UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7179
SONAT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0647939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-3800
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE:
110,032,997 SHARES OUTSTANDING ON OCTOBER 31, 1998
<PAGE>
SONAT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)--September 30, 1998 and
<S> <C>
December 31, 1997 1
Condensed Consolidated Statements of Operations
(Unaudited)--Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 - 35
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 36 - 37
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Restated)
ASSETS (In Thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 10,620 $ 27,278
Restricted cash (Note 3) - 115,956
Accounts receivable 351,363 619,581
Inventories 71,440 65,161
Income taxes 1,714 1,985
Gas imbalance receivables 11,737 16,644
Assets from trading activities 125,068 92,150
Other 29,144 42,052
---------- ----------
Total Current Assets 601,086 980,807
---------- ----------
Investments in Unconsolidated Affiliates and Other 699,552 553,618
---------- ----------
Plant, Property and Equipment 8,457,665 7,830,697
Less accumulated depreciation, depletion
and amortization 5,818,460 4,264,917
---------- ----------
2,639,205 3,565,780
---------- ----------
Deferred Charges and Other:
Assets from trading activities 28,169 9,638
Other 140,483 142,271
---------- ----------
168,652 151,909
---------- ----------
Total Assets $4,108,495 $5,252,114
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 109,829 $ 14,508
Unsecured notes 637,276 446,721
Accounts payable 342,414 615,322
Accrued income taxes 19,758 18,274
Accrued interest 44,691 37,242
Accrued long-term compensation (Note 3) - 73,799
Gas imbalance payables 11,434 14,320
Liabilities from trading activities 120,271 85,398
Other 41,517 75,299
---------- ----------
Total Current Liabilities 1,327,190 1,380,883
---------- ----------
Long-Term Debt 1,100,591 1,235,984
---------- ----------
Deferred Credits and Other:
Deferred income taxes 158,065 485,950
Liabilities from trading activities 18,015 5,014
Other 161,995 182,507
---------- ----------
338,075 673,471
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock and other capital 179,514 167,786
Retained earnings 1,223,990 1,858,871
---------- ----------
1,403,504 2,026,657
Less treasury stock 60,865 64,881
---------- ----------
Total Stockholders' Equity 1,342,639 1,961,776
---------- ----------
Total Liabilities and Stockholders' Equity $4,108,495 $5,252,114
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Revenues $ 874,497 $1,073,715 $2,908,772 $3,053,169
---------- ---------- ---------- ----------
Costs and Expenses:
Natural gas cost 512,592 690,315 1,827,809 2,013,706
Electric power cost 133,667 98,993 314,279 174,849
Operating and maintenance 39,098 49,845 118,828 132,666
General and administrative 28,053 29,974 86,705 116,702
Depreciation, depletion
and amortization 85,991 101,773 278,866 290,156
Ceiling test charges 455,027 - 1,035,178 -
Restructuring costs - - 15,017 -
Taxes, other than income 9,391 11,308 36,826 28,210
---------- ---------- ---------- ----------
1,263,819 982,208 3,713,508 2,756,289
---------- ---------- ---------- ----------
Operating Income (Loss) (389,322) 91,507 (804,736) 296,880
Other Income, Net:
Equity in earnings of
unconsolidated affiliates 16,668 8,876 43,848 28,443
Minority interest (882) (448) (2,513) (1,244)
Other income, net 4,735 1,059 6,699 8,563
---------- ---------- ---------- ----------
20,521 9,487 48,034 35,762
---------- ---------- ---------- ----------
Earnings (Loss) Before Interest
and Taxes (368,801) 100,994 (756,702) 332,642
Interest:
Interest income 938 1,467 4,201 3,662
Interest expense (34,470) (26,763) (101,392) (78,134)
Interest capitalized 1,220 1,791 4,092 5,658
---------- ---------- ---------- ----------
(32,312) (23,505) (93,099) (68,814)
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes (401,113) 77,489 (849,801) 263,828
Income Tax Expense (Benefit) (142,697) 25,141 (304,039) 87,636
---------- ---------- ---------- ----------
Net Income (Loss) $ (258,416) $ 52,348 $ (545,762) $ 176,192
========== ========== ========== ==========
Basic Earnings (Loss) Per Share
of Common Stock $ (2.35) $ .48 $ (4.96) $ 1.60
========== ========== ========== ==========
Diluted Earnings (Loss) Per Share
of Common Stock $ (2.35) $ .47 $ (4.96) $ 1.58
========== ========== ========== ==========
Weighted Average Shares
Outstanding 110,034 109,926 110,017 110,164
========== ========== ========== ==========
Weighted Average Shares Outstanding-
Assuming Dilution 110,034 111,397 110,017 111,716
========== ========== ========== ==========
Dividends Paid Per Share $ .27 $ .27 $ .81 $ .81
========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------------
1998 1997
---- ----
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income (loss) $ (545,762) $ 176,192
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization,
including ceiling test charges 1,314,044 290,156
Deferred income taxes (315,090) 100,518
Equity in earnings of unconsolidated
affiliates, less distributions (36,868) (23,926)
Change in:
Accounts receivable 269,057 74,823
Inventories (6,280) (11,709)
Accounts payable (289,313) (54,128)
Accrued interest and income taxes, net 9,204 (41,744)
Accrued long-term compensation (73,799) 20,758
Other current assets and liabilities (18,853) 5,711
Net change from trading activities (3,574) (2,930)
Net change in restricted cash 115,956 -
Other, net 7,355 22,260
----------- -----------
Net cash provided by operating activities 426,077 555,981
----------- -----------
Cash Flows from Investing Activities:
Plant, property and equipment additions (653,658) (760,562)
Net proceeds from disposal of assets 259,991 7,413
Investments in unconsolidated affiliates and other (109,923) (21,955)
----------- -----------
Net cash used in investing activities (503,590) (775,104)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 500,000 1,497,000
Payments of long-term debt (541,935) (1,172,125)
Changes in short-term borrowings 190,555 77,167
----------- -----------
Net changes in debt 148,620 402,042
Dividends paid (89,117) (69,635)
Treasury stock purchases (1,289) (51,316)
Other equity 2,641 9,629
----------- -----------
Net cash provided by financing activities 60,855 290,720
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (16,658) 71,597
Cash and Cash Equivalents at Beginning of Period 27,278 48,009
----------- -----------
Cash and Cash Equivalents at End of Period $ 10,620 $ 119,606
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 88,215 $ 68,821
Income taxes paid, net 8,724 22,969
</TABLE>
See accompanying notes.
<PAGE>
SONAT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Sonat
Inc. (Sonat) and its subsidiaries (the Company) have been prepared in accordance
with the instructions to Form 10-Q and include the information and footnotes
required by such instructions. In the opinion of management, all adjustments,
including those of a normal recurring nature, have been made that are necessary
for a fair presentation of the results for the interim periods presented herein.
The 1997 periods have been restated for a change to the full cost
method of accounting for the Company's oil and gas operations (see Note 2) and
to reflect the Company's merger with Zilkha Energy Company (see Note 3). Certain
other amounts in the 1997 condensed consolidated financial statements and notes
have been reclassified to conform with the 1998 presentation.
During the first quarter of 1998, the Company recognized the effect of
a change in salvage values, including reversal of excess depreciation expense,
relating to certain fixed assets, primarily aircraft and vehicles. The change,
which was to comply with recent Federal Energy Regulatory Commission (FERC)
directives, increased net income for the nine-month period ended September 30,
1998, by $4.6 million. The effect of the change on the three-month period ended
September 30, 1998, was not material.
2. Change in Method of Accounting For Oil and Gas Operations
In September 1998, the Company changed its accounting method for oil
and gas operations as conducted by its subsidiaries, Sonat Exploration Company
and Sonat Exploration GOM (Sonat Exploration), from the successful efforts
method to the full cost method because its future capital spending will be
focused significantly more on exploration activity than in the past. Full cost
accounting, which amortizes rather than expenses dry-hole exploration and other
related costs, provides a more appropriate method of matching revenues and
expenses for the Company's exploration strategy. Exploration activity has
increased from 6 percent of 1995 capital spending, or $27 million, to an
estimated 33 percent of 1998 capital spending, or approximately $175 million. A
significant percentage of Sonat Exploration's 1999 capital program is expected
to be spent on exploratory drilling.
The adoption of the full cost method is expected to increase 1998 and
1999 normalized earnings from levels that would have been reported under
successful efforts accounting and, more importantly, will reduce earnings
volatility from quarter-to-quarter and year-to-year going forward. The Company's
earnings will now be more comparable to its integrated pipeline company peers
that have substantial exploration and production operations, most of which use
the full cost method.
Under the full cost method, all productive and non-productive costs
incurred in connection with the acquisition, exploration and development of oil
and gas reserves are capitalized and amortized on the unit-of-production method
using
<PAGE>
2. Change in Method of Accounting For Oil and Gas Operations (Cont'd)
proved reserves. Certain unevaluated properties are excluded from the
amortization base until a determination has been made as to the existence of
proved reserves. Since the Company's operations are limited to the United
States, it utilizes a single cost center for amortization purposes. Capitalized
costs are subject to a "ceiling test" which limits such costs to the aggregate
of the present value of future net revenues plus the lower of cost or fair
market value of unproved properties. Any conveyances of properties are treated
as adjustments to the cost of oil and gas properties with no gain or loss
recognized.
The Company has restated all prior financial statements as a result of
the conversion to full cost accounting. As a part of this process, all previous
charges related to the impairment of Sonat Exploration's assets, including those
taken in 1998, were reversed, which significantly raised the book value of those
properties as well as the Company's stockholders' equity. The full cost method,
however, requires quarterly ceiling tests to ensure that the carrying value of
assets on the balance sheet is not overstated. Sonat Exploration has performed
ceiling tests for each of the three 1998 quarters. At March 31, 1998, June 30,
1998 and September 30, 1998, it was determined that capitalized costs exceeded
the ceiling test limits by $39.7 million, $540.5 million and $455.0 million,
respectively, which are included as ceiling test charges in the Condensed
Consolidated Statement of Operations. The third quarter test was based on NYMEX
prices of $1.67 per thousand cubic feet (Mcf) for natural gas and $14.98 per
barrel for oil, and was adjusted for hedges, basis differentials and other
pricing factors. Future quarterly full cost ceiling tests will be based on the
then-current NYMEX prices for both natural gas and oil, after adjustments. The
end result of the full cost conversion is that both the book value of Sonat
Exploration's properties and the Company's stockholders' equity are at higher
levels than if it had continued with the successful efforts method of
accounting.
The effect of the accounting change on net income is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------- -------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, Except Per-Share Amounts)
Effect on:
<S> <C> <C> <C> <C> <C>
Net income $(317,544) $94,858 $130,584 $18,006 $64,289
Earnings per share of
common stock $ (2.89) $ .86 $ 1.19 $ .16 $ .58
Earnings per share of
common stock-
assuming dilution $ (2.89) $ .85 $ 1.17 $ .16 $ .58
</TABLE>
<PAGE>
2. Change in Method of Accounting For Oil and Gas Operations (Cont'd)
The balances of retained earnings for all periods have been adjusted
for the effect (net of income taxes) of applying retroactively the new method of
accounting.
The effect of the accounting change on stockholders' equity is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------- -------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Stockholders' Equity $39,443 $312,060 $347,786 $228,707 $219,506
</TABLE>
The effect of the restatement on earnings by quarter for 1998 and 1997 is
as follows (per share amounts are on a diluted basis):
<TABLE>
<CAPTION>
Amount Per Share Amount Per Share
1998 1997
---- ----
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
First $ (10,063) $ (.09) $17,672 $.16
Second $ (57,317) $ (.52) $19,454 $.17
Third $(250,164) $(2.27) $57,732 $.52
Fourth N/A N/A $35,726 $.32
</TABLE>
Under the successful efforts method of accounting the Company would
have reported net income as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C> <C>
Net Income (Loss) $(8,252) $(5,384) $(228,218) $81,333
======= ======= ========= =======
Earnings (Loss) Per Share of
Common Stock-Assuming Dilution $ (.07) $ (.05) $ (2.07) $ .73
======= ======= ========= =======
</TABLE>
Net income under the successful efforts method for both 1997 periods
included a charge of $34.0 million, or $.31 per share, related to the impairment
of certain oil and gas properties.
Net income under the successful efforts method for the 1998 three-month
and nine-month periods included a charge for restructuring and impairment costs
related to the Company's oil and gas operations of $21.2 million, or $.19 per
share, and $310.4 million, or $2.82 per share, respectively.
<PAGE>
3. Changes in Operations
Business Combination - On January 30, 1998, following a special
shareholders' meeting, the Company completed the merger with Zilkha Energy
Company by exchanging approximately 24.2 million common shares for all of the
outstanding shares of Zilkha Energy. Zilkha Energy was a privately owned
exploration and production company. Immediately thereafter Zilkha Energy's name
was changed to Sonat Exploration GOM Inc. It operates mainly on the continental
shelf of the Gulf of Mexico.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board (APB) Opinion
No. 16. Accordingly, all prior period condensed consolidated financial
statements, notes and operational data have been restated to include Sonat
Exploration GOM in the Company's financial statements for all periods reported.
