in Sonat Offshore stock which was discussed earlier (see
Note 2 of the Notes to Consolidated Financial Statements), income taxes
increased due to higher pretax earnings and a decrease in tax preference items.
1995 Versus 1994. Income tax expense in 1995 increased due to taxes
associated with unusual items, 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 the years 1986-1988 which reduced reported income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities $500.6 $184.3 $510.6
- ---------------------------------------------------------------
</TABLE>
1996 VERSUS 1995. Cash flow from operations increased $316.3 million
compared with the 1995 period primarily due to improved operating results at
both Sonat Exploration and Sonat Marketing (discussed earlier in the operating
sections). At Southern, net GSR recoveries in 1996 compared to net GSR payments
in 1995 resulted in a $104.6 million improvement in cash flow from operations.
Other than the net GSR recoveries/payments discussed above, both the
change in GSR costs and the change in reserves for regulatory matters were
attributable to recognition of the Customer Settlement in the second quarter of
1996 (see discussion earlier). The change in deferred income taxes reflects the
deductibility of certain oil and gas drilling costs in the current period and
the disposal of the Company's investment in Baker Hughes preferred stock in the
1995 period.
II-10 35
<PAGE> 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- -------------------------------------------------------------------------------
The growth in accounts receivable and accounts payable is primarily
attributable to higher natural gas prices and the expanding business of Sonat
Marketing. The change in accrued interest and income taxes essentially reflects
income tax deductions of GSR payments and tax refunds in the current period
compared to income tax payments in 1995, including taxes on the Sonat Offshore
stock disposition. Inventories increased primarily due to gas inventory
purchases at Sonat Marketing and material purchases at Southern and Sonat
Exploration. The change in other current assets and other current liabilities
is primarily due to a decrease in gas imbalance receivables and payables, which
occurred in the prior period.
The caption Other in the Consolidated Statement of Cash Flows includes
$32.9 million of accrual reversals in May 1996 related to the Customer
Settlement and $13.1 million of exploration costs in the current period. In
addition, the 1995 period includes $37.5 million from the termination of
long-term gas sales contracts, as well as $13.5 million in transition costs
deferred at Southern.
1995 VERSUS 1994. Several factors contributed to the $326.3 million
decrease in cash flows from operations in 1995 compared to 1994. The $99.3
million change in net payments for GSR costs is primarily due to a $45.0
million payment to Exxon and the funding of a $42.3 million GSR liability in
the current period compared to net recoveries of $18.7 million in the prior
period. The $64.1 million change in reserves for regulatory matters reflects
Southern's implementation of reduced rates and cessation of additional revenue
collection on March 1, 1995. The change in take-or-pay costs reflects the
completion of Southern's take-or-pay cost recovery in 1994. 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 $112.4 million in taxes on the sale
of the Company's remaining interest in Sonat Offshore stock. Partly offsetting
was the recognition of $72.1 million of tax benefits consisting of the
utilization of Section 29 tax credits and net operating losses.
In 1995, Other includes $37.5 million related to the termination of
two long-term gas sales contracts, while Other in 1994 includes a $56.5 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.
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Investing Activities $(482.5) $92.3 $(601.1)
- --------------------------------------------------------------------------
</TABLE>
1996 VERSUS 1995. Investing activities required $482.5 million of net
cash in 1996 compared to providing $92.3 million in 1995, which included
sources of cash from unusual items. In 1995, the Company received $326.0
million from the sale of its remaining interest in Sonat Offshore stock, $167.0
million from the sale of four million shares of Baker Hughes convertible
preferred stock, and $105.1 million in proceeds from the sale of Sonat
Exploration oil and gas properties. Capital expenditures (see table below) were
higher in the 1996 period compared to the 1995 period primarily due to
Southern's system expansion.
1995 VERSUS 1994. Investing activities provided $92.3 million of net
cash in 1995 compared to using $601.1 million in 1994. The 1995 period included
the unusual items discussed above. In addition, net advances of $159.0 million
were made to Citrus in 1994. Capital expenditures were higher in the 1995
period compared to the 1994 period primarily due to increased acquisitions at
Sonat Exploration and expansions at Southern.
36 II-11
<PAGE> 35
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Capital expenditures for the Company's business segments (excluding
exploratory costs and unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production $368.4 $416.2 $389.8
Natural Gas Transmission 130.4 62.7 51.2
Energy Marketing 4.7 2.8 3.2
Other 6.0 5.9 4.1
- -------------------------------------------------------------------------
Total $509.5 $487.6 $448.3
=========================================================================
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates were as follows:
<TABLE>
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production $ 0.3 $ 0.7 $ 0.1
Natural Gas Transmission 15.1 100.5 398.4
Other 0.5 0.5 0.5
- -----------------------------------------------------------------------
Total $15.9 $101.7 $399.0
=======================================================================
<CAPTION>
(In Millions)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities $(25.8) $(248.5) $88.8
- -----------------------------------------------------------------------
</TABLE>
1996 VERSUS 1995. Net cash used in financing activities was $222.7
million less in the 1996 period compared to the 1995 period. A portion of the
proceeds from the Sonat Offshore stock sale and the Baker Hughes stock sale
were used to repay borrowings under Sonat's floating rate facilities in the
1995 period.
The Company utilizes its $500 million long-term revolving credit
agreement in managing its working capital requirements. During 1996, the
Company borrowed $855.0 million and repaid $700.0 million under this agreement.
1995 VERSUS 1994. Net cash used in financing activities was $337.3
million higher in the 1995 period compared to the 1994 period, primarily due to
repayments of floating rate facilities. Proceeds from the unusual items
discussed above were used in the 1995 repayments. Other includes the $32.0
million contributed by Atlanta Gas Light as an investment in Sonat Marketing
(see Note 2 of the Notes to Consolidated Financial Statements).
CAPITAL RESOURCES
At December 31, 1996, the Company had lines of credit and a revolving
credit agreement with a total capacity of $750 million. Of this, $437 million
was available. The Company has a 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, and, as a result, at that
date the Company would not have deemed available under the lines of credit and
the revolving credit agreement an amount equal to the $137 million of
commercial paper then outstanding.
Sonat has a shelf registration with the Securities and Exchange
Commission (SEC) that provides for issuance of up to $500 million in debt
securities of which $200 million has been issued. Southern also has a shelf
registration with the SEC for up to $200 million in debt securities, of which
$100 million has been issued.
The Company has a stock repurchase program in effect through the end of
1997. As of December 31, 1996, the Company had remaining authority to purchase
approximately one million shares of the Company's common stock. Shares
purchased are intended for reissuance in connection with employee stock options
and restricted stock programs.
The Company believes that cash flow from operations and borrowings under
its existing credit facilities and shelf registrations would 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 affects the operating results of
Sonat Exploration and Sonat Marketing. The Company's use of derivatives to
reduce the effect of this volatility is described in Note 3 of the Notes to
Consolidated Financial Statements.
37 II-12
<PAGE> 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- --------------------------------------------------------------------------------
The Company also has exposure to financial market risks. In
anticipation of a future borrowing, Southern had in effect at December 31,
1996, a forward rate agreement to hedge its interest rate risk (see Note 3 of
the Notes to Consolidated Financial Statements).
The Company's use of these derivative instruments is implemented under a
set of policies approved by the Board of Directors. Speculative transactions
using financial derivatives are prohibited. In the case of Sonat Exploration,
these policies prohibit transactions not matched by physical commodity
positions. For commodity price hedges, these policies set limits regarding
volumes relative to budgeted production or sales levels. Sonat Marketing uses
derivatives to hedge physical positions and is authorized to engage in
financial transactions to support its customers' needs subject to a policy that
limits the net positions to specific value at risk limits. Sonat Marketing's
policy is to run substantially balanced books within these defined trading
limits. Material forward rate agreements and swap counterparties are approved
by the Board, and volume limits for swaps are set for any single counterparty.
Reports detailing each transaction, mark to market and value at risk positions,
are reviewed by 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.
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 has been notified that it is or may be a potentially
responsible party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) in connection with three Superfund
sites for which the amount of its liability has not been settled. In these
cases, the Company has determined that the aggregate maximum amount of loss
reasonably likely to be attributed to 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 subsidiaries, South Georgia Natural Gas Company and Sea Robin
Pipeline Company, have used, and continue to use at several locations, gas
meters containing elemental mercury. Southern, South Georgia and Sea Robin 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
38 II-13
<PAGE> 37
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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. Southern completed the characterization of its remaining
190 sites in Mississippi during 1996. Approximately 50 percent of the sites
characterized in 1995 and 1996 across the pipeline systems of Southern and Sea
Robin had detectable levels of mercury. Characterization of potential sites on
the pipeline system of South Georgia has not commenced at this time. Southern
will file copies of the characterization reports with the applicable state
agencies upon their finalization. At this time, only the State of Georgia has
issued formal guidelines for remediation of mercury sites, although the State
of Louisiana has issued informal guidance. 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 guidance is still
uncertain for all sites. Based on its experience with other remediation
projects, industry experience to date with remediation of mercury, and its
characterization data, 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, South Georgia, and Sea Robin 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.
FORWARD LOOKING STATEMENTS
Disclosures provided 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
success of the Company's exploratory drilling activities, the results of the
Company's hedging activities, the success of management's cost reduction
activities and the requirements to receive various government approvals to
proceed with the expansion initiatives at Southern. 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.
II-14 39
<PAGE> 38
- --------------------------------------------------------------------------------
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 on the facing page. 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 27, 1997
40 II-15
<PAGE> 39
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Birmingham, Alabama
January 20, 1997
II-16 41
<PAGE> 40
<TABLE>
<CAPTION>
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 29,639 $ 37,289
Accounts receivable 577,717 327,697
Inventories (Note 4) 30,500 23,956
Gas imbalance receivables 21,694 16,556
Income taxes 2,163 12,979
Other 89,806 75,954
- --------------------------------------------------------------------------------------------------------------------------
Total Current Assets 751,519 494,431
- --------------------------------------------------------------------------------------------------------------------------
Investments and Advances:
Unconsolidated affiliates (Note 5) 414,560 386,081
Other investments (Notes 2 and 3) 50,561 46,688
- --------------------------------------------------------------------------------------------------------------------------
465,121 432,769
- --------------------------------------------------------------------------------------------------------------------------
Plant, Property and Equipment, successful efforts method of accounting used
for oil and gas properties (Notes 6 and 13) 5,084,283 4,822,879
Less Accumulated Depreciation, Depletion and Amortization 2,650,419 2,545,320
- --------------------------------------------------------------------------------------------------------------------------
2,433,864 2,277,559
- --------------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other:
Gas supply realignment costs (Note 9) 11,144 199,073
Other 113,011 107,609
- --------------------------------------------------------------------------------------------------------------------------
124,155 306,682
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,774,659 $ 3,511,441
==========================================================================================================================
</TABLE>
See accompanying notes.
42 II-17
<PAGE> 41
<TABLE>
<CAPTION>
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- ---------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year (Note 7) $ 53,707 $ 18,750
Unsecured notes (Note 7) 158,030 218,900
Accounts payable 510,130 297,660
Accrued income taxes 26,726 10,579
Accrued interest 28,584 27,115
Gas imbalance payables 20,290 21,444
Other 51,370 45,677
- ---------------------------------------------------------------------------------
Total Current Liabilities 848,837 640,125
- ---------------------------------------------------------------------------------
Long-Term Debt (Note 7) 872,255 770,313
- ---------------------------------------------------------------------------------
Deferred Credits and Other:
Deferred income taxes (Note 8) 284,564 213,122
Reserves for regulatory matters (Note 9) 14,644 181,798
Other 169,995 223,441
- ---------------------------------------------------------------------------------
469,203 618,361
- ---------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, $1.00 par; 400,000,000 shares
authorized, 87,232,573 and 87,244,476 shares
issued in 1996 and 1995, respectively (Note 10) 87,233 87,244
Other capital 31,648 39,795
Retained earnings 1,495,186 1,387,137
- ---------------------------------------------------------------------------------
1,614,067 1,514,176
Less treasury stock at cost, 830,908 and
1,077,480 shares in 1996 and
1995, respectively (Note 10) (29,703) (31,534)
- ---------------------------------------------------------------------------------
Total Stockholders' Equity 1,584,364 1,482,642
- ---------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $3,774,659 $3,511,441
=================================================================================
</TABLE>
See accompanying notes.
II-18 43
<PAGE> 42
<TABLE>
<CAPTION>
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per-Share Amounts)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Note 12) $3,394,898 $1,990,141 $1,735,967
- -----------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 2,158,313 1,090,756 795,025
Transition cost recovery and natural gas purchase
contract settlement costs 170,718 58,010 116,159
Electric power cost 65,699 88 -
Operating and maintenance 172,762 171,885 222,901
General and administrative 150,490 140,511 133,138
Depreciation, depletion and amortization 288,192 298,714 257,759
Taxes, other than income 47,447 41,244 41,546
- -----------------------------------------------------------------------------------------------------------------
3,053,621 1,801,208 1,566,528
- -----------------------------------------------------------------------------------------------------------------
Operating Income 341,277 188,933 169,439
- -----------------------------------------------------------------------------------------------------------------
Other Income (Loss), Net:
Equity in earnings of unconsolidated affiliates (Note 5) 34,211 46,258 44,319
Sale of stock of subsidiary (Note 2) - 188,012 -
Minority interest (4,907) (888) -
Other 6,516 (44,590) 16,348
- -----------------------------------------------------------------------------------------------------------------
35,820 188,792 60,667
- -----------------------------------------------------------------------------------------------------------------
Interest:
Interest income 4,153 6,413 7,403
Interest expense (92,040) (102,797) (86,982)
Interest capitalized 5,094 6,540 6,692
- -----------------------------------------------------------------------------------------------------------------
(82,793) (89,844) (72,887)
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 294,304 287,881 157,219
Income Tax Expense (Note 8) 93,115 94,993 15,812
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 201,189 $ 192,888 $ 141,407
=================================================================================================================
Earnings Per Share of Common Stock (Note 10) $ 2.33 $ 2.24 $ 1.62
=================================================================================================================
Weighted Average Shares Outstanding (Note 10) 86,211 86,270 87,119
Dividends Paid Per Share (Note 10) $ 1.08 $ 1.08 $ 1.08
=================================================================================================================
</TABLE>
See accompanying notes.
44 II-19
<PAGE> 43
<TABLE>
<CAPTION>
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
1996 1995 1994
-------------------- ------------------ --------------------
Years Ended December 31, 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 87,244 $ 87,244 87,252 $ 87,252 87,158 $ 87,158
Issued (canceled) (11) (11) (8) (8) 94 94
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 87,233 87,233 87,244 87,244 87,252 87,252
- ----------------------------------------------------------------------------------------------------------------------------
Other Capital:
Balance at beginning of year 39,795 42,311 36,074
Benefit plans transactions (8,147) (2,516) 6,237
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 31,648 39,795 42,311
- ----------------------------------------------------------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year 1,387,137 1,287,339 1,239,983
Net income 201,189 192,888 141,407
Cash dividends at $1.08 per share (93,140) (93,090) (94,051)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,495,186 1,387,137 1,287,339
- ----------------------------------------------------------------------------------------------------------------------------
Treasury Stock, at cost:
Balance at beginning of year (1,077) (31,534) (871) (25,016) - -
Purchased (774) (30,914) (645) (19,230) (940) (27,005)
Issued 1,020 32,745 439 12,712 69 1,989
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year (831) (29,703) (1,077) (31,534) (871) (25,016)
- ----------------------------------------------------------------------------------------------------------------------------
86,402 $1,584,364 86,167 $1,482,642 86,381 $1,391,886
============================================================================================================================
</TABLE>
See accompanying notes.
II-20 45
<PAGE> 44
<TABLE>
<CAPTION>
Consolidated Financial Statements Sonat Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 201,189 $ 192,888 $ 141,407
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 288,192 298,714 257,759
Deferred income taxes 71,442 25,165 1,607
Equity in earnings of unconsolidated affiliates, less distributions (23,040) (34,265) (31,740)
Gain on sale of stock of subsidiary and net loss
on disposal of assets (3,377) (144,969) (3,554)
Reserves for regulatory matters (167,154) (1,545) 62,542
Gas supply realignment costs 187,929 (38,223) 18,736
Funding of gas supply realignment cost liability - (42,330) -
Natural gas purchase contract settlement costs - - 18,535
Change in:
Accounts receivable (250,221) (72,610) (837)
Inventories (6,544) 2,766 3,174
Accounts payable 212,470 85,516 15,368
Accrued interest and income taxes, net 28,490 (29,379) (46,758)
Other current assets (19,019) 2,332 (5,206)
Other current liabilities 4,567 (16,508) (18,072)
Other (24,326) (43,218) 97,671
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 500,598 184,334 510,632
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Plant, property and equipment additions (509,534) (487,564) (448,314)
Net proceeds from sale of subsidiary stock and disposal of assets 49,256 592,838 18,832
Investments in unconsolidated affiliates and other (22,209) (12,959) (171,660)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (482,487) 92,315 (601,142)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 855,776 3,103,000 4,448,000
Payments of long-term debt (718,877) (3,296,565) (4,327,835)
Changes in short-term borrowings (60,870) 18,900 87,154
- -----------------------------------------------------------------------------------------------------------------------
Net changes in debt 76,029 (174,665) 207,319
Dividends paid (93,140) (93,090) (94,051)
Other (8,650) 19,264 (24,449)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,761) (248,491) 88,819
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (7,650) 28,158 (1,691)
Cash and Csh Equivalents at Beginning of Year 37,289 9,131 10,822
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 29,639 $ 37,289 $ 9,131
=======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid For:
Interest (net of amount capitalized) $ 67,874 $ 81,900 $ 80,310
Income taxes, net (5,694) 96,455 44,061
=======================================================================================================================
</TABLE>
See accompanying notes.
46 II-21
<PAGE> 45
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 and electric power. 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 1995 and 1994 Consolidated Financial Statements have been
reclassified to conform with the 1996 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, 1996, inventories consist primarily of
materials and supplies and gas stored underground 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.
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 hedging activities are
recognized in the same section of the Consolidated Statements of Cash Flows as
the hedged transaction.
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. Accruals for
environmental remediation liabilities are not material and have not been
discounted.
II-22 47
<PAGE> 46
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) BUSINESS DESCRIPTION AND
SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation - The Company follows the provisions of
Accounting Principles Board Opinion (APB) No. 25 for its stock-based
compensation awards (see Note 10).
Issuance of Stock by Subsidiary - The Company follows an accounting
policy of income statement recognition for issuances of stock by a subsidiary.
Minority Interest - Minority interest in net income of subsidiaries is
included as a component of Other Income (Loss), Net in the Consolidated
Statements of Income.
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.
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.
(2) CHANGES IN OPERATIONS
Sonat Marketing Company L.P. (Sonat Marketing) was formed in September 1995 and
is jointly owned by the Company and a subsidiary of AGL Resources Inc. Sonat's
wholly owned subsidiary, Sonat Marketing Company, contributed all of its assets
and liabilities except $32.0 million of accounts receivable and Atlanta Gas
Light Company, another subsidiary of AGL Resources, contributed $32.0 million
in cash to Sonat Marketing in exchange for a 35 percent ownership interest.
AGL Resources has certain rights to resell to the Company is interest in Sonat
Marketing, including a right until August 31, 2000, to receive the greater of
fair market value or a formula price. The pretax gain on the transaction of
approximately $23.4 million, which is included in Other Deferred Credits in the
Consolidated Balance Sheet, has been deferred.
In June 1995, the Company sold back to Baker Hughes Incorporated for
$167.0 million the four million shares of Baker Hughes convertible perferred
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
after-tax loss of $8.2 million, or $.09 per share.
In July 1995, the Company made a capital contribution of its remaining
shares of Sonat Offshore Drilling Inc.'s 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 $326.0 million,
which resulted in a pretax gain of $188.0 million. The Company realized an
after-tax gain of $110.1 million, or $1.27 per share, on the transaction.
In April 1995, Sonat Power Marketing Inc. was formed to market electric
power. In the second quarter of 1996, AGL Resources acquired a 35 percent
ownership interest in Sonat Power Marketing L.P., to which Sonat Power Marketing
Inc. contributed all of its assets and liabilities. The transaction resulted in
a $.5 million pretax gain, which is included in Other Income, Other in the
Consolidated Statements of Income.
(3) FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses futures contracts, options and oil and natural gas price swap
agreements to hedge its commodity price risk. Gains or losses experienced on
hedging transactions are offset by the related gains or losses recognized on
the sale of the commodity. Sonat Marketing performs all hedging activity for
both its own account and for the account of Sonat Exploration. The financial
results of any hedging activity for Sonat Exploration's account are passed
through to Sonat Exploration. Prior to 1997, Sonat Marketing has used
derivatives to hedge only physical transactions. In 1997 Sonat Marketing
intends to engage in derivative transactions to meet its customer needs,
subject to policies that limit the aggregate value at risk and mark to market
positions of its trans-
48 II-23
<PAGE> 47
actions and that require it to run substantially balanced
books within these defined trading limits.
Futures - Natural gas and oil futures contracts are traded on the New
York Mercantile Exchange (NYMEX). Natural gas contracts are for fixed units of
10,000 MMBtu and are available for up to 36 months in the future. Oil futures
are for fixed units of 1,000 barrels and are available for up to 34 months in
the future. NYMEX requires both parties (buyers and sellers) to futures
contracts to deposit cash or other assets (the margin) with a broker 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, 1996, the Company had net
deposits of $22 million with brokers for margin calls, included in other
current assets on the Consolidated Balance Sheet, of which $12.5 million was
for Sonat Marketing's account and $9.5 million for Sonat Exploration's account.
Sonat Marketing uses natural gas futures contracts to reduce exposure
to price risk when gas is not bought and sold simultaneously. Sonat Exploration
uses futures contracts to lock in the price for portions of its expected future
natural gas production when it believes that prices are at acceptable levels.
At December 31, 1996, Sonat Marketing and Sonat Exploration had the
following open futures positions:
<TABLE>
<CAPTION>
Open Deferred Gain
Contracts or (Loss)
------------ -------------
Long (Short) (In Thousands)
- ------------------------------------------------------------------------
<S> <C> <C>
Natural Gas Futures:
For Marketing's account 1,303 $ 4,535
For Exploration's account (2,512) (10,053)
- ------------------------------------------------------------------------
Total (1,209) $ (5,518)
========================================================================
Oil Futures:
For Marketing's account - -
For Exploration's account (1,290) (3,379)
- ------------------------------------------------------------------------
Total (1,290) $ (3,379)
========================================================================
</TABLE>
The above contracts will mature over 1997 and 1998.
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 Marketing uses swaps to lock in a margin on its gas transactions or to
hedge exposure on swap agreements with Sonat Exploration. Sonat Exploration
uses swap agreements to hedge exposure to changes in spot-market prices on the
amount of production covered in the agreement.
During 1996, Sonat Exploration had one oil price swap agreement and
several gas price swap agreements in place. Starting in January 1997, Sonat
Exploration has hedged various portions of its 1997 through 2000 production of
oil and gas by entering into fixed price swaps with Sonat Marketing. Marketing
has then hedged its risk from entering into these swaps by putting on futures
positions and entering into offsetting swaps with third parties with aggregate
volumes equal to its swaps with Sonat Exploration.
At December 31, 1996, Sonat Marketing and Sonat Exploration had the
following open swap positions:
<TABLE>
<CAPTION>
Number of Fair
Agreements Value Duration
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Natural Gas Swaps:
For Marketing's
account 75 $ 17 1 month - 5 years
For Exploration's
account 34 (31,389) 1 year - 3 years
- --------------------------------------------------------------
109 $(31,372)
==========================================================================================
</TABLE>
Options - Options can be exchange traded on the NYMEX or traded over the
counter. Exchange traded options give the owner the right but not the
obligation to a futures contract. Over the counter options give the owner the
right but not the obligation to buy or sell an underlying commodity at a given
price. At December 31, 1996, Sonat Marketing had only over the counter options.
In order to meet the requirements of certain gas purchase agreements,
Sonat Marketing has purchased puts of 33 TBtu and sold calls of 26 TBtu with a
counterparty at zero cost.
II-24 49
<PAGE> 48
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) FINANCIAL INSTRUMENTS (Continued)
Marketing also has sold puts for notional volumes of 5.5 TBtu. At December 31,
1996, the market value of these options was $1.9 million unfavorable.
Credit Risk - Due to changes in market conditions the value of swaps and
options can change in relation to their value to the Company. At December 31,
1996, the market value of the Company's in-the-money swaps was $3.6 million.
The credit risk resulting from in-the-money swaps is monitored on a regular
basis. Sonat Marketing has established policies and procedures to evaluate
potential counterparties for credit worthiness before entering into over the
counter swap and option agreements.
Financial Risk
On January 22, 1996, Southern Natural Gas Company (Southern) entered into a
forward rate agreement to hedge the interest rate risk of an anticipated future
borrowing under an existing shelf registration statement. The base 10 year
treasury rate for this future borrowing was hedged at approximately 5.78
percent on a notional amount of $97.0 million. In September 1996, due to
revised expectations of external financing requirements, 50 percent of the
forward rate agreement was liquidated resulting in a gain of $3.9 million. At
December 31, 1996, the fair market value of the remaining $48.5 million
notional amount of this agreement was approximately $2.0 million.
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)
December 31, 1996 Carrying Amounts Fair Value
- ---------------------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $29,639 $29,639
Investment in Debt Securities 42,058 43,337
Gas Supply Realignment Costs 11,144 11,144
Unsecured Notes 158,030 158,030
Long-Term Debt 925,962 963,026
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1995 Carrying 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 218,900 218,900
Long-Term Debt 789,063 862,123
- ----------------------------------------------------------------
</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 - The carrying amount reported in the Consolidated Balance
Sheets approximates its fair value.
Investment in debt securities - 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 investment grade institutions.
This investment practice limits the Company's exposure to concentrations of
credit risk.
Accounts receivable of the Exploration and Production segment are primarily
from joint-interest partners, oil and gas marketing companies and pipeline
companies. A majority of its revenues are from Sonat Marketing, which is
headquartered in the Southeast. 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,
50 II-25
<PAGE> 49
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
industrial end users and local distribution companies, with primary
concentration in the Gulf Coast, 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 $9.7
million in 1996 and $10.2 million in 1995.
(4) INVENTORIES
The table below shows the values of various categories of the
Company's inventories by segment.
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Exploration and Production:
Materials and supplies $ 2,358 $ 2,311
Natural Gas Transmission:
Materials and supplies 24,197 21,625
Energy Marketing:
Gas stored underground 3,938 19
Other 7 1
- ------------------------------------------------------------
$30,500 $23,956
============================================================
</TABLE>
(5) UNCONSOLIDATED AFFILIATES
At December 31, 1996, the Company's investments in unconsolidated affiliates
totaled $414.6 million, and the Company's share of underlying equity in net
assets of the investees was $471.6 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, 1996, the Company's cumulative equity in
earnings of these unconsolidated affiliates was $286.7 million and cumulative
dividends received from them totaled $164.5 million.