There were no transactions between Sonat and Sonat Exploration GOM
prior to the combination.
At December 31, 1997, Sonat Exploration GOM had accrued $73.8 million,
which represented compensation due to certain employees under deferred
compensation plans. The liability was estimated based on the fair market value
of Sonat Exploration GOM as of December 31, 1997. The Company's restricted cash
deposit at December 31, 1997, reflected on the Condensed Consolidated Balance
Sheet was used to settle this liability and certain other merger related
expenses.
Sonat Exploration Company Restructuring - On April 23, 1998, the
Company announced a restructuring of Sonat Exploration Company. The
restructuring included significant property sales and certain cost reduction
activities associated with a reduction in work force. Oil and natural gas
properties with a net book value of approximately $605 million having
approximately 500 billion cubic feet of natural gas equivalent reserves and
daily net production of approximately 190 million cubic feet of natural gas
equivalent were sold or are in the process of being sold. Most of the sales have
been completed with proceeds used to pay down debt.
A pretax restructuring charge of $15.0 million for restructuring
expenses primarily associated with a reduction in work force was recognized in
the second quarter of 1998. All work force reductions have been completed.
4. Trading Activities and Derivative Financial Instruments
The Company uses derivative instruments (commodity futures contracts,
options and price swap agreements) to both hedge its commodity price risk on
natural gas, crude oil and electricity, and as a market maker (trading activity)
in natural gas.
<PAGE>
4. Trading Activities and Derivative Financial Instruments (Cont'd)
Natural gas, crude oil and electricity 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. Crude
oil contracts are for fixed units of 1,000 barrels and are available for periods
up to 84 months in the future. Electricity contracts are for 736 megawatt hours
and are available for up to 18 months in the future.
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.
Options can be exchange traded on the NYMEX or traded over the counter.
Exchange traded and over-the-counter options give the owner the right, but not
the obligation, to a futures contract, or to buy or sell an underlying commodity
at a given price, respectively.
At September 30, 1998, the Company had outstanding energy commodity
futures, swaps and options. In the table below, buys of swaps represent either
1) payment of fixed price and receipt of NYMEX or index; or 2) payment of NYMEX
or index and receipt of index. The notional volume and terms of these
transactions are as follows:
<TABLE>
<CAPTION>
Notional Volume Maximum
Commodity Buy Sell Term
- --------- --- ---- ----
<S> <C> <C> <C>
Natural Gas (Tbtu) 1,324.46 1,456.27 60 months
Electricity (Thousands of MWh) 16.9 16.9 1 month
Oil (Millions of Barrels) 4.4 1.1 60 months
</TABLE>
Derivative Commodity Instruments Held or Issued for Trading Purposes
The Company maintains active trading positions in natural gas and crude
oil commodity futures, swap and option contracts and limits its risk to changes
in the value of its outstanding positions through the use of Value-at-Risk
models, establishment of offsetting positions, and limit and monitoring
procedures. The trading operation also enters into natural gas commodity
purchase and sale commitments. These activities constitute its trading business
and are essential to provide customers with market products at competitive
prices. All of these trading positions are reported at fair value and recorded
under the heading of Assets/Liabilities from Trading Activities (current and
long-term) in the Condensed Consolidated Balance Sheets. The change in fair
value is recognized in revenues as it occurs. Fair value is subject to change
and reflects management's best estimate of market prices considering various
factors including closing exchange and over-the-counter quotations, time value
and volatility factors underlying the commitments. These market prices are
adjusted to reflect the potential impact of liquidating Sonat Marketing's
position in an orderly manner over a reasonable period of time under present
market conditions.
<PAGE>
4. Trading Activities and Derivative Financial Instruments (Cont'd)
The amounts disclosed in the following table represent the
end-of-period fair value and the average fair value of the trading portfolio.
<TABLE>
<CAPTION>
Fair Value Average Fair Value
(Carrying Amount) for the Nine Months
as of 9/30/98 Ended 9/30/98
(In Thousands)
Energy Commodity Trading:
<S> <C> <C>
Assets $153,237 $113,750
Liabilities 138,286 100,227
=======================================================================================================
</TABLE>
Net trading gains for the three months and nine months ended September 30,
1998, are $4.3 million and $23.3 million, respectively.
Derivative Commodity Instruments Held or Issued for Purposes Other Than Trading
In certain cases derivative positions are taken specifically to
mitigate market price risk associated with significant physical transactions and
are accounted for using hedge accounting provided they meet hedge accounting
criteria. Under hedge accounting, gains and losses from futures are deferred in
the Condensed Consolidated Balance Sheets in Deferred Credits and Other and
recognized in earnings in conjunction with the revenue recognition of the
underlying physical transaction. Each net payment/receipt due or owed under a
swap agreement is recognized in earnings during the period to which the
payment/receipt relates, and there is no recognition in the Condensed
Consolidated Balance Sheets for changes in the swap's fair value. Gains or
losses resulting from settlement of swaps are amortized over their original
terms.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. In the event that correlation falls below allowable levels,
the gains or losses associated with the hedging instruments are immediately
recognized to the extent that correlation is lost.
<PAGE>
4. Trading Activities and Derivative Financial Instruments (Cont'd)
Sonat Exploration hedges a portion of its production by entering into
intercompany swaps with Sonat Marketing. The exposure that Sonat Marketing
assumes from Sonat Exploration is then hedged by entering into derivative
instruments with outside counterparties. Sonat Marketing and Sonat Power
Marketing also hedge third-party purchases and sales by entering into commodity
futures, swaps and options. The information in the following table represents
the fair value of all outstanding derivative positions as of September 30, 1998.
Not included are the related physical positions that these derivative positions
hedge.
Fair Value
(In Thousands)
Natural Gas $(32,581)
Electricity 13
Deferred amounts on open futures positions will mature over 1998 and
1999.
Credit Risk from Derivative Activities
NYMEX traded futures are guaranteed by the NYMEX and have nominal
credit risk. On all other transactions described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. The Company
has established policies and procedures to evaluate potential counterparties for
creditworthiness before entering into over-the-counter swap and option
agreements. The credit risk resulting from in-the-money swaps is monitored on a
regular basis against established collateralization limits and credit limits
establish by the Company. Due to changes in market conditions, the market value
of swaps and options and the associated credit exposure with the counterparties
can change significantly. At September 30, 1998, the market value of the
Company's in-the-money swaps and options was $7.6 million, and all
counterparties were within collateral and credit limits except one counterparty
which was $0.3 million over their credit limit. Reserves for credit risk are
established as necessary.
<PAGE>
5. Unconsolidated Affiliates
The following table presents the components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Company's Share of Reported Earnings (Losses):
<S> <C> <C> <C> <C>
Exploration and Production $ 49 $ 89 $ 370 $ 290
------- ------ ------- -------
Natural Gas Transmission:
Citrus Corp. 6,269 5,241 21,262 17,343
Amortization of Citrus basis
difference 345 345 1,037 1,037
Bear Creek Storage Company 2,438 2,558 6,973 7,889
Destin 3,381 188 8,515 307
Other 255 (30) 322 (83)
------- ------ ------- -------
12,688 8,302 38,109 26,493
------- ------ ------- -------
Energy Services 3,594 186 4,375 669
------- ------ ------- -------
Other 337 299 994 991
------- ------ ------- -------
$16,668 $8,876 $43,848 $28,443
======= ====== ======= =======
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus
Corp. (Citrus), the parent company of Florida Gas Transmission Company (Florida
Gas). Southern Natural Gas Company owns a one-third interest in Destin Pipeline
Company, L.L.C. (Destin) and a subsidiary of Southern Natural Gas owns 50
percent of Bear Creek Storage Company (Bear Creek), an underground gas storage
company.
<PAGE>
5. Unconsolidated Affiliates (Cont'd)
The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $151,150 $213,535 $446,712 $572,685
Expenses (Income):
Natural gas cost 72,400 136,326 202,003 323,591
Operating expenses 25,103 23,384 69,990 73,814
Depreciation and amortization 13,255 13,181 38,986 47,768
Interest and other 20,360 23,422 66,850 71,904
Income taxes 7,494 6,740 26,359 20,922
-------- -------- -------- --------
Income Reported $ 12,538 $ 10,482 $ 42,524 $ 34,686
======== ======== ======== ========
</TABLE>
The following is summarized income statement information for Bear
Creek. No provision for income taxes has been included since its income taxes
are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,882 $8,899 $26,732 $27,218
Expenses:
Operating expenses 1,533 1,157 5,286 3,519
Depreciation 1,361 1,358 4,080 4,072
Other expenses, net 1,112 1,269 3,420 3,849
------ ------ ------- -------
Income Reported $4,876 $5,115 $13,946 $15,778
====== ====== ======= =======
</TABLE>
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Construction of the pipeline
began in December 1997. Destin was partially completed and placed in service in
September 1998, and is expected to be fully in service by January 1999. The FERC
has approved two extensions of Destin for a total filed cost of an additional
$56 million. The total cost of Destin is now estimated to be $446 million.
Destin's earnings in 1997 and 1998 primarily relate to the allowance for funds
used during construction (AFUDC) capitalized on its capital expenditures to
date.
<PAGE>
6. Debt and Lines of Credit
Long-Term Debt and Lines of Credit - 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. At December 31, 1997, there was an outstanding balance of
$130.0 million. During the first nine months of 1998, $70.0 million was borrowed
and $200.0 million was repaid under the revolving credit agreement, resulting in
no amounts outstanding at September 30, 1998.
In January 1998, Sonat made two public offerings of Notes pursuant to a
shelf registration statement. In one offering, Sonat issued $100 million of 6
5/8 percent Notes due February 1, 2008, at 99.531 percent to yield 6.69 percent.
In the other offering, Sonat issued $100 million of 7 percent Notes due February
1, 2018, at 99.787 percent to yield 7.02 percent. The net proceeds from the
offerings were used for general corporate purposes, including capital
expenditures, working capital and repayment of debt.
In September 1998, Southern Natural Gas made a public offering of
$100.0 million of its 6.125 percent Notes due September 15, 2008, at 99.531
percent to yield 6.189 percent. The net proceeds from the offering were used for
general corporate purposes, including capital expenditures.
Unsecured Notes - Loans under all short-term credit facilities are for
a duration of less than three months.
In January 1998, Sonat completed a new 364-day $700 million revolving
credit facility with 20 banks. In connection with this new facility the Company
terminated existing lines of credit providing for up to $200 million of
borrowings. At September 30, 1998, Sonat had short-term lines of credit of
$700.0 million available through January 25, 1999. Southern Natural Gas had
short-term lines of credit of $50.0 million available through May 31, 1999.
Borrowings are available for a period of not more than 364 days 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
September 30, 1998, Sonat had $25.5 million outstanding under its agreement at a
rate of 5.99 percent. No amounts were outstanding under Southern Natural Gas'
agreement.
Sonat had $611.8 million in commercial paper outstanding at an average
rate of 5.82 percent at September 30, 1998.
<PAGE>
7. Rate Matters and Contingencies
Periodically, Southern Natural Gas and its subsidiaries (Southern) make
general rate filings with the 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 provides reserves relating to such amounts collected subject to
refund, as appropriate, and makes refunds upon establishment of the final rates.
At September 30, 1998, Southern's rates are established by a settlement that was
approved by FERC orders issued in 1995 and 1996. All of its customers are
parties to the settlement, and all revenue is based on the final settlement
rates and therefore is not being collected subject to refund.
8. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income (loss) or stockholders' equity. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities to be
included in other comprehensive income. Comprehensive income (loss), net of
related tax, is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In Thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $(258,416) $52,348 $(545,762) $176,192
Unrealized Gains (Loss)
on Securities (1,730) (5,288) (866) (5,067)
Reclassification adjustment (1,181) (20) (1,219) (1,179)
--------- ------- --------- --------
Comprehensive Income (Loss) $(261,327) $47,040 $(547,847) $169,946
========= ======= ========= ========
</TABLE>
Common Stock and Other Capital in the Condensed Consolidated Balance
Sheets includes $1.1 million at September 30, 1998, and $3.2 million at December
31, 1997, related to other comprehensive income, which is comprised of
unrealized gains on securities.
<PAGE>
9. Segment Information
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company had previously modified its definition of segments to
conform to the approach required by SFAS No. 131.
The Company's consolidated financial statements reflect operations in
three segments: Exploration and Production, Natural Gas Transmission and Energy
Services.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
---------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 30,427 $82,056 $762,024 $ (10) $ 874,497
Intersegment Revenues 90,734 11,293 - 11,801 113,828
Earnings (Loss) Before
Interest and Taxes (428,537) 52,857 4,206 2,673 (368,801)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
---------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $90,358 $70,445 $912,910 $ 2 $1,073,715
Intersegment Revenues 89,897 22,709 - 12,108 124,714
Earnings Before
Interest and Taxes 50,413 48,983 710 888 100,994
</TABLE>
<PAGE>
9. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
---------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $ 152,363 $257,150 $2,499,242 $ 17 $2,908,772
Intersegment Revenues 278,839 37,200 - 34,109 350,148
Earnings (Loss) Before
Interest and Taxes (954,340) 184,919 6,686 6,033 (756,702)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
---------------------------------------------------------------------------------
Exploration Natural
and Gas Energy
Production Transmission Services Other Total
(In Thousands)
Revenues from
<S> <C> <C> <C> <C> <C>
External Customers $257,733 $226,309 $2,569,114 $ 13 $3,053,169
Intersegment Revenues 279,801 69,393 - 33,465 382,659
Earnings Before
Interest and Taxes 160,279 164,139 1,464 6,760 332,642
</TABLE>
<PAGE>
9. Segment Information (Cont'd)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Total Earnings (Loss) Before
Interest and Taxes for
<S> <C> <C> <C> <C>
Reportable Segments $(368,801) $100,994 $(756,702) $332,642
Interest Income 938 1,467 4,201 3,662
Interest Expense (34,470) (26,763) (101,392) (78,134)
Interest Capitalized 1,220 1,791 4,092 5,658
--------- -------- --------- --------
Income (Loss) Before Income
Taxes $(401,113) $ 77,489 $(849,801) $263,828
========= ======== ========= ========
</TABLE>
Assets for the Company's three segments are as follows:
September 30, 1998
------------------
(In Thousands)
Assets by Segment
Exploration and Production $1,643,021
Natural Gas Transmission 1,938,847
Energy Services 627,039
<PAGE>
10. Earnings Per Share
The calculation of diluted earnings per share differs from that of
basic earnings per share due to the denominator for the diluted calculation
including common stock equivalents applicable to outstanding stock options.
The following table presents the computation of basic and diluted
earnings (loss) per share of common stock:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, Except Per-Share Amounts)
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $(258,416) $ 52,348 $(545,762) $176,192
========= ======== ========= ========
Denominator:
Denominator for Basic Earnings Per Share:
Weighted average number of
shares of common stock
outstanding 110,034 109,926 110,017 110,164
Effect of Dilutive Securities:
Common stock equivalents
applicable to outstanding
stock options (a) 1,471 (a) 1,552
--------- -------- --------- --------
Denominator for Diluted Earnings Per Share:
Adjusted weighted average
shares using treasury
stock method for assumed
conversions 110,034 111,397 110,017 111,716
========= ======== ========= ========
Basic Earnings (Loss) Per Share
of Common Stock $ (2.35) $ .48 $ (4.96) $ 1.60
========= ======== ========= ========
Diluted Earnings (Loss) Per Share
of Common Stock $ (2.35) $ .47 $ (4.96) $ 1.58
========= ======== ========= ========
</TABLE>
(a) The addition of 457,000 dilutive potential common shares for the
three-month period of 1998 and 882,000 dilutive potential common shares
for the nine-month period of 1998 would be antidilutive in the
computation of diluted earnings per share, and are therefore not
included.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Operating Income
Business segment operating results for Sonat Inc. and its subsidiaries
(the Company) are presented in the table below. The table also shows unusual
items that affect earnings before interest and taxes (EBIT) and net income
comparisons. The table is presented because management believes this information
enhances the analysis of results of operations. All prior period data has been
restated for the Company's adoption of the full cost accounting method for its
oil and gas operations.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In Millions, Except Per-Share Amounts)
Earnings (Loss) Before Interest and Taxes:
<S> <C> <C> <C> <C>
Exploration and production $(428.5) $ 50.4 $ (954.3) $160.3
Natural gas transmission 52.9 48.9 184.9 164.1
Energy services 4.2 .8 6.7 1.5
Other 2.6 .9 6.0 6.7
------- ------ --------- ------
(368.8) 101.0 (756.7) 332.6
Adjustment for Unusual Items:
Exploration and production
Ceiling test charges (455.0) - (1,035.2) -
Restructuring costs - - (15.0) -
------- ------ --------- ------
Earnings Before Interest and Taxes
Excluding Unusual Items $ 86.2 $101.0 $ 293.5 $332.6
======= ====== ========= ======
Net Income (Loss) As Reported $(258.4) $ 52.4 $ (545.8) $176.2
Adjustment for Unusual Items:
Exploration and production
Ceiling test charges (295.8) - (672.9) -
Restructuring costs - - (9.7) -
------- ------ --------- ------
Net Income Excluding Unusual Items $ 37.4 $ 52.4 $ 136.8 $176.2
======= ====== ========= ======
Diluted Earnings (Loss) Per Share $ (2.35) $ .47 $ (4.96) $ 1.58
======= ====== ========= ======
Diluted Earnings Per Share
Excluding Unusual Items $ .34 $ .47 $ 1.24 $ 1.58
======= ====== ========= ======
</TABLE>
<PAGE>
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. 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 Services segment.
On January 30, 1998, the Company completed its merger with Zilkha
Energy Company for $1.3 billion (see Note 3 of the Notes to Condensed
Consolidated Financial Statements).
In September 1998, the Company changed its method of accounting for oil
and gas operations from successful efforts to full cost (see Note 2 of the Notes
to Condensed Consolidated Financial Statements).
So far this year, the Company has been successful on four of the 13
exploratory wells that it has drilled in the Gulf of Mexico. The Company has
recently completed the technical and permitting work necessary to drill a number
of important offshore prospects, including its Timbalier Trench and Viosca Knoll
blocks. With these prospects now ready to drill and because of the recent
decline in day rates for offshore drilling rigs and related services, the
Company plans to increase substantially its offshore exploration activity with
13 wells planned for the fourth quarter of 1998 and first quarter of 1999.
Onshore exploration activity is also expected to increase sharply due to the
significant number of exploration prospects that the Company has generated this
year.
In the August Federal Lease Sale 171, Sonat Exploration was the
successful bidder on 24 offshore tracts at a total cost of $6.9 million. Twenty
of these leases are in deep water and are a part of the Company's efforts to
build a deep-water exploration program in depth levels greater than 600 feet in
the Gulf of Mexico.
<PAGE>
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Revenues: $ 121.2 $180.2 $ 431.2 $537.5
------- ------ -------- ------
Costs and Expenses:
Operating and maintenance 16.2 21.0 54.8 61.2
General and administrative 7.0 9.0 25.3 45.7
Depreciation, depletion and
amortization 69.4 87.3 238.3 248.3
Ceiling test charges 455.0 - 1,035.2 -
Restructuring costs - - 15.0 -
Taxes and other 3.9 12.6 19.2 24.7
------- ------ -------- ------
551.5 129.9 1,387.8 379.9
------- ------ -------- ------
Operating Income (Loss) (430.3) 50.3 (956.6) 157.6
Other Income 1.8 .1 2.3 2.7
------- ------ -------- ------
Earnings (Loss) Before Interest
and Taxes As Reported (428.5) 50.4 (954.3) 160.3
Restructuring Costs and Ceiling
Test Charges 455.0 - 1,050.2 -
------- ------ -------- ------
Earnings Before Interest and
Taxes Excluding Unusual Items $ 26.5 $ 50.4 $ 95.9 $160.3
======= ====== ======== ======
Net Sales Volumes:
Gas (Bcf) 54 68 177 196
Oil and condensate (MBbls) 1,622 1,747 5,356 4,453
Natural gas liquids (MBbls) 378 496 1,553 1,293
- ---------------------------------------------------------------------------------------------------------------------
Average Sales Prices:
Gas ($/Mcf) $ 1.85 $ 2.08 $ 1.96 $ 2.20
Oil and condensate ($/Bbl) 12.34 18.72 13.44 19.89
Natural gas liquids ($/Bbl) 8.33 10.94 9.04 11.84
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Third Quarter 1998 to Third Quarter 1997 Analysis
EBIT decreased $23.9 million after excluding the recognition of ceiling
test charges of $455.0 million in the third quarter of 1998 (see Note 2 of the
Notes to Condensed Consolidated Financial Statements), primarily due to lower
revenues due to lower energy prices and production volumes, partly offset by
lower costs and expenses.
Natural gas and oil and condensate production decreased 21 percent and
7 percent, respectively, from the third quarter of 1997 primarily due to
property sales that have occurred as part of the previously announced corporate
restructuring. Average realized natural gas prices decreased 11 percent to $1.85
per thousand cubic feet (Mcf) from $2.08 per Mcf in the third quarter of 1997.
Realized oil and condensate prices decreased 34 percent to an average of $12.34
per barrel from $18.72 per barrel in the third quarter of 1997. Oil and
condensate production decreased 7 percent primarily due to property sales.
<PAGE>
Costs and expenses were $33.4 million lower than the prior period after
excluding the ceiling test charges discussed earlier. Depreciation, depletion
and amortization expense decreased by 21 percent due to lower production and a
slightly lower amortization rate ($1.06 for the 1998 period compared to $1.07
for the 1997 period). Taxes and other expenses decreased 69 percent due to a
contract termination fee incurred by Sonat Exploration GOM (formerly Zilkha
Energy) in 1997. Operating and maintenance expense decreased 23 percent
primarily due to property sales in 1998.
Other income increased due to a gain on the disposal of marketable
securities in the 1998 period.
Nine Months 1998 to Nine Months 1997 Analysis
EBIT decreased $64.4 million after excluding the recognition of
$1,035.2 million for ceiling test charges, discussed earlier, and the $15.0
million restructuring charge recorded in the second quarter of 1998, primarily
due to lower energy prices and production volumes, partly offset by lower costs
and expenses.
Natural gas production decreased to 177 Bcf from 196 Bcf in 1997.
Average realized natural gas prices decreased 11 percent to $1.96 per Mcf for
the 1998 period from $2.20 per Mcf for the 1997 period. Realized oil and
condensate prices decreased 32 percent to an average of $13.44 per barrel from
$19.89 per barrel in the 1997 period. Oil and condensate production increased 20
percent, slightly offsetting these unfavorable factors.
Costs and expenses were $42.3 million lower after excluding the charges
for ceiling tests and restructuring in the 1998 period. General and
administrative expense decreased 45 percent primarily as a result of executive
compensation expense for Sonat Exploration GOM, which was included in the 1997
period. Operating and maintenance expense decreased 11 percent primarily due to
property sales during 1998. Taxes and other expenses decreased 22 percent due to
a contract termination fee incurred by Sonat Exploration GOM in the 1997 period.
Depreciation, depletion and amortization expense decreased slightly due to lower
volumes.
Other income was slightly lower for the nine-month 1998 period compared
with the nine-month 1997 period due to gains on the disposal of marketable
securities in 1997, partly offset by a gain on disposal of marketable securities
in the 1998 period.
<PAGE>
Hedging Activities
Sonat Exploration, through Sonat Marketing, uses derivative financial
instruments to manage the risks associated with price volatility for its
production, which it sells in the spot market. (See Market Risk and Note 4 of
the Notes to Condensed Consolidated Financial Statements.) Gains or losses
experienced on Sonat Exploration's hedging transactions offset the changes in
revenue recognized on the sale of the commodity. Natural gas revenues were
reduced by $.2 million and $5.9 million in the three-month and nine-month
periods ended September 30, 1998, and were reduced by $2.1 million and $24.8
million in the three-month and nine-month periods ended September 30, 1997,
respectively, as a result of hedging activities. There were no oil hedging
activities reflected in the 1998 period. Hedging activities increased oil
revenues by $.2 million in the three-month period ended September 30, 1997, and
reduced oil revenues by $.5 million in the nine-month period ended September 30,
1997.
A portion of Sonat Exploration's future gas production is hedged
through the year 2012. At September 30, 1998, Sonat Exploration's hedged gas
production is as follows:
Weighted
Average
Volumes Price
(Bcf) (per Mcf)
Remainder of 1998 13.8 $2.14
1999 62.5 2.13
2000 42.2 2.16
2001 4.4 2.30
2002-2012 41.8 3.33
- ---------------------------------------------------------------------
164.7 $2.45
=====================================================================
NATURAL GAS TRANSMISSION
The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company and its subsidiaries (Southern) and Citrus Corp. (a
50 percent-owned company). Southern and Citrus are actively pursuing
opportunities to expand their pipeline systems in their traditional market areas
and to connect new gas supplies.
In April 1997, units of Shell Oil Company and Amoco Corporation joined
with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-feet-per-day pipeline designed to transport natural gas from
deep-water areas in the eastern Gulf of Mexico. Southern Natural Gas has a
one-third interest in this pipeline. Shell and Amoco have made substantial firm
transportation commitments to this pipeline. Eight other shippers have also
dedicated their production from certain leases in the eastern Gulf of Mexico to
Destin for transportation and discussions are under way with other prospective
shippers. Construction of the pipeline began in December 1997, and it was
partially completed and in service in September 1998, and is expected to be
fully in service by January 1999. In June 1998, the FERC approved Destin's
application to extend its pipeline system approximately 14 miles to transport
additional gas reserves committed to Destin's system. This extension is expected
to be in service in late 1998. In July 1998 the FERC also approved another
Destin application to extend its pipeline by approximately 31 miles to transport
additional gas reserves committed to its system. This extension is expected to
be in service in early 1999. The total capital expended by Destin is now
estimated to be $446 million.