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Company's Share of
Reported Earnings (Losses)
Exploration and
Production $ 408 $ 615 $ 245
- -----------------------------------------------------------------------------
Natural Gas Transmission:
Citrus Corp. (including
$1,383,000 of amorti-
zation of basis
difference in each year) 22,902 28,196 28,937
Bear Creek Storage 10,184 9,596 8,954
Other (554) (239) (60)
- -----------------------------------------------------------------------------
32,532 37,553 37,831
- -----------------------------------------------------------------------------
Energy Marketing 9 (5) (151)
- -----------------------------------------------------------------------------
Other:
Sonat Offshore Drilling - 6,734 5,049
Other 1,262 1,361 1,345
- -----------------------------------------------------------------------------
1,262 8,095 6,394
- -----------------------------------------------------------------------------
$34,211 $46,258 $44,319
=============================================================================
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus,
the parent company of Florida Gas Transmission Company. A subsidiary of
Southern owns 50 percent of Bear Creek Storage Company, an underground gas
storage company.
The following is summarized financial information
for Citrus:
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 769,335 $682,387 $477,462
Expenses (Income):
Natural gas cost 428,842 362,635 294,670
Operating expenses 94,573 94,647 71,871
Depreciation and
amortization 83,563 81,227 63,737
Allowance for funds
used during
construction 153 (42,804) (98,269)
Interest and other 91,926 99,238 55,857
Income taxes 27,240 33,818 34,487
- -----------------------------------------------------------
Income Reported $ 43,038 $ 53,626 $ 55,109
===========================================================
</TABLE>
II-26 51
<PAGE> 50
(5) UNCONSOLIDATED AFFILIATES (continued)
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
ASSETS
Current $ 107,045 $ 107,429
Net transmission
plant and property 2,362,038 2,401,847
Other 96,069 72,272
- -----------------------------------------------------------
$2,565,152 $2,581,548
===========================================================
LIABILITIES AND EQUITY
Current $ 211,228 $ 187,279
Long-term debt and
other liabilities 1,544,184 1,627,567
Stockholders' equity 809,740 766,702
- -----------------------------------------------------------
$2,565,152 $2,581,548
===========================================================
</TABLE>
Florida Gas' Phase III expansion, which began in 1994, was completed
during February 1995, resulting in a significant increase in revenues and costs
and a 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, 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $36,258 $36,167 $35,655
Expenses:
Operating expenses 4,817 5,408 5,303
Depreciation 5,415 5,399 5,396
Other expenses, net 5,657 6,167 7,048
- -----------------------------------------------------------------------
Income Reported $20,369 $19,193 $17,908
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current $ 7,205 $ 7,438
Net plant and property 154,388 159,348
Other 338 434
- -----------------------------------------------------------------------
$161,931 $167,220
=======================================================================
LIABILITIES AND EQUITY
Current $ 8,525 $ 8,554
Long-term debt and
other liabilities 55,729 62,658
Participants' equity 97,677 96,008
- -----------------------------------------------------------------------
$161,931 $167,220
=======================================================================
</TABLE>
In 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
$21.0 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.
(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, 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Exploration and Production $2,579,740 $2,436,283
Natural Gas Transmission 2,422,845 2,315,002
Energy Marketing 11,508 6,772
Other 70,190 64,822
- ---------------------------------------------------------------
$5,084,283 $4,822,879
===============================================================
</TABLE>
52 II-27
<PAGE> 51
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Plant, property and equipment includes construction work in progress of
$108.0 million and $43.6 million at December 31, 1996 and 1995, respectively.
Plant, property and equipment also includes $124.8 million and $130.2 million
of gas stored underground at December 31, 1996 and 1995, respectively.
The accumulated depreciation, depletion and amortization amounts, by
business segment, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Exploration and Production $1,075,016 $1,008,815
Natural Gas Transmission 1,539,983 1,504,086
Energy Marketing 3,143 1,449
Other 32,277 30,970
- ---------------------------------------------------------------
$2,650,419 $2,545,320
===============================================================
</TABLE>
The annual depreciation rates or useful productive lives, by business
segment, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission:
Mainline transmission
property 2.0% 2.8% 2.8%
Gas supply 4.4% 4.4% 4.4%
Gas gathering 2.8% 2.8% 2.8%
Underground storage
facilities 3.3% 3.3% 3.3%
Liquefied natural
gas facilities 3.2% 3.2% 3.2%
Other 2-25 yrs. 3-20 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 1995 year-end reserve report, the Company, in accordance with Statement of
Financial Accounting Standards (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 $23.0 million impairment adjustment is
included in Depreciation, Depletion and Amortization in the 1995 Consolidated
Statement of Income.
II-28 53
<PAGE> 52
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(7) DEBT AND LINES OF CREDIT
Long-Term Debt - Long-term debt consists of:
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sonat Inc.
Revolving Credit Agreement at rates based on prime, international or
money-market lending rates (an effective rate of 5.76% at December 31, 1996)
expiring on June 30, 2001 $155,000 $ --
6 7/8% Notes due June 1, 2005 200,000 200,000
9 1/2% Notes due August 15, 1999 100,000 100,000
8.65% Notes due through July 29, 1997 9,286 18,572
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 8,400 10,900
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 880 1,760
7.80% Term Loan due through December 31, 1997 400 800
Southern LNG Inc.
Promissory Note (an effective rate of 6.75% at December 31, 1996 and 1995) due through April 1999 15,000 20,000
Capital Leases and Other 1,996 2,031
- ------------------------------------------------------------------------------------------------------------------------------
Total Outstanding 925,962 789,063
Less Long-Term Debt Due Within One Year 53,707 18,750
- ------------------------------------------------------------------------------------------------------------------------------
$872,255 $ 770,313
==============================================================================================================================
</TABLE>
Annual maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Years (In Thousands)
- ------------------------------------
<S> <C>
1997 $ 53,707
1998 7,306
1999 107,315
2000 2,223
2001 355,233
2002-2005 400,178
- ------------------------------------
$925,962
====================================
</TABLE>
Sonat has a bank revolving credit agreement that provides for periodic
borrowings and repayments of up to $500.0 million through June 30, 2001.
Borrowings are supported by unsecured promissory notes that, at the option of
the Company, will bear interest at the banks' prevailing prime or international
lending rate, or such rates as the banks may competitively bid. During 1996,
$855.0 million was borrowed and $700.0 million was repaid under the revolving
credit agreement, resulting in $155.0 million outstanding at December 31, 1996,
at a rate of 5.76 percent.
Unsecured Notes - Loans outstanding under all short-term credit
facilities are for a duration of less than three months. Sonat and Southern have
available short-term lines of credit of $200.0 million and $50.0 million,
respectively, for a period of 364 days. Borrowings are available through May 27,
1997, and are in the form of unsecured promissory notes that bear interest at
rates based on the banks' prevailing prime, international or money-market
lending rates. At December 31, 1996 and 1995, Sonat had $21.0 million and $8.9
million outstanding, respectively, at rates of 6.90 percent and 6.68 percent,
respectively. At December 31, 1996 and 1995, no amounts were outstanding under
Southern's agreement.
Sonat had $137.0 million and $210.0 million, respectively, in commercial
paper outstanding at average rates of 5.76 percent and 6.12 percent at December
31, 1996 and 1995, respectively.
54 II-29
<PAGE> 53
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(8) INCOME TAXES
An analysis of the Company's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $17,652 $71,871 $ 4,619
State 4,021 (2,043) 10,930
- --------------------------------------------------------------------------------
21,673 69,828 15,549
- --------------------------------------------------------------------------------
Deferred:
Federal 66,051 21,936 13,188
State 5,391 3,229 (12,925)
- --------------------------------------------------------------------------------
71,442 25,165 263
- --------------------------------------------------------------------------------
Income Tax Expense $93,115 $94,993 $15,812
================================================================================
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $330,047 $294,789
GSR and other transition costs -- 26,052
Inventories 11,572 11,572
Other 6,372 6,264
- ----------------------------------------------------------------
Total deferred tax liabilities 347,991 338,677
- ----------------------------------------------------------------
Deferred Tax Assets:
GSR and other transition costs 13,228 --
Revenue reserves 4,681 74,876
Employee benefits 11,897 11,084
Other accounting accruals 16,705 20,763
Other 16,916 18,832
- ----------------------------------------------------------------
Total deferred tax assets 63,427 125,555
- ----------------------------------------------------------------
Net Deferred Tax Liabilities $284,564 $213,122
================================================================
</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.
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, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense at
Statutory Federal
Income Tax Rates $103,006 $100,758 $ 55,027
Increases (Decreases)
Resulting From:
State income taxes, net
of federal income
tax benefit 6,118 771 (3,634)
Non-conventional
fuel tax credits (9,465) (11,380) (14,217)
Refunds and
adjustment of
accrued tax position 880 14,639 (7,881)
Dividend exclusion (6,413) (11,248) (12,440)
Other (1,011) 1,453 (1,043)
- --------------------------------------------------------------------------------
Income Tax Expense $ 93,115 $ 94,993 $ 15,812
================================================================================
</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. At December 31, 1996, Southern's
rates are established by the Customer Settlement and a FERC order effective for
parties contesting the Customer Settlement and are not subject to refund (see
discussion below).
Customer Settlement - 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 or have incurred certain costs (transition costs) as a result of the
Order, the principal one being costs related to amendment or
II-30 55
<PAGE> 54
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
9 COMMITMENTS AND CONTINGENCIES (continued)
termination of, or purchases of gas at above-market prices under, existing gas
purchase contracts, which are referred to as gas supply realignment (GSR) costs.
In an order issued on September 29, 1995, (the Settlement Order) the
FERC approved a comprehensive settlement (the Customer Settlement) that is
effective as to all Southern's customers, except one customer representing
approximately 2 percent of the firm transportation capacity on Southern's
system. The Customer Settlement resolved all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636. The four major rate cases
resolved by the Customer Settlement cover consecutive periods beginning
September 1, 1989. In May 1996, the Settlement became final and Southern
credited in the aggregate the full amount of Southern's rate reserves as of
February 28, 1995, plus interest, less certain amounts withheld for potential
refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. The total credit recorded in May 1996 amounted to $163.9 million.
Southern implemented reduced settlement rates 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, but requires Southern to file a new rate case no later than September 1,
1999. The Settlement also provides for Southern to recover $363 million of GSR
costs incurred or reserved as of December 31, 1996, and 50 percent of future GSR
costs that Southern may incur thereafter, which future costs the Company
believes will not be material to its financial position or results of
operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (April 11 Order). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the one remaining contesting party concern the recoverability of
certain GSR and other transition costs under Order No. 636, which would not be
material to the Company's financial position or results of operations even if
such issues were determined adversely to Southern. The contesting party, and one
other entity that may potentially compete with Southern in providing storage
services, have each appealed the April 11 Order and the Settlement Order to the
D.C. Circuit Court of Appeals. Although there can be no assurances, the Company
believes that the Settlement Order and the April 11 Order should be upheld on
appeal.
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 was denied by the FERC on June 26, 1996.
Sea Robin filed on August 15, 1996, for judicial review of the orders denying
its petition.
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. On August 2, 1996, the
FERC issued an order on the complaint, instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued by May 2, 1997. On December 31, 1996, Sea Robin filed a proposed
settlement of the complaint proceeding pursuant to which it would voluntarily
reduce its transportation rates by $.0042 per decatherm (Dth), calculated on a
100 percent load factor basis, effective January 1, 1997. The
56 II-31
<PAGE> 55
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
settlement is supported by the staff of the FERC and one of two groups of active
intervenors but is opposed by the complainant shippers. By order dated February
7, 1997, the Presiding Administrative Law Judge certified the settlement to the
FERC Commissioners. Sea Robin is unable to predict the outcome of this
proceeding, but, if the proposed settlement is not approved and a hearing is
held, any reduction in Sea Robin's rates can be implemented only on a
prospective basis and any such change is not expected to be material to the
Company's financial position or results of operations.
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.
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, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Affiliated
Operating Leases $18,149 $18,152 $18,709
Affiliated Operating Leases 3,680 3,635 3,669
- --------------------------------------------------------------------------------
$21,829 $21,787 $22,378
================================================================================
</TABLE>
At December 31, 1996, future minimum payments for non-cancelable
operating leases for the years 1997 through 2001 are $9 million or less per
year. Future minimum rentals to be received under subleases for the years 1997
through 2001 are approximately $1 million per year.
10 CAPITAL STOCK AND STOCK-BASED COMPENSATION
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 1996 1995
- --------------------------------------------------------------------------------
Price Range High-Low
<S> <C> <C>
First $37 1/4 - 31 1/8 $30 3/8 - 26
Second 45 3/8 - 36 1/8 33 - 29 3/4
Third 47 1/2 - 41 33 1/2 - 29 1/4
Fourth 54 3/4 - 44 1/8 36 1/4 - 27 3/4
================================================================================
Dividends Paid
First $ .27 $ .27
Second .27 .27
Third .27 .27
Fourth .27 .27
- --------------------------------------------------------------------------------
$ 1.08 $ 1.08
================================================================================
Shareholders of
Record at Year-End 12,020 12,928
================================================================================
</TABLE>
The Company had no restrictions on the payment of dividends at December
31, 1996.
The Company has a Preference Share Rights Plan designed to protect the
interest of stockholders in the event of a hostile attempt to take over the
Company and to make it more difficult for a person to gain control of the
Company in a manner or on terms not approved by the Board of Directors. The plan
provides for the issuance of one right with respect to each outstanding share of
common stock. The rights issued under the 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 exercisable for
one one-hundredth 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. As of December 31, 1996, 1,000,000 shares of Series
A Participating Preference stock were reserved for issuance under this plan.
II-32 57
<PAGE> 56
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
10 CAPITAL STOCK AND STOCK-BASED COMPENSATION
(continued)
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. Commencing in November 1995, the Company has
issued, in tandem with its regular stock options, SARs that are exercisable only
in the event of a change in control (limited SARs). In November 1995, the
Company also issued limited SARs to certain key employees with respect to all of
their then outstanding options. No other SARs have been issued since 1990. At
December 31, 1996, 249,334 SARs relating to the earlier periods were
outstanding. All options granted since December 1992 have 10-year terms and vest
and become fully exercisable at the end of 5 years of continued employment.
Options issued after 1992 also contain an acceleration provision dependent upon
a specified increase in the Company's stock price. Options granted prior to
December 1992 vested over three years and had no accelerated vesting
provisions. The Company issued 97,000 shares of restricted stock with a $52
market value to employees during 1996 and 35,700 shares with a $32.19 market
value during 1995. At December 31, 1996, 104,498 of the 451,700 cumulative
restricted shares issued have vested. A new plan was authorized during 1995
which made an additional four million shares available for issuance.
The Company has elected to follow APB No. 25, Accounting for Stock Issued
to Employees and related Interpretations in accounting for its employee stock
options. Under APB No. 25, compensation expense is recognized for the difference
between the option price and market value on the measurement date for variable
stock option awards and restricted stock grants. No compensation expense is
recognized for options Sonat issued after 1990 because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
Stock-based compensation decreased pretax income by $13.2 million in 1996
and $7.9 million in 1995 and increased pretax income by $1.2 million in 1994.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of the Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: interest rates (zero-coupon U.S.
government issues with a remaining life of six years) of 6.10 percent and 5.68
percent; dividend yields of 2.35 percent and 3.35 percent; volatility factors of
the expected market price of the Company's common stock of .255 and .192; and a
weighted-average expected life of the options of six years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
58 II-33
<PAGE> 57
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
The Company's pro forma information follows:
<TABLE>
<CAPTION>
(In Thousands,
Except Per-Share Amounts)
Years Ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Net Income
<S> <C> <C>
As reported $201,189 $192,888
Pro forma 198,522 192,843
Earnings Per Share
As reported $ 2.33 $ 2.24
Pro forma 2.30 2.24
- --------------------------------------------------------------------------------
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period, which is
five years for both awards. However, since all of the 1995 stock option grants
vested under an accelerated vesting clause in 1996, the entire remaining cost
for that award is reflected in 1996. Because the Company's stock options vest
generally over five years and additional awards are typically made each year,
the above pro forma disclosures are not likely to be representative of the
effects on pro forma net income for future years.
A summary of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning of Year 4,578,600 $ 25.24 4,358,820 $ 23.52 3,518,595 $ 22.07
Granted 633,700 52.00 682,300 32.25 990,700 27.94
Exercised (1,013,954) 21.58 (450,020) 19.06 (122,842) 18.96
Forfeited (20,120) 31.81 (12,500) 27.33 (27,633) 18.55
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding - End of Year 4,178,226 30.16 4,578,600 25.24 4,358,820 23.52
====================================================================================================================================
Exercisable - End of Year 3,544,526 26.26 2,566,520 21.55 2,637,880 20.07
====================================================================================================================================
Shares Authorized for Future Grants 3,597,100 4,230,800 946,023
====================================================================================================================================
Fair Value of Options Granted During the Year $ 14.87 $ 6.33 --
====================================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Range of Exercise Number Outstanding Weighted Avg. Remaining Weighted-Avg. Number Weighted-Avg.
Prices 12/31/96 Contractual Life Exercise Price Exercisable 12/31/96 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 13.625 - $17.4375 536,051 4.1 $15.76 536,051 $ 15.76
$ 21.125 - $29.125 1,555,205 6.5 25.45 1,555,205 25.45
$ 30.00 - $32.25 1,453,270 7.8 30.99 1,453,270 30.99
$ 52.00 633,700 9.9 52.00 - 52.00
- -----------------------------------------------------------------------------------------------------------------------------
4,178,226 3,544,526
=============================================================================================================================
</TABLE>
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 no shares during 1996 and
967 shares during 1995 with a market value of $28.50 per share. At December 31,
1996, 28,260 of the 37,460 cumulative shares granted have vested.
Treasury Stock - The Company has a stock repurchase program in effect
through the end of 1997, which authorizes the purchase of approximately one
million shares of the Company's common stock. Shares purchased are being
reissued in connection with employee stock options and restricted stock
programs.
Serial Preference Stock - At December 31, 1996 and 1995, there were
10,000,000 shares of $1.00 par value Serial Preference Stock authorized, with
none issued.
II-34 59
<PAGE> 58
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
11 RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS
Retirement Plans - Sonat 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,
1996, this trust had assets with a fair market value of $37.5 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, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost -Benefits
Earned during the Period $ 8,818 $ 5,756 $ 6,256
Interest Cost on Projected
Benefit Obligation 26,550 25,822 24,407
(Gain) Loss on Assets (46,475) (97,687) 11,982
Net Amortization
and Deferral 7,945 61,307 (49,397)
- --------------------------------------------------------------------------------
$ (3,162) $ (4,802) $ (6,752)
================================================================================
</TABLE>
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,
---------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested benefit obligations $ 281,818 $ 282,993 $ 26,778 $ 25,552
Non-vested benefit obligations 8,149 8,053 532 514
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 289,967 291,046 27,310 26,066
Effect of projected future salary increases 58,271 54,911 11,277 15,176
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligations 348,238 345,957 38,587 41,242
Plan Assets at Fair Value (3) 461,299 433,574 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligations (in Excess of) or Less than Plan Assets 113,061 87,617 (38,587) (41,242)
Unrecognized Net (Assets) or Obligations at Transition (4) (11,226) (12,956) 256 307
Unrecognized Net (Gain) Loss (5) (86,441) (68,075) 6,763 12,788
Unrecognized Prior Service Cost 4,853 5,320 3,540 3,941
Net Unamortized Deferred Charge from Early
Retirement Termination Benefits (6) 5,966 7,851 -- 1,207
Adjustment Required to Recognize Minimum Pension Liability -- -- -- (1,861)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Pension Asset (Liability) Recognized in the Consolidated Balance Sheets 26,213 $ 19,757 $(28,028) $(24,860)
===================================================================================================================================
</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 at
transition are 16.5 years for the Retirement Plan and 15 years for the
Supplemental Plan.
(5) Amortization periods for unrecognized net (gain) loss are approximately 16
years for the Retirement Plan and 16.4 and 14.2 years for the Supplemental
Plan for 1996 and 1995, respectively.
(6) Amortization periods for early retirement termination benefits are 10 years
for the Retirement Plan and five years for the Supplemental Plan.
60 II-35
<PAGE> 59
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
No amount of additional minimum liability is required for 1996 under the
provisions of SFAS No. 87. The amount of additional minimum liability required
for 1995 was $1.9 million.
The assumed rates used to measure the projected benefit obligations and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Discount Rate 7.0% 7.0% 8.5%
Long-Term Rate of Return 9.5% 9.5% 8.5%
Increase in Future Compensation
Levels (Composite Rate):
Retirement and
Supplemental Plans 5.0% 5.5% 5.5%
=====================================================================
</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 accrues 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, 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 2,161 $ 1,672 $ 1,843
Interest Cost 6,387 7,409 7,051
Return on Plan Assets (3,922) (3,398) (428)
Net Amortization
and Deferral 5,535 5,546 3,200
- --------------------------------------------------------------
$ 10,161 $ 11,229 $ 11,666
==============================================================
</TABLE>
The Company funds postretirement health care benefits for employees of its
regulated subsidiaries in an amount generally equal to the subsidiaries' annual
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, 1996 and
1995, for the Company's postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ 63,750 $ 68,353
Fully eligible active
plan participants 5,221 5,446
Other active plan participants 26,056 23,503
- --------------------------------------------------------------------
95,027 97,302
Plan Assets at Fair Value (1) 32,595 24,352
- --------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation in
Excess of Plan Assets (62,432) (72,950)
Unrecognized Transition Obligation 57,544 61,140
Unrecognized Net Gain(2) (15,013) (7,465)
Net Unamortized Deferred Charge
from Early Retirement
Termination Benefits 6,265 8,299
- --------------------------------------------------------------------
Accrued Postretirement Benefit Cost $(13,636) $(10,976)
====================================================================
</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.
(2) Amortization periods for unrecognized net gain are 15.4 and 15.7 years for
1996 and 1995, respectively.
The assumed rates used to measure the projected benefit obligation and the
expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 7.0% 8.5%
Long-Term Rate of Return:
Medical assets 5.5% 5.5% 5.5%
Life insurance assets 7.5% 7.5% 8.5%
========================================================
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 8 percent in 1997, 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, 1996, by approximately $12.7 mil-
II-36 61
<PAGE> 60
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
11 RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS
(continued)
lion and increase the service cost and interest cost components of the net
periodic postretirement benefit cost by approximately $1.5 million.
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. Transportation service is provided
for its distribution customers, direct industrial customers and other end-users,
gas producers, other gas pipelines, and gas marketing and trading companies. It
provides transportation service in both its gas supply and market areas. The
principal industries served directly by the natural gas transmission's pipeline
system and indirectly through its distribution customers' systems include the
chemical, pulp and paper, textile, primary metals, stone, clay and glass
industries.
The Energy Marketing segment is engaged primarily in natural gas and
electric power marketing for industrial and commercial users, gas distribution
companies and gas producers throughout the Gulf Coast, Southeastern, Midwestern
and Northeastern United States.
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. The Company has no foreign operations.
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. Minority interest is included in Other Income, Net.
62 II-37
<PAGE> 61
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
BUSINESS SEGMENT ANALYSIS
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Exploration and production $ 565,654 $ 403,488 $ 412,750
Natural gas transmission 776,311 661,597 727,179
Energy marketing 2,592,703 1,249,903 942,208
Other 44,352 37,122 7,585
Intersegment revenue (584,122) (361,969) (353,755)
- --------------------------------------------------------------------------------------------------------------
$ 3,394,898 $ 1,990,141 $ 1,735,967
==============================================================================================================
Depreciation, Depletion and Amortization:
Exploration and production $ 236,419 $ 239,167 $ 206,842
Natural gas transmission 48,293 52,274 46,576
Energy marketing 1,729 955 2,954
Other, including depreciation of corporate equipment 1,751 6,318 1,387
- --------------------------------------------------------------------------------------------------------------
$ 288,192 $ 298,714 $ 257,759
==============================================================================================================
Operating Profit:
Exploration and production $ 161,893 $ 22,967 $ 64,001
Natural gas transmission 165,587 158,329 88,436
Energy marketing 10,184 6,510 11,901
Other 3,981 2,317 2,852
- --------------------------------------------------------------------------------------------------------------
Operating profit 341,645 190,123 167,190
Corporate Expenses, Net (368) (1,190) 2,249
- --------------------------------------------------------------------------------------------------------------
Operating income 341,277 188,933 169,439
Equity in Earnings (Losses) of Unconsolidated Affiliates:
Exploration and production 408 615 245
Natural gas transmission 32,532 37,553 37,831
Energy marketing 9 (5) (151)
Other 1,262 8,095 6,394
Other Income, Net 1,609 142,534 16,348
Interest Expense, Net (82,793) (89,844) (72,887)
- --------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 294,304 $ 287,881 $ 157,219
==============================================================================================================
</TABLE>
Revenues from Major Customers
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Atlanta Gas Light:
Natural gas transmission $180,051 $190,209 $250,932
Energy marketing 54,191 38,342 39,926
- -----------------------------------------------------------------------
$234,242 $228,551 290,858
=======================================================================
Alabama Gas Corporation:
Natural gas transmission $ 82,120 $ 91,635 $118,975
Energy marketing 86,062 50,134 59,556
- -----------------------------------------------------------------------
$168,182 $141,769 $178,531
=======================================================================
</TABLE>
Both of the major customers or their affiliates participate with the
Company in certain joint venture operations.
II-38 63
<PAGE> 62
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(12) BUSINESS SEGMENT ANALYSIS (continued)
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, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated:
Exploration and production (excluding exploratory costs) $368,423 $416,158 $389,766
Natural gas transmission 130,417 62,720 51,206
Energy marketing 4,736 2,758 3,200
Other 5,958 5,928 4,142
- --------------------------------------------------------------------------------------------------
509,534 487,564 448,314
- --------------------------------------------------------------------------------------------------
Unconsolidated Affiliates (Company's Portion):
Exploration and production 222 723 101
Natural gas transmission 15,138 100,489 398,389
Other 490 525 452
- --------------------------------------------------------------------------------------------------
15,850 101,737 398,942
- --------------------------------------------------------------------------------------------------
$525,384 $589,301 $847,256
==================================================================================================
</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, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Exploration and production $1,705,504 $1,592,399 $1,488,054
Natural gas transmission 1,181,440 1,285,404 1,155,242
Energy marketing 524,768 261,751 189,651
Other 41,449 37,850 37,531
Adjustments and eliminations (156,140) (103,579) (70,444)
- --------------------------------------------------------------------------------------------------
3,297,021 3,073,825 2,800,034
- --------------------------------------------------------------------------------------------------
Investments in Unconsolidated Affiliates:
Exploration and production 5,255 4,876 6,281
Natural gas transmission 392,180 368,527 338,608
Energy marketing 5,457 490 932
Other 11,668 12,188 140,508
- --------------------------------------------------------------------------------------------------
414,560 386,081 486,329
Corporate Assets 63,078 51,535 244,323
- --------------------------------------------------------------------------------------------------
Total Assets $3,774,659 $3,511,441 $3,530,686
==================================================================================================
</TABLE>
64 II-39
<PAGE> 63
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
(13) OIL AND GAS OPERATIONS (UNAUDITED)
At December 31, 1996, the Company had interests in oil and gas properties that
are located primarily in Texas, Oklahoma, Louisiana, Arkansas, 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.