<PAGE>
Southern Natural Gas is moving forward on three expansions to northern
Alabama, eastern Tennessee, and central Alabama that have a total filed capital
cost of $126 million. The North Alabama expansion, which originally received
FERC approval in May 1997, is now anticipated to go in service in the fall of
1999. Southern Natural Gas received FERC approval in October 1998 of an
application that it had filed to change the route of the pipeline as it crosses
the Wheeler National Wildlife Refuge, but the new route must still be approved
by the U.S. Fish and Wildlife Service. The 122-mile expansion will provide 76
million-cubic-feet-per-day capacity to the participating customers. A second
expansion to serve customers primarily in eastern Tennessee received FERC
approval in April 1998 and was placed in service in November 1998. Southern
Natural Gas has firm transportation commitments totaling 65 million cubic feet
of natural gas per day from customers in eastern Tennessee, Georgia and Alabama
related to this expansion. The expansion in central Alabama received FERC
approval in March 1998 and is also expected to go in service in November of
1998. This expansion will provide 34 million cubic feet per day of firm
transportation to Alabama Power Company and two other customers.
In December 1997, an affiliate of AGL Resources, Inc. and Southern
Natural Gas formed a new entity, Etowah LNG Company, L.L.C. (Etowah LNG), to
jointly construct, own and operate a new liquefied natural gas peaking facility
in Polk County, Georgia. Peaking services provide supplemental gas supplies on
days when demand is highest, typically during the winter. Under the agreement,
AGL Resources and Southern Natural Gas each will own 50 percent of Etowah LNG,
which will be regulated by the FERC. The proposed plant will connect directly
into AGL Resources' principal natural gas distribution subsidiary, Atlanta Gas
Light Company, and Southern Natural Gas' pipeline. Etowah LNG will provide
natural gas storage and peaking services to Atlanta Gas Light and the city of
Austell, Georgia. The new facility will cost approximately $90 million with 300
million cubic feet per day of deliverability capacity. Etowah LNG filed a
certificate application with the FERC in April 1998. Subject to receiving timely
FERC approval, construction will begin in early 1999 in order to provide peaking
services during the 2001-02 winter heating season. The agreement for Etowah LNG
to provide services to Atlanta Gas Light includes, however, a provision allowing
Atlanta Gas Light to terminate the agreement in the event it does not receive,
with respect to the agreement, a satisfactory order from the Georgia Public
Service Commission (Georgia PSC). In September 1998 the Georgia PSC issued an
order approving the agreement, but allowed for further review of it. In light of
this order, the parties have agreed to extend the time period during which
Atlanta Gas Light may terminate the agreement to December 15, 1998. If Atlanta
Gas Light exercises its option to terminate its service agreement with Etowah
LNG, the project would not go forward and Atlanta Gas Light would be obligated
to reimburse Etowah LNG for all of its costs incurred in the project to date.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Revenues:
Market transportation and
<S> <C> <C> <C> <C>
storage $77.7 $74.9 $239.1 $232.7
Supply transportation 11.1 12.8 34.8 35.7
Other 4.6 5.4 20.5 27.3
----- ----- ------ ------
Total Revenues 93.4 93.1 294.4 295.7
----- ----- ------ ------
Costs and Expenses:
Operating and maintenance 21.0 20.4 59.6 60.2
General and administrative 14.8 15.8 42.5 52.9
Depreciation and amortization 13.6 12.0 32.2 35.6
Taxes, other than income 5.4 5.0 16.1 15.0
----- ----- ------ ------
54.8 53.2 150.4 163.7
----- ----- ------ ------
Operating Income 38.6 39.9 144.0 132.0
Other Income:
Equity in earnings of
unconsolidated affiliates 6.0 2.7 15.7 8.1
Other 1.9 1.0 3.7 5.9
----- ----- ------ ------
7.9 3.7 19.4 14.0
----- ----- ------ ------
Earnings Before Interest and Taxes $46.5 $43.6 $163.4 $146.0
===== ===== ====== ======
(Billion Cubic Feet)
Volumes:
Market transportation 140 133 462 439
Supply transportation 85 109 283 289
----- ----- ------ ------
Total Volumes 225 242 745 728
===== ===== ====== ======
</TABLE>
CITRUS CORP.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Equity in Earnings of
<S> <C> <C> <C> <C>
Citrus Corp. $ 6.7 $ 5.6 $ 22.4 $ 18.4
===== ===== ====== ======
(Billion Cubic Feet)
Florida Gas Volumes (100%):
Market transportation 119 124 323 346
Supply transportation 11 5 27 18
----- ----- ------ ------
Total Volumes 130 129 350 364
===== ===== ====== ======
</TABLE>
<PAGE>
Third Quarter 1998 to Third Quarter 1997 Analysis
Southern Natural Gas Company and Subsidiaries - EBIT for Southern was
$46.5 million in the third quarter of 1998 compared with $43.6 million in the
third quarter of 1997. The increase was primarily due to higher equity in
earnings of Destin and an expansion placed in service, partially offset by
higher depreciation expense.
Market transportation revenues increased as a result of the recent
expansion. Supply transportation revenues decreased due to a decrease in volumes
as a result of hurricanes and tropical storms, and natural production declines
taking place in certain Gulf of Mexico fields. General and administrative
expense decreased primarily due to lower employee benefit expenses and
stock-based compensation expense. Depreciation and amortization expense
increased in the 1998 period due to plant additions and pursuant to a provision
of the customer settlement allowing a deferral of depreciation on certain plant
categories until March 1, 1998. That deferral is now being amortized.
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin, primarily resulting from AFUDC capitalized. During the
third quarter, construction of the offshore portion of the Destin pipeline was
completed, and it is currently transporting about 90 million cubic feet (MMcf)
of natural gas per day. As additional reserves are connected during the fourth
quarter, daily throughput is expected to exceed 200 MMcf per day by year end.
Citrus - Equity in earnings of Citrus increased $1.1 million to $6.7
million for the three months ended September 30, 1998. The increase is primarily
due to the recognition of credits on a gas supply agreement, lower interest
expense and an adjustment to a reserve for gas imbalances, partly offset by
higher operating expenses.
Nine Months 1998 to Nine Months 1997 Analysis
Southern Natural Gas Company and Subsidiaries - EBIT was $163.4 million
for the nine months ending September 30, 1998, compared with $146.0 million for
the same 1997 period. The increase was primarily due to an expansion placed in
service, lower expenses and increased earnings of Destin. Partially offsetting
these increases was the net effect of reserve adjustments made in the 1997 and
1998 periods, which is discussed below.
Market transportation revenues improved primarily due to a recent
expansion. Other revenues decreased due to a favorable $10 million reserve
adjustment in 1997 relating to Southern's obligation to pay royalty claims in
connection with take-or-pay settlements entered into in the 1980's, offset
partially by the reversal of the remaining $4.2 million of royalty reserves in
1998. Such reversal was made because management determined that the likelihood
of the Company making any significant royalty payments as a result of its prior
take-or-pay settlements was remote. General and administrative expenses
decreased primarily due to lower employee benefit expenses, lower insurance
expenses and lower stock-based compensation expense. Depreciation and
amortization expense decreased primarily due to an adjustment of the salvage
value on certain fixed assets (see Note 1 of the Notes to Condensed Consolidated
Financial Statements). Increases due to plant additions and the amortization of
the deferred depreciation pursuant to the customer settlement partially offset
this decrease.
<PAGE>
Equity in earnings of unconsolidated affiliates increased in 1998 due
to earnings of Destin, primarily resulting from AFUDC capitalized on its current
construction costs. Other income was lower primarily due to the recognition of a
gain on the termination of a forward rate agreement in the 1997 period.
Citrus - Equity in earnings of Citrus increased $4.0 million to $22.4
million for the nine months ended September 30, 1998. The increase is primarily
due to the recognition of credits on a gas supply agreement, lower operating
expenses and lower interest expense, partly offset by reduced utilization of
firm transportation capacity held by Citrus Trading and lower revenues at
Florida Gas due to lower throughput.
Natural Gas Sales and Supply
As a result of FERC Order No. 636, Southern Natural Gas terminated or
renegotiated to market pricing substantially all of its gas supply contracts
through which it had historically obtained its long-term gas supply. Pending the
termination of the remaining supply contracts, Southern Natural Gas' remaining
gas supply is sold on a month-to-month basis. Gas sales revenue and natural gas
cost are included in other revenue.
Southern Natural Gas' annual purchase commitments total less than $25
million per year for 1998 and subsequent years. Based on Southern Natural Gas'
current expectations with respect to natural gas prices in 1998 and the years
following, only an insignificant amount of gas volumes is expected to be at
prices above market.
Rate Matters
Under terms of a settlement approved by the FERC, all of Southern
Natural Gas' previously pending rate proceedings and proceedings to recover gas
supply realignment and other transition costs associated with the implementation
of FERC Order No. 636 have been resolved. The settlement requires Southern
Natural Gas to file a new rate case no later than September 1, 1999.
In September 1997, the FERC approved a Rate Case Settlement between
Florida Gas and its customers. The terms of the settlement provide for tiered
rates effective beginning March 1, 1997, which, for a two-year period, reflect
an increase over the rates in effect prior to the rate filing for transportation
through both the pre expansion and Phase III expansion systems. The settlement
resolved all issues related to Phase III construction and the construction cost
audit. The settlement terms require Florida Gas to file a new rate case no later
than October 1, 2001.
<PAGE>
ENERGY SERVICES
Sonat Energy Services, through its majority-owned subsidiaries, Sonat
Marketing and Sonat Power Marketing L.P. (Sonat Power Marketing), conducts
marketing activities in the natural gas and electric industries, respectively.
Sonat Marketing purchases and resells substantially all of Sonat Exploration's
natural gas production, as well as purchasing and reselling gas for other
customers. Sonat Power Marketing has executed electric power purchase, sales and
transmission agreements with numerous companies and is focused on expanding its
wholesale electric marketing business. Both of these subsidiaries use derivative
instruments in managing commodity price risk (see Market Risk and Note 4 of the
Notes to Condensed Consolidated Financial Statements).
In 1998 a subsidiary of Sonat Energy Services acquired a 50 percent
interest in a natural gas-fired power plant in Georgia (the Mid-Georgia Cogen
plant) for a gross investment of approximately $28 million. The power plant
began operations in June 1998. In July 1998, Sonat Energy Services announced its
intention to develop a 680-megawatt natural gas-fired peaking power plant near
Columbus, Georgia. The Cataula Power Plant, which will have a gross investment
of approximately $227 million, is scheduled to begin commercial operation in
June 2000. The plant will provide energy to serve the growing Georgia and
Southeast power markets during peak power demand periods. Sonat Energy Services
is pursuing additional power plant opportunities.
Sonat Intrastate-Alabama Inc. (SIA), a wholly owned subsidiary of Sonat
Energy Services, owns an approximately 450-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. SIA's throughput in the first nine months of 1998 was 31 Bcf
compared with 26 Bcf in the first nine months of 1997.
Sonat Power Systems Inc., a wholly owned subsidiary of Sonat, formed a
strategic alliance in 1997 with AlliedSignal Power Systems Inc., an unaffiliated
company, to market and support its onsite electric power systems in 13 Southern
states from Texas to Virginia, and the District of Columbia.
<PAGE>
ENERGY SERVICES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Revenues $762.0 $912.9 $2,499.2 $2,569.1
====== ====== ======== ========
Operating Margin $ 13.7 $ 11.0 $ 41.1 $ 31.4
====== ====== ======== ========
Operating Income $ 1.5 $ .9 $ 4.8 $ 2.0
====== ====== ======== ========
Earnings Before Interest and Taxes $ 4.2 $ .7 $ 6.7 $ 1.5
====== ====== ======== ========
Physical Volumes:
Sonat Marketing Gas Sales
Volumes (100%)
(Billion Cubic Feet) 285 339 929 942
====== ====== ======== ========
Sonat Power Marketing Sales
Volumes (100%)
(Thousands of Megawatt Hours) 3,051 3,344 8,950 6,662
====== ====== ======== ========
Financial Settlements (Notional):
(Bcf/d) 11.8 4.5 8.7 3.6
====== ====== ======== ========
</TABLE>
Third Quarter 1998 to Third Quarter 1997 Analysis
Third quarter 1998 financial results improved from third quarter 1997
levels, as EBIT rose to $4.2 million from $.7 million in 1997. The increase was
due to better power marketing results and the contribution of the 50
percent-owned Mid-Georgia Cogen L.P. power plant. Sonat Marketing Company's
third quarter physical sales volumes were slightly below 1997 levels. Notional
sales volumes from natural gas derivative transactions more than doubled,
however, reflecting an increase in Sonat Marketing's financial transactions on
behalf of customers and an increase in reliance on financial transactions to
manage its basis positions. While Sonat Power Marketing's third quarter 1998
volumes were slightly below 1997 levels, margins were substantially better due
to improved market conditions. Sonat Power Marketing's financial results also
benefited from marketing arrangements, whereby it participates in the spread
between natural gas and electricity prices.
Nine Months 1998 to Nine Months 1997 Analysis
EBIT for the first nine months of 1998 rose to $6.7 million compared
with $1.5 million for the first nine months of 1997. The improved results
reflect higher volumes at Sonat Power Marketing, better margins, and the
contribution of the Mid-Georgia Cogen L.P. power plant. Although Sonat
Marketing's physical sales volumes were essentially flat, notional sales volumes
more than doubled. Sonat Power Marketing's sales volumes reached 9.0 million
megawatt hours, up significantly from 6.7 million megawatt hours in the first
nine months of 1997. The initiation of commercial operations at the Mid-Georgia
plant in June 1998 and electric power marketing opportunities created by the
above normal temperatures in the Southeast and Midwest contributed to the
increase in EBIT. Results for 1998 reflect start-up losses for Sonat Power
Systems, which slightly offset these favorable factors.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Interest Expense, Net $ (32.3) $(23.5) $ (93.1) $(68.8)
</TABLE>
Net interest expense increased in both the three-month and nine-month
periods of 1998 as compared to the same periods of 1997 due to higher average
debt levels. Partially offsetting was the effect of lower interest rates on debt
in both periods of 1998. In addition, the nine-month period of 1998 reflects
higher interest income on restricted cash and other investments. Interest
capitalized decreased in both periods of 1998 due to lower interest capitalized
at Sonat Exploration.
<TABLE>
<S> <C> <C> <C> <C>
Income Tax Expense (Benefit) $(142.7) $ 25.1 $(304.0) $ 87.6
</TABLE>
Income tax expense decreased in both periods due to the ceiling test
charges related to the Company's oil and gas operations. Absent these charges,
the effective tax rate was lower in both periods of 1998 as compared to 1997
because tax preference items had a greater impact on income before income taxes
in the 1998 periods.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
(In Millions)
<S> <C> <C>
Operating Activities $ 426.1 $556.0
</TABLE>
Cash flow from operations decreased $129.9 million compared to the 1997
period primarily due to lower operating results at Sonat Exploration. Partially
offsetting the decrease was higher cash flows at Sonat Energy Services.
Operating results were discussed earlier.
Depreciation, depletion, and amortization and deferred income taxes
include a charge of $1,035.2 million and a benefit of $362.3 million,
respectively, for ceiling test charges related to Sonat Exploration's oil and
gas properties in 1998. Absent the ceiling test charges, the change in deferred
income taxes and accrued interest and income taxes primarily reflects the
capitalization of intangible drilling costs in the current period. The change in
accounts receivable and accounts payable is primarily attributable to lower
natural gas prices and volumes. The change in restricted cash, accrued long-term
compensation, and other current assets and liabilities primarily represent the
payment of certain expenses in connection with the merger between the Company
and Zilkha Energy in January 1998 (see Note 3 of the Notes to Condensed
Consolidated Financial Statements). Lower broker deposits at Sonat Marketing in
the current period slightly offset the decline in current assets and
liabilities.
The caption Other in the 1997 period includes $15.4 million of deferred
gains on derivatives designated as hedges at Sonat Marketing.
<TABLE>
<S> <C> <C>
Investing Activities $(503.6) $(775.1)
</TABLE>
Net cash used in investing activities was $271.5 million lower in 1998
compared to 1997. The decrease was primarily attributable to proceeds from the
sale of certain oil and gas properties (see Note 3 of the Notes to Condensed
Consolidated Financial Statements). The sale of those properties also had the
effect of decreasing capital expenditures at Sonat Exploration in the current
period. Higher investments in unconsolidated affiliates, specifically, the
Destin and the Mid-Georgia Cogen joint ventures partially offset these
decreases.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
(In Millions)
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<S> <C> <C>
Exploration and Production $ 481.1 $ 649.1
Natural Gas Transmission 160.3 100.5
Energy Marketing 8.1 8.3
Other 4.2 2.7
------- -------
Total $ 653.7 $ 760.6
======= =======
</TABLE>
The Company's share of capital expenditures by its unconsolidated
affiliates was $100.3 million and $18.1 million in the first nine months of 1998
and 1997, respectively.
<TABLE>
<S> <C> <C>
Financing Activities $ 60.9 $ 290.7
</TABLE>
Net cash provided by financing activities was $229.8 million lower in
1998 period compared to 1997. The proceeds from the sale of oil and gas
properties were used to repay borrowings under Sonat's floating rate facilities
in the current period.
CAPITAL RESOURCES
At September 30, 1998, the Company had bank lines of credit and a
revolving credit agreement with banks with a total capacity of $1.25 billion.
The Company's bank and commercial paper borrowings in the aggregate are not
authorized to exceed the maximum amount available under its lines of credit and
revolving credit agreement. As a result, after giving effect to the $611.8
million of commercial paper and $25.5 million of borrowings from the short-term
lines of credit, $612.7 million was available to the Company under such lines of
credit and revolving credit agreement at September 30, 1998.
Sonat and Southern Natural Gas have shelf registration statements with
the Securities and Exchange Commission which provide for the issuance of up to
$500 million in debt securities by both companies. Southern Natural Gas issued
$100 million in debt under its registration statement in the third quarter of
1998.
The Company's capital expenditures and other investing requirements for
1998 are expected to aggregate $910.2 million. This amount reflects investments
in unconsolidated affiliates and proposed expenditures for oil and gas property
acquisitions, exploration and development, pipeline expansion and other
projects. The Company completed the Zilkha Energy merger on January 30, 1998,
issuing $1.04 billion of common stock to the Zilkha Energy shareholders (see
Note 3 of the Notes to Condensed Consolidated Financial Statements). The
Company's cash requirements relating to the Zilkha Energy merger totaled
approximately $290 million, principally for repayment of debt and certain other
liabilities of Zilkha Energy and transaction expenses.
<PAGE>
The Company has a stock repurchase program in effect through the end of
1998. As of September 30, 1998, the Company had remaining authority to purchase
approximately 967,000 shares of the Company's common stock. Shares purchased
under the program are expected to be reissued in connection with employee stock
option and restricted stock programs.
The Company believes that cash flow from operations and borrowings in
either the private or public market will provide the Company with the means to
fund operations and currently planned investment and capital expenditures.
MARKET RISK
Financial instruments of the Company expose it to both commodity price
risk and interest rate risk.
Commodity Price Risk - The Company's primary market risk exposure is
the volatility of energy commodity prices, relating to the portfolio position of
its financial instruments and physical commitments, which can affect the
operating results of Sonat Exploration and Sonat Energy Services. The Company
uses commodity futures contracts, options and price swap agreements to hedge its
commodity price risk on crude oil, natural gas and electricity. Sonat Energy
Services performs all hedging activity (non-trading) for both its own operations
and for the operations of Sonat Exploration. Sonat Energy Services, through its
subsidiary, Sonat Marketing, also uses derivative instruments as a market maker
(trading activity) by maintaining active trading positions in natural gas
futures and swap contracts and limiting its risk to changes in the value of its
outstanding positions through the use of Value-at-Risk models, establishment of
offsetting positions, and limit and monitoring procedures.
The Company's non-trading (hedging) and trading activities are
implemented under a set of policies approved by the Board of Directors. In
addition, all derivative activities are internally reviewed by a Risk Oversight
Committee to ensure compliance with all policies. The Company's use of
derivative instruments to reduce the effect of market volatility is described in
Note 4 of the Notes to Condensed Consolidated Financial Statements. The Risk
Oversight Committee and management monitor the portfolio Value-at-Risk to ensure
compliance with Board limits.
Interest Rate Risk - The Company's entire portfolio of interest rate
risk instruments is classified as non-trading. The Company's interest income and
expense are sensitive to changes in the level of short-term interest rates in
the United States. In general, the Company uses excess funds to reduce
short-term debt levels and therefore has minimal cash equivalent investments. To
mitigate the impact of fluctuations in interest rates, the Company maintains a
balance among components of its capital structure, providing a mix of maturities
and pricing methods for its debt obligations. In the past the Company has used
derivative instruments to aid in its management of interest rate risk, although
it is not currently doing so.
<PAGE>
YEAR 2000 PROJECT
The Company is aware of the potential impact the Year 2000 could have
on its information technology and business infrastructure. To answer the Year
2000 challenge, the Sonat Board of Directors directed that a corporate-wide
initiative be undertaken. A consulting firm was engaged to assist in this
effort.
The Company has divided its Year 2000 project into assessment,
implementation, and testing phases. During the assessment phase, the Company
completed a comprehensive inventory of IT systems, embedded systems, equipment,
computer hardware and software that rely on a computer chip as well as service
providers that could be impacted by the Year 2000 problem. For vendor supplied
items, the Company has contacted its vendors seeking written verification of
Year 2000 readiness. In addition, the Company is also communicating with its
customers and business partners to determine the extent to which the Company is
vulnerable to the failure of those third parties to remediate their Year 2000
issue.
The Company is currently engaged in the implementation and testing
phases of the Year 2000 project. The implementation phase includes completing
the replacement of mainframe systems with Year 2000-compliant vendor packages on
new client/server platforms and performing any required modifications and
upgrades identified during the assessment phase. The testing phase involves
testing systems for Year 2000 readiness. The Company is scheduled to have all
critical systems tested, remediations plans defined, and corrective action
underway by December 31, 1998. All remediation efforts are scheduled to be
completed by June 30, 1999.
The Company is also currently developing contingency plans as
practicable for critical systems, service providers, and business partners.
These plans involve developing contingencies for failures that may result from
the Year 2000 problem. The Company is scheduled to have these plans completed by
June 30, 1999. The Company has not completed analyzing worst case scenarios and
therefore is not able to estimate potential lost revenue at this time.
The estimated cost to the Company of the Year 2000 project for capital
as well as general and administrative costs is expected to be $5 million to $10
million. As of September 30, 1998, the Company has incurred approximately $1.3
million in Year 2000 project costs. The Company expects to fund Year 2000
expenditures from normal operations.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income as changes
occur. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. SFAS No. 133 becomes effective for fiscal
years beginning after June 15, 1999. As a result, calendar year-end companies
have until January 1, 2000, to adopt. Early application is encouraged, but only
permitted as of the beginning of any fiscal quarter. Retroactive application to
previous periods, even previous quarters within the same fiscal year, is not
permitted. The Company has not yet determined what the effect of SFAS No. 133
will be on the earnings and financial position of the Company.
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements
regarding the Company's business plans and prospects, objectives, future
drilling plans, expansion projects, proposed capital expenditures and expected
performance or results. These forward-looking statements are based on
assumptions that the Company believes are reasonable, but are subject to a wide
range of risks and uncertainties and, as a result, actual results and experience
may differ materially from the anticipated results or other expectations
expressed in such forward-looking statements. Such statements are made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
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
success of the Company's exploration and development drilling programs, which
would affect production levels and reserves; the results of the Company's
hedging activities; risks incident to the drilling and operation of oil and gas
wells; future drilling, production and development costs, including drilling rig
rates; the success of the Company's cost reduction activities; and the
requirements to receive various governmental approvals to proceed with pipeline,
storage and power generation projects, and unanticipated construction delays in
connection with such projects. 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.
Changes in business conditions in the oil and gas industry and at Sonat
Exploration could change its current plans for increasing its onshore and
offshore exploration programs. Such changes would include material changes in
oil and gas prices and drilling rig rates. Finally, there can be no assurance
that Destin will be able to timely connect new fields or that the production
from those fields will allow it to meet its planned throughput objectives.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits1
Exhibit
Number Exhibits
10.1* Executive Award Plan of Sonat Inc. as Amended and Restated as of
July 23, 1998
10.2* Amendment to the Performance Award Plan of Sonat Inc. dated as of
July 23, 1998
10.3* Amendment to the Performance Award and Cash Bonus Plan of Sonat
Inc. dated as of July 23, 1998
10.4* Amendment to the Cash Bonus Plan of Sonat Inc. dated as of
July 23, 1998
10.5* Executive Severance Agreement dated July 23, 1998, between Sonat
Inc. and Ronald L. Kuehn, Jr.
10.6* Executive Severance Agreement dated July 23, 1998, between Sonat
Inc. and Thomas W. Barker, Jr. and schedule identifying
substantially identical Executive Severance Agreements between
Sonat Inc. and other parties
12* Computation of Ratio of Earnings to Fixed Charges
18* Letter re Change in Accounting Principles
27.1* Financial Data Schedules for the period ended September 30, 1998,
filed electronically only
27.2* Restated Financial Data Schedules for the period ended
June 30, 1998, filed electronically only
27.3* Restated Financial Data Schedules for the period ended
March 31, 1998, filed electronically only
27.4* Restated Financial Data Schedules for the period ended
December 31, 1997, filed electronically only
27.5* Restated Financial Data Schedules for the period ended
September 30, 1997, filed electronically only
27.6* Restated Financial Data Schedules for the period ended
June 30, 1997, filed electronically only
27.7* Restated Financial Data Schedules for the period ended
March 31, 1997, filed electronically only
27.8* Restated Financial Data Schedules for the period ended
December 31, 1996, filed electronically only
27.9* Restated Financial Data Schedules for the period ended
December 31, 1995, filed electronically only
- ------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on July 23, 1998, reporting
certain information under Item 5 with respect to the second quarter results of
operations and the completion of the restructuring of its wholly owned
subsidiary, Sonat Exploration Company.