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, 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Oil and Gas Properties:
Proved properties $2,461,709 $2,336,264
Unproved properties 118,031 100,019
- ----------------------------------------------------------------
2,579,740 2,436,283
Less Accumulated Depreciation,
Depletion and Amortization 1,075,016 1,008,815
- ----------------------------------------------------------------
$1,504,724 $1,427,468
================================================================
</TABLE>
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, were as follows:
Costs Incurred
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Property Acquisition Costs:
Proved properties $ 48,118 $208,866 $142,294
Unproved properties 44,623 14,767 28,953
Exploration Costs 41,728 12,138 11,284
Development Costs 244,008 183,056 215,205
- ------------------------------------------------------------------
Total Costs $378,477 $418,827 $397,736
==================================================================
</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>
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Liquids Gas Liquids Gas
(MBbls) (Bcf) (MBbls) (Bcf)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proved (Developed and Undeveloped) Reserves, Net:
Beginning of year 44,228 1,505.5 31,627 1,367.3
Revisions of previous estimates 3,106 50.2 998 48.4
Extensions, discoveries and other additions 11,597 295.2 6,774 173.8
Purchases of reserves in place 1,536 100.6 16,954 248.1
Sales of reserves in place (1,724) (55.1) (6,656) (149.0)
Production (7,306) (204.8) (5,469) (183.1)
- -------------------------------------------------------------------------------------------------------------
End of Year 51,437 1,691.6 44,228 1,505.5
- -------------------------------------------------------------------------------------------------------------
Proved Developed Reserves:
Beginning of year 25,613 1,060.1 22,269 1,001.0
End of year 28,961 1,188.3 25,613 1,060.1
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------------
Liquids Gas
(MBbls) (Bcf)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Proved (Developed and Undeveloped) Reserves, Net:
Beginning of year 27,094 1,186.6
Revisions of previous estimates (2,891) 31.3
Extensions, discoveries and other additions 4,876 107.2
Purchases of reserves in place 8,059 229.9
Sales of reserves in place (129) (6.0)
Production (5,382) (181.7)
- --------------------------------------------------------------------------------------
End of Year 31,627 1,367.3
- --------------------------------------------------------------------------------------
Proved Developed Reserves:
Beginning of year 19,776 899.6
End of year 22,269 1,001.0
======================================================================================
</TABLE>
MBbls - Thousands of barrels
Bcf - Billion cubic feet
II-40 65
<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. 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, 1996.
Results of operations from producing activities by fiscal year were as
follows:
Results of Operations
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Sales $ 155,274 $ 175,032 $ 148,530
Affiliated sales 410,380 228,456 264,220
- -------------------------------------------------------------------------
Total 565,654 403,488 412,750
Production Costs (88,036) (81,046) (81,067)
Exploration Expenses (21,669) (9,065) (12,181)
Depreciation, Depletion
and Amortization (236,419) (239,167) (206,842)
- -------------------------------------------------------------------------
219,530 74,210 112,660
Income Tax Expense (67,454) (14,730) (25,031)
- -------------------------------------------------------------------------
Results of Operations
from Producing
Activities (Excluding
Corporate Overhead
and Interest Costs) $ 152,076 $ 59,480 $ 87,629
=========================================================================
</TABLE>
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves follows:
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Future Cash Inflows $ 7,041,438 $ 3,562,789 $ 2,835,781
Future Production
and Development
Costs (1,627,378) (1,286,074) (1,200,581)
Future Income
Tax Expenses (1,407,017) (354,041) (83,931)
- --------------------------------------------------------------------------
Future Net
Cash Flows 4,007,043 1,922,674 1,551,269
10% Annual
Discount for
Estimated Timing
of Cash Flows (1,313,286) (611,206) (465,469)
- --------------------------------------------------------------------------
Standardized
Measure of
Discounted
Future Net
Cash Flows $ 2,693,757 $ 1,311,468 $ 1,085,800
==========================================================================
</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.
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>
(In Thousands)
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and Transfers of Oil and Gas Produced, Net of Production Costs $ (477,618) $(322,442) $(331,683)
Net Changes in Prices and Production Costs 1,412,485 186,034 (327,290)
Extensions, Discoveries and Improved Recovery, Less Related Costs 664,888 176,080 104,554
Changes in Estimated Future Development Costs 269 (15,362) (28,397)
Development Costs Incurred During the Period 107,158 103,138 68,945
Revisions of Previous Quantity Estimates 125,181 49,129 11,157
Accretion of Discount 145,877 105,288 129,974
Net Change in Income Taxes (683,539) (180,223) 40,039
Purchases of Reserves in Place 199,532 333,260 160,335
Sales of Reserves in Place (126,557) (155,952) (5,226)
Changes in Production Rates (Timing) and Other 14,613 (53,282) (29,226)
- ------------------------------------------------------------------------------------------------------------------
$ 1,382,289 $ 225,668 $(206,818)
==================================================================================================================
</TABLE>
66 II-41
<PAGE> 65
Sonat Inc. and Subsidiaries
- -------------------------------------------------------------------------------
(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
- ------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Revenues $734,406 $847,151 $788,161 $1,025,180
Operating Income 83,231 74,241 75,160 108,645
Net Income 45,569 40,595 48,034 66,991
- ------------------------------------------------------------------------
Earnings Per Share $ .53 $ .47 $ .56 $ .78
- ------------------------------------------------------------------------
<CAPTION>
1995(1)
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------
</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 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 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 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 futures contracts that ceased to qualify for
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.
II-42 67
<PAGE> 66
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $3,394.9 $1,990.1 $1,735.9 $1,741.1 $1,484.4
Costs and Expenses 3,053.6 1,801.2 1,566.5 1,508.2 1,273.3
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 341.3 188.9 169.4 232.9 211.1
Other Income, Net (3) 35.8 188.8 60.7 182.1 22.0
Interest Expense, Net (82.8) (89.8) (72.9) (47.3) (96.3)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Extraordinary Item and Income Taxes 294.3 287.9 157.2 367.7 136.8
Income Taxes (Benefits) 93.1 95.0 15.8 102.7 35.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Cumulative Effect of Accounting Changes 201.2 192.9 141.4 265.0 101.0
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 Income Taxes -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 201.2 $ 192.9 $ 141.4 $ 261.2 $ 212.4
=================================================================================================================================
Earnings (Loss) Per Share from Continuing Operations
before Extraordinary Item $ 2.33 $ 2.24 $ 1.62 $ 3.05 $ 1.17
Earnings (Loss) Per Share $ 2.33 $ 2.24 $ 1.62 $ 3.01 $ 2.47
Weighted Average Shares Outstanding (thousands) 86,211 86,270 87,119 86,703 85,945
Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.00
=================================================================================================================================
Assets $3,774.7 $3,511.4 $3,530.7 $3,214.0 $3,165.3
Debt Maturing within One Year $ 211.7 $ 237.7 $ 219.3 $ 232.9 $ 20.1
Long-Term Debt 872.3 770.3 963.4 741.2 1,175.7
Stockholders Equity 1,584.4 1,482.6 1,391.9 1,363.2 1,172.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $2,668.4 $2,490.6 $2,574.6 $2,337.3 $2,368.1
=================================================================================================================================
</TABLE>
Notes:
(1) Discontinued operations include the measurement-while-drilling business 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.
68 II-43
<PAGE> 67
Sonat Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
1991 1990 1989 1988 1987 1986
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,421.0 $ 1,356.9 $1,659.2 $1,277.3 $ 1,344.9 1,628.6
Costs and Expenses 1,217.5 1,192.2 1,481.4 1,142.4 1,176.5 1,929.3
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 203.5 164.7 177.8 134.9 168.4 (300.7)
Other Income, Net (3) 14.7 69.8 47.1 12.5 41.5 118.1
Interest Expense, Net (117.7) (102.6) (75.2) (54.4) (54.6) (77.9)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Extraordinary Item and Income Taxes 100.5 131.9 149.7 93.0 155.3 (260.5)
Income Taxes (Benefits) 22.6 40.7 54.1 40.5 85.2 (144.7)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Cumulative Effect of Accounting Changes 77.9 91.2 95.6 52.5 70.1 (115.8)
Income (Loss) from Discontinued Operations (1) (11.9) 2.7 (2.0) 2.2 24.9 (73.6)
Extraordinary Loss, Net of Tax (2) -- -- -- -- -- --
Cumulative Effect of Change in Method of Accounting
for Income Taxes -- -- -- 13.1 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 66.0 $ 93.9 $ 93.6 $ 67.8 $ 95.0 $ (189.4)
===============================================================================================================================
Earnings (Loss) Per Share from Continuing Operations
before Extraordinary Item $ .91 $ 1.07 $ 1.17 $ .65 $ .87 $ (1.43)
Earnings (Loss) Per Share $ .77 $ 1.10 $ 1.15 $ .83 $ 1.17 $ (2.34)
Weighted Average Shares Outstanding (thousands) 85,771 85,612 81,682 81,238 80,912 80,948
Dividends Paid Per Share $ 1.00 $ 1.00 1.00 $ 1.00 $ 1.00 $ 1.00
===============================================================================================================================
Assets $3,208.5 $ 3,045.1 $2,892.3 $2,969.5 $ 3,074.4 $3,288.8
Debt Maturing within One Year $ 79.2 $ 63.1 $ 155.9 $ 50.4 $ 225.6 $ 104.6
Long-Term Debt 1,315.1 1,094.0 929.5 859.4 824.8 1,336.3
Stockholders Equity 1,042.7 1,060.5 1,035.3 1,010.2 1,023.0 1,005.9
- -------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $2,437.0 $ 2,217.6 $2,120.7 $1,920.0 $ 2,073.4 $2,446.8
===============================================================================================================================
</TABLE>
II-44 69
<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-45
<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 19, 1997
(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, 1996 and
1995................................................... II-17
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994...................... II-19
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995, and
1994................................................... II-20
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994...................... 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, 1996,
listed on Page IV-6.................................... IV-6
</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
- ------- --------
<C> <S>
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 as Exhibit 3-(b) to Form 10-K of Sonat Inc. for
the year 1995
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
</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
Beverly T. Krannich, Secretary, Sonat Inc., P.O. Box 2563, Birmingham,
Alabama 35202.
IV-1
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<C> <S>
4.2 (a) Form of Indenture dated June 1, 1986, from Sonat Inc. to
Manufacturers Hanover Trust Company, Trustee, as amended by
(1) First Supplemental Indenture dated June 1, 1995, between
Sonat Inc. and Chemical Bank, successor by merger to
Manufacturers Hanover Trust Company, as Trustee, filed as
Exhibit 4-(1) to Amendment No. 1 to Registration Statement
No. 33-5947 dated June 4, 1986, except (1), which was filed
as Exhibit 4-(1) to Form 8-K of Sonat Inc. dated June 6,
1995
4.2 (b) Specimen Note of Sonat Inc. for the $200 million 6 7/8%
Notes due June 1, 2005, issued under Registration Statement
No 33-62166, filed as Exhibit 4-(2) to Form 8-K of Sonat
Inc. dated June 6, 1995
4.2 (c) Specimen Note of Sonat Inc. for the $100 million 9 1/2%
Notes due August 15, 1999, issued under Registration
Statement No 33-5947, filed herewith
4.2 (d) Specimen Note of Sonat Inc. for the $100 million 9% Notes
due May 1, 2001, issued under Registration Statement No
33-5947, filed as Exhibit 4-(2) to Form 8-K of Sonat Inc.
dated April 30, 1991
4.3 (a) 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 Statement No.
33-47266 of Southern Natural Gas Company dated April 16,
1992
4.3 (b) Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4.3 (c) Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated January
14, 1992
4.3 (d) Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No 33-47266, filed herewith
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 June 1, 1996, among Sonat Inc.,
the Banks named therein, and The Chase Manhattan Bank
(National Association), and Morgan Guaranty Trust Company of
New York, as Co-Agents, filed as Exhibit 4 to Form 10-Q of
Sonat Inc. for the quarter ended June 30, 1996
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 as Exhibit 4.6 to Form 10-K of Sonat
Inc. for the year 1995
COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.1 Supplemental Benefit Plan of Sonat Inc. as Amended and
Restated effective January 1, 1995, and (1) amendment dated
December 1, 1995, filed herewith
10.2 Executive Award Plan of Sonat Inc. as Amended and Restated
as of December 1, 1995, (corrected on December 4, 1996), and
(1) amendment dated December 6, 1996, filed herewith
10.3 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
was filed as Exhibit 10.6 to Form 10-K of Sonat Inc. for the
year 1995
10.4 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 was filed as Exhibit 10.7 to Form 10-K of
Sonat Inc. for the year 1995
10.5 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 was filed as Exhibit 10.8 to Form 10-K of
Sonat Inc. for the year 1995
</TABLE>
IV-2
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<C> <S>
10.6 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 was filed as
Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1995
10.7 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 as
Exhibit 10.10(a) to Form 10-K of Sonat for the year 1995
10.8 Executive Severance Agreement dated December 1, 1995,
between Sonat Inc. and Donald G. Russell, filed as Exhibit
10.10(b) to Form 10-K of Sonat Inc. for the year 1995
10.9 Directors' Fees Deferral Plan of Sonat Inc. -- Summary dated
January 1, 1997, filed herewith
10.10 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 was filed as
Exhibit 10.12 to Form 10-K of Sonat Inc. for the year 1995
10.11 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
10.12 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
10.13 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
10.14 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 was filed as
Exhibit 10.16 to Form 10-K of Sonat Inc. for the year 1995
10.15 Sonat Inc. Deferred Compensation Plan -- Plan Summary dated
March 1, 1997, filed herewith
OTHER MATERIAL CONTRACTS
10.16 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
</TABLE>
IV-3
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
10.17 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 19, 1997, 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, 1997, 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,
1996, on behalf of certain directors and officers of the registrant, filed herewith
27 Financial Data Schedule for the period ended December 31, 1996 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.
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, 1996.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-4
<PAGE> 74
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, 1997
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, 1997
- ----------------------------------------------------- President and Chief
(RONALD L. KUEHN, JR.) Executive Officer
(ii) Principal Financial Officer:
/s/ THOMAS W. BARKER, JR. Vice President -- Finance March 21, 1997
- ----------------------------------------------------- and Treasurer
(THOMAS W. BARKER, JR.)
Principal Accounting Officer:
/s/ JAMES A. RUBRIGHT Senior Vice President and March 21, 1997
- ----------------------------------------------------- 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 ADRIAN M. TOCKLIN
ROBERT J. LANIGAN JAMES B. WILLIAMS
MAX L. LUKENS JOE B. WYATT
CHARLES MARSHALL
BENJAMIN F. PAYTON
*Signed on behalf of each of these persons and on his behalf:
</TABLE>
By /s/ JAMES A. RUBRIGHT
--------------------------------------------------------
JAMES A. RUBRIGHT
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY
DATED FEBRUARY 27, 1997, ALL OF WHICH ARE
FILED HEREWITH AS EXHIBIT 24
IV-5
<PAGE> 75
CITRUS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Report of Ernst & Young LLP, Independent Auditors
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors IV-7
Consolidated Financial Statements
Consolidated Balance Sheets - Assets IV-8
Consolidated Balance Sheets - Liabilities and Stockholders' Equity IV-9
Consolidated Statements of Income and Retained Earnings IV-10
Consolidated Statements of Cash Flows IV-11
Notes to Consolidated Financial Statements IV-12
</TABLE>
IV-6
<PAGE> 76
Report of Independent Auditors
Board of Directors
Citrus Corp.
We have audited the accompanying consolidated balance sheets of Citrus
Corp. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings and cash flows for
each of the three years in the period ended December 31, 1996. 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 Citrus
Corp. and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Birmingham, Alabama
February 28, 1997
/s/ Ernst & Young, LLP
----------------------
Ernst & Young, LLP
IV-7
<PAGE> 77
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
December 31,
-------------------------
(In Thousands) 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 16,063 $ 2,985
Trade and other receivables
Customers, net 69,599 62,349
Affiliated companies 98 385
Contract reformation costs, net 7,078 33,584
Commodity adjustment costs 5,519 5,411
Materials and supplies 2,557 2,379
Other 6,131 336
-------------------------
Total Current Assets 107,045 107,429
-------------------------
Deferred Charges
Unamortized debt expense 7,356 8,737
Commodity adjustment costs 34,698 40,217
Other 54,015 23,318
-------------------------
Total Deferred Charges 96,069 72,272
-------------------------
Property, Plant and Equipment, at cost 2,790,210 2,797,051
Less - accumulated depreciation and amortization 428,172 395,204
-------------------------
Net Property, Plant and Equipment 2,362,038 2,401,847
-------------------------
TOTAL ASSETS $2,565,152 $2,581,548
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-8
<PAGE> 78
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
December 31,
-------------------------
(In Thousands) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 15,000 $ 70,000
Long-term debt due within one year 100,000 --
Accounts payable
Trade 29,351 43,172
Affiliated companies 28,920 7,719
Accrued liabilities
Interest 18,296 18,088
Income taxes -- 2,065
Other taxes 4,695 3,381
TCR deferred revenues 6,256 37,392
Other 8,710 5,462
-------------------------
Total Current Liabilities 211,228 187,279
-------------------------
Long-Term Debt 1,025,000 1,125,000
-------------------------
Deferred Credits
Deferred income taxes 474,569 466,030
Other 44,615 36,537
-------------------------
Total Deferred Credits 519,184 502,567
-------------------------
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 175,468 132,430
-------------------------
Total Stockholders' Equity 809,740 766,702
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,565,152 $2,581,548
- -----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-9
<PAGE> 79
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------
(In Thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gas sales $444,623 $377,218 $305,350
Gas transportation 324,712 305,169 172,112
---------------------------------------------
769,335 682,387 477,462
---------------------------------------------
Costs and Expenses
Natural gas purchased 428,842 362,635 294,670
Operations and maintenance 74,413 79,880 63,365
Depreciation 26,651 22,850 2,348
Amortization 56,912 58,377 61,389
Taxes - other than income taxes 20,160 14,767 8,506
---------------------------------------------
606,978 538,509 430,278
---------------------------------------------
Operating Income 162,357 143,878 47,184
---------------------------------------------
Other Income (Expense)
Interest expense, net (97,363) (98,887) (55,760)
Allowance for funds used during construction (153) 42,804 98,269
Other, net 5,437 (351) (97)
---------------------------------------------
(92,079) (56,434) 42,412
---------------------------------------------
Income Before Income Taxes 70,278 87,444 89,596
Income Tax Expense 27,240 33,818 34,487
---------------------------------------------
Net Income 43,038 53,626 55,109
Retained Earnings, Beginning of Year 132,430 78,804 23,695
---------------------------------------------
Retained Earnings, End of Year $175,468 $132,430 $78,804
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-10
<PAGE> 80
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $43,038 $ 53,626 $ 55,109
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 83,563 81,227 63,737
Deferred income taxes 8,539 21,780 25,577
Allowance for funds used during construction 153 (42,804) (98,269)
Gain on sale of assets (7,181) -- --
Changes in assets and liabilities
Trade and other receivables (6,963) (16,301) (1,494)
Materials and supplies (178) (424) 3,326
Accounts payable 7,380 (12,199) (29,421)
Accrued liabilities (543) (1,005) 13,230
Other current assets and liabilities (2,547) (12,639) 9,081
Contract reformation settlements and adjustments (4,931) (3,917) (8,169)
Other, net (2,225) (18,587) (49,960)
--------------------------------------
Net Cash Provided by (Used in) Operating Activities 118,105 48,757 (17,253)
--------------------------------------
Cash Flows From Investing Activities
Additions to property, plant and equipment (29,000) (208,627) (855,832)
Allowance for funds used during construction (153) 42,804 98,269
Net proceeds from sale of assets 7,181 -- --
Disposition of property, plant and equipment, net 3,081 883 (2,024)
--------------------------------------
Net Cash Used in Investing Activities (18,891) (164,940) (759,587)
--------------------------------------
Cash Flows From Financing Activities
Short-term bank borrowings, net (55,000) 70,000 (275,000)
Proceeds from issuance of long-term debt -- -- 790,000
Payment of long-term debt -- -- (90,000)
TCR sale proceeds -- -- 86,313
TCR remittances (31,136) (28,900) (20,021)
Hedging proceeds -- -- 36,161
Equity contribution from stockholders -- -- 318,000
--------------------------------------
Net Cash Provided by (Used in) Financing Activities (86,136) 41,100 845,453
--------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 13,078 (75,083) 68,613
Cash and Cash Equivalents, Beginning of Year 2,985 78,068 9,455
--------------------------------------
Cash and Cash Equivalents, End of Year $ 16,063 $ 2,985 $ 78,068
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Additional cash flow information:
Interest (net of amounts capitalized) $103,902 $104,348 $ 58,180
Income taxes paid (received) 20,766 14,160 4,054
</TABLE>
IV-11
<PAGE> 81
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), Citrus Trading Corp. (Trading) and Citrus Energy
Services, Inc. (CESI). 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.
CESI began operations in February 1996 and provides construction,
operations and maintenance services primarily to customers of
Transmission and Trading.
(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
maturities of three months or less at the time of purchase.
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.
REVENUE RECOGNITION - Gas sales revenue is recognized when gas is
sold. Gas transportation revenue is recognized when the service
is provided.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the
risks of price fluctuations, Trading, from time to time, has
entered 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, none of which has
been material for any of the periods presented, 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.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The allowance
for funds used during construction consists, in general, of the
net cost of borrowed and equity funds used for construction
purposes and a reasonable rate on other funds when so used. The
allowance is determined by applying the capitalization rate to
construction work orders. Capitalization begins at the time the
Company begins the continuous accumulation of costs in a
construction work order on a planned progressive basis and ends
when the facilities are placed in service.
IV-12
<PAGE> 82
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
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
1.45%, 1.41% and .75% for 1996, 1995 and 1994, 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.
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 firm
contract quantities and 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 to 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.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the
Financial Accounting Standards Board issued SFAS No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires, among other
things, that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 in 1996 did not have a
material impact on its financial position or results of
operations.
RECLASSIFICATIONS - Certain amounts in the consolidated
financial statements have been reclassified in 1995 and 1994 to
conform with the 1996 presentation.
IV-13
<PAGE> 83
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt outstanding at December 31, 1996 and 1995 was as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------- -------------
Citrus Corp.
- ------------
<S> <C> <C>
11.10% Notes due 1998-2006 $ 175,000 $ 175,000
8.49% Notes due 2007-2009 90,000 90,000
------------- -------------
265,000 265,000
------------- -------------
Transmission
- ------------
7. 75% Notes due 1997 100,000 100,000
9. 30% Notes due 1998 25,000 25,000
8. 14% Notes due 1999 200,000 200,000
9. 75% Notes due 1999-2008 65,000 65,000
8. 63% Notes due 2004 250,000 250,000
10.11% Notes due 2009-2013 70,000 70,000
9. 19% Notes due 2005-2024 150,000 150,000
------------- -------------
860,000 860,000
------------- -------------
Total Outstanding 1,125,000 1,125,000
Less Long-Term Debt Due Within One Year 100,000 --
------------- -------------
$1,025,000 $1,125,000
============= =============
</TABLE>
Annual maturities and sinking fund requirements on long-term debt
outstanding as of December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
- ---- ----------
<S> <C>
1997 $ 100,000
1998 44,250
1999 225,750
2000 25,750
2001 25,750
Thereafter 703,500
----------
$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, 1996.
Transmission has a committed line of credit of $70.0 million of which $15.0
million was outstanding with a rate of 5.80% at December 31, 1996, and
uncommitted facilities for up to $50.0 million which were available at December
31, 1996.
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.
IV-14
<PAGE> 84
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) INCOME TAXES
The principal components of the Company's net deferred income tax
liabilities at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryforward $ -- $ 498
Other 24,334 21,595
-------- --------
24,334 22,093
-------- --------
Deferred income tax liabilities
Depreciation and amortization 478,506 460,058
Contract reformation costs 15,211 23,500
Other 5,186 4,565
-------- --------
498,903 488,123
-------- --------
Net deferred income tax liabilities $474,569 $466,030
======== ========
</TABLE>
Total income tax expense for the years ended December 31, 1996, 1995 and
1994 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Payable currently
Federal $15,445 $10,138 $ 7,000
State 3,256 1,900 1,910
------- ------- -------
18,701 12,038 8,910
------- ------- -------
Payment deferred
Federal 7,847 18,867 21,882
State 692 2,913 3,695
------- ------- -------
8,539 21,780 25,577
------- ------- -------
Total income tax expense $27,240 $33,818 $34,487
======= ======= =======
</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, 1996,
1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax provision $24,597 $30,605 $31,359
Net state income taxes 2,566 3,128 3,063
Other 77 85 65
------- ------- -------
Income tax expense $27,240 $33,818 $34,487
======= ======= =======
</TABLE>
The Company has an alternative minimum tax (AMT) credit of approximately
$15 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 AMT credit
carryforward as a reduction of deferred tax liabilities.
<PAGE> 85
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) EMPLOYEE BENEFIT PLANS
The employees of the Company 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 in the
form of an annuity 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 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 in the form of a
cash balance of 5% of annual base pay. Pension expenses charged
by Enron were immaterial for 1996, 1995 and 1994.
As of September 30, 1996, the most recent valuation date, the
plan net assets for the Enron Plan in which the employees of the
Company participate was greater than the actuarial present value
of projected plan benefit obligations by approximately $5
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 medical, dental and life insurance benefits to eligible
employees and their eligible dependents. Benefits are provided
under the provisions of a contributory defined dollar benefit
plan.
The Company accounts for postretirement benefit costs over
the service lives of the employees expected to be eligible to
receive such benefits. The Company 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 was $1.5, $.9 and
$.8 million for 1996, 1995 and 1994, 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% in 1996 decreasing
to 5% over 9 years. The APBO exceeded plan assets by $129 million
as of its most recent valuation date of December 31, 1996.
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. All shares included in the ESOP have been allocated to the
employee accounts.
IV-16
<PAGE> 86
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) MAJOR CUSTOMERS
Revenues from individual customers exceeding 10% of total
revenues for the years ended December 31, 1996, 1995 and 1994
were approximately as follows (in thousands):
<TABLE>
<CAPTION>
Customers 1996 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C>
Florida Power & Light Co. $466,000 $343,000 $267,000
Enron Capital and Trade Resources 19,000 65,000 --
</TABLE>
At December 31, 1996, the Company's subsidiaries had receivables
of approximately $45.7 and $6.1 million from Florida Power & Light
Company 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 $11.9, $11.6 and $17.4
million for these expenses for the years ended December 31, 1996,
1995 and 1994, respectively.