The Company filed a Report on Form 8-K on September 17, 1998, reporting
certain information under Item 5 with respect to the Grynberg complaint.
The Company filed a Report on Form 8-K on October 22, 1998, reporting
certain information under Item 5 with respect to the Company's third quarter
results which reflected the adoption of the full cost method of accounting for
its exploration and production business segment.
1 The Company will furnish to requesting security holders the exhibits 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 in writing and should be addressed to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham,
Alabama 35202-2563.
<PAGE>
SONAT INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
Date: November 12, 1998 By: /s/ James E. Moylan, Jr.
-------------------------- --------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
Date: November 12, 1998 By: /s/ Thomas W. Barker, Jr.
-------------------------- ---------------------------
Thomas W. Barker, Jr.
Vice President-Finance
EXHIBIT 10.1
EXECUTIVE AWARD PLAN
OF
SONAT INC.
(As Amended and Restated as of July 23, 1998)
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.
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 canceled
(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.
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.
(h) Change of Control. Notwithstanding the exercisability
schedule governing any Option, upon the occurrence of a Change of
Control (as defined in Section 4.9) all Options outstanding at the time
of such Change of Control and held by optionees who are employees of
the Company or its Subsidiaries at the time of 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 a Change of Control. 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 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 a Change of Control, in
addition to the Appreciation and any Supplemental Payment (as defined in Section
2.3) to which the holder is entitled, the holder shall receive (in cash, in
Common Stock, or a combination of both, at the discretion of the Committee) (1)
the amount by which the greater of (a) the highest market price per share of
Common Stock during the 60-day period preceding exercise of the Stock
Appreciation Right or (b) the highest price per share of Common Stock (or the
cash- equivalent thereof as determined by the Board of Directors) paid by an
acquiring person during the 60-day period preceding a Change of Control, exceeds
the 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 a 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 in cash, in Common Stock, or a combination of both, at the
discretion of the Committee.
2.3 Supplemental Payment on Exercise of Options or Stock Appreciation
Rights
The Committee, either at the time of grant or at the time of exercise
of any Option or related Stock Appreciation Right or Limited Stock Appreciation
Right, may provide for a supplemental payment (the "Supplemental Payment") by
the Company to the optionee with respect to the exercise of any Option or
related Stock Appreciation Right or Limited Stock Appreciation Right. The
Supplemental Payment shall be in the amount specified by the Committee, which
shall not exceed, but may be equal to, the amount necessary to pay the federal
income tax payable with respect to both exercise of the Option or related Stock
Appreciation Right or Limited Stock Appreciation Right and receipt of the
Supplemental Payment, assuming the optionee is taxed at the maximum effective
federal income tax rate applicable thereto. The Supplemental Payment shall be
paid in cash, Common Stock, or a combination of both, at the option of the
Committee. The Supplemental Payment shall be paid within 30 days of the date of
exercise of an Option or Stock Appreciation Right or Limited Stock Appreciation
Right (or, if later, within 30 days of the date on which income is recognized
for federal income tax purposes with respect to such exercise).
2.4 Statutory Options
Subject to the limitations on Option terms set forth in Section 2.1,
the Committee shall have the authority to grant (i) incentive stock options
within the meaning of Section 422 of the Code and (ii) Options containing such
terms and conditions as shall be required to qualify such Options for
preferential tax treatment under the Code as in effect at the time of such
grant. Options granted pursuant to this Section 2.4 may contain such other terms
and conditions permitted by Article II of this Plan as the Committee, in its
discretion, may from time to time determine (including, without limitation,
provision for Stock Appreciation Rights, Limited Stock Appreciation Rights and
Supplemental Payments), to the extent that such terms and conditions do not
cause the Options to lose their preferential tax treatment. To the extent the
Code and Regulations promulgated thereunder require a plan to contain specified
provisions in order to qualify options for preferential tax treatment, such
provisions shall be deemed to be stated in this Plan.
III. RESTRICTED STOCK
3.1 Terms and Conditions of Restricted Stock Awards
Subject to the following provisions, all awards of Restricted Stock
shall be in such form and shall have such terms and conditions as the Committee,
in its discretion, may from time to time determine:
(a) The Restricted Stock award shall specify the number of
shares of Restricted Stock to be awarded, the price, if any, to be paid
by the recipient of the Restricted Stock, and the date or dates on
which the Restricted Stock will vest. The vesting of Restricted Stock
may be conditioned upon the completion of a specified period of service
with the Company or its Subsidiaries, upon the attainment of specified
performance goals, or upon such other criteria as the Committee may
determine in its sole discretion.
(b) Stock certificates representing the Restricted Stock
granted to an employee shall be registered in the employee's name. Such
certificates shall either be held by the Company on behalf of the
employee, or delivered to the employee bearing a legend to restrict
transfer of the certificate until the Restricted Stock has vested, as
determined by the Committee. The Committee shall determine whether the
employee shall have the right to vote and/or receive dividends on the
Restricted Stock before it has vested. No share of Restricted Stock may
be sold, transferred, assigned, or pledged by the employee until such
share has vested in accordance with the terms of the Restricted Stock
award. In the event of an employee's termination of employment before
all of his Restricted Stock has vested, or in the event other
conditions to the vesting of Restricted Stock have not been satisfied
prior to any deadline for the satisfaction of such conditions set forth
in the award, the shares of Restricted Stock which have not vested
shall be forfeited and any purchase price paid by the employee shall be
returned to the employee. At the time Restricted Stock vests (and, if
the employee has been issued legended certificates of Restricted Stock,
upon the return of such certificates to the Company), a certificate for
such vested shares shall be delivered to the employee (or the
beneficiary designated by the employee in the event of death), free of
all restrictions.
(c) Notwithstanding the vesting conditions set forth in the
Restricted Stock award, (i) the Committee may in its discretion
accelerate the vesting of Restricted Stock at any time, and (ii) all
shares of Restricted Stock shall vest upon a Change of Control of the
Company.
3.2 Supplemental Payment on Vesting of Restricted Stock
The Committee, either at the time of grant or at the time of vesting of
Restricted Stock, may provide for a Supplemental Payment by the Company to the
employee in an amount specified by the Committee which shall not exceed, but may
be equal to, the amount necessary to pay the federal income tax payable with
respect to both the vesting of the Restricted Stock and receipt of the
Supplemental Payment, assuming the employee is taxed at the maximum effective
federal income tax rate applicable thereto and has not elected to recognize
income with respect to the Restricted Stock before the date such Restricted
Stock vests. The Supplemental Payment shall be paid within 30 days of each date
that Restricted Stock vests. The Supplemental Payment shall be paid in cash,
Common Stock, or a combination of both, at the discretion of the Committee.
IV. ADDITIONAL PROVISIONS
4.1 General Restrictions
Each award under the Plan shall be subject to the requirement that, if
at any time the Committee shall determine that (i) the listing, registration or
qualification of the shares of Common Stock subject or related thereto upon any
securities exchange or under any state or federal law, or (ii) the consent or
approval of any government regulatory body, or (iii) an agreement by the
recipient of an award with respect to the disposition of shares of Common Stock
is necessary or desirable (in connection with any requirement or interpretation
of any federal or state securities law, rule or regulation) as a condition of,
or in connection with, the granting of such award or the issuance, purchase or
delivery of shares of Common Stock thereunder, such award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee.
4.2 Adjustments for Changes in Capitalization
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, rights offer, liquidation, dissolution, merger,
consolidation, spin-off, sale of assets, payment of an extraordinary cash
dividend, or any other change in or affecting the corporate structure or
capitalization of the Company, the Committee shall make appropriate adjustment
in the number and kind of shares authorized by the Plan (including any
limitations on individual awards), in the number, price or kind of shares
covered by the awards and in any outstanding awards under the Plan.
4.3 Amendments
(a) The Board of Directors may amend the Plan from time to time. No
such amendment shall require approval by the stockholders unless stockholder
approval is required by applicable law or stock exchange requirements.
(b) The Committee shall have the authority to amend any grant to
include any provision which, at the time of such amendment, is authorized under
the terms of the Plan; 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 canceled 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 canceled award; provided, however, that
any Option that is granted in lieu of a canceled Option shall have an option
price at least equal to the option price of the canceled 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 (if expressed prior to the
making of such election).
4.6 Non-Assignability
Except as expressly provided in the Plan, no award under the Plan shall
be assignable or transferable by the holder thereof except by will or by the
laws of descent and distribution. During the life of the holder, awards under
the Plan shall be exercisable only by such holder or by the guardian or legal
representative of such holder.
4.7 Non-Uniform Determinations
Determinations by the Committee under the Plan (including, without
limitation, determinations of the persons to receive awards; the form, amount
and timing of such awards; the terms and provisions of such awards and the
agreements evidencing same; and provisions with respect to termination of
employment) need not be uniform and may be made by it selectively among persons
who receive, or are eligible to receive, awards under the Plan, whether or not
such persons are similarly situated.
4.8 No Guarantee of Employment
The grant of an award under the Plan shall not constitute an assurance
of continued employment for any period.
4.9 Change of Control
A "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (1) the
then outstanding shares of common stock of the Company (the
"Outstanding Common Stock") or (2) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition directly from the Company, (B) any
acquisition by the Company, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A),
(B) and (C) of subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors; provided,
however, that any individual becoming a director subsequent to such
date whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board of Directors; or
(iii) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Common Stock and Outstanding Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the 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.
4.10 Duration and Termination
(a) The Plan shall be of unlimited duration. Notwithstanding the
foregoing, no incentive stock option (within the meaning of Section 422 of the
Code) shall be granted under the Plan after April 26, 2005, but awards granted
prior to such date may extend beyond such date, and the terms of this Plan shall
continue to apply to all awards granted hereunder.
(b) The Board of Directors may discontinue or terminate the Plan at any
time. Such action shall not impair any of the rights of any holder of any award
outstanding on the date of the Plan's discontinuance or termination without the
holder's written consent.
This document incorporates into a single document the provisions of the
Plan as amended as of July 23, 1998.
IN WITNESS WHEREOF, this document has been executed as of July 23,
1998.
SONAT INC.
by:
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief Executive Officer
EXHIBIT 10.2
AMENDMENT TO THE
PERFORMANCE AWARD PLAN
OF SONAT INC.
Sonat Inc. hereby amends the Performance Award Plan of Sonat Inc., as
amended effective as of December 1, 1995 (the "Plan"), as follows, effective as
of July 23, 1998:
1. The first sentence of Section 2.6 of the Plan is hereby amended to read
in its entirety as follows:
Notwithstanding any other provision of this Plan or contained
in any Award granted hereunder (including any provision for deferred
payment thereof), upon the occurrence of a Change of Control (as
defined in Section 3.6), a participant shall be deemed to have earned
100% of the Bonus Opportunities contained in any outstanding Awards
for which the determinations described in Section 2.3 have not been
made, and the amount of such Bonus Opportunities shall be paid
promptly (and no later than 30 days after the Change of Control) in a
cash lump sum.
2. The Plan is in all other respects ratified and confirmed without
amendment.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of July 23,
1998.
SONAT INC.
By:
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief Executive Officer
EXHIBIT 10.3
AMENDMENT TO THE
PERFORMANCE AWARD AND CASH BONUS PLAN
OF SONAT INC.
Sonat Inc. hereby amends the Performance Award and Cash Bonus Plan of Sonat
Inc., as amended effective as of December 1, 1995 (the "Plan"), as follows,
effective as of July 23, 1998:
1. The first sentence of Section 2.6 of the Plan is hereby amended to read
in its entirety as follows:
Notwithstanding any other provision of this Plan or contained
in any Performance Award granted hereunder (including any provision
for deferred payment thereof), upon the occurrence of a Change of
Control (as defined in Section 4.6), a participant shall be deemed to
have earned 100% of the Bonus Opportunities contained in any
outstanding Performance Awards for which the determinations described
in Section 2.3 have not been made, and the amount of such Bonus
Opportunities shall be paid promptly (and no later than 30 days after
the Change of Control) in a cash lump sum.
2. The Plan is in all other respects ratified and confirmed without
amendment.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of July 23,
1998.
SONAT INC.
By:
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief Executive Officer
EXHIBIT 10.4
AMENDMENT TO THE
CASH BONUS PLAN
OF SONAT INC.
Sonat Inc. hereby amends the Cash Bonus Plan of Sonat Inc., as amended
effective as of December 1, 1995 (the "Plan"), as follows, effective as of July
23, 1998.
1. The first sentence of Section 2.6 of the Plan is hereby amended to read
in its entirety as follows:
Notwithstanding any other provision of this Plan or contained
in any Annual Bonus Award granted hereunder (including any provision
for deferred payment thereof), upon the occurrence of a Change of
Control (as defined in Section 4.6), a participant shall be deemed to
have earned 100% of the Bonus Opportunities contained in any
outstanding Annual Bonus Awards for which the determinations
described in Section 2.3 have not been made, and the amount of such
Bonus Opportunities shall be paid promptly (and no later than 30 days
after the Change of Control) in a cash lump sum.