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 $19.8, $66.1 and $9.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company's
subsidiaries purchased gas from affiliates of Sonat of
approximately $139.8, $84.1 and $22.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company's
subsidiaries also purchased gas from affiliates of Enron of
approximately $252.6, $186.7 and $139.4 million for the years
ended December 31, 1996, 1995 and 1994, 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 has been authorized by the FERC to recover
certain transition costs incurred through the reformation of gas
purchase contracts related to Transmission's jurisdictional sales
services. On November 1, 1993, Transmission's Order No. 636
restructuring settlement went into effect. The settlement allows
Transmission 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.
Transmission has no gas purchase contracts with accrued
take-or-pay obligations which have not yet been terminated. As
the remaining purchase contracts expire or are terminated and
Transmission completes making settlement payments to suppliers,
it will file for recovery of such amounts. Management believes
that these costs will be 100% recoverable through existing tariff
mechanisms.
IV-17
<PAGE> 87
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RATE MATTERS (continued)
On August 30, 1996, Transmission made a Section 4 rate
filing in Docket No. RP96-366-000 proposing an increase in annual
revenues of approximately $27.4 million for service on the
pre-expansion system and approximately $8.2 million for service
on the Phase III expansion system. In an order issued September
30, 1996, the FERC accepted and suspended the filing to be
effective March 1, 1997, subject to refund and certain
conditions. By order issued November 27, 1996, certain audit and
investigation matters (see Note 9) were consolidated with the
rate case. Pursuant to a revised procedural schedule issued
December 19, 1996, a hearing will commence on January 13, 1998,
if no settlement is reached.
(9) COMMITMENTS AND CONTINGENCIES
The FERC's Division of Audits (DOA) 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 proposed
adjustments to the amount of AFUDC capitalized during
construction of its Phase III expansion facilities. Pursuant to
an agreement among Transmission, FERC staff and customer
intervenors, Transmission filed a settlement agreement on July
30, 1996, which was approved by FERC order issued September 27,
1996. The settlement provided for a reduction of $18.75 million
in its Gas Plant in Service account. In addition, the settlement
provided that Transmission would restructure its capital accounts
by removing approximately $348 million of excess donated capital
on its books related to the Phase III construction. As required
under the settlement, Transmission debited its Donations Received
from Stockholders account and credited its Notes Receivable from
Associated Companies Account. The settlement is without
prejudice to Transmission seeking Commission approval to recover
the $18.75 million, required to be removed from its plant
account, in the rate case filed by Transmission on August 30,
1996.
The DOA is conducting a review of Transmission's books and
records as to the construction costs of the Phase III expansion. There
has been no indication at this point that the auditors have found any
costs not properly charged. The FERC's Division of Enforcement (DOE) is
conducting an informal investigation as to the possible non-compliance
with certain environmental conditions attached to the FERC certificate
authorizing the Phase III expansion. DOE has not informed the Company's
management of the identification of costs not properly recoverable by
Transmission. By order issued November 27, 1996, the FERC consolidated
the Phase III cost audit and the DOE informal investigation with
Transmission's rate case in Docket No. RP96-366-000. Discovery is
underway, and the Company's management believes settlement discussions
will begin in a few months.
The outcome of these matters cannot be determined at this
time; however, management believes that the ultimate resolution
of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
IV-18
<PAGE> 88
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------ -------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 16,063 $ 16,063 $ 2,985 $ 2,985
Contract reformation
costs, net 7,078 7,078 33,584 33,584
TCR deferred revenues 6,256 6,256 37,392 37,392
Notes payable to banks 15,000 15,000 70,000 70,000
Long-term debt 1,125,000 1,245,688 1,125,000 1,325,276
</TABLE>
The carrying amount of cash and cash equivalents, contract
reformation costs, TCR deferred revenues and notes payable 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.
IV-19
<PAGE> 89
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1996
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-14 Map of the Southeastern United States showing the
approximate location of the pipeline systems of Southern,
Florida Gas, and SIA (as described on pages I-7, I-12, and
I-16, respectively), and the underground storage facilities
of Southern (as described on page I-8 and I-9).
</TABLE>
<PAGE> 1
EXHIBIT 4.2(c)
[Form of Face of Note]
$_____________ No._______
SONAT INC.
9 1/2 % Note due August 15, 1999
SONAT INC., a corporation duly organized and existing under the laws of
the State of Delaware (herein referred to as the "Company", which term shall
also include any successor corporation), for value received, hereby promises
pay to _______________, or registered assigns, at the office or agency of the
Company in the Borough of Manhattan, The City of New York, the principal sum
______________ Dollars on August 15, 1999, in such coin or currency if the --
United States of Americas as at the time of payment shall be legal tender for
the payment of public and private debts, and to pay interest on said principal
sum at the rate of 9 1/2 % per annum, at said office or agency, in like coin
or currency, from the February 15 or August 15, as the case may be, next
preceding the date hereof to which interest has been paid (unless the date
hereof is a February 15 or August 15 to which interest has been paid, in which
case from the date hereof, or unless no interest has been paid hereon, in which
case from August 15, 1989, or unless the date hereof is between April 15 or
October 15, as the case may be, and the following February 1 or August 1, in
which case from such February 15 or August 15, provided, however, that if the
Company shall default in payment of the interest due on such February 15 or
August 15, then from the next preceding date to which interest has been paid or
if no interest has been paid on the Notes, then from August 15, 1989)
semi-annually on February 15 or August 15 of each year, beginning on February
15, 1990, until said principal sum shall have become due and payable, and
similarly to pay interest at the same rate per annum on any overdue principal
and (to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest. The interest so
payable on any February 15 or August 15 will, subject to certain exceptions
provided in the Indenture referred to on the reverse hereof, be paid to the
person in whose name this Note is registered at the close of business on the
February 1 or August 1, as the case may be, next preceding such February 15 or
August 15 and may, at the Company's option, be paid by check to such person
mailed to the address shown on the Note register.
The provisions of this Note are continued on the reverse hereof and such
continued provisions shall for all purposes have the same effect as though
fully set forth at this place.
<PAGE> 2
This Note shall not be valid or become obligatory for any purpose until
the certificate of authentication heron shall have been signed by the Trustee
under the aforesaid Indenture.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated: SONAT INC.
By ________________________________
Chairman of the Board
ATTESTED:
By ________________________
Secretary
Trustee's Certificate of Authentication
This is one of the Securities of the series designated herein referred to
in the within-mentioned Indenture.
MANUFACTURERS HANOVER TRUST
COMPANY,
as Trustee
By _____________________________
Authorized Officer
<PAGE> 3
[Form of Reverse of Note]
SONAT INC.
9 1/2 % Note due August 15, 1999
This Note is one of a duly authorized issue of debentures, notes or other
evidences of indebtedness of the Company (herein referred to as the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to an indenture dated as of June 1, 1987 (herein referred to
as the "Indenture"), duly executed and delivered by the Company to
MANUFACTURERS HANOVER TRUST COMPANY, Trustee, a corporation organized and
existing under the laws of the State of New York (hereinafter referred to as
the "Trustee"). Reference is made to the Indenture and all indentures
supplemental thereto for a description of the rights, limitations of the
rights, obligations, duties and immunities thereunder of the Trustee, the
Company and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. The Securities
may be issued in one or more series, which different series may be issued in
various aggregate principal amounts, may mature at different times, may bear
interest (if any) at different rates, may be subject to different redemption or
sinking fund provisions (if any), may be subject to different covenants and
Events of Default and may otherwise vary as in the Indenture provided. This
Note is one of the series designated as the 9 1/2% Notes due August 15, 1999 of
the Company (herein referred to as the "Notes") limited in aggregate principal
amount to $100,000,000.
In case an Event of Default, as defined in the Indenture, with respect to
the Notes shall have occurred and be continuing, the principal of all of the
Notes and the occurred interest thereon my be declared, and upon such
declaration shall become, due and payable, and such declaration may in certain
events be rescinded by the Holders of a majority in aggregate principal amount
of the Notes at the time Outstanding, in the manner, with the effect and
subject to the conditions provided in the Indenture.
The Indenture also provides that the Holders of the majority in aggregate
principal amount of the Notes at the time Outstanding may waive (with certain
exceptions) any past default under the Indenture and its consequences. The
Indenture contains provisions permitting the Company and the Trustee, with the
consent of the Holders of a majority in aggregate principal amount of the
Securities at the time Outstanding of each series to be affected, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the Holders of the Securities of each such series; provided, however,
that no such supplemental indenture shall (i) change the stated maturity date
of any Security, or reduce the rate or change the time of payment of interest
thereon, or reduce the principal amount
<PAGE> 4
thereof or any premium thereon, or make the principal thereof or any premium or
interest thereon payable in any coin or currency other than that hereinbefore
provided, without the consent of the Holder of such Security, or (ii) reduce
the aforesaid percentage of Securities, the Holders of which are required to
consent to any such supplemental indenture, without the consent of the Holders
of all Securities affected thereby. Any such waiver or consent by the Holder
of this Note (unless effectively revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Note and of any Notes issued in exchange herefor or in lieu hereof,
irrespective of whether any notation of such waiver or consent is made upon
this Note.
No reference herein to the Indenture and no provision of this Notes or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note
at the time and place and at the rate and in the coin or currency herein
prescribed. In the event of the consolidation or merger of the obligor hereon
into, or the sale or conveyance of its property as an entirety or substantially
as an entirety to, a successor corporation in accordance with the provisions of
the Indenture, such successor corporation shall be fully substituted for the
predecessor corporation as obligor heron; and in the case of any such sale or
conveyance, such predecessor corporation shall be released from its liability
as such obligor, all as more fully set forth in the Indenture.
The Notes are issuable in registered form without coupons in denominations
of $1,000 and any integral multiples thereof. At the Principal Office of the
Trustee in said Borough of Manhattan and in the manner and subject to the
limitations provided in the Indenture and upon payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in relation thereto,
Notes of any denomination may be exchanged for a like aggregate principal
amount of Notes of any other authorized denomination or denominations.
The Notes may not be redeemed prior to maturity.
The Indenture contains provisions for defeasance at any time of (a) the
entire indebtedness of the Company on this Note and (b) a restrictive covenant
and the related Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Note.
This Note is transferable by the registered Holder hereof in person or by
his attorney duly authorized in writing at the Principal Office of the Trustee
in said Borough of Manhattan, but only in the manner and subject to the
limitations provide in the Indenture and upon payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in relation thereto,
and upon surrender and cancellation of this Note. Upon any such transfer a new
Note or Notes of authorized denominations, for the same aggregate principal
amount, will be issued to the transferee in exchange herefor.
<PAGE> 5
Prior to due presentment for registration of transfer of any Note, the
Company, the Trustee, any Paying Agent and any Note registrar may deem and
treat the person in whose name this Notes registered as the absolute owner
hereof for the purpose of receiving payment as herein provided and for all
other purposes whether or not this Note be overdue and notwithstanding any
notation of ownership or other writing hereon made by anyone other than the
Company or any Note registrar, and neither the Company, the Trustee, any Paying
Agent nor any Note registrar shall be affected by notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture or any indenture
supplemental thereto, against any incorporator, stockholder, officer or
director, as such, past, present or future, of the Company or of any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.
<PAGE> 1
EXHIBIT 4.3(d)
[Form of Face of Note]
$_____________ No.________
SOUTHERN NATURAL GASCOMPANY
8 5/8% Note due May 1, 2002
SOUTHERN NATURAL GAS COMPANY, a corporation duly organized and existing
under the laws of the State of Delaware (herein referred to as the "Company",
which term shall also include any successor corporation), for value received,
hereby promises to pay to _______________, or registered assigns, at the office
or agency of the Company in the Borough of Manhattan, The City of New York, the
principal sum of ______________ Dollars on May 1, 2002, in such coin or
currency if the United States of Americas as at the time of payment shall be
legal tender for the payment of public and private debts, and to pay interest
on said principal sum at the rate of 8 5/8 % per annum, at said office or
agency, in like coin or currency, from the May 1 or November 1, as the case may
be, next preceding the date hereof to which interest has been paid (unless the
date hereof is a May 1 or November 1 to which interest has been paid, in which
case from the date hereof, or unless no interest has been paid hereon, in which
case from May 1, 1992, or unless the date hereof is between April 15 or
October 15, as the case may be, and the following May 1 or November 1, in which
case from such May 1 or November 1, provided, however, that if the Company
shall default in payment of the interest due on such May 1 or November 1, then
from the next preceding date to which interest has been paid or if no interest
has been paid on the Notes, then from May 1, 1992) semi-annually on May 1 or
November 1 of each year, beginning on November 1, 1992, until said principal
sum shall have become due and payable, and similarly to pay interest at the
same rate per annum on any overdue principal and (to the extent that payment of
such interest is enforceable under applicable law) on any overdue installment
of interest. The interest so payable on any May 1 or November 1 will, subject
to certain exceptions provided in the Indenture referred to on the reverse
hereof, be paid to the person in whose name this Note is registered at the
close of business on the April 15 or October 15, as the case may be, next
preceding such May 1 or November 1 and may, at the Company's option, be paid by
check to such person mailed to the address shown on the Note register.
The provisions of this Note are continued on the reverse hereof and such
continued provisions shall for all purposes have the same effect as though
fully set forth at this place.
<PAGE> 2
This Note shall not be valid or become obligatory for any purpose until
the certificate of authentication heron shall have been signed by the Trustee
under the aforesaid Indenture.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated: SOUTHERN NATURAL GAS COMPANY
By ________________________________
Chairman of the Board
ATTESTED:
By ________________________
Secretary
Trustee's Certificate of Authentication
This is one of the Securities of the series designated herein referred to
in the within-mentioned Indenture.
MANUFACTURERS HANOVER TRUST
COMPANY,
as Trustee
By _____________________________
Authorized Officer
<PAGE> 3
[Form of Reverse of Note]
SOUTHERN NATURAL GAS COMPANY
8 5/8% Note due May 1, 2002
(continued)
This Note is one of a duly authorized issue of debentures, notes or other
evidences of indebtedness of the Company (herein referred to as the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to an indenture dated as of June 1, 1987 (herein referred to
as the "Indenture"), duly executed and delivered by the Company to
MANUFACTURERS HANOVER TRUST COMPANY, Trustee, a corporation organized and
existing under the laws of the State of New York (hereinafter referred to as
the "Trustee"). Reference is made to the Indenture and all indentures
supplemental thereto for a description of the rights, limitations of the
rights, obligations, duties and immunities thereunder of the Trustee, the
Company and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. The Securities
may be issued in one or more series, which different series may be issued in
various aggregate principal amounts, may mature at different times, may bear
interest (if any) at different rates, may be subject to different redemption or
sinking fund provisions (if any), may be subject to different covenants and
Events of Default and may otherwise vary as in the Indenture provided. This
Note is one of the series designated as the 8 5/8% Notes due May 1, 2002 of the
Company (herein referred to as the "Notes") limited in aggregate principal
amount to $100,000,000.
In case an Event of Default, as defined in the Indenture, with respect to
the Notes shall have occurred and be continuing, the principal of all of the
Notes and the occurred interest thereon my be declared, and upon such
declaration shall become, due and payable, and such declaration may in certain
events be rescinded by the Holders of a majority in aggregate principal amount
of the Notes at the time Outstanding, in the manner, with the effect and
subject to the conditions provided in the Indenture.
The Indenture also provides that the Holders of the majority in aggregate
principal amount of the Notes at the time Outstanding may waive (with certain
exceptions) any past default under the Indenture and its consequences. The
Indenture contains provisions permitting the Company and the Trustee, with the
consent of the Holders of a majority in aggregate principal amount of the
Securities at the time Outstanding of each series to be affected, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the Holders of the Securities of each such series; provided, however,
that no such
<PAGE> 4
supplemental indenture shall (i) change the stated maturity date of any
Security, or reduce the rate or change the time of payment of interest thereon,
or reduce the principal amount thereof or any premium thereon, or make the
principal thereof or any premium or interest thereon payable in any coin or
currency other than that hereinbefore provided, without the consent of the
Holder of such Security, or (ii) reduce the aforesaid percentage of Securities,
the Holders of which are required to consent to any such supplemental
indenture, without the consent of the Holders of all Securities affected
thereby. Any such waiver or consent by the Holder of this Note (unless
effectively revoked as provided in the Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Note
and of any Notes issued in exchange herefor or in lieu hereof, irrespective of
whether any notation of such waiver or consent is made upon this Note.
No reference herein to the Indenture and no provision of this Notes or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note
at the time and place and at the rate and in the coin or currency herein
prescribed. In the event of the consolidation or merger of the obligor hereon
into, or the sale or conveyance of its property as an entirety or substantially
as an entirety to, a successor corporation in accordance with the provisions of
the Indenture, such successor corporation shall be fully substituted for the
predecessor corporation as obligor heron; and in the case of any such sale or
conveyance, such predecessor corporation shall be released from its liability
as such obligor, all as more fully set forth in the Indenture.
The Notes are issuable in registered form without coupons in denominations
of $1,000 and any integral multiples thereof. At the Principal Office of the
Trustee in said Borough of Manhattan and in the manner and subject to the
limitations provided in the Indenture and upon payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in relation thereto,
Notes of any denomination may be exchanged for a like aggregate principal
amount of Notes of any other authorized denomination or denominations.
The Notes may not be redeemed prior to maturity.
The Indenture contains provisions for defeasance at any time of (a) the
entire indebtedness of the Company on this Note and (b) a restrictive covenant
and the related Events of Default, upon compliance by the Company with certain
conditions set forth therein, which provisions apply to this Note.
This Note is transferable by the registered Holder hereof in person or by
his attorney duly authorized in writing at the Principal Office of the Trustee
in said Borough of Manhattan, but only in the manner and subject to the
limitations provide in the Indenture and upon payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in relation thereto,
and upon surrender and cancellation of this Note.
<PAGE> 5
Upon any such transfer a new Note or Notes of authorized denominations, for the
same aggregate principal amount, will be issued to the transferee in exchange
herefor.
Prior to due presentment for registration of transfer of any Note, the
Company, the Trustee, any Paying Agent and any Note registrar may deem and
treat the person in whose name this Notes registered as the absolute owner
hereof for the purpose of receiving payment as herein provided and for all
other purposes whether or not this Note be overdue and notwithstanding any
notation of ownership or other writing hereon made by anyone other than the
Company or any Note registrar, and neither the Company, the Trustee, any Paying
Agent nor any Note registrar shall be affected by notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture or any indenture
supplemental thereto, against any incorporator, stockholder, officer or
director, as such, past, present or future, of the Company or of any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.
<PAGE> 1
EXHIBIT 10.1
SONAT INC.
SUPPLEMENTAL BENEFIT PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1995)
ARTICLE I - PURPOSE AND HISTORY
1.1 PURPOSE
This Supplemental Benefit Plan, as amended and restated herein (the
"Plan"), is adopted by Sonat Inc. (the "Company") on its own behalf and on
behalf of its subsidiaries and affiliates (the "Employers") which are
participating companies in the Sonat Inc. Retirement Plan (the "Retirement
Plan") and/or the Sonat Savings Plan (formerly the Sonat Inc. Stock Purchase
Plan) (the "Savings Plan"). The purposes of this Plan are:
(i) To provide benefits ("Excess Retirement Plan Benefits") in
excess of the limitations imposed by Sections 401(a)(9),
401(a)(17), 415, and/or the incidental benefit requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), on
the Retirement Plan.
(ii) To provide benefits ("Vesting Benefits") to certain employees
whose rights to Vested Benefits have not vested under Article
5 of the Retirement Plan in the event that their employment is
terminated after a Change of Control (as defined in Section
4.3 below).
(iii) To provide benefits ("Excess Savings Plan Benefits") to
employees whose ability to make employee contributions or to
receive employer contributions to the Savings Plan is limited
by Sections 401(a)(17), 401(m), and/or 415 of the Code.
<PAGE> 2
2
1.2 HISTORY OF THE PLAN
The Plan was adopted on July 28, 1983, as an amendment and restatement
of the Company's Supplemental Pension Plan, which was adopted effective January
1, 1976. The Plan was amended and restated as of January 1, 1985 in order to (1)
provide certain "Excess Disability Benefits", (2) conform the references in the
Plan to the provisions of the Retirement Plan and the Sonat Inc. Stock Purchase
Plan as in effect on the date thereof, and (3) clarify the meaning and intent of
the Plan.
The Plan was amended and restated as of January 1, 1987 in order to (1)
provide that Excess Retirement Plan Benefits and Excess Savings Plan Benefits
include benefits in excess of the limitations imposed by Section 401(a)(17) of
the Code (as well as Section 415 of the Code) on the Retirement Plan and Savings
Plan, (2) provide as Excess Savings Plan Benefits matching contributions on
amounts an employee is unable to contribute to the Savings Plan by reason of the
limitations imposed by Sections 401(a)(17), 401(m), and/or 415 of the Code, (3)
modify the time of commencement and form in which Excess Retirement Plan
Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid, (4)
provide for the accelerated distribution of Excess Savings Plan Benefits in the
event of a Participant's Termination of Employment following a Change of Control
(as defined herein) and (5) transfer the provisions and obligations relating to
Excess Disability Benefits from this Plan to the Sonat Inc. Supplemental
Disability Plan (the "Supplemental Disability Plan").
The Plan was amended effective as of September 6, 1989 to reflect an
amendment to the Retirement Plan permitting participants to elect that benefits
payable to a child be instead payable to a trust for the benefit of such child.
The Plan was amended and restated as of December 1, 1991 in order to further
modify the time of commencement and form in which Excess Retirement Plan
Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid.
The Plan was amended and restated effective as of February 25, 1993 in
order to provide flexibility to participants as to the time of commencement and
form in which Excess Retirement Plan Benefits and Excess Savings Plan Benefits
are paid.
<PAGE> 3
3
The Plan was amended effective as of July 1, 1993 to clarify the
provisions applicable to employees of Sonat Offshore Drilling Inc. ("SODI") and
its subsidiaries whose benefits under the Retirement Plan and the Savings Plan
were transferred to plans established by SODI following the initial public
offering of SODI common stock ("SODI Employees"). The Plan was amended effective
as of April 28, 1994 to change the interest rate used for purposes of the
definition of Actuarial Equivalent.
The Plan is amended and restated as of the date hereof in order to (1)
provide that amounts credited as Excess Savings Plan Benefits will be deemed
invested in phantom shares of common stock of the Company and/or phantom shares
of certain mutual funds, and (2) permit the payment of Excess Retirement Plan
Benefits to a trust for the benefit of one or more children of the participant.
ARTICLE II - EXCESS RETIREMENT PLAN BENEFITS
2.1 ELIGIBILITY
Each employee whose Retirement Benefit or Vested Benefit from the
Retirement Plan is limited by Code Sections 401(a)(17) and/or 415 and the
incorporation of those limitations in the Retirement Plan or whose Survivors
Benefits under the Retirement Plan are limited by Code Section 401(a)(9) or the
incidental benefit requirements of the Code and the incorporation of such
limitations in the Retirement Plan (a "Participant") shall be entitled to Excess
Retirement Plan Benefits under this Plan, regardless of whether such Participant
has received notice that he or she is so entitled. All capitalized terms used in
this Article II and not defined in this Plan shall have the meanings ascribed
thereto in the Retirement Plan.
2.2 DETERMINATION OF APPLICABLE FORM OF BENEFIT
If a Participant's date of Termination of Continuous Employment
occurred prior to December 1, 1991, such Participant's Excess Retirement Plan
Benefits shall be paid in annuity form as provided in Section 2.4 below
("Annuity Form"). If a Participant's date
<PAGE> 4
4
of Termination of Continuous Employment occurred on or after December 1, 1991,
such Participant's Excess Retirement Plan Benefits shall be paid in lump sum
form as provided in Section 2.3 below ("Lump Sum Form") unless, at least twelve
full calendar months before the date of the Participant's Termination of
Continuous Employment, the Participant filed with the Company an irrevocable
written election to have such benefits paid in Annuity Form, in which case such
benefits shall be paid in Annuity Form. Notwithstanding any other provision of
the Plan, a Participant's election with respect to the portion of his or her
Excess Retirement Plan Benefit attributable to his or her retirement benefit
shall determine the Form in which the portion of such benefit attributable to
any related survivor benefit is paid.
2.3 LUMP SUM FORM
The following provisions of this Section 2.3 apply to Excess Retirement
Plan Benefits which are paid in Lump Sum Form.
(a) BENEFIT UPON TERMINATION OF CONTINUOUS EMPLOYMENT. Upon the
Termination of Continuous Employment (other than death) of a Participant who is
entitled to a Retirement Benefit or a Vested Benefit and whose Excess Retirement
Plan Benefits are payable in Lump Sum Form, such Participant shall be entitled
to an Excess Retirement Plan Benefit, payable in the form of a cash lump sum,
that is equal to the sum of:
(1) the "Actuarial Equivalent" (as defined in Section 2.3(d)
below) of the excess, if any, of (i) the amount that hypothetically
would have been payable to the Participant as a Retirement Benefit or a
Vested Benefit, as the case may be, under the Retirement Plan if
Sections 401(a)(17) and 415 of the Code were nonexistent and the
provisions of the Retirement Plan incorporating the limitations
contained in Sections 401(a)(17) and 415 of the Code were inoperative,
over (ii) the amount which hypothetically would have been payable to
the Participant as a Retirement Benefit or Vested Benefit, as the case
may be,
<PAGE> 5
5
under the Retirement Plan upon application of the actual terms of the
Retirement Plan, assuming that for purposes of clauses (i) and (ii) the
Participant elected to receive such Benefit in the form of a single
life annuity commencing on the earliest date on which the Participant
may commence receipt of his Retirement Benefit or Vested Benefit, as
the case may be, under the terms of the Retirement Plan; plus
(2) if the Participant is entitled to a Retirement Benefit and
has an Eligible Spouse (as defined in Section 2.3(e) below) on the date
of such Termination of Continuous Employment, the Actuarial Equivalent
of the excess, if any, of (i) the amount that hypothetically would have
been payable to the Eligible Spouse as a Survivors Benefit under the
Retirement Plan upon the death of the Participant if Sections
401(a)(17) and 415 of the Code were nonexistent and Section 7.10 and
the provisions of the Retirement Plan incorporating the limitations
contained in Sections 401(a)(17) and 415 of the Code were inoperative,
over (ii) the amount which hypothetically would have been payable to
the Eligible Spouse as a Survivors Benefit under the Retirement Plan
upon application of the actual terms of the Retirement Plan, with such
excess to be valued as a reversionary annuity, payable immediately upon
the death of the Participant, using the interest rate and mortality
table set forth in Section 2.3(d).
Such cash lump-sum payment shall be paid as soon as practicable (and within 30
days) after the Participant's Termination of Continuous Employment.
(b) CERTAIN SURVIVOR BENEFITS. Upon the death of a Participant whose
Excess Retirement Plan Benefits are payable in Lump Sum Form, either
(1) after the Participant's Termination of Continuous Employment
(if such Participant was entitled to a Retirement Benefit and did not
have an Eligible Spouse at the date of such Termination of Continuous
Employment), or
<PAGE> 6
6
(2) prior to the Participant's Termination of Continuous
Employment,
his or her Eligible Spouse (or, if the Participant has no Eligible Spouse at the
date of death, each of the Participant's Eligible Children) shall be entitled to
an Excess Retirement Plan Benefit, payable in the form of a cash lump sum, that
is equal to the Actuarial Equivalent of the excess, if any, of (i) the amount
that hypothetically would have been payable to the Eligible Spouse or such
Eligible Child (as the case may be) as a Survivors Benefit under the Retirement
Plan upon the death of the Participant if Sections 401(a)(17) and 415 of the
Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in Section 401(a)(17) and 415 of the
Code were inoperative, over (ii) the amount actually payable to the Eligible
Spouse or such Eligible Child (as the case may be) as a Survivors Benefit under
the Retirement Plan upon application of the actual terms of the Retirement Plan.
Such lump-sum payment shall be paid as soon as practicable (and within 30 days)
after the Participant's death.
(c) ADDITIONAL SURVIVORS BENEFITS TO ELIGIBLE CHILDREN. If the
Participant's Eligible Spouse dies after the date of death of the Participant,
the Participant's Eligible Children shall each be entitled to an Excess
Retirement Plan Benefit, payable in the form of a cash lump sum, that is equal
to the Actuarial Equivalent of the excess, if any, of (i) the amount that
hypothetically would have been payable to such Eligible Child as a Survivors
Benefit under the Retirement Plan if Sections 401(a)(17) and 415 of the Code
were nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in Section 401(a)(17) and 415 of the
Code were inoperative, over (ii) the amount actually payable to such Eligible
Child as a Survivors Benefit under the Retirement Plan. Such cash lump-sum
payment shall be paid as soon as practicable (and within 30 days) after the
Eligible Spouse's death.
(d) DEFINITION OF ACTUARIAL EQUIVALENT. For purposes of Section 2.3 and
Section 4.2, "Actuarial Equivalent" shall mean a benefit actuarially equal in
value to the
<PAGE> 7
7
value of a given benefit in a given form or schedule, based upon (1) the 1983
Group Annuity Mortality Table (or, if different, the mortality table or tables
used to calculate Actuarial Equivalents under the Retirement Plan as of the date
on which an Actuarial Equivalent is being determined under this Plan) and (2) an
interest rate equal to the yield on new 7-12 year AA-rated general obligation
tax-exempt bonds as determined by Merrill Lynch & Co. (or its affiliates) and
published in The Wall Street Journal (or other financial publication) on the
business day immediately preceding the date of the Participant's Termination of
Continuous Employment (for calculation of Actuarial Equivalents under Sections
2.3(a) and 4.2 of this Plan), the date of the Participant's death (for
calculation of Actuarial Equivalents under Section 2.3(b) of this Plan), or the
date of the Participant's Eligible Spouse's death (for calculation of Actuarial
Equivalents under Section 2.3(c) of this Plan) (or, if such yield is not so
determined and published on such business day, on the most immediately preceding
day on which such yield was so determined and published); provided, however,
that if such yield has not been so determined and published within 90 days prior
to the date of the Participant's Termination of Continuous Employment or death
or the date of the Participant's Eligible Spouse's death (as the case may be),
the interest rate shall be the yield on substantially similar securities on the
business day preceding the applicable date as determined by AmSouth Bank N.A.
upon the request of either the Company or the Participant, Eligible Spouse or
Eligible Child (as the case may be). Notwithstanding the preceding provisions of
this Section 2.3(d), if the only Survivors Benefit to which an Eligible Spouse
is entitled under the Retirement Plan is an ERISA Preretirement Survivor
Annuity, determination of Actuarial Equivalent under Section 2.3(b) shall be
based upon the assumption that payment of the amounts described in clauses (i)
and (ii) of Section 2.3(b) commence on the first day of the month immediately
following the later of the date on which the Participant would have attained age
55 or the Participant's date of death.
(e) DEFINITION OF ELIGIBLE SPOUSE. For purposes of Section 2.3,
"Eligible Spouse" shall mean the person who was married to the Participant under
the laws of
<PAGE> 8
8
the State where the marriage was contracted throughout the one year period
ending on the earlier of the date on which the Participant has a Termination of
Continuous Employment or the date of the Participant's death. If the Participant
does not have an Eligible Spouse on the date of Termination of Continuous
Employment, the person who was married to the Participant under the laws of the
State where the marriage was contracted throughout the one year period ending on
the date of the Participant's death shall be the Participant's Eligible Spouse.
In no event may a Participant have more than one Eligible Spouse under this
Plan.
2.4 ANNUITY FORM
The following provisions of this Section 2.4 apply to Excess Retirement
Plan Benefits which are paid in Annuity Form.
(a) RETIREMENT ANNUITY. Each Participant who is entitled to a
Retirement Benefit or a Vested Benefit and whose Excess Retirement Plan Benefits
are payable in Annuity Form shall be entitled to Excess Retirement Plan Benefits
equal to the excess, if any, of (i) the amount that hypothetically would have
been payable to the Participant as a Retirement Benefit or a Vested Benefit, as
the case may be, under the Retirement Plan (after any increases in Retirement
Benefits or Vested Benefits payable generally under the Company's retirement
program which take effect after the Participant's Termination of Continuous
Employment) if Sections 401(a)(17) and 415 of the Code were nonexistent and the
provisions of the Retirement Plan incorporating the limitations contained in
Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount
which hypothetically would have been payable to the Participant as a Retirement
Benefit or Vested Benefit, as the case may be, under the Retirement Plan upon
application of the actual terms of the Retirement Plan, assuming that for
purposes of clauses (i) and (ii) the Participant elected to receive such Benefit
in the form of a single life annuity commencing on the date on which the
Participant actually commences receipt of his Retirement Benefit or Vested
Benefit, as the case may be,
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9
under the Retirement Plan. Excess Retirement Plan Benefits shall be paid
commencing at the time and in the form provided below:
(i) If the Participant is entitled to a Retirement
Benefit under the Retirement Plan, the Participant's
Excess Retirement Plan Benefit shall be payable to
the Participant in the form of a single life annuity,
in monthly installments commencing (A) on the
Participant's early or normal retirement date, as the
case may be, under the Retirement Plan; or (B) in the
case of a Participant entitled to a Projected
Retirement Benefit, upon his or her Termination of
Continuous Employment.
(ii) If the Participant is entitled to a Vested Benefit
under the Retirement Plan, the amount of the
Participant's Excess Retirement Plan Benefit shall be
calculated using the Retirement Plan's early benefit
commencement factors (which are incorporated in the
Retirement Plan's definition of Actuarial Equivalent)
and the Section 415 limits which apply for the
benefit commencement date elected by the Participant
under the Retirement Plan. However, payment of such
Excess Retirement Plan Benefit shall not commence
until the first day of the month following the
Participant's attainment of normal retirement age.
Such Benefit shall be payable (1) to the Participant
in the form of a single life annuity if the
Participant does not have a Spouse at the time the
Excess Retirement Plan Benefit commences, and (2) to
the Participant and his or her Spouse in the form of
a 50% joint and survivor annuity if the Participant
has a Spouse at the time the Excess Retirement Plan
Benefit commences.
(iii) If payment of the Participant's Vested Benefit under
the Retirement Plan commences prior to the first day
of the month following the
<PAGE> 10
10
Participant's attainment of normal retirement age,
the Company shall create and maintain on its books an
account for such Participant (the "Vested Benefits
Account") to which the Company shall credit the
following amounts. At the beginning of each month
beginning with the first month for which the
Participant receives a Vested Benefit under the
Retirement Plan and ending with the month in which
the Participant attains normal retirement age, the
Company shall credit the Vested Benefits Account with
an amount equal to the amount of the Excess
Retirement Plan Benefit calculated under Section
2.4(a)(ii) above. At the end of each calendar quarter
beginning with the first calendar quarter in which an
amount is credited pursuant to the preceding sentence
and ending with the calendar quarter referred to in
the following sentence, the Company shall also credit
to such Vested Benefits Account a sum which is equal
to the product of (i) the average balance in such
Account for the calendar quarter (without regard to
any debits made at the end of the calendar quarter)
times (ii) one-fourth of the annual prime rate for
corporate borrowers quoted by The Chase Manhattan
Bank, N.A. at the beginning of the calendar quarter.
At the end of the calendar quarter in which occurs
the earlier of the Participant's attainment of normal
retirement age or the Participant's death, the
Company shall debit the Participant's Vested Benefits
Account and pay to such Participant (or in the event
of the Participant's death, to his or her
Beneficiary) the entire balance in such Account.
(b) SURVIVOR ANNUITY. Each Eligible Family Member of a Participant
under the Retirement Plan shall be entitled to Excess Retirement Plan Benefits
equal to the excess, if any, of (i) the amount that hypothetically would have
been payable to the Eligible Family Member as a Survivors Benefit under the
Retirement Plan (after any
<PAGE> 11
11
increases in Survivors Benefits payable generally under the Company's retirement
program which take effect after the Participant's death) if Sections 401(a)(17)
and 415 of the Code were nonexistent and Section 7.10 and the provisions of the
Retirement Plan incorporating the limitations contained in Section 401(a)(17)
and 415 of the Code were inoperative, over (ii) the amount actually payable to
the Eligible Family Member as a Survivors Benefit under the Retirement Plan.
Excess Retirement Plan Benefits shall be paid to the Eligible Family Members,
commencing on the first day of the month following the death of the Participant,
as follows:
(i) If the Participant's Eligible Family Members include
an Eligible Spouse (which term, for purposes of this
Section 2.4, shall have the meaning set forth in the
Retirement Plan), the Excess Retirement Plan Benefits
for such Eligible Family Members shall be payable to
such Eligible Spouse until such person dies or is no
longer an Eligible Spouse.
(ii) If Excess Retirement Plan Benefits cease to be
payable to an Eligible Spouse, or in the event there
is no Eligible Spouse at the date of the
Participant's death, the Excess Retirement Plan
Benefits otherwise payable to such Eligible Spouse
shall be payable to an Eligible Child, until the
earlier of the death of such Eligible Child or the
date on which he or she ceases to be an Eligible
Child, with such Benefits to be divided equally among
the Eligible Children in the event that there is more
than one Eligible Child. In the event there is more
than one Eligible Child and Excess Retirement Plan
Benefits cease with respect to one Eligible Child,
each subsequent payment of Excess Retirement Plan
Benefits will be divided equally among the remaining
Eligible Children.
<PAGE> 12
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Notwithstanding the preceding provisions of this Section 2.4(b), if the only
Survivor's Benefit to which the Eligible Family Member is entitled under the
Retirement Plan is an ERISA Preretirement Survivor Annuity, (i) payment of the
Excess Retirement Plan Benefits shall commence on the first day of the month
immediately following the later of the date on which the Participant would have
attained age 55 or the Participant's date of death, and (ii) the Excess
Retirement Plan Benefits shall cease to be payable upon the death of the
Eligible Spouse.
2.5 DEFINITION OF ELIGIBLE CHILD
For purposes of Section 2.3 and 2.4, the term "Eligible Child" shall
mean the deceased Participant's Eligible Child (as defined in the Retirement
Plan). However, if the Participant has so elected under the Retirement Plan,
payments which otherwise would be made to an Eligible Child shall be made to an
Eligible Trust (as defined in the Retirement Plan). Notwithstanding the
Participant's election to have payments made to a trust, if the Administrative
Committee of the Retirement Plan determines that the trust is not an Eligible
Trust at the time payment to such trust is to be made, such payment shall not be
made to the trust and shall instead be made directly to the Participant's
Eligible Child.
2.6 PROVISIONS REGARDING SODI EMPLOYEES
(a) For purposes of Article II, all references to the Retirement Plan
as it relates to SODI Employees (as defined in Section 1.2) shall be deemed to
refer to such plan as in effect on June 30, 1993. In no event shall SODI
Employees accrue benefits under Article II of this Plan after June 30, 1993
(unless rehired by the Company).
(b) For purposes of determining the timing of benefit payments under
this Plan, SODI Employees shall not be deemed to have incurred a Termination of
Continuous Employment by virtue of the initial public offering of SODI common
stock, but shall instead be deemed to have incurred a Termination of Continuous
Employment
<PAGE> 13
13
upon the termination of their employment with SODI and its subsidiaries (as
defined for purposes of the SODI retirement plan).
(c) Retirement, Vested and Survivor Benefits of SODI Employees under
this Plan shall be determined based on the SODI Employee's accrued retirement
or vested benefit, as the case may be (under the Retirement Plan and this
Plan), as of June 30, 1993 and the maximum dollar limit under Code Section
415(b) and the defined benefit fraction under Code Section 415(e) applicable as
of June 30, 1993. In addition, where the SODI Employee's Termination of
Continuous Employment occurs before the SODI Employee has attained age 65, the
benefits payable under this Plan shall be determined as follows.
(1) In the case of a SODI Employee who is eligible for early
retirement under the Retirement Plan on the date of his or her
Termination of Continuous Employment, the Participant's benefit accrued
as of June 30, 1993 (under both the Retirement Plan and this Plan)
payable at age 65 shall first be reduced to the date of the
Participant's Termination of Continuous Employment using the early
retirement factors in the Retirement Plan as in effect on June 30,
1993, and from this amount there shall be subtracted the amount of the
Participant's June 30, 1993 accrued benefit payable under the
Retirement Plan, calculated using the Code Section 415 limits in effect
on June 30, 1993 as adjusted to reflect early commencement of the
benefit on the date of the Participant's Termination of Continuous
Employment.
(2) In the case of a SODI Employee who is not eligible for
early retirement under the Retirement Plan on the date of his or her
Termination of Continuous Employment, the Participant's benefit accrued
as of June 30, 1993 (under both the Retirement Plan and this Plan)
payable at age 65 shall first be reduced to the earliest date when the
Participant may commence receipt of his benefit under the Retirement
Plan, using the factors in the Retirement Plan as in effect on June 30,
1993 for determining the actuarial equivalent of the Participant's
vested benefit (as set forth in such plan's definition of Actuarial
<PAGE> 14
14
Equivalent), and from this amount there shall be subtracted the amount
of the Participant's June 30, 1993 accrued benefit payable under the
Retirement Plan, calculated using the Code Section 415 limits in effect
on June 30, 1993 as adjusted to reflect early commencement of the
benefit on the earliest date when the Participant may commence receipt
of his benefit under the Retirement Plan.
Notwithstanding any other provision of this Plan, Survivors Benefits of SODI
Employees who die after June 30, 1993 shall be determined by reference to the
Survivors Benefits payable under the Sonat Offshore Retirement Plan rather than
the Retirement Plan.
(d) For purposes of Section 2.2, a SODI Employee's election to have
Excess Retirement Plan Benefits paid in Annuity Form which is filed with SODI at
least twelve full calendar months before such Participant's Termination of
Continuous Employment shall be deemed an election filed with the Company to have
benefits under this Plan paid in Annuity Form.
ARTICLE III - EXCESS SAVINGS PLAN BENEFITS
3.1 ELIGIBILITY
Each employee on whose behalf Company Matching Contributions to the
Savings Plan are limited by Sections 401(a)(17), 401(m), and/or 415 of the Code
and the incorporation of those limitations in the Savings Plan (a "Participant")
shall be entitled to Excess Savings Plan Benefits under this Plan, regardless of
whether such Participant has received notice that he or she is so entitled. In
addition, each Participant whose ability to make aggregate Before-Tax and
After-Tax Contributions to the Savings Plan is limited by Sections 401(a)(17),
401(m), and/or 415 of the Code and the incorporation of those limitations in the
Savings Plan shall be entitled to Excess Savings Plan Benefits under this Plan,
regardless of whether such Participant has received notice that he or she is so
entitled. All capitalized terms used in this Article III
<PAGE> 15
15
and not defined in this Plan shall have the meanings ascribed thereto in the
Savings Plan.
3.2 CREDITS TO ACCOUNT
(a) CREDIT OF CONTRIBUTIONS. The Company shall create and maintain on
its books two accounts for each Participant (the "Diversifiable Account" and the
"Non-Diversifiable Account", respectively, which are collectively referred to as
the "Accounts") to which it shall credit (i) the amount of any Company Matching
Contributions which are not paid to the Savings Plan by virtue of the
limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and the
incorporation of those limitations in the Savings Plan, plus (ii) the amount of
any Company Matching Contributions that would have been made under the Plan (but
for the limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and
the incorporation of those limitations in the Savings Plan) had the Participant
contributed the Before-Tax and After-Tax Contributions which he or she elected
to contribute but was precluded from contributing by virtue of the limitations
of Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of
those limitations in the Savings Plan. Such amounts, if any, shall be credited
at such time after the end of each pay period as Company Matching Contributions
for such pay period are paid to the Savings Plan. Prior to January 1, 1995 all
amounts credited under this Article III shall be credited as provided in Section
3.2 (b). Beginning January 1, 1995 all amounts credited under this Article III
shall be credited as provided in Section 3.2 (c). The Accounts shall be debited
upon payment to the Participant as provided in Section 3.4. The amount of a
Participant's Excess Savings Plan Benefits shall be equal to the fair market
value of his or her Accounts, as determined pursuant to Section 3.2 (d).
(b) CREDITING BEFORE JANUARY 1, 1995. All amounts credited prior to
January 1, 1995 shall be credited to the Diversifiable Account. At the end of
each calendar quarter prior to January 1, 1995, regardless of whether any other
credits are then made to the Diversifiable Account or whether the Participant is
then in the employ
<PAGE> 16
16
of the Employers, the Company shall also credit to the Diversifiable Account a
sum which is equal to the product of (i) the average balance in the
Diversifiable Account for the quarter (without regard to any debits made at the
end of such quarter) times (ii) one-fourth of the annual prime rate for
corporate borrowers quoted by The Chase Manhattan Bank, N.A. at the beginning of
the quarter.
(c) CREDITING BEGINNING JANUARY 1, 1995. Beginning January 1, 1995, 50%
of each amount credited on behalf of a Participant pursuant to Section 3.2 (a)
shall be credited to the Non-Diversifiable Account. All amounts in the
Non-Diversifiable Account shall be credited to a subaccount that is deemed
invested in Common Stock of the Company (a "Phantom Stock Subaccount"). The
remaining 50% of each amount credited on behalf of the Participant pursuant to
Section 3.2 (a), plus all amounts credited to the Participant's Account as of
January 1, 1995, shall be credited to the Diversifiable Account. All amounts in
the Diversifiable Account shall be credited, at the direction of the Participant
(but subject to the restrictions of Section 3.3), to one or more of (i) a
Phantom Stock Subaccount, or (ii) a subaccount which is deemed invested in one
of the mutual fund investments designated by the Company (each of such
subaccounts referred to as a "Phantom Mutual Fund Subaccount"). In each case,
the Participant's Phantom Stock Subaccount and each Phantom Mutual Fund
Subaccount shall be credited with the number of phantom shares (including
fractional shares) equal to the number of shares (of Common Stock or of such
mutual fund, as the case may be) which could have been purchased with the dollar
amount to be credited, valued at the fair market value of such share as of the
close of business on the business day such amounts are credited. At the time
that any dividends are paid on the Common Stock or the applicable mutual fund,
as the case may be, there shall be credited to the Participant's Phantom Stock
Subaccount or Phantom Mutual Fund Subaccount, as the case may be, a number of
phantom shares (including fractional shares) equal to the result obtained by
multiplying (i) the number of phantom shares credited to the Participant's
Phantom Stock Subaccount or Phantom Mutual Fund Subaccount, as the case may be,
on the applicable dividend record date, by (ii) the amount of the dividend
<PAGE> 17
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per share, and dividing such product by (iii) the fair market value of a share
as of the close of business on the dividend payment date.
(d) DETERMINATION OF FAIR MARKET VALUE. The fair market value of the
Participant's Phantom Stock Subaccount or a Phantom Mutual Fund Subaccount, as
the case may be, on any given date shall be determined by multiplying (i) the
number of phantom shares credited to such subaccount on such date, by (ii) the
fair market value of a share (of Common Stock or of such mutual fund, as the
case may be) as of the close of business on such date.
3.3 INVESTMENT ELECTIONS AND TRANSFERS
(a) NEW CONTRIBUTIONS TO DIVERSIFIABLE ACCOUNT. At any time prior to
the start of a calendar quarter, a Participant may file an election with the
Company (in the manner and subject to any limitations specified by the Company)
to designate the phantom subaccounts to which new contributions to the
Participant's Diversifiable Account shall be credited. All amounts credited to
the Participant's Diversifiable Account on or after the first day of such
calendar quarter shall be credited in accordance with such election. The
Participant may file a new election at any time (in the manner and subject to
any limitations specified by the Company), which shall take effect beginning
with the first day of the next calendar quarter. If a Participant fails to file
an election form, all amounts credited to the Participant's Diversifiable
Account as of January 1, 1995 and all amounts subsequently credited to such
Account prior to the effective date of a properly-filed election form shall be
credited as phantom shares of the Fidelity Retirement Government Money-Market
Portfolio.
(b) TRANSFERS WITHIN DIVERSIFIABLE ACCOUNT. A Participant may at any
time file an election with the Company (in the manner and subject to any
limitations specified by the Company) to transfer a portion of his or her
Diversifiable Account from one Phantom Mutual Fund Subaccount to another, or
from a Phantom Mutual Fund Subaccount to the Phantom Stock Subaccount. Transfers
shall be made as of the first
<PAGE> 18
18
business day of any calendar quarter for all transfer elections received by the
Company in the preceding calendar quarter, based on the respective fair market
values of the respective phantom shares at the close of business on such first
business day of the calendar quarter. No transfers out of a Participant's
Phantom Stock Subaccount shall be permitted prior to the time set forth in
Section 3.3 (c).
(c) TRANSFERS OUT OF PHANTOM STOCK SUBACCOUNT OF DIVERSIFIABLE ACCOUNT.
A Participant shall have the right to transfer all or a portion of the amount
credited to the Phantom Stock Subaccount of his or her Diversifiable Account out
of such Subaccount and into one or more Phantom Mutual Fund Subaccounts (in the
manner and subject to any limitations specified by the Company) beginning on the
first day of the calendar quarter that is at least six months after the later of
(i) the date of the Participant's Termination of Employment or (ii) the date the
Participant is no longer subject to Section 16 of the Securities Exchange Act of
1934.
(d) NON-DIVERSIFIABLE ACCOUNT. All amounts credited to a Participant's
Non-Diversifiable Account shall be credited to a Phantom Stock Subaccount.
Transfers out of such Subaccount shall not be permitted.
3.4 PAYMENT OF ACCOUNTS
Upon a Participant's Termination of Employment, the Company shall debit
his or her Accounts and pay to such Participant (or in the event of the
Participant's death, to his or her Beneficiary) amounts at the times determined
pursuant to this Section 3.4.
(a) CASH LUMP SUM. Except as provided in Section 3.4(b) or 3.4(c)
below, upon a Participant's Termination of Employment, there shall be paid to
the Participant in a cash lump sum on (or as soon as practicable after) the
first business day of the calendar quarter following his or her Termination of
Employment an amount equal to the sum of: (i) the value of the Participant's
Accounts, as determined below, plus (ii) the amount of any Company Matching
Contributions that would have been credited to the
<PAGE> 19
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Accounts under Section 3.2 for pay periods beginning before the Participant's
Termination of Employment if such Company Matching Contributions have not yet
been credited at the time of valuation of the Participant's Accounts. For
purposes of determining the value of a Participant's Accounts pursuant to this
Section 3.4 (a), (i) phantom shares in each of the Phantom Mutual Fund
Subaccounts shall be valued as of the business day that is two business days
before the date the payment is due, and (ii) phantom shares in the Phantom Stock
Subaccount shall be valued based on the average of the closing prices of the
Company's Common Stock on the ten business days ending two business days before
the payment is due.
(b) INSTALLMENTS. If, at least twelve full calendar months before the
date of the Participant's Termination of Employment, the Participant filed with
the Company an irrevocable written election to have all or any designated
portion of his or her Accounts paid in installments, payment of such
Participant's Accounts (or designated portion thereof) shall be made in such
number of annual installments (to a maximum of 15) as shall have been designated
by the Participant in the written election referred to above. Payment of the
first installment shall be made on (or as soon as practicable after) the first
business day of the calendar quarter following the Participant's Termination of
Employment. Each subsequent installment shall be paid on the anniversary of the
first day of such calendar quarter (or, if such day is not a business day, on
the next business day thereafter). Each installment shall be in an amount equal
to (i) the value of the Participant's Accounts at the time of payment of such
installment, as determined below, divided by (ii) the number of installments
remaining to be paid (including the installment about to be paid), and shall be
made on pro rata basis from the Participant's Accounts and Subaccounts. For
purposes of determining the value of an installment of a Participant's Accounts
pursuant to this Section 3.4 (b), (i) phantom shares in each of the Phantom
Mutual Fund Subaccounts shall be valued as of the business day that is two
business days before the date payment of the installment is due, and (ii)
phantom shares in the Phantom Stock Subaccounts shall be valued based on the
average of the
<PAGE> 20
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closing prices of the Company's Common Stock on the ten business days ending two
business days before the date payment of the installment is due.
(c) PRIOR ELECTIONS. Notwithstanding the provisions of Sections 3.4 (a)
and (b), any election made by a Participant prior to February 25, 1993 to have
payment of all or a portion of his or her Accounts made in installments shall be
irrevocable. In the event that no election is in effect for a given year after
1983 and prior to 1988, the Participant shall be deemed to have elected
installment payments for such year for purposes of the preceding sentence. The
provisions of Sections 3.4 (a) and (b) shall apply with respect to any portion
of the Participant's Accounts which was distributable in the form of a lump sum
pursuant to a Participant's election or Plan provision which became effective
prior to February 25, 1993.
3.5 CHANGE OF CONTROL PROVISIONS
Notwithstanding a Participant's election or the provisions of Section
3.4, in the event of a Participant's Termination of Employment within three
years following a Change of Control (as defined in Section 4.3 below), then
there shall be paid to the Participant in a cash lump sum, as soon as
practicable (and within 30 days) after his or her Termination of Employment an
amount equal to the sum of (i) the value of the Participant's Accounts, as
determined below, plus (ii) the amount of any Company Matching Contributions
that would have been credited to the Accounts under Section 3.2 for pay periods
beginning before the Participant's Termination of Employment if such Company
Matching Contributions have not yet been credited at the time of valuation of
the Participant's Accounts. For purposes of determining the value of a
Participant's Accounts pursuant to this Section 3.5, (i) phantom shares in each
of the Phantom Mutual Fund Subaccounts shall be valued as of the business day
that is two business days before the date of payment, and (ii) phantom shares in
the Phantom Stock Subaccounts shall be valued based on the average of the
closing prices of the Company's Common Stock on the ten business days ending two
business days before the date of payment.