2. The Plan is in all other respects ratified and confirmed without
amendment.
IN WITNESS WHEREOF, Sonat Inc. has executed this document as of July 23, 1998.
SONAT INC.
By:
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief Executive Officer
EXHIBIT 10.5
EXECUTIVE SEVERANCE AGREEMENT, dated as of July 23, 1998, by and
between Sonat Inc., a Delaware corporation ("Sonat"), and Ronald L. Kuehn,
Jr. ("Executive").
WHEREAS, the Executive Compensation Committee of the Board of Directors
of Sonat has recommended, and the Board of Directors has approved, that Sonat
enter into severance agreements with key executives who are from time to time
designated by the Executive Compensation Committee;
WHEREAS, should Sonat become subject to any proposed or threatened
Change of Control (as hereinafter defined), the Board of Directors believes it
imperative that Sonat and the Board of Directors be able to rely upon Executive
to continue in Executive's position, and that Sonat be able to receive and rely
upon Executive's advice, if requested, as to the best interests of Sonat and its
stockholders without concern that Executive might be distracted by the personal
uncertainties and risks created by such a proposal or threat;
WHEREAS, should Sonat receive any such proposals, in addition to
Executive's regular duties, Executive may be called upon to assist in the
assessment of such proposals, to advise management and the Board of Directors as
to whether such proposals would be in the best interests of Sonat and its
stockholders, and to take such other actions as the Board of Directors might
determine to be appropriate;
WHEREAS, Executive is a key executive and, pursuant to action taken by
the Executive Compensation Committee and the Board of Directors, has previously
entered into a severance agreement with Sonat; and
WHEREAS, the Executive Compensation Committee and the Board of
Directors have approved certain revisions to such severance agreement, Executive
agrees to such revisions, and Executive and Sonat desire to amend and restate
such severance agreement in order to consolidate the terms thereof into a single
document;
NOW, THEREFORE, Sonat and Executive agree as follows:
1. Services During Certain Events. In the event a third person begins a
tender or exchange offer, circulates a proxy to stockholders, or takes other
steps to effect a Change of Control, Executive agrees not to voluntarily leave
the employ of Sonat or its subsidiaries, and to render the services contemplated
in the recitals to this Agreement, until the third person has abandoned or
terminated his efforts to effect a Change of Control or until a Change of
Control has occurred.
2. Termination Following Change of Control. Except as provided in
Section 4 hereof, Sonat will provide or cause to be provided to Executive the
rights and benefits described in Section 3 hereof in the event that Executive's
employment is terminated:
(a) at any time within three years following a Change of
Control by Sonat or its subsidiaries for reasons other than for "cause"
(as such term is defined in Section 4 hereof) or other than as a
consequence of Executive's death, permanent disability or retirement at
or after April 30, 2001 ("Normal Retirement Date") as provided under
Sonat's Retirement Plan as in effect immediately preceding such date;
(b) at any time within three years following a Change of
Control by Executive following the occurrence of any of the following
events without Executive's written consent:
(i) the assignment of Executive to any duties or
responsibilities that are inconsistent with Executive's
position, duties, responsibilities or status immediately
preceding such Change of Control, or a change in reporting
responsibilities or titles in effect at such time resulting in
a reduction of Executive's responsibilities or position;
(ii) the reduction of Executive's annual salary
(including any deferred portions thereof), annual or long-term
cash or stock bonus opportunities, or level of benefits or
supplemental compensation; or
(iii) the transfer of Executive to a location
requiring a change in Executive's residence or a material
increase in the amount of travel normally required of
Executive in connection with Executive's employment; or
(c) by Executive for any reason during the 30-day period
immediately following the first anniversary of the date of the Change
of Control.
For purposes of this Agreement, "Change of Control" shall
mean:
A. The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding shares of common stock of Sonat (the
"Outstanding Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Sonat entitled to vote generally in the
election of directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this subsection A, the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from Sonat, (ii)
any acquisition by Sonat, (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Sonat or any corporation controlled by
Sonat or (iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection C; or
B. Individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board of Directors; provided, however that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by Sonat's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors; or
C. Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets of Sonat
(a "Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns Sonat or all or substantially all of Sonat's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Common Stock and Outstanding Voting Securities, as the case
may be, (ii) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of Sonat or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board of Directors, providing for
such Business Combination.
3. Rights and Benefits upon Termination. In the event of the
termination of Executive's employment under any of the circumstances set forth
in Section 2 hereof ("Termination"), Sonat agrees to provide or cause to be
provided to Executive the following rights and benefits:
(a) Lump Sum Payment at Termination. Executive shall be
entitled to receive within 30 days of Termination a lump-sum payment in
cash in the amount of three times Executive's Earnings (as such term is
defined in this Section 3(a)); provided, however, that if there are
fewer than 36 months remaining from the date of Termination to
Executive's Normal Retirement Date, the amount calculated pursuant to
this paragraph will be reduced by multiplying such amount by a
fraction, the numerator of which is the number of months (including any
fraction of a month) so remaining to Executive's Normal Retirement Date
and the denominator of which is 36.
For purposes of this Agreement, "Earnings" shall mean
the sum of (1) Executive's Annual Base Pay (as defined below), (2)
Executive's Recent Cash Bonus (as defined below), and (3) Executive's
Recent Long-Term Compensation (as defined below).
"Annual Base Pay" shall mean the greater of (1) the
annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) immediately before the Change of Control, and (2) the
annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) immediately before the date of Termination.
"Recent Cash Bonus" shall mean the product of
Executive's Annual Base Pay multiplied by the greater of:
(1) the quotient determined by
dividing (a) the sum of the amounts payable
to Executive upon the occurrence of a Change
of Control pursuant to Section 2.6 of
Sonat's Performance Award Plan, Section 2.6
of Sonat's Cash Bonus Plan, and Section 2.6
of Sonat's Performance Award and Cash Bonus
Plan (regardless of whether such amounts are
paid in a lump sum or in installments), by
(b) the annualized amount of Executive's
rate of base pay (as shown in Sonat's
payroll records) immediately before the
Change of Control; and
(2) the highest quotient determined,
for the calendar year in which the Change of
Control occurs and for each of the two
preceding calendar years, by dividing (a)
the sum of the bonuses paid to Executive
under the Performance Award Plan, the Cash
Bonus Plan, and the Performance Award and
Cash Bonus Plan during the first calendar
quarter of such calendar year (including for
this purpose any amount receipt of which was
deferred by the Executive
Compensation Committee
pursuant to the terms of such Plans, or by
Executive pursuant to the terms of Sonat's
Deferred Compensation Plan), by (b) the
annualized amount of Executive's rate of
base pay (as shown in Sonat's payroll
records) at the time of such payment.
Notwithstanding the foregoing, if at the
time of the Change of Control the amount
paid to Executive under clause (1) above is
with respect to a bonus opportunity
established for the preceding calendar year
(or a portion thereof), the quotients
calculated pursuant to this clause (2) shall
be determined for each of the three calendar
years before the calendar year in which the
Change of Control occurs.
"Recent Long-Term Compensation" shall mean the product of
Executive's Annual Base Pay multiplied by the average of the quotients
determined, for each of the three calendar years before the date of the Change
of Control, by dividing (a) the Grant Value (as defined below) for the regular
annual grant of stock options and/or restricted stock made under Sonat's
Executive Award Plan during the fourth calendar quarter of such calendar year by
(b) the annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) on the date of such grant. Grant Value shall mean, with respect
to any such annual grant during any fourth calendar quarter, the sum of (1) the
product of the number of stock options granted to Executive multiplied by the
value of each such stock option at the date of grant (as determined or approved
by the Executive Compensation Committee at the date of grant), plus (2) the
product of the number of shares of restricted stock granted to Executive
multiplied by the value of a share of restricted stock at the date of grant (as
determined or approved by the Executive Compensation Committee at the date of
grant). Notwithstanding the foregoing, if the Change of Control occurs in the
fourth calendar quarter of a calendar year and after the regular annual grant of
stock options and/or restricted stock for such year, the quotients calculated as
described above shall be determined for such calendar year and for the two
preceding calendar years. If the quotient determined for any calendar year is
zero, such quotient shall be disregarded (and no additional quotients shall be
calculated in substitution therefor).
(b) Retirement Benefits. If at the date of Termination,
Executive is not otherwise entitled to receive an early retirement
benefit under the terms of a qualified defined benefit retirement plan
of Sonat or its subsidiaries, Sonat shall pay in cash to Executive, in
the form of a cash lump sum (a "Severance Retirement Benefit"), an
amount equal to the Actuarial Equivalent (as defined below) of the
excess, if any, of (1) the monthly benefit calculated under the early
retirement provisions of the Retirement Plan (as in effect immediately
prior to the Change of Control), using the early retirement reduction
factors applicable as of the later of age 55 or Executive's actual age
at the date of Termination, and (2) the monthly benefit payable to
Executive under the Retirement Plan (as in effect on the date of
Executive's Termination), assuming the following for purposes of
clauses (1) and (2): (A) the benefit is payable in the form of a single
life annuity as of the later of the date Executive attains age 55 and
the date of Termination; (B) the benefit is calculated based on
Executive's actual service and actual earnings history at the date of
Termination; (C) Executive is fully vested in the benefit; and (D) the
benefit is calculated under the assumption that Sections 401(a)(17) and
415 of the Internal Revenue Code of 1986, as amended (the "Code"), are
nonexistent and the provisions of the Retirement Plan incorporating
such Code Sections are inoperative. The determination of Executive's
Severance Retirement Benefit shall not include the value of any
benefits under the "cash balance" portion of the Retirement Plan. The
Severance Retirement Benefit shall be paid as soon as practicable (and
within 30 days) after the date of Termination, and shall not be
affected by the settlement option or date of commencement of any
benefits actually payable under the Retirement Plan or Sonat's
Supplemental Benefit Plan.
(c) Survivors' Benefits. If Executive is entitled to receive a
Severance Retirement Benefit under Section 3(b) and on the date of
Termination Executive either (1) has an Eligible Spouse (as such term
is defined in the Retirement Plan as in effect immediately prior to the
Change of Control, and determined as if Executive had died on the date
of Termination), or (2) does not have an Eligible Spouse (as defined
above) but does have one or more Eligible Children (as such term is
defined in the Retirement Plan as in effect immediately prior to the
Change of Control, and determined as if Executive had died on the date
of Termination), Sonat shall pay to Executive, in the form of a cash
lump sum (the "Severance Survivors' Benefit"), an amount equal to the
Actuarial Equivalent of the monthly survivors' benefit payable to such
Eligible Spouse or Eligible Children (as the case may be) under the
Retirement Plan (as in effect immediately prior to the Change of
Control) with respect to Executive if Executive's retirement benefit
were calculated under the early retirement provisions of such plan,
using the early retirement benefit reduction factors applicable as of
the later of age 55 or Executive's actual age at the date of
Termination, and assuming (A) the retirement benefit is payable as of
the later of the date Executive attains age 55 and the date of
Termination; (B) the retirement benefit is calculated based on
Executive's actual service and actual earnings history at the date of
Termination; (C) Executive is fully vested in the retirement benefit;
and (D) the retirement benefit and survivors' benefit are calculated
under the assumption that Code Sections 401(a)(17) and 415 are
nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in such Code Sections are
inoperative. The determination of Executive's Severance Survivors'
Benefit shall not include the value of any benefits under the "cash
balance" portion of the Retirement Plan.
The Severance Survivors' Benefit shall be paid as soon as practicable
(and within 30 days) after the date of Termination and shall not be
affected by any settlement option or date of commencement of any
benefits actually payable under the Retirement Plan or the Supplemental
Benefit Plan.
(d) Insurance and Other Special Benefits. To the extent
Executive is eligible thereunder, Executive shall continue to be
covered by the life and dependent life insurance, medical and dental
insurance, and accident and disability insurance plans of Sonat and its
subsidiaries or any successor plan or program in effect at Termination
for employees in the same class or category as Executive, subject to
the terms of such plans and to Executive's making any required
contributions thereto. In the event Executive is ineligible to continue
to be so covered under the terms of any such benefit plan or program,
or in the event Executive is eligible but the benefits applicable to
Executive are not substantially equivalent to the benefits applicable
to Executive immediately prior to Termination, then, for a period of 36
months following Termination (or until Executive's Normal Retirement
Date, whichever is sooner), Sonat shall provide such substantially
equivalent benefits, or such additional benefits as may be necessary to
make the benefits applicable to Executive substantially equivalent to
those in effect before Termination, through other sources; provided,
however, that if during such period Executive should enter into the
employ of another company or firm which provides substantially similar
benefit coverage, Executive's participation in the comparable benefit
provided by Sonat either directly or through such other sources shall
cease. Nothing contained in this paragraph shall be deemed to require
or permit termination or restriction of Executive's coverage under any
plan or program of Sonat or any of its subsidiaries or any successor
plan or program thereto to which Executive is entitled under the terms
of such plan or program, whether at the end of the aforementioned
36-month period or at any other time. Executive shall be entitled to
continuation ("COBRA") coverage under Code Section 4980B upon the
termination of the coverage provided under this Section 3(d) to the
same extent as if such coverage had not been provided. Upon the
occurrence of both (1) the termination of the medical coverage
(including any COBRA coverage elected by Executive) provided under this
Section 3(d), and (2) Executive's attainment of age 55, Executive shall
be eligible for such retiree medical coverage as may be available
generally to early or normal retirees of Sonat, or to former employees
in the same class or category as Executive, subject to the terms of
such coverage and to Executive's making any required contributions
thereto.