<PAGE> 21
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3.6 BENEFICIARY
For purposes of this Article III, "Beneficiary" shall mean (i) the
person, persons or entity designated by a Participant to receive Excess Savings
Plan Benefits in the event of the Participant's death, or (ii) if the
Participant has made no such designation, his or her Beneficiary under the
Savings Plan.
3.7 ANTIDILUTION ADJUSTMENTS
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, or other change in or affecting the
corporate structure or capitalization of the Company, the Executive Compensation
Committee or other designated committee of the Board of Directors of the Company
consisting solely of "disinterested" directors within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934 (the "Committee") shall make
appropriate adjustment to the Phantom Stock Subaccounts of Participants so that
the phantom shares in such subaccounts shall be treated as if they were actual
shares of Common Stock. In the event the Common Stock is converted into cash,
the phantom shares in the Phantom Stock Subaccounts shall similarly be converted
into cash as of the same date, and shall automatically be credited as phantom
shares of the Fidelity Government Money-Market Portfolio (or such other Phantom
Mutual Fund Subaccount as may be designated by the Committee). In the event the
Common Stock is converted into other securities or property, the value of such
securities and property shall be determined by AmSouth Bank NA, and the Phantom
Stock Subaccounts shall be converted into cash of the same value and credited as
phantom shares of the Fidelity Government Money-Market Portfolio (or such other
Phantom Mutual Fund Subaccount as may be designated by the Committee).
<PAGE> 22
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3.8 PROVISIONS REGARDING SODI EMPLOYEES
SODI Employees (as defined in Section 1.2) shall not be deemed to have
incurred a Termination of Employment by virtue of the initial public offering of
SODI common stock, but shall instead be deemed to have incurred a Termination of
Employment upon the termination of their employment with SODI and its
subsidiaries (as defined for purposes of the SODI savings plan). In no event
shall SODI Employees accrue benefits under Article III of this Plan after June
30, 1993 (unless rehired by the Company), but Accounts established pursuant to
Article III hereof shall continue to be credited with interest as provided in
Section 3.2(b).
ARTICLE IV - VESTING BENEFITS
4.1 ELIGIBILITY
Each employee who has had a Termination of Continuous Employment and
who is a member of the Vesting Group (as defined in Section 4.4 below) (a
"Participant") shall be entitled to Vesting Benefits hereunder, regardless of
whether such Participant has received notice that he or she is so entitled, but
only if a Change of Control (as defined in Section 4.3 below) has occurred while
he or she is employed by one of the Employers and is a member of the Vesting
Group. All capitalized terms used in this Article IV and not defined in this
Plan shall have the meanings ascribed thereto in the Retirement Plan.
4.2 AMOUNT AND FORM OF VESTING BENEFIT
Each Participant shall be entitled to a Vesting Benefit, payable in the
form of a cash lump sum, that is equal in amount to the Actuarial Equivalent (as
defined in Section 2.3(d) above) of the excess, if any, of (i) the amount
hypothetically payable to the Participant as a Vested Benefit under the
Retirement Plan if (x) Section 5.01 of the Retirement Plan were hypothetically
amended to provide a Vesting Date based on a period of Vesting Service
equivalent to the actual Vesting Service of the Participant,
<PAGE> 23
23
and (y) Sections 401(a)(17) and 415 of the Code were nonexistent and the
provisions of the Retirement Plan incorporating the limitations contained in
Sections 401(a)(17) and 415 of the Code were inoperative, over (ii) the amount
payable as a Vested Benefit under the Retirement Plan, assuming for purposes of
clauses (i) and (ii) that the Participant commenced receiving benefits under
such clause in the form of a single life annuity on the earliest date on which
the Participant could have commenced receipt of a Vested Benefit under the
Retirement Plan (had he or she been entitled to such Benefit). The grant of
Vesting Benefits shall not increase the Participant's Credited Service under the
Retirement Plan. Such cash lump-sum payment shall be paid as soon as practicable
(and within 30 days) after the Participant's Termination of Continuous
Employment.
4.3 DEFINITION OF CHANGE OF CONTROL
A "Change of Control" shall be deemed to have occurred if:
(i) any "person" (as defined in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as in effect as of May 3,
1984) is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934, as such Rules were in effect as of May 3, 1984) 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 of the Company within any period of
three consecutive years which change shall not have been
approved by a majority of the Board of Directors of the
Company as constituted immediately prior to the commencement
of such period, or
<PAGE> 24
24
(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.
4.4 DEFINITION OF VESTING GROUP
An employee shall be deemed to be a member of the Vesting Group if,
immediately prior to the occurrence of a Change of Control, he or she (1) is a
participant in the Retirement Plan, (2) is employed as an officer by an
Employing Company (as defined in the Retirement Plan) and (3) is not fully
vested under the Retirement Plan.
ARTICLE V - FUNDING
5.1. UNFUNDED PLAN
The Plan shall be unfunded, and the entire cost of the benefits and
administration of the Plan shall be borne by the Company.
ARTICLE VI - MISCELLANEOUS
6.1 EFFECT OF IRS DETERMINATION
If any amounts whose distribution is deferred pursuant to the Plan are
found in a "determination" (within the meaning of Section 1313(a) of the Code)
to have been includible in gross income by a Participant prior to payment of
such amounts under the Plan, such amounts shall be immediately paid to such
Participant notwithstanding the Participant's election or any other provision of
the Plan.
6.2 AMENDMENT
The Company intends to maintain the Plan in force indefinitely, but
necessarily reserves the right by action of its Board of Directors to amend or
discontinue the Plan at
<PAGE> 25
25
any time, provided that (i) no amendment or discontinuance of the Plan shall
diminish in any way payments under this Plan due thereafter under rights created
or grants made before such amendment or discontinuance and (ii) rights created
or grants made before such amendment or discontinuation shall continue in force
and effect and shall continue to accrue as though no amendment or
discontinuation of this Plan had occurred.
6.3 EXCESS DISABILITY BENEFITS
The Excess Disability Benefits formerly provided under this Plan are
instead payable under the Supplemental Disability Plan to the full extent that
they formerly would have been payable under this Plan. To the extent that a
benefit is payable pursuant to the Supplemental Disability Plan it shall not be
payable under this Plan, and to the extent that a benefit is payable pursuant to
this Plan it shall not be payable under the Supplemental Disability Plan.
6.4 NON-ALIENATION; TAX WITHHOLDING
No benefit payable under this Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, garnishment,
encumbrance, or charge; provided, however, that taxes may be withheld from
benefit payments to the extent required by any federal, state or local law or
regulation.
6.5 NO RIGHT TO CONTINUED EMPLOYMENT
Participation in the Plan shall not give any employee the right to be
retained in the employ of the Employers.
6.6 DEFINITION OF PARTICIPANT
Any employee who is a "Participant" under any Section of this Plan
shall not be deemed to be a "Participant" under any other Section unless he or
she also satisfies the definition of "Participant" under such other Section. Any
Plan provision to the contrary notwithstanding, an employee shall not be a
"Participant" under any Section of this Plan unless either (i) the employee is a
member of a select group of management
<PAGE> 26
26
or highly compensated employees (as provided in Section 201(b) of the Employee
Retirement Income Security Act of 1974, as amended), or (ii) the benefits under
this Plan are provided solely by virtue of the limitations of Section 415 of the
Code and the incorporation of those limitations in the Retirement Plan or the
Savings Plan, as the case may be.
6.7 PLAN ADMINISTRATION AND INTERPRETATION
The administration of the Plan and the exclusive power to interpret it
is vested in the Employee Benefits Committee of the Board of Directors of the
Company. The Employee Benefits Committee may delegate any or all of its duties
and responsibilities hereunder to the Administrative Committee of the Retirement
Plan.
6.8 SUBSIDIARIES AND AFFILIATES
Each subsidiary or affiliate of the Company which the Company has
designated as a participating company in the Retirement Plan and/or the Savings
Plan with respect to its employees shall automatically be deemed to have adopted
this Plan; provided however, that if the terms of the Retirement Plan or the
Savings Plan with respect to such subsidiary or affiliate are different from
those applicable to the Company, such difference or differences shall be given
effect in applying this Plan. References herein to the Retirement Plan or the
Savings Plan shall be in regard to such plan as amended from time to time.
6.9 MINORS AND INCOMPETENTS
If a person entitled to benefits under this Plan is a minor or is
physically unable or mentally incompetent to receive such benefits and to
execute a valid release therefor, the Plan may pay such benefits to the guardian
or representative of such person or the individual or institution maintaining
custody of such person (provided that such payment shall be made for and applied
to the benefit of the person entitled thereto), and the release of such
guardian, representative, individual or institution shall be a valid and
complete discharge for payment of such benefit.
<PAGE> 27
27
6.10 CHOICE OF LAW
THIS PLAN SHALL BE INTERPRETED PURSUANT TO THE LAWS OF THE STATE OF
ALABAMA, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES.
IN WITNESS WHEREOF, Sonat Inc. has caused this Plan as amended
and restated hereby to be executed as of January 1, 1995.
By: /s/ Ronald L. Kuehn, Jr.
------------------------
<PAGE> 28
28
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> 29
29
(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.
--------------------------------
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE AWARD PLAN
OF
SONAT INC.
(AS AMENDED AND RESTATED AS OF DECEMBER 1, 1995)
(CORRECTED ON DECEMBER 4, 1996)
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 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.
<PAGE> 2
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 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.
<PAGE> 3
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.
(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.
<PAGE> 4
(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.
(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
<PAGE> 5
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.
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).
<PAGE> 6
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:
(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
<PAGE> 7
death), free of all restrictions.
(c) Notwithstanding the vesting conditions set forth in the
Restricted Stock award, (i) the Committee may in its discretion
accelerate the vesting of Restricted Stock at any time, and (ii) all
shares of Restricted Stock shall vest upon a Change of Control of the
Company.
3.2 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK
The Committee, either at the time of grant or at the time of vesting of
Restricted Stock, may provide for a Supplemental Payment by the Company to the
employee in an amount specified by the Committee which shall not exceed, but may
be equal to, the amount necessary to pay the federal income tax payable with
respect to both the vesting of the Restricted Stock and receipt of the
Supplemental Payment, assuming the employee is taxed at the maximum effective
federal income tax rate applicable thereto and has not elected to recognize
income with respect to the Restricted Stock before the date such Restricted
Stock vests. The Supplemental Payment shall be paid within 30 days of each date
that Restricted Stock vests. The Supplemental Payment shall be paid in cash or
Common Stock, in the discretion of the Committee, except that in the event of a
Change of Control the Supplemental Payment shall be paid in cash.
IV. ADDITIONAL PROVISIONS
4.1 GENERAL RESTRICTIONS
Each award under the Plan shall be subject to the requirement that, if
at any time the Committee shall determine that (i) the listing, registration or
qualification of the shares of Common Stock subject or related thereto upon any
securities exchange or under any state or federal law, or (ii) the consent or
approval of any government regulatory body, or (iii) an agreement by the
recipient of an award with respect to the disposition of shares of Common Stock
is necessary or desirable (in connection with any requirement or interpretation
of any federal or state securities law, rule or regulation) as a condition of,
or in connection with, the granting of such award or the issuance, purchase or
delivery of shares of Common Stock thereunder, such award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITALIZATION
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, rights offer, liquidation, dissolution, merger,
consolidation, spin-off, sale of assets, payment of an extraordinary cash
dividend, or any other change in or affecting the corporate structure or
capitalization of the Company, the Committee shall make appropriate adjustment
in the number and kind of shares authorized by the Plan (including any
limitations on individual awards), in the number, price or kind of shares
covered by the awards and in any outstanding awards under the Plan.
<PAGE> 8
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; provided, however, that (1) no outstanding award may be
revoked or altered in a manner unfavorable to the holder without the written
consent of the holder, and (2) no outstanding Option may be altered in a manner
that reduces the option price (except as provided in Section 4.2).
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; provided, however, that
any Option that is granted in lieu of a cancelled Option shall have an option
price at least equal to the option price of the cancelled Option.
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.
<PAGE> 9
4.7 NON-UNIFORM DETERMINATIONS
Determinations by the Committee under the Plan (including, without
limitation, determinations of the persons to receive awards; the form, amount
and timing of such awards; the terms and provisions of such awards and the
agreements evidencing same; and provisions with respect to termination of
employment) need not be uniform and may be made by it selectively among persons
who receive, or are eligible to receive, awards under the Plan, whether or not
such persons are similarly situated.
4.8 NO GUARANTEE OF EMPLOYMENT
The grant of an award under the Plan shall not constitute an assurance
of continued employment for any period.
4.9 CHANGE OF CONTROL
(a) 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
<PAGE> 10
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.
(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 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
<PAGE> 11
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, and corrects certain errors
made in the earlier restatement of the Plan.
IN WITNESS WHEREOF, this document has been executed as of December 4,
1996.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
----------------------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 12
AMENDMENT TO THE
SONAT INC. EXECUTIVE AWARD PLAN
Sonat Inc. hereby amends the Executive Award Plan (the "Plan")
as follows:
1. Sections 2.2(c) and 2.2(d) of the Plan are amended to read
as follows:
(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, and (ii) in addition to the Appreciation and
the Supplemental Payment (if any), the holder shall receive in cash (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
<PAGE> 13
in clause (iii) of this sentence. All of such amounts shall be paid in
cash within 30 days of the exercise of the Limited Stock Appreciation
Right.
2. This amendment to the Plan shall be effective as of December 6,
1996.
IN WITNESS WHEREOF, this document has been executed as of December 6,
1996.
SONAT INC.
by: /s/ Ronald L. Kuehn, Jr.
----------------------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
13
<PAGE> 1
EXHIBIT 10.9
SUMMARY OF THE SONAT INC.
DIRECTOR'S FEES DEFERRAL PLAN
JANUARY 1, 1997
DEFERRAL ELECTION
The Sonat Inc. Director's Fees Deferral Plan (the "Plan") provides that
a Director of Sonat Inc. (the "Company") may elect to defer receipt of all or
any part of his or her Director's fees. (As used in this Summary, "fees" means
both retainer fees and meeting fees.) You may defer fees by filing a Deferral
Election Form with the Company. In general, you must file the Deferral Election
before the beginning of the calendar year in which the Deferral Election is to
become effective. The Deferral Election will renew automatically from year to
year, unless you revoke or change it by filing a new form. Any revocation or
change of the Deferral Election will be effective ONLY with respect to
Director's fees paid in the calendar year(s) following the year in which the
revocation or change is filed.
ADMINISTRATION
The Plan is administered by the Committee on Directors of the Board of
Directors of the Company.
DIRECTOR'S ACCOUNT
The amount of any deferred fees will be credited to an account on the
books of the Company on the date on which the fees would have first become
payable.
<PAGE> 2
INVESTMENT OF YOUR ACCOUNT
The Company will establish investment options in your Account:
investment in "phantom" units in a fund that is invested in the Company's common
stock (except for about 1% of the fund's value, which is invested in short-term
money-market investments) (a "Phantom Stock Investment") and "phantom"
investments in the mutual funds available under the Company's Savings Plan. The
investment options that are currently available under the Plan are described in
the attached "Summary of Investment Options."
To elect how future credits to your Account will be invested in these
investment choices, you must make your initial election by filing an Initial
Investment Election Form with the Company's Human Resources Department. This
election will be effective on the first day of the calendar quarter after the
form is received. ALLOCATIONS CREDITED TO YOUR ACCOUNT AFTER JANUARY 1, 1997 AND
BEFORE THE EFFECTIVE DATE OF YOUR INITIAL INVESTMENT ELECTION FORM WILL BE
INVESTED IN A PHANTOM INVESTMENT IN THE NORTHERN TRUST COMPANY BENCHMARK
GOVERNMENT FUND.
After you have filed your Initial Investment Election Form, you may
change the way future allocations are invested by calling Mike Byrne ((205)
325-7329) in the Company's Human Resources Department. All elections must be in
1% increments. Such changes will be effective as of the close of business on the
day the phone call is made.
TRANSFERS AMONG INVESTMENT OPTIONS
You may transfer funds among the various investment options, either
before or after payments from the Plan have begun, by calling Mike Byrne ((205)
325-7329) in the Company's Human Resources Department on any business day. All
transfers will be effective as of the close of business on the day the phone
call is made.
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<PAGE> 3
PAYMENT ELECTIONS
Payment Commencement Event. Payments from your Account will begin on
the first business day of the calendar quarter following your termination of
service as a Director (your "Payment Commencement Event").
Special Rule for Elections Made Before January 1, 1995. If, under the
Plan as in effect before January 1, 1995, you elected a Payment Commencement
Event of a specified age, the Payment Commencement Event that you elected will
be your Payment Commencement Event for all fees deferred under the Plan.
Installment Election. At the time you make the Deferral Election, you
may (but need not) elect to receive payments from your Account in annual
installments (over a period you select of up to 15 years). Once you make an
installment election, it may not be changed or revoked except with respect to
fees earned during the calendar years following the calendar year in which the
change is made.
If at the time of making the Deferral Election, you are unsure as to
whether you want to receive your Account in installments, you may defer making
the installment election until a later time, provided that the election must be
made at least 12 months before the Payment Commencement Event. If you do not
make a timely election of installment payments, the deferred fees will
automatically be paid in a lump sum.
Lump-Sum Payments. Any deferred fees that are paid as a lump sum will
be paid in cash on the first business day of the calendar quarter after the
Payment Commencement Event. All investment options will be valued as of the
close of the business day that is two business days before the date the payment
is due (except for the Phantom Stock Investment, which will be valued based on
the average of the closing prices of the Investment on the 10 business days
ending two business days
-3-
<PAGE> 4
before the payment is due).
Installment Payments. If any of your deferred fees are payable as
installment payments, the first installment payment will be paid on the first
business day of the calendar quarter after your Payment Commencement Event, and
each subsequent payment will be made on the anniversary of the preceding
payment. Each installment shall equal (1) the balance in your Account at the
time of payment, divided by (2) the number of installments remaining to be paid
(including the installment about to be paid). All investment options will be
valued as of the close of the business day that is two business days before the
date the payment is due (except for the Phantom Stock Investment, which will be
valued based on the average of the closing prices of the Investment on the 10
business days ending two business days before the payment is due). All
installment payments will be made in cash on a pro rata basis from your
investments at the time of payment.
Change of Control Election. At the time you make a Deferral Election,
you may make a special election which overrides your elections as to Payment
Commencement Event and installment payments in the event that your service as a
Director is terminated within one year following a Change of Control of the
Company. You may indicate that in such event, you want to receive all amounts
credited to your Account in a lump sum within 30 days following termination of
service as a Director.
Change of Payment Elections. Each of the above payment elections will
renew automatically without the filing of a separate Deferral Election Form each
year. However, if you want to change any of the above elections, you may do so
by filing a new Deferral Election Form. Except as provided under "Installment
Election" above, the changes will only be effective with respect to fees earned
in the calendar year
-4-
<PAGE> 5
following the calendar year in which the new form is filed.
DESIGNATION OF BENEFICIARY
You will receive a Designation of Beneficiary form on which to indicate
the beneficiary who should receive any lump-sum payment or installment payments
due from your Account in the event of your death. Any such designation may be
revoked at any time and a new beneficiary designated by filing a new Designation
of Beneficiary form with the Company's Human Resources Department. If no
beneficiary is designated, your Account will be paid to your estate.
EFFECT ON DIRECTOR'S RETIREMENT PLAN
An election to defer receipt of Director's fees will not affect the
benefits payable to you pursuant to the Sonat Inc. Retirement Plan for
Directors.
CONSEQUENCES UNDER SECURITIES EXCHANGE ACT SECTION 16
General. As a Director of the Company, you are subject to the
provisions of Section 16 of the Securities Exchange Act. Section 16(b) requires
you to pay over to the Company any profit that you realize from the purchase and
sale, or sale and purchase, of any Company equity security within any period of
less than six months. Section 16(a) requires you to report changes in your
beneficial ownership of Company equity securities to the Securities and Exchange
Commission. These reports are made on Form 4 (filed within 10 days after the end
of the month in which the transaction occurs) or Form 5 (filed by the February
14 after the year in which the transaction occurs).
Contributions; Transfers Among Funds. Units in the Phantom Stock
Investment are treated as equity securities under Section 16. Acquisitions of
these units through deferral of fees or reinvestment of earnings are exempt
under Section 16(b) (in other words, such transactions are neither purchases nor
sales). An
-5-
<PAGE> 6
election to transfer funds into (or out of) the Phantom Stock Investment is
exempt under Section 16(b), unless it occurs less than six months after an
election to make an "opposite way" transfer under the Plan. For example, an
election to transfer funds OUT OF the Phantom Stock Investment (and into a
phantom mutual fund) is not a Section 16(b) sale UNLESS it occurs less than six
months after an election to transfer funds INTO the Phantom Stock Investment.
Plan Distributions. The transactions that result from the payment of
your Account to you upon your termination of service as a Director (i.e.,
liquidation of units in the Phantom Stock Investment) are exempt under Section
16(b).
Reporting Requirements. The crediting of Phantom Stock Investment units
upon a deferral of fees is reportable on Form 5 (or, if you so elect, on an
earlier Form 4). Transfers of funds that result in a Section 16 purchase or sale
must be reported on Form 4. All other transfers must be reported on Form 5 (or,
if you so elect, on an earlier Form 4). Distributions under the Plan upon your
termination of service as a Director are not subject to any reporting
requirements. The crediting of Phantom Stock Investment units to reflect the
reinvestment of dividends is not separately reportable; however, each Form 4 or
Form 5 report that shows a transaction in Phantom Stock Investment units must
show the total number of units held in the Plan.
-6-
<PAGE> 1
EXHIBIT 10.15
SONAT INC. DEFERRED COMPENSATION PLAN
PLAN SUMMARY
MARCH 1, 1997
The Sonat Inc. Deferred Compensation Plan ("the Plan") provides you
with a tax-advantaged opportunity to save for retirement and other future income
needs. You are encouraged to review the Plan with your family and your tax and
financial advisors to determine how the Plan can help you meet your personal
financial goals.
The following is a summary of the Plan, in a Question-and-Answer
format. The official provisions of the Plan are in the Plan document, which you
may obtain from the Human Resources Department in Birmingham. If there is any
conflict or inconsistency between this summary or any other written or oral
communication and the Plan document, the official Plan document will always
govern. The Plan is subject to continued compliance with Internal Revenue
Service regulations.
HOW THE PLAN WORKS
1. WHAT IS THE SONAT INC. DEFERRED COMPENSATION PLAN?
- AN OVERVIEW
The Plan is a non-qualified deferred compensation program that allows
you to make pre-tax deferrals of base pay and bonuses, allocate the deferrals to
various investment options, and have your account balance paid to you in the
future.
You will be able to elect, for each year, the amount of base pay and
bonus that you wish to defer. You may defer up to 25% of your base pay and up to
90% of your annual bonus. Your deferrals will accrue earnings as if held in
"phantom" investments in the investment options available under the Sonat
Savings Plan.
Generally speaking, distribution will be made upon termination of your
employment. You may instead select a specified date on which to receive
payments, which may be before or after your anticipated retirement or
termination date. Payment will be made as a lump sum or in annual installments,
at your election.
2. WHAT ARE THE ADVANTAGES OF THE DEFERRED COMPENSATION PLAN?
A. REDUCED CURRENT INCOME TAXES.
Your current federal taxable income is reduced by the amount you elect
to defer. However, you will be taxed at the ordinary income rates in effect at
the time of distribution of your account. All state income tax laws (except in
Pennsylvania and New Jersey) follow the federal law and exclude the amount you
defer from current taxable income. Please consult with your personal tax advisor
regarding the laws for your particular state.
1
<PAGE> 2
B. MORE DOLLARS AVAILABLE FOR INVESTMENT.
The initial deferral (investment) into this Plan can be a more
efficient investment than most other outside investments, because you are
investing pre-tax income rather than after-tax income. For example:
<TABLE>
<CAPTION>
==================================
OUTSIDE
INVESTMENT THIS PLAN
==================================
<S> <C> <C>
Compensation $1.00 $1.00
-----------------------------------------------------------------------
Current Income Tax @ 36% -.36 -.00
-----------------------------------------------------------------------
Net Funds Invested $ .64 $1.00
=======================================================================
</TABLE>
C. TAX-DEFERRED ACCUMULATION.
Earnings in your Plan account are not subject to federal income tax
until paid to you. As a result, investments in the Plan can generate higher
results than similar investments whose earnings are taxed each year.
D. POSSIBLE FUTURE TAX SAVINGS.
You may achieve additional income tax savings when you receive your
deferral account, if you are in a lower tax bracket at that time.
3. WHAT ARE THE TRADE-OFFS IF I PARTICIPATE?
A. REDUCED CURRENT CASH FLOW.
By deferring your compensation, you reduce your current cash flow.
Therefore, if you require a greater amount of current income, deferral may not
be appropriate for you. However, the cash flow reduction may be significantly
less than the amount deferred, since your deferral is in pre-tax dollars. For
example, if your tax rate is 36%, $10,000 of compensation produces approximately
$6,400 of after-tax income. Therefore, deferring $10,000 reduces your disposable
after-tax income by $6,400, and you also have the equivalent of $10,000 working
for you in your deferral account.
B. THE PROGRAM IS UNFUNDED.
Under current IRS regulations, your deferral account must be an
unsecured general obligation of Sonat Inc. and may not be funded in any way.
Therefore, your right to receive payments under the Plan will be subject to
Sonat Inc.'s ability to pay, and in the event of Sonat's bankruptcy or
insolvency will be the same as any other unsecured general creditor. The Plan
does not create a trust relationship between you, or any other person, and the
Company.
2
<PAGE> 3
C. RESTRICTED ACCESS TO YOUR MONEY.
You do not have access to your deferrals and earnings until the date
you specify on your election form, except in the limited circumstances discussed
at Question 15.
D. EMPLOYMENT AND LOCAL TAXES.
Amounts you defer under the Plan are subject to Social Security taxes
(up to the statutory limit), Medicare taxes and local (county and city) taxes
(if applicable). Withholding of these taxes on base pay deferral amounts will be
made from your remaining undeferred base pay. If you defer any of your bonus,
the taxes on your deferral will be withheld from the portion of the bonus that
is not deferred. (This is the reason the Plan does not allow complete deferral
of a bonus payout.) However, under current law, the payments from your accounts
will not be subject to Social Security, Medicare or local taxes at the time of
distribution.
E. POSSIBLE HIGHER TAX RATE.
The benefits of your deferral may be smaller than you would otherwise
expect if, at the time of distribution, you are in a higher tax bracket than
when you deferred.
4. HOW DOES THE DEFERRED COMPENSATION PLAN COMPARE WITH THE SONAT SAVINGS
PLAN?
Please refer to Exhibit A of this Summary.
5. DOES MY PARTICIPATION AFFECT MY OTHER SONAT BENEFITS?
Your participation in the Plan will have no effect on your other Sonat
benefits.
ELIGIBILITY
6. WHO IS ELIGIBLE TO PARTICIPATE IN THE DEFERRED COMPENSATION PLAN?
To be eligible to participate in the Plan, you must be an officer of
the Company or one of its principal subsidiaries, and must be selected for
participation by the Company's Chief Executive Officer.
DEFERRAL ELECTIONS
7. WHAT DEFERRAL ELECTIONS CAN I MAKE?
Each year you will be able to elect to defer both base pay and bonus.
Each item of compensation (base pay and bonus) for each year will be treated as
a discrete election. With each deferral election, you will select how much you
wish to defer, how you wish it to be paid (lump sum or installments), and when
you wish to receive it in the future. You will also select how the deferred
amounts will be allocated among the investment choices under the Plan. All of
these elections are discussed in more detail below.
3
<PAGE> 4
8. WHEN DO I MAKE MY ELECTION TO DEFER?
An election to defer base pay must be made before the calendar year in
which the base pay is earned. The election to defer a bonus earned for a given
calendar year must be made by March 31 of that year.
Special rules will apply for an officer who first becomes eligible to
participate in the Plan after January 1, 1997. Such an officer must make
deferral elections for the remainder of the year's base pay, and the bonus
earned for that year, during that year and within 31 days after becoming
eligible.
9. HOW MUCH CAN I DEFER?
You may defer up to 25% of your annual base pay. Your deferral can be
for 1, 2, 3, 4 or 5% of base pay, or in 5% increments up to 25%. You may also
defer up to 90% of your annual bonus in 10% increments. An election to defer a
bonus will apply only to your annual bonus opportunity, and not to any special
bonus that you may receive.
In certain circumstances, if you elect to defer 90% of an annual bonus,
the remaining 10% may not be enough to satisfy the applicable federal and state
income, Social Security, Medicare and local tax withholding obligations. If this
situation applies to you, the Company will automatically reduce the amount of
bonus deferred (generally to about 85%), and use the remainder to satisfy the
tax withholding obligations.
Your election to defer is irrevocable, so you should carefully assess
the impact of your deferral elections on your personal financial situation.
10. WHAT ARE MY INVESTMENT OPTIONS?
Your deferral accounts will accrue earnings, according to your
election, as if held in the investment options available under the Sonat Savings
Plan - Sonat Stock Fund, Benchmark Government, PIMCO Total Return, Fidelity
Puritan, Benchmark Equity Index, MFS Research, Fidelity Magellan, T. Rowe Price
New Horizons, and T. Rowe Price International. Your allocations to these
investment choices must be in 1% increments. For more information, see the
Summary of Investment Options for the Plan.
Please note that your deferrals will not actually be invested in these
funds, but will be valued as if they were. (This bookkeeping treatment is often
called a "phantom" investment.) Your account's value will change as the values
of the relevant funds change, including reinvestments of dividends and earnings.
11. CAN I CHANGE HOW FUTURE ALLOCATIONS WILL BE INVESTED, AND MOVE FUNDS
AMONG THE INVESTMENT OPTIONS?
You may change the way future allocations are invested by selecting a
new allocation (in 1% increments, with a total of 100% among the investment
choices). You may also transfer your current balance among the investment
options by selecting (in 1% increments, with a total allocation of 100%) the
options in which you want your funds to be invested. Each procedure can be done
by phone on any business day, and will be effective on the day you make the
phone call.
4
<PAGE> 5
To process these transactions, you should call Mike Byrne in the
Company's Human Resources Department (205/325-7329).
12. WHEN WILL I RECEIVE MY DEFERRAL ACCOUNT BALANCE?
Each time you make a deferral election, you will elect a payment event
upon which to receive the amount deferred (and earnings on that amount) -
termination of employment, or a specified future date. Each year and each
element of compensation (base pay or bonus) will be treated as a separate
election. Special Plan provisions apply in the event of your death, or in the
event of a change of control of the Company.
A. TERMINATION OF EMPLOYMENT
If you select termination of employment as the payment event, the
account balance will be paid to you on the first business day of the following
calendar quarter. (If your employment terminates on the first day of a calendar
quarter, payment will be made as soon as practicable (and within 30 days)
thereafter.) This selection would cover termination due to early or normal
retirement, disability, discharge, or resignation. AN ELECTION TO RECEIVE A
DEFERRED AMOUNT (AND EARNINGS) UPON TERMINATION OF EMPLOYMENT WILL BE
IRREVOCABLE.
B. SPECIFIED DATE
You may instead select a specified date on which to receive the amount
deferred (and earnings). Such a date must be a July 1, must be at least two
years after the deferral election is made, and must be no later than your 70th
birthday.
If you select a payment event of a specified date you may, by making a
subsequent election at least 12 months before the specified date, elect to
postpone the date of payment. The new date must be a July 1, must be at least
two years after the date you first selected, and must be no later than your 70th
birthday. (You may not select termination of employment as your new payment
event.) YOU MAY POSTPONE THE SPECIFIED PAYMENT DATE OF A GIVEN DEFERRAL (AND
EARNINGS) ONLY ONCE. For example, if you elect to have a portion of your 1998
base pay (and earnings) paid on July 1, 2001, you could elect a later payment
date (on or after July 1, 2003) by filing an election before July 1, 2000.
C. DEATH
Upon your death, your entire balance in the Plan will be paid to your
beneficiary in a cash lump sum on the first day of the calendar quarter
following your death (or the first business day thereafter). For information
about beneficiary designations, see Question 14.
5
<PAGE> 6
D. CHANGE OF CONTROL
If your employment terminates within three years after a Change of
Control of the Company (as defined n the Plan), your entire balance in the Plan
will be paid to you in a cash lump sum as soon as practicable (and within 30
days) after your termination of employment. Also, if a Change of Control occurs
after termination of your employment, your entire balance in the Plan will be
paid to you in a cash lump sum as soon as practicable (and within 30 days) after
the Change of Control.
E. COMMITTEE DISCRETION TO DEFER PAYMENT
Under current tax law, if you are an executive whose pay is disclosed
in the Company's proxy statement, and if the "non-performance based" pay you
receive in a year exceeds $1,000,000, the Company will not receive a tax
deduction for the excess non-performance based pay. In general, under the
Company's current compensation programs, the following elements of pay are
"non-performance based" when received: base pay; a portion of annual bonus; base
pay deferred from previous years (and earnings thereon); and a portion of annual
bonuses deferred from previous years (and earnings thereon).
IF THE EXECUTIVE COMPENSATION COMMITTEE DETERMINES THAT YOUR RECEIPT OF
A PAYMENT FROM THE PLAN COULD CAUSE THE COMPANY TO LOSE A TAX DEDUCTION UNDER
THIS LAW, THE COMMITTEE CAN DEFER ALL OR PART OF THE PAYMENT TO ELIMINATE OR
REDUCE LOSS OF THE TAX DEDUCTION. UNDER CURRENT LAW, THIS ISSUE CAN GENERALLY
ARISE ONLY IF YOU RECEIVE A PAYMENT BEFORE TERMINATION OF EMPLOYMENT.
13. HOW WILL MY ACCOUNT BE PAID OUT OF THE PLAN?
When you make a deferral election, you will elect how you wish to
receive the amount deferred (and earnings on that amount). As with the payment
event, each year and each element of compensation (base pay and bonus) will be
treated as a separate election. You may choose, in each case, a lump sum payment
or annual installments.
A. ANNUAL INSTALLMENTS
You may elect to have payment made to you in 2-15 annual installments.
IF YOU MAKE AN INSTALLMENT ELECTION, THAT ELECTION IS IRREVOCABLE. If you elect
installment payments, the first payment will be made on the first business day
of the calendar quarter after your payment event (i.e. your termination or
specified future date), and each subsequent payment will be made on the
anniversary of the preceding payment. (If your payment event occurs on the first
day of a calendar quarter, the first payment will be made as soon as practicable
(and within 30 days) thereafter.) Each installment will equal (1) the balance of
the amount deferred (and earnings) being paid out under the installment election
at the time of payment, divided by (2) the number of payments remaining to be
paid (including the current installment). For example, if you elect for a
deferral (and earnings) to be paid in three annual installments beginning July
1, 2005, the first payment will equal 1/3 of the balance on July 1, 2005; the
second installment will equal 1/2 of the balance on July 1, 2006; and the last
installment will equal the remaining balance on July 1, 2007.
6
<PAGE> 7
B. LUMP SUM
If you make a lump sum election, payments will be made to you in that
form. If you elect a lump sum, you may later decide, by making an irrevocable
election at least 12 months before the payment event (that is, termination of
employment or a specified date, according to your election), to instead receive
the payment in 2-15 annual installments, as discussed above. Therefore, if you
are not sure whether you want installment payments at the time you make a
deferral election, you may wish to elect a lump sum, and consider making an
installment election later.
C. ACCOUNT VALUATION
All investment options will be valued at the close of the business day
that is two business days before the date of payment (except for the Sonat
Stock Fund investment, which will be valued based on the average of the closing
price of the Fund on the 10 business days ending two business days before the
date of payment). All installment payments will be made on a pro rata basis
from your investments at the time of payment.
14. HOW DO I NAME MY BENEFICIARY?
Upon your death, your beneficiary(ies) will be paid your entire Plan
balance. You may make or change a beneficiary designation at any time, by
filling out a Beneficiary Designation Form and filing it with the Company's
Human Resources Department. You may name one or more primary beneficiaries, as
well as one or more contingent beneficiaries (to receive your Plan balance if
all primary beneficiaries predecease you). If you make no beneficiary
designation, or if all designated beneficiaries predecease you, your Plan
balance will be paid to your estate.
ACCESS TO YOUR MONEY BEFORE THE PAYMENT EVENT
15. CAN I GET MONEY FROM MY ACCOUNT BEFORE THE DATE I ELECT FOR DEFERRAL
PAYMENTS TO BEGIN?
Access to your Plan balance before the payment event that you select is
very limited. You may withdraw funds from your deferral account only in the
event of an extreme and unforeseen financial hardship.
A. FINANCIAL HARDSHIP DISTRIBUTIONS
In the event of unusual, extraordinary expenses or unforeseen financial
hardship, you may request a distribution of the amount reasonably necessary to
meet your financial need. This definition of hardship is more stringent than the
hardship provision in the Sonat Savings Plan, and does not, for instance,
include college expenses, or costs in connection with a home purchase. It
generally encompasses hardship generated by unforeseen circumstances, such as
unreimbursed medical expenses, family loss of income by layoff and the like. The
Executive Compensation Committee of the Board of Directors may approve or deny
the request in its sole discretion, and distribution is limited to the amount
necessary to relieve the hardship plus your income tax liability on the
distribution. If approved, this distribution is not subject to any penalty
taxes, and is ordinary income for federal and state income tax purposes.
7
<PAGE> 8
B. LOANS
Loans are not available from your account balance, since the Plan would
lose its favorable tax treatment if loans were permitted.
TAX CONSIDERATIONS
16. WHAT ARE SOME OF THE MORE COMMON TAX-RELATED QUESTIONS THAT SHOULD
CONCERN ME?
AM I TAXED ON MY DEFERRALS OR EARNINGS CREDITED TO THEM?
Under current tax law, neither your deferrals nor the earnings thereon
are subject to federal income tax before withdrawal from the Plan. All state
income laws (except in Pennsylvania and New Jersey) follow the federal law and
exclude the amount you defer from current taxable income. Under current law,
there will be no income tax liability until you actually receive a payment.
Check with your legal or tax counsel concerning your specific state or local
(city, county) tax laws.
WHAT ABOUT SOCIAL SECURITY, MEDICARE AND LOCAL TAXES?
Deferred amounts are subject to these taxes AT THE TIME OF DEFERRAL.
The eventual payment of your deferral accounts, including earnings, will not be
subject to these taxes under current law. Distributions from the Plan will not
reduce your Social Security benefits after retirement, as they do not represent
wages for services performed in the calendar year of receipt.
HOW WILL PAYMENTS BE REPORTED?
Payments made to you will be reported on Form W-2, whether you are
employed or retired at time of distribution. Payments to beneficiaries made in
the event of your death will be reported on Form 1099.
CAN I ROLL OVER MY DISTRIBUTION TO AN IRA?
No, because this is not a tax-qualified program under the Internal
Revenue Code. When electing a Plan distribution, you should seek professional
tax advice to determine the best course of action in light of your financial
circumstances.
WILL THE PLAN BENEFITS PAID TO MY BENEFICIARIES BE INCLUDED IN MY GROSS ESTATE
FOR FEDERAL ESTATE TAX PURPOSES?
Yes, the cumulative amounts in your account at the time of death will
be included in your estate. If, however, your spouse is your beneficiary and the
benefit qualifies for the estate tax marital deduction, the amount in your
account may not increase your taxable estate.
You should consult with your legal and financial advisors about
beneficiary designations and the payment of benefits in the event of your death.
8
<PAGE> 9
HOW WILL MY DISTRIBUTIONS BE TAXED?
Under current law, distributions from your account are taxed as
ordinary income when received, and no special tax advantages or penalties apply.
Federal and state income taxes will be withheld from your payments when they are
made.
ENROLLMENT
17. HOW DO I SIGN UP FOR THE DEFERRED COMPENSATION PLAN?
You will be given enrollment materials a few weeks before a deferral
election is required under the Plan. You should review these materials carefully
with your family and financial advisors, and return all the necessary forms by
the dates described in the materials.
18. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE DEFERRED COMPENSATION
PLAN OR THE ENROLLMENT PACKAGE?
If you have general questions about the Plan or the enrollment
materials, call Mike Byrne (205/325-7329) or Al Delchamps (205/325-7676).
You should call Mike Byrne (205/325-7329) for information about your
Plan accounts and the available investment options, to change the way future
allocations to your account are invested, to move funds among the investment
options, and for information regarding beneficiary designations.
OTHER INFORMATION
19. WHAT INFORMATION WILL I RECEIVE ABOUT MY PLAN BALANCE?
You will receive a quarterly statement that will provide you with the
balance in your account, deferrals and investment earnings for the quarter, and
other information.
20. WHAT ARE THE SECTION 16 CONSEQUENCES OF PARTICIPATING IN THE PLAN?
You need to review this Question and Answer only if you are an
executive officer of Sonat Inc. who is subject to the provisions of Section 16
of the Securities Exchange Act. Section 16(b) requires executive officers to pay
over to the Company any profit realized from the purchase and sale, or sale and
purchase, of Company equity securities within any period of less than six
months. Section 16(a) requires reports of changes in beneficial ownership of
Sonat equity securities to the Securities and Exchange Commission. YOU WILL BE
NOTIFIED IF YOU ARE SUBJECT TO SECTION 16.
The following will describe how transactions in the Plan are treated
for purposes of Sections 16(b) (short swing profit liability) and 16(a)
(reporting). When a transaction is said to be "exempt", it means the transaction
is not a "purchase" or a "sale" under Section 16(b). (As noted below, however,
many exempt transactions still trigger reporting requirements under Section
16(a).)
9
<PAGE> 10
A. CONTRIBUTIONS; INVESTMENT OF EARNINGS
Acquisitions of units of the phantom Sonat Stock Fund through deferrals
and reinvestment of earnings under the Plan are exempt under Section 16(b).
B. TRANSFERS AMONG INVESTMENT OPTIONS; IN-SERVICE CASH WITHDRAWALS AND
PAYMENTS; SAVINGS PLAN LOANS
Transfers among investment options under the Plan are called
"discretionary" transactions under the Section 16 rules. The Section 16
consequence of a discretionary transaction in the Plan is affected by the
discretionary transactions in ANY Sonat plan that involves stock or phantom
stock funds - the Sonat Savings Plan, the Savings Plan feature of the
Supplemental Benefit Plan, and the Deferred Compensation Plan. A discretionary
disposition of units of the Sonat Stock Fund or phantom Sonat Stock Fund in ANY
of these plans (such as a transfer into a mutual fund investment, or the
liquidation of stock to acquire loan proceeds or to fund a cash in-service
withdrawal from the Savings Plan) will be exempt UNLESS you elected to make a
discretionary acquisition (such as transfer from a mutual fund (or phantom
mutual fund) into units of the Sonat Stock Fund (or phantom Sonat Stock Fund))
within the previous 6 months under ANY plan. Similarly, a discretionary
acquisition of units of the Sonat Stock Fund (or phantom Sonat Stock Fund) under
ANY plan (as described above) is exempt, UNLESS you elected to make a
discretionary disposition of units of the Sonat Stock Fund (or phantom Sonat
Stock Fund) under ANY plan within the previous 6 months.
For example, assume the following sequence of transactions, with no
prior discretionary transactions under any plan:
December 1, 1998 -- you transfer 1,000 units out of the Sonat Stock
Fund in the Savings Plan into a mutual fund.
January 1, 1999 -- you transfer 1,000 units out of the phantom Sonat
Stock Fund in the Supplemental Savings Plan into a phantom mutual fund.
March 1, 1999 -- you acquire 1,000 units of the phantom Sonat Stock
Fund in the Deferred Compensation Plan by transfer from a mutual fund.
July 1, 1999 -- you take an in-service cash withdrawal from the Savings
Plan which results in the liquidation of 500 units of the Sonat Stock
Fund.
The first two transactions are exempt under Section 16(b), because they
are both dispositions of Sonat stock or phantom stock and there was no
discretionary acquisition under any plan within the preceding six months. The
March 1 transaction is a non-exempt "purchase" under Section 16(b), because it
is a discretionary acquisition that occurs only two months after a discretionary
disposition (the January 1 transfer). The fact that the January and March
transactions occurred in different plans does not change the result. The March 1
purchase can be matched against any sale that occurs inside or outside the plans
within six months before or after March 1 (including a sale resulting from a
cashless option exercise). The July transaction is a discretionary disposition
that occurred within three months of the March 1 discretionary acquisition, so
it is a non-exempt "sale" under Section 16(b). The March purchase and the July
sale will be matched against each other for Section 16(b) short-swing profit
liability purposes.
10
<PAGE> 11
C. DISTRIBUTIONS FROM THE PLAN
In general, the liquidation of phantom Sonat Stock Funds units in
connection with a distribution from the Plan is a Section 16(b) "sale", unless
the Executive Compensation Committee of the Company's Board of Directors
specifically approves the related deferral election. (However, such a
liquidation is exempt under Section 16(b) if the distribution results from
termination of employment, if you did not initially elect a lump-sum payment and
subsequently change to annual installments.)
D. REPORTING REQUIREMENTS
Transactions in the Plan that result in a Section 16 "purchase" or
"sale" must be reported on Form 4. All other (exempt) discretionary transactions
must be reported on Form 5 (or, if you so elect, on an earlier Form 4).
Transactions that result from your termination of service are not subject to any
reporting requirements (unless you continue to serve as a director). Each Form 4
or Form 5 report that shows a transaction in phantom Sonat Stock Fund units must
show the total number of shares of phantom Sonat stock represented by the units
credited to your account in the Plan.
21. CAN THE PLAN BE AMENDED OR DISCONTINUED?
The Company's Board of Directors retains the right to amend or
terminate the Plan at any time. However, your accrued benefits at the time of
any amendment, suspension or termination of the Plan cannot be reduced.
11
<PAGE> 12
SONAT INC. DEFERRED COMPENSATION PLAN
PLAN SUMMARY
EXHIBIT A
COMPARISON OF NON-QUALIFIED DEFERRED COMPENSATION PLAN
AND BEFORE-TAX (401K) CONTRIBUTIONS TO QUALIFIED SONAT SAVINGS PLAN
<TABLE>
<CAPTION>
========================================================================================
NON-QUALIFIED
DEFERRED QUALIFIED
COMPENSATION PRINCIPAL CHARACTERISTICS SONAT SAVINGS
PLAN PLAN
========================================================================================
<S> <C> <C>
Yes Deferral on Pre-Tax Basis Yes(1)
- ----------------------------------------------------------------------------------------
Yes FICA/Medicare/Local Withheld on Deferrals Yes
- ----------------------------------------------------------------------------------------
Yes Earnings Accumulate Tax Deferred Yes
- ----------------------------------------------------------------------------------------
No Actual Funds or Assets Held in Participant Accounts Yes
- ----------------------------------------------------------------------------------------
Yes Distributions Subject to Income Taxes Yes
- ----------------------------------------------------------------------------------------
28% Federal Income Tax Statutory Withholding Rate on 20%(2)
Lump-Sum Payments
- ----------------------------------------------------------------------------------------
No Rollover into an IRA Allowed Yes
- ----------------------------------------------------------------------------------------
No 5 or 10 Year Income Tax Averaging Available Yes(3)
- ----------------------------------------------------------------------------------------
No 15% Excise Tax on Lump-Sum Distributions Over $750,000 Yes(4)
- ----------------------------------------------------------------------------------------
Yes(5) Hardship Withdrawals Available Yes
- ----------------------------------------------------------------------------------------
No Loans Against Accounts Available Yes
- ----------------------------------------------------------------------------------------
No 10% Penalty Tax for pre-age 59 1/2 distributions Yes(2)
========================================================================================
</TABLE>
- ------------------------
(1) Amount limited by IRS rules.
(2) If not rolled over.
(3) 5 year averaging not available on distributions after 1999; 10 year
averaging grandfathered for those born on or before January 1, 1936.
(4) For years after 1999.
(5) "Hardship" definition is much more stringent than in the Savings Plan.
12
<PAGE> 1
Exhibit 11
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands Except
Per-Share Amounts)
<S> <C> <C> <C>
Primary Earnings Per Share (1)
------------------------------
Net Income $201,189 $192,888 $141,407
======== ======== ========
Common Stock and Common Stock Equivalents:
Weighted Average Number of Shares
of Common Stock Outstanding 86,211 86,270 87,119
Common Stock Equivalents Applicable
to Outstanding Stock Options 1,353 832 951
-------- -------- -------
Weighted Average Number of Shares
of Common Stock and Common Stock
Equivalents Outstanding 87,564 87,102 88,070
======== ======== ======
Primary Earnings Per Share $ 2.30 $ 2.21 $ 1.61
======== ======== ========
</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,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands)
Earnings from Continuing Operations:
Income before income taxes $294,304 $282,497 $154,871 $364,198 $133,728
Fixed charges (see computation below) 152,830 165,154 127,909 129,160 156,428
Less allowance for interest capitalized (5,094) (6,540) (6,692) (4,101) (8,422)
-------- -------- ------------- -------- --------
Total Earnings Available for Fixed Charges $442,040 $441,111 $276,088 $489,257 $281,734
======== ======== ============= ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $145,406 $157,653 $120,295 $122,204 $149,165
Rentals(b) 7,424 7,501 7,614 6,956 7,263
-------- -------- ------------- -------- --------
$152,830 $165,154 $127,909 $129,160 $156,428
======== ======== ============= ======== ========
Ratio of Earnings to Fixed Charges 2.9 2.7 2.2 3.8 1.8
======== ======== ============= ======== ========
</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
unconsolidated affiliates.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF SONAT INC.
AS OF JANUARY 1, 1997
<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 Intrastate-Alabama Inc. Alabama 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%
Sonat Public Service Company L.L.C.(e) Delaware 50%
Vail Trading Company Delaware 100%
Sonat Power Inc.(f) Delaware 100%
Pacific Gas Power Inc. Delaware 100%
Sonat Power Marketing Inc. Delaware 100%
Sonat Power Marketing L.P.(g) Delaware 65%
Utilities Service Group L.P.(h) 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(i) Delaware 100%
Field Gas Gathering Inc. Delaware 100%
Sonat Minerals Inc. Delaware 100%
Sonat Minerals Leasing Inc. Delaware 100%
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%
Destin Pipeline Company Inc. Delaware 100%
Sonat Gathering Company Delaware 100%
Sonat Ventures Inc.(j)(k) Delaware 100%
Sonat NGV Technology Inc.(l) Delaware 100%
South Georgia Natural Gas Company Delaware l00%
Southern Deepwater Pipeline Company(m) Delaware l00%
Southern LNG Inc.
(formerly Southern Energy) Delaware l00%
Southern Gas Storage Company(n) Delaware l00%
Southern Offshore Pipeline Company(m) Delaware 100%
</TABLE>
<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; AGL Energy
Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds
a 35-percent limited partnership interest.
(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 Marketing Company L.P. has a 50-percent interest in Sonat Public
Service Company L.L.C., a limited liability company, the remaining 50
percent of which is owned by PSNC Production Corporation, a wholly
owned subsidiary of Public Service Company of North Carolina, Inc.
(f) 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.
(g) Sonat Power Marketing Inc. is a 65-percent participant and General
Partner in Sonat Power Marketing L.P., a limited partnership; AGL Power
Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds
a 35-percent limited partnership interest.
(h) Sonat Energy Services Company has a 64-percent limited partnership
interest and a 1-percent general partnership interest and Sonat Power
Marketing Inc. has a 35-percent limited partnership interest in
Utilities Service Group L.P., a Delaware limited partnership.
(i) 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.
(j) 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 wholly owned subsidiary of Energen
Corporation.
<PAGE> 4
(k) 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 wholly
owned subsidiary of Lykes Energy, Inc.
(l) Sonat NGV Technology Inc. is a one-half participant in NGV Southeast
Technology Center, L.L.C., a Georgia limited liability company, the
remaining 50 percent of which is held by Georgia Energy Company, a
subsidiary of AGL Resources, Inc.
(m) Southern Deepwater Pipeline Company and Southern Offshore Pipeline
Company each have a 50-percent interest in Sea Robin Pipeline Company,
an unincorporated joint venture.
(n) 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 Tennessee Gas Pipeline Company, a subsidiary of El Paso
Energy Corporation. Bear Creek Storage Company has a l00-percent
interest in Bear Creek Capital Corporation.
<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 24, 1997
To Our Stockholders:
The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation,
will be held at the Ballroom, The Ritz-Carlton Houston, 1919 Briar Oaks Lane,
Houston, Texas at 9:00 a.m., local time, on Thursday, April 24, 1997, for the
following purposes:
1. To elect five Directors as members of the Board of Directors of the
Company, to serve until the 2000 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. l).
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 7,
1997, 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,
/s/ Beverley T. Krannich
BEVERLEY T. KRANNICH
Secretary
Birmingham, Alabama
March 19, 1997
- --------------------------------------------------------------------------------
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 24, 1997
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 24, 1997 at 9:00 a.m. at the Ballroom, The Ritz-Carlton Houston, 1919
Briar Oaks Lane, Houston, Texas. Mailing of the Proxy Statement and the
accompanying proxy card to the stockholders is expected to commence on or about
March 20, 1997.
VOTING SECURITIES
As of January 31, 1997, the Company had outstanding 86,417,161 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 7, 1997, 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. 1. 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 II 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 II Directors are Jerome J.
Richardson, Donald G. Russell, Adrian M. Tocklin, James B. Williams and Joe B.
Wyatt. Each of the nominees has been previously elected as a Director by the
stockholders, except for Mr. Russell and Ms. Tocklin. 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" JEROME J. RICHARDSON, DONALD
G. RUSSELL, ADRIAN M. TOCKLIN, JAMES B. WILLIAMS AND JOE B. WYATT AS CLASS II
DIRECTORS.
<PAGE> 3
NOMINEES FOR DIRECTOR -- CLASS II -- TERMS TO EXPIRE 2000
<TABLE>
<S> <C>
JEROME J. RICHARDSON, age 60, is Owner/Founder of the NFL Carolina
[PHOTO Panthers. He has served as a Director of the Company since 1991. Mr.
JEROME J. RICHARDSON] Richardson is also a Director of NCAA Foundation, 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.
- ----------------------------------------------------------------------------------------------
DONALD G. RUSSELL, age 65, is Executive Vice President of the
[PHOTO Company and Chairman of the Board and Chief Executive Officer of
DONALD G. RUSSELL] Sonat Exploration Company (a wholly-owned subsidiary of the
Company). On September 22, 1994, he was elected as a Director of the
Company by the Board of Directors, effective as of September 22,
1994. During the past five years, Mr. Russell has served as an
executive officer of the Company and Sonat Exploration Company.
- ----------------------------------------------------------------------------------------------
ADRIAN M. TOCKLIN, age 45, is President -- Diversified Operations of
[PHOTO CNA Insurance Companies, the principal business of which is property
ADRIAN M. TOCKLIN] and casualty insurance. On July 28, 1994, she was elected as a
Director of the Company by the Board of Directors, effective as of
September 1, 1994. She is also a 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.
- ----------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
JAMES B. WILLIAMS, age 63, is Chairman of the Board and Chief
[PHOTO Executive Officer of SunTrust Banks, Inc. He has served as a
JAMES B. WILLIAMS] Director of the Company since 1987. Mr. Williams is also a Director
of The Coca-Cola Company, 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.
- ----------------------------------------------------------------------------------------------
JOE B. WYATT, age 61, is Chancellor, Chief Executive Officer and
[PHOTO Trustee of Vanderbilt University, a position he has held during the
JOE B. WYATT] 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 Micro, Inc., Reynolds Metals Company and
University Research Association.
- ----------------------------------------------------------------------------------------------
</TABLE>
CONTINUING DIRECTORS -- CLASS I -- TERMS TO EXPIRE 1999
<TABLE>
<S> <C>
[PHOTO WILLIAM O. BOURKE, age 69, is Chairman of the Executive Committee of
WILLIAM O. BOURKE] the Board of Directors and a Director of Reynolds Metals Company, an
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., Premark International Inc. and Tupperware
Corporation. During the past five years prior to his retirement in
April 1992, Mr. Bourke served as an executive officer of Reynolds
Metals Company.
- ----------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
[PHOTO ROBERTO ROBERTO C. GOIZUETA, age 65, is Chairman of the Board and Chief
C. GOIZUETA] Executive Officer of The Coca-Cola Company, the principal business
of which is the manufacture of soft drinks. He has served as a
Director of the Company since 1981. Mr. Goizueta is also a Director
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.
- ----------------------------------------------------------------------------------------------
[PHOTO RONALD RONALD L. KUEHN, JR., age 61, is Chairman of the Board, President
L. KUEHN, JR.] and Chief Executive Officer of the Company. He has served as a
Director of the Company since 1981. Mr. Kuehn is also a Director of
AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation,
The Dun & Bradstreet Corporation, Transocean Offshore Inc. and Union
Carbide Corporation, and a member of the Board of Trustees of
Birmingham-Southern College and Tuskegee University. During the past
five years, Mr. Kuehn has served as an executive officer of the
Company.
- ----------------------------------------------------------------------------------------------
[PHOTO ROBERT ROBERT J. LANIGAN, age 68, is Chairman Emeritus of the Board of
J. LANIGAN] Directors of Owens-Illinois, Inc., the principal business of which
is the manufacture and sale of packaging products. He has served as
a Director of the Company since 1983. Mr. Lanigan is also a Director
of Chrysler Corporation, Cognizant Corporation, The Coleman Company,
Inc., The Dun & Bradstreet Corporation and Transocean Offshore Inc.
During the past five years prior to his appointment to his current
position, Mr. Lanigan served as an executive officer of
Owens-Illinois, Inc.
- ----------------------------------------------------------------------------------------------
[PHOTO CHARLES CHARLES MARSHALL, age 67, is the former Vice Chairman of the Board
MARSHALL] of American Telephone and Telegraph Company. He has served as a
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>
4
<PAGE> 6
CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 1998
<TABLE>
<S> <C>
[PHOTO MAX MAX L. LUKENS, age 48, is Chairman, President and Chief Executive
L. LUKENS] Officer of Baker Hughes Incorporated, the principal business of
which is the provision of products and services to the petroleum and
continuous process industries. He has served as a Director of the
Company since 1995. Mr. Lukens is also a Director of Baker Hughes
Incorporated and Transocean Offshore Inc. During the past five
years, Mr. Lukens has served as an executive officer of Baker Hughes
Incorporated.
- ----------------------------------------------------------------------------------------------
[PHOTO BENJAMIN BENJAMIN F. PAYTON, age 64, is President of Tuskegee University, a
F. PAYTON] position he has held during the past five years. He has served as a
Director of the Company since 1992. Dr. Payton is also a Director of
AmSouth Bancorporation, ITT Corporation, Liberty Corporation,
Morrison's Health Care, Inc., Praxair, Inc. and Ruby Tuesday, Inc.
- ----------------------------------------------------------------------------------------------
[PHOTO JOHN JOHN J. PHELAN, JR., age 65, is the former Chairman of the Board and
J. PHELAN, JR.] Chief Executive Officer of the New York Stock Exchange. From 1991 to
1993, he was President of the International Federation of Stock
Exchanges. Mr. Phelan has served as a Director of the Company since
1990. He is also a Director of Eastman Kodak Company, Merrill Lynch
& Co., Inc. and Metropolitan Life Insurance Company and a Senior
Advisor to The Boston Consulting Group.
- ----------------------------------------------------------------------------------------------
</TABLE>
John J. Creedon, who is currently a Class III Director, will retire from
the Board of Directors on April 24, 1997, in accordance with the Board's
retirement policy.
BOARD MEETINGS AND COMMITTEES
During 1996 the Board of Directors held eight regular and special meetings.
The Board has established Committees that 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.
5
<PAGE> 7
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, Mr. Phelan, Vice Chairman, and Mr. Goizueta, Mr.
Richardson, Ms. Tocklin and Mr. Wyatt. The Committee met three times during
1996.
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 three times during 1996.
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 funded plans. The current members of the Committee are Mr. Wyatt,
Chairman, and Mr. Lanigan, Mr. Marshall, Dr. Payton, Ms. Tocklin and Mr.
Williams. The Committee met twice during 1996.
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 and Mr. Wyatt. The Committee met six times during 1996.
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 and Mr. Richardson. The Committee met three
times during 1996.
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
6
<PAGE> 8
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. Bourke,
Chairman, and Mr. Creedon, Mr. Marshall, Dr. Payton, Mr. Phelan and Ms. Tocklin.
The Committee met twice during 1996.
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, Ms. Tocklin,
Mr. Williams and Mr. Wyatt. The Committee met three times during 1996.
COMPENSATION OF OUTSIDE DIRECTORS
FEES AND RETAINERS. Each non-employee Director of the Company receives a
quarterly retainer of $9,000 ($10,250 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 eight 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 (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
7
<PAGE> 9
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, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)
--------------------------------------------------------- -----------------------
<S> <C>
Richard B. Bates......................................... 88,277(2)
William O. Bourke........................................ 5,000
John J. Creedon.......................................... 13,550(3)
Roberto C. Goizueta...................................... 3,600
Ronald L. Kuehn, Jr. .................................... 811,067(2 and 4)
Robert J. Lanigan........................................ 6,040
Max L. Lukens............................................ 967
Charles Marshall......................................... 7,600
James E. Moylan, Jr. .................................... 118,043(2 and 5)
Benjamin F. Payton....................................... 2,612
John J. Phelan, Jr. ..................................... 2,660
Jerome J. Richardson..................................... 5,192
James A. Rubright........................................ 101,475(2)
Donald G. Russell........................................ 351,442(2)
William A. Smith......................................... 253,672(2)
Adrian M. Tocklin........................................ 2,633(6)
James B. Williams........................................ 15,200
Joe B. Wyatt............................................. 3,200
All Present Directors and Executive Officers as a Group
(20 persons)........................................... 1,926,023(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, 1997, each such
individual beneficially owned less than 1.0% 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 20 persons, beneficially owned 2.2% of the
outstanding shares of the Company's Common Stock.
The number of shares shown includes 800 shares of restricted stock for each
of Mr. Bourke, Mr. Goizueta, Mr. Lanigan, Mr. Lukens, Mr. Marshall, Dr. Payton,
Mr. Phelan, Mr. Richardson, Ms. Tocklin, Mr. Williams and Mr. Wyatt, and 400
shares of restricted stock for Mr. Creedon, granted under the Company's
Restricted Stock Plan for Directors, which shares had not vested as of January
31, 1997. 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,
1997, the following individuals also held the following number of "phantom"
shares of the Company's Common Stock under the Company's Director's Fees
Deferral Plan (with respect to Mr. Creedon, Mr. Marshall, Ms. Tocklin and Mr.
Williams) or Supplemental Benefit Plan (with respect to the other named
8
<PAGE> 10
individuals): Mr. Bates, 477 phantom shares; Mr. Creedon, 9,203 phantom shares;
Mr. Kuehn, 12,424 phantom shares; Mr. Marshall, 4,594 phantom shares; Mr.
Moylan, 188 phantom shares; Mr. Rubright, 455 phantom shares; Mr. Russell, 6,717
phantom shares; Mr. Smith, 513 phantom shares; Ms. Tocklin, 711 phantom shares;
and Mr. Williams, 4,247 phantom shares.
NOTE 2: The number of shares shown for Messrs. Bates, Kuehn, Moylan,
Rubright, Russell and Smith includes 9,600 shares, 109,600 shares, 13,500
shares, 15,700 shares, 31,000 shares and 12,100 shares, respectively, of
restricted stock granted under the Company's Executive Award Plan, which shares
had not vested as of January 31, 1997. Such persons have the right to vote and
receive dividends on such shares, but do not have the power to dispose of, or to
direct the disposition of, such shares until such shares are vested pursuant to
the terms of such plan. The number of shares shown for Messrs. Bates, Kuehn,
Moylan, Rubright, Russell and Smith also includes (a) 8,441 shares, 47,593
shares, 10,622 shares, 275 shares, 11,391 shares and 16,296 shares,
respectively, held by the Trustee under the Company's Savings Plan as of January
31, 1997; and (b) 66,000 shares, 634,800 shares, 92,000 shares, 85,500 shares,
297,000 shares and 211,000 shares, respectively, covered by options under the
Company's Executive Award Plan which were exercisable within sixty days after
January 31, 1997.
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 9,500 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 205,700 shares of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1997; 112,874 shares held by the Trustee under the
Company's Savings Plan as of January 31, 1997; 1,484,800 shares covered by
options under the Company's Executive Award Plan which were exercisable within
sixty days after January 31, 1997; and 9,200 shares of restricted stock granted
under the Company's Restricted Stock Plan for Directors, which shares had not
vested as of January 31, 1997.
COMPENSATION OF EXECUTIVE OFFICERS
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Executive Compensation Committee of the Board of Directors of the
Company, which is composed solely of non-employee Directors, administers the
Company's executive compensation program. The Committee's primary responsibility
is to ensure that the executive compensation program furthers the interests of
the Company and its stockholders.
The Company's executive compensation program has three principal
objectives: (1) to attract and retain a highly qualified and motivated
management team; (2) to appropriately reward individual 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
9
<PAGE> 11
group. The peer group used for determining 1996 compensation for corporate
executives consisted of 23 publicly held companies in the energy business (the
"Corporate Peer Group"). 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 18 of this Proxy Statement is not used to determine the
compensation of executives, because that group includes primarily natural gas
distribution companies and does not adequately represent the broader energy
industry from which the Company recruits.
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 1996 were slightly above the median level overall,
although some executives were below and some above the median. Mr. Kuehn has
been in his current position for approximately 12 1/2 years. His salary for 1996
(which included a 3.1% increase, effective April 1) 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 program is designed to pay total annual
cash compensation in the upper quartile of the relevant peer group when the
Company meets or exceeds 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 1996 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 1996 bonus opportunities were the
Company's 1996 earnings per share ("EPS") as compared to EPS targets established
by the Committee, the Company's five-
10
<PAGE> 12
year average cash flow return on assets as compared to that of a group of energy
companies whose aggregate asset mix approximates that of the Company (the
"Financial Peer Group") and, for the subsidiary officers, subsidiary earnings
before interest, taxes and corporate charges ("EBITC") as compared to EBITC
targets established by the Committee. Payout of the EPS and EBITC goals was
based on comparison of actual EPS and EBITC to the EPS and EBITC targets,
provided that a minimum level of EPS or EBITC was required for any payout to be
made. The payout of the cash flow return on assets goal was based on the
Company's performance against the mean of the Financial Peer Group.
The corporate and subsidiary goals included in the 1996 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 1996 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 1997, the Committee reviewed in detail the extent to which the
1996 performance goals had been achieved. The Company's EPS was significantly
above the target, and cash flow return on assets was significantly above the
mean for the Financial Peer Group. Each of the subsidiaries met or exceeded its
EBITC target. The payout percentages for these financial goals were 120% of the
bonus opportunity for the EPS goal, 100% of the bonus opportunity for the cash
flow return on assets goal, and 104-120% of the bonus opportunity for the
subsidiary EBITC goals.
In general, there was substantial achievement of the other corporate and
subsidiary goals. The payout percentage for corporate and subsidiary goals
ranged from 93% to 103%.
Including individual performance, the total bonus payout percentages under
the 1996 annual incentive program ranged from 95% to 130%. Mr. Kuehn's total
bonus payout percentage for 1996 was 120% of his bonus opportunity.
LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of
the Company's executive compensation program is designed to align executive and
stockholder interests by rewarding executives for the attainment of stock price
appreciation and total stockholder returns.
As a general rule, the Committee administers the long-term stock incentive
program through annual grants of stock options and restricted stock to certain
executive officers of the Company and its major operating subsidiaries. Awards
under the annual grant program were made in December 1996. In addition, the
Committee may make special awards to individual executives during the year on a
discretionary basis.
In 1996, 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 dividends paid, and weighted
for most recent performance) as compared to the total stockholder return of the
Financial 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 Financial Peer Group. In 1996, the Company's weighted annualized
three-year total stockholder return was in the top quartile of the Financial
Peer Group. The December 1996 long-term incentive grants were designed to
reflect that performance and to result in long-term compensation at that level.
For purposes of determining the value of long-term incentive compensation, an
independent compensation consulting firm uses a modified Black-
11
<PAGE> 13
Scholes option pricing model to value stock options granted by the Company and
the companies in the Corporate Peer Group. Similarly, the consulting firm values
restricted share grants based on the present value of the shares on the date of
grant (taking into account the vesting schedules of the grants and projected
executive turnover). The Committee may adjust the grants to take into account
individual performance and the number of options and restricted shares
previously granted to the executive.
In December 1996, 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 Financial Peer Group and to result in long-term compensation
in the top quartile 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 Joe B. Wyatt
</TABLE>
12
<PAGE> 14
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ending December 31, 1994,
1995 and 1996 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., 1996 $736,500 $800,000 $2,154,978(3) $748,800(4) 82,500 $108,429
Director, Chairman of 1995 $710,000 $418,600 $ 332,396(3) $306,375(5) 79,200 $108,107
the Board, President and 1994 $660,000 $450,000 $ 0 $459,938(6) 112,000 $110,064
Chief Executive Officer
Richard B. Bates, 1996 $241,875 $165,000 $ 0 $208,000(4) 20,000 $ 27,146
Senior Vice President 1995 $222,500 $ 84,900 $ 0 $ 74,175(5) 18,000 $ 26,100
1994 $208,750 $121,400 $ 0 $ 91,988(6) 22,000 $ 25,362
James E. Moylan, Jr., 1996 $245,000 $190,000 $ 0 $208,000(4) 20,000 $ 28,245
Senior Vice President 1995 $226,250 $131,100 $ 0 $ 74,175(5) 18,000 $ 27,284
1994 $200,000 $114,300 $ 0 $ 91,988(6) 22,000 $ 25,525
James A. Rubright, 1996 $300,250 $193,700 $ 0 $208,000(4) 20,000 $ 40,173
Senior Vice President 1995 $287,750 $117,100 $ 0 $ 74,175(5) 18,000 $ 40,534
and General Counsel(7) 1994 $240,625 $130,600 $ 115,572(8) $268,275(6 & 9) 67,500 $ 35,813
Donald G. Russell, 1996 $481,500 $469,400 $ 0 $468,000(4) 53,000 $ 39,209
Director and Executive 1995 $465,750 $184,400 $ 0 $161,250(5) 45,000 $ 39,588
Vice President 1994 $430,000 $250,000 $ 0 $278,750(6) 66,000 $ 71,165
William A. Smith, 1996 $365,000 $218,300 $ 919,299(3) $197,600(4) 17,000 $ 43,817
Executive Vice President 1995 $361,250 $135,300 $ 188,043(10) $ 74,175(5) 18,000 $ 45,560
1994 $342,000 $200,000 $ 44,000(11) $167,250(6) 45,000 $ 44,439
</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, 1996, and the value of such shares (calculated by
multiplying the closing price of unrestricted shares of the Company's Common
Stock on December 31, 1996 ($51.50) by the number of shares held on such date)
is as follows: Mr. Kuehn, 109,600 shares, $5,644,400; Mr. Bates, 9,600 shares,
$494,400; Mr. Moylan, 13,500 shares, $695,250; Mr. Rubright, 15,700 shares,
$808,550; Mr. Russell, 31,000 shares, $1,596,500; and Mr. Smith, 12,100 shares,
$623,150.
NOTE 2: With respect to 1996, 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 for each such executive officer; (2) Company
contributions to the Savings Plan accounts under the Company's Supplemental
13
<PAGE> 15
Benefit Plan -- $47,224, $6,932, $7,189, $11,698, $26,459 and $17,832; 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 -- $48,455,
$7,464, $8,306, $15,725, $0 and $13,235.
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 14,400 shares, 4,000 shares, 4,000 shares,
4,000 shares, 9,000 shares and 3,800 shares of restricted stock granted on
December 5, 1996 to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith,
respectively.
NOTE 5: 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 6: 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 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 $44,000 housing allowance related to Mr. Smith's
relocation from Birmingham, Alabama to Houston, Texas.
14
<PAGE> 16
OPTION GRANT TABLE
The following table contains certain information with respect to stock
options (and tandem stock appreciation rights that become exercisable only upon
certain change of control events ("Limited SARs")) granted in 1996 under the
Company's Executive Award Plan to the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM (10
INDIVIDUAL GRANTS YEARS)
-------------------------------------------------------- ------------------------------------
NUMBER OF % OF TOTAL 5% 10%
SECURITIES OPTIONS/SARS (RESULTING (RESULTING
UNDERLYING GRANTED TO EXERCISE COMPANY STOCK COMPANY STOCK
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRICE OF PRICE OF
NAME GRANTED(1) 1996 ($/SHARE)(2) DATE(3) $84.70)(4) $134.87)(4)
- ----------------------------- ------------- ------------- ------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
All Stockholders............. -- -- -- -- $ 2,825,841,165 $ 7,161,390,132
Ronald L. Kuehn, Jr.......... 82,500 13.0% $ 52.00 12/4/06 $ 2,697,750 $ 6,836,775
Richard B. Bates............. 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400
James E. Moylan, Jr.......... 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400
James A. Rubright............ 20,000 3.2% $ 52.00 12/4/06 $ 654,000 $ 1,657,400
Donald G. Russell............ 53,000 8.4% $ 52.00 12/4/06 $ 1,733,100 $ 4,392,110
William A. Smith............. 17,000 2.7% $ 52.00 12/4/06 $ 555,900 $ 1,408,790
Named Executive Officers' Potential Realizable Value as a % of All Stockholders'
Potential Realizable Value 0.25% 0.25%
</TABLE>
NOTE 1: All stock options shown in the table were granted on December 5,
1996. 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). 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 December 5,
2001, the average of the closing prices of the Company's Common Stock during
such period is at least $78.00. 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 $84.70 or
$134.87 Resulting Company Stock Price (as the case may be) and the $52.00
exercise price, multiplied by (a) for all stockholders, the number of
outstanding shares of the Company's Common Stock as of December 31, 1996, and
(b) for each named executive officer, the number of options granted.
15
<PAGE> 17
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 1996 and
unexercised stock options (and tandem SARs) held as of December 31, 1996.
<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. ................. 110,000 $ 3,128,125 634,800 82,500 $ 17,455,200 $ 0
Richard B. Bates....... 9,000 $ 133,875 66,000 20,000 $ 1,503,250 $ 0
James E. Moylan,
Jr. ................. 0 $ 0 92,000 20,000 $ 2,270,875 $ 0
James A. Rubright...... 0 $ 0 85,500 20,000 $ 1,891,187 $ 0
Donald G. Russell...... 0 $ 0 297,000 53,000 $ 7,510,687 $ 0
William A. Smith....... 45,000 $ 1,334,437 211,000 17,000 $ 5,564,312 $ 0
</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 $51.50 (the closing price of the
Company's Common Stock on December 31, 1996) 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 before 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.
16
<PAGE> 18
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
1996 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 1996 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 1996 COVERED RETIREMENT
NAME SERVICE(1) COMPENSATION(2) BENEFIT(3)
- ------------------------------------------ ----------- --------------- ----------------
<S> <C> <C> <C>
Ronald L. Kuehn, Jr. ..................... 26.4 $ 1,155,150 $739,296
Richard B. Bates.......................... 11.8 $ 326,825 $211,129
James E. Moylan, Jr. ..................... 20.5 $ 376,150 $244,498
James A. Rubright......................... 2.8 $ 417,400 $156,525
Donald G. Russell......................... 8.9 $ 665,950 $155,832
William A. Smith.......................... 26.7 $ 500,350 $325,228
</TABLE>
NOTE 1: The number of years of credited service under the Retirement Plan
and Supplemental Benefit Plan as of December 31, 1996.
NOTE 2: The amount of covered compensation under the Retirement Plan and
Supplemental Benefit Plan during 1996.
NOTE 3: The estimated annual retirement benefit payable as a single life
annuity to the named executive officer (based on the assumptions that such
officer retires at age 65 (age 67 for Mr. Russell) and has average covered
compensation at his retirement date equal to his 1996 covered compensation, and
calculated prior to the offset for primary social security benefits).
17
<PAGE> 19
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, 1996, 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>
12/31/91 100.00 100.00 100.00
12/31/92 153.57 107.61 110.45
12/31/93 190.56 118.41 131.04
12/31/94 191.67 120.01 125.08
12/31/95 252.23 164.95 176.73
12/31/96 373.77 202.73 234.70
</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,
1991, 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, The Columbia Gas
System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron
Corp., ENSERCH Corporation, NICOR Inc., NorAm Energy Corp., ONEOK Inc., Pacific
Enterprises, PanEnergy Corp., 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
18
<PAGE> 20
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 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's account
balance in the Director's Fees Deferral Plan will be distributed immediately in
a cash lump if either (a) the Director terminates service as a Director within
three years after a Change of Control or (b) a Change of Control occurs after
the Director has commenced payment of benefits from the Plan, regardless of any
elections the Director may have made with respect to the timing and manner of
payment of such account balance. 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.
The named executive officers have 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
19
<PAGE> 21
(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 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, 1997, 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, $4,615,150 in cash and $0 in retirement benefits;
Mr. Bates, $1,226,400 in cash and $0 in retirement benefits; Mr. Moylan,
$1,310,150 in cash and $0 in retirement benefits; Mr. Rubright, $1,484,750 in
cash and $5,502 in retirement benefits; Mr. Russell, $1,745,547 in cash and $0
in retirement benefits; and Mr. Smith, $1,750,050 in cash and $69,362 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.
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 1998 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 24,
1997.
20
<PAGE> 22
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
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 solicitations of
proxies for election of directors pursuant to the 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.
21
<PAGE> 23
INSTITUTIONAL OWNERSHIP OF COMMON STOCK
The table below sets forth, as of December 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>
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109............. Common Stock 9,199,244 10.6%
The Prudential Insurance Company
of America
751 Broad Street
Newark, New Jersey 07102................ Common Stock 4,690,717 5.4%
</TABLE>
In reports 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, 1996, FMR Corp. and The Prudential Insurance Company of America
each 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
John J. Creedon, a Director of the Company, filed one late report under
Section 16(a) of the Securities Exchange Act of 1934 with respect to a
charitable contribution of the Company's Common Stock.
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. Abstentions and 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 anticipates that
the fees that it will incur for this service, excluding out-of-pocket expenses,
will not exceed $10,000. 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.
------------------------------
22
<PAGE> 24
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 1997 Annual Meeting, but if any other
matters do properly come before the meeting, the persons named as proxies will
vote upon such matters in accordance with their best judgment.
Please complete, sign, date and return the enclosed proxy card promptly.
SONAT INC.
/s/ Beverley T. Krannich
-------------------------
Beverley T. Krannich
SECRETARY
Birmingham, Alabama
March 19, 1997
23
<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
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 Statements (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 20, 1997, with respect to the consolidated financial
statements of Sonat Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
Birmingham, Alabama
March 18, 1997
<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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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, 1997.
/s/ 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, 1996, 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 her name hereto as of
the 27th day of February, 1997.
/s/ Adrian M. Tocklin
<PAGE> 13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; 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, 1996, 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, 1997.
/s/ James B. Williams
<PAGE> 14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; 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, 1996, 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, 1997.
/s/ Joe B. Wyatt
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,639
<SECURITIES> 0
<RECEIVABLES> 577,717
<ALLOWANCES> 0
<INVENTORY> 30,500
<CURRENT-ASSETS> 751,519
<PP&E> 5,084,283
<DEPRECIATION> 2,650,419
<TOTAL-ASSETS> 3,774,659
<CURRENT-LIABILITIES> 848,837
<BONDS> 872,255
0
0
<COMMON> 87,233
<OTHER-SE> 1,497,131
<TOTAL-LIABILITY-AND-EQUITY> 3,774,659
<SALES> 2,699,535
<TOTAL-REVENUES> 3,394,898
<CGS> 2,224,012
<TOTAL-COSTS> 2,567,492
<OTHER-EXPENSES> 288,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,946
<INCOME-PRETAX> 294,304
<INCOME-TAX> 93,115
<INCOME-CONTINUING> 201,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201,189
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
</TABLE>