(e) Relocation Assistance. Should Executive move his or her
residence in order to pursue other business opportunities within three
years of the date of Termination (or until Executive's Normal
Retirement Date, whichever is sooner), Sonat shall reimburse Executive
for any expenses incurred in that relocation (including taxes payable
on the reimbursement) which are not reimbursed by another employer;
provided, however, that Executive shall be entitled to such
reimbursement with respect to only one such relocation, it being agreed
that in the event of more than one such relocation, Executive shall be
entitled to specify the relocation for which reimbursement hereunder is
to be made. Benefits under this provision will include the assistance,
at no cost to Executive, in selling Executive's home and other
assistance which was customarily provided to executives transferred
within Sonat or between Sonat and its subsidiaries prior to the Change
of Control.
(f) Other Benefit Plans. The specific arrangements referred to
in this Section 3 are not intended to exclude Executive's participation
in other benefit plans in which Executive currently participates or
which are available to executive personnel generally in the class or
category of Executive or to preclude other compensation or benefits as
may be authorized by the Board of Directors from time to time.
(g) Duty to Mitigate. Executive's entitlement to benefits
hereunder shall not be governed by any duty to mitigate damages by
seeking further employment nor offset by any compensation which
Executive may receive from future employment.
(h) Payment Obligations Absolute. Sonat's obligation to pay or
cause to be paid to Executive the benefits and to make the arrangements
provided in this Section 3 shall be absolute and unconditional and
shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other
right, which Sonat may have against Executive or anyone else. All
amounts payable by or on behalf of Sonat hereunder shall be paid
without notice or demand. Each and every payment made hereunder by or
on behalf of Sonat shall be final and Sonat and its subsidiaries shall
not, for any reason whatsoever, seek to recover all or any part of such
payment from Executive or from whomever shall be entitled thereto.
(i) Actuarial Equivalent. "Actuarial Equivalent" shall mean a
benefit actuarially equal in value to the 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
Agreement) 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 Executive's Termination (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
Executive's Termination, the interest rate shall be the yield on
substantially similar securities on the business day preceding the date
of Executive's Termination as determined by AmSouth Bank N.A. upon the
request of either Sonat or Executive.
The Severance Survivors' Benefit shall be valued as a
reversionary annuity commencing upon the death of Executive. For
purposes of calculating the Severance Survivors' Benefit, (1) it shall
be assumed that Executive, Executive's Eligible Spouse, and Executive's
Eligible Children do not die before the later of the date Executive
attains age 55 and the date of Executive's Termination, and (2) if
Executive has Eligible Children (but not an Eligible Spouse), it shall
be assumed that each Eligible Child remains an Eligible Child until the
date such Eligible Child attains age 25 and that such Eligible Child
does not die before such date.
4. Conditions to the Obligations of Sonat. Sonat shall have no
obligation to provide or cause to be provided to Executive the rights and
benefits described in Section 3 hereof if either of the following events shall
occur:
(a) Termination for Cause. Sonat or its subsidiaries shall
terminate Executive's employment for "cause". For purposes of this
Agreement, termination of employment for "cause" shall mean termination
solely for dishonesty, conviction of a felony, or willful unauthorized
disclosure of confidential information of Sonat.
(b) Resignation as Director. Executive shall not, promptly
after Termination and upon receiving a written request to do so, resign
as a director and/or officer of each subsidiary and affiliate of Sonat
of which Executive is then serving as a director and/or officer.
5. Confidentiality; Non-Solicitation; Cooperation.
(a) Confidentiality. Executive agrees that at all times following
Termination, Executive will not, without the prior written consent of Sonat,
disclose to any person, firm or corporation any confidential information of
Sonat or its subsidiaries which is now known to Executive or which hereafter may
become known to Executive as a result of Executive's employment or association
with Sonat and which could be helpful to a competitor, unless such disclosure is
required under the terms of a valid and effective subpoena or order issued by a
court or governmental body; provided, however, that the foregoing shall not
apply to confidential information which becomes publicly disseminated by means
other than a breach of this Agreement.
(b) Non-Solicitation. Executive agrees that for a period of three years
following the date of Termination (or until Executive's Normal Retirement Date,
whichever is sooner) Executive will not induce, either directly or indirectly,
any employee of senior to manager level of Sonat or any of its subsidiaries to
terminate his or her employment.
(c) Cooperation. Executive agrees that, at all times following
Termination, Executive will furnish such information and render such assistance
and cooperation as may reasonably be requested in connection with any litigation
or legal proceedings concerning Sonat or any of its subsidiaries (other than any
legal proceedings concerning Executive's employment). In connection with such
cooperation, Sonat will pay or reimburse Executive for reasonable expenses.
(d) Remedies for Breach. It is recognized that damages in the event of
breach of this Section 5 by Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that Sonat, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and Executive hereby waives any and all defenses
Executive may have on the ground of lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude Sonat from pursuing any other rights and remedies
at law or in equity which Sonat may have.
6. Certain Additional Payments by Sonat. (a) Anything in this Agreement
to the contrary notwithstanding and except as set forth below, in the event it
shall be determined that any payment or distribution by Sonat to or for the
benefit of Executive, or any benefit, arrangement regarding the exercise or
vesting of options, restricted stock, or other securities of Sonat, or other
plan, agreement or arrangement regarding a change of control of Sonat (whether
determined pursuant to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this Section 6) (any
such payment, distribution, benefit, arrangement, plan, or agreement being
referred to as a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "Excise
Tax"), then Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive of all
federal, state, local, employment and payroll taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any federal, state, local, employment and payroll taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 6(a), if it shall be determined that Executive is entitled to a Gross-Up
Payment, but that Executive, after taking into account the Payments and the
Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000
(taking into account both federal, state, local, employment and payroll taxes
and any Excise Tax) as compared to the net after-tax proceeds to Executive
resulting from an elimination of the Gross-Up Payment and a reduction of the
Payments, in the aggregate, to an amount (the "Reduced Amount") such that the
receipt of Payments would not give rise to any Excise Tax, then no Gross-Up
Payment shall be made to Executive and the Payments, in the aggregate, shall be
reduced to the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations
required to be made under this Section 6, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to Sonat and Executive within 15 business days of the receipt
of notice from Executive that there has been a Payment or such earlier time as
is requested by Sonat. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting a Change of
Control, Executive shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be
paid by Sonat to Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon Sonat and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by Sonat should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that Sonat exhausts
its remedies pursuant to Section 6(c) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by Sonat to or for the benefit of Executive.
(c) Executive shall notify Sonat in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by Sonat
of a Gross-Up Payment. Such notification shall be given as soon as practicable
but no later than ten business days after Executive is informed in writing of
such claim and shall apprise Sonat of the nature of such claim and the date on
which such claim is requested to be paid. Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which it
gives such notice to Sonat (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Sonat notifies Executive
in writing prior to the expiration of such period that it desires to contest
such claim, Executive shall:
(i) give Sonat any information reasonably requested by Sonat
relating to such claim,
(ii) take such action in connection with contesting such claim
as Sonat shall reasonably request in writing from time to time,
including without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by Sonat,
(iii) cooperate with Sonat in good faith in order effectively
to contest such claim, and
(iv) permit Sonat to participate in any proceedings relating
to such claim;
provided, however, that Sonat shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold Executive harmless, on an after-tax basis,
for any Excise Tax or federal, state, local, employment and payroll tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 6(c), Sonat shall control all proceedings
taken in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a refund or to
contest the claim in any permissible manner, and Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as Sonat shall
determine; provided, however, that if Sonat directs Executive to pay such claim
and sue for a refund, Sonat shall advance the amount of such payment to
Executive, on an interest-free basis, and shall indemnify and hold Executive
harmless on an after-tax basis, from any Excise Tax or federal, state, local,
employment or payroll tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, Sonat's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder, and Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to Sonat's complying with the
requirements of Section 6(c)) promptly pay to Sonat the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and Sonat does not notify
Executive in writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
7. Term of Agreement. This Agreement shall terminate on July 31, 1999;
provided, however, that this Agreement shall automatically renew for successive
one-year terms unless the Board of Directors notifies Executive in writing at
least 30 days prior to a July 31 expiration date that it does not desire to
renew the Agreement for an additional term. This Agreement shall also terminate
if and when the Executive Compensation Committee determines that Executive is no
longer a key executive for purposes of being a party to an executive severance
agreement with Sonat and so notifies Executive in writing. The preceding
provisions of this Section 7 to the contrary notwithstanding, this Agreement
shall not terminate (i) within three years after a Change of Control or (ii)
during any period of time when Sonat has reason to believe that any third person
has begun a tender or exchange offer, circulated a proxy to stockholders, or
taken other steps or formulated plans to effect a Change of Control, such period
of time to end when, in the opinion of the Executive Compensation Committee, the
third person has abandoned or terminated his efforts or plans to effect a Change
of Control.
8. Expenses. Sonat shall pay or reimburse Executive for all costs and
expenses, including, without limitation, court costs and attorneys' fees,
incurred by Executive as a result of any claim, action or proceeding (including,
without limitation, a claim, action or proceeding by Executive against Sonat)
arising out of, or challenging the validity or enforceability of, this Agreement
or any provision hereof. Sonat shall pay or reimburse such costs and expenses
promptly (and within 30 days) after Executive has submitted supporting
documentation.
9. Miscellaneous.
(a) Assignment. No right, benefit or interest hereunder shall be
subject to assignment, anticipation, alienation, sale, encumbrance, charge,
pledge, hypothecation or set-off in respect of any claim, debt or obligation, or
to execution, attachment, levy or similar process; provided, however, that
Executive may assign any right, benefit or interest hereunder if such assignment
is permitted under the terms of any plan or policy of insurance or annuity
contract governing such right, benefit or interest.
(b) Construction of Agreement. Nothing in this Agreement shall be
construed to amend any provision of any plan or policy of Sonat and its
subsidiaries. This Agreement is not, and nothing herein shall be deemed to
create, a commitment of continued employment of Executive by Sonat or any of its
subsidiaries.
(c) Amendment. This Agreement may not be amended, modified or cancelled
except by written agreement of the parties.
(d) Waiver. No provision of this Agreement may be waived except by a
writing signed by the party to be bound thereby.
Executive may at any time or from time to time waive any or
all of the rights and benefits provided for herein which have not been received
by Executive at the time of such waiver. In addition, prior to the last day of
the calendar year in which Executive's Termination occurs, Executive may waive
any or all rights and benefits provided for herein which have been received by
Executive; provided that prior to the end of such year Executive repays to Sonat
(or, if the benefit was received from an employee benefit plan trust, to such
trust) the amount of the benefit received together with interest thereon at the
minimum rate required to avoid imputed income. Any waiver of benefits pursuant
to this paragraph shall be irrevocable. If Executive waives a right or benefit
provided for herein and such waiver is determined by the Internal Revenue
Service not to be effective, Sonat shall indemnify Executive for any federal
income and excise taxes Executive incurs as a result of that determination, so
as to put Executive in the position Executive would have been in had the waiver
been given effect.
(e) Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall remain in full force and effect to
the fullest extent permitted by law.
(f) Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's personal representative and heirs, and
Sonat and any successor organization or organizations which shall succeed to
substantially all of the business and property of Sonat, whether by means of
merger, consolidation, acquisition of substantially all of the assets of Sonat
or otherwise, including by operation of law.
(g) Taxes. Any payment or delivery required under this Agreement shall
be subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and Sonat shall use its best efforts to
satisfy promptly all such requirements.
(h) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
(i) Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the matters covered
hereby, and incorporates into one document any previous severance agreement
executed by the parties and all amendments thereto as of the date hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as July
23, 1998.
SONAT INC.
By:
Vice President - Human Resources and
Secretary
Ronald L. Kuehn, Jr.
EXHIBIT 10.6
EXECUTIVE SEVERANCE AGREEMENT, dated as of July 23, 1998, by and
between Sonat Inc., a Delaware corporation ("Sonat"), and Thomas W. Barker,
Jr. ("Executive").
WHEREAS, the Executive Compensation Committee of the Board of Directors
of Sonat has recommended, and the Board of Directors has approved, that Sonat
enter into severance agreements with key executives who are from time to time
designated by the Executive Compensation Committee;
WHEREAS, should Sonat become subject to any proposed or threatened
Change of Control (as hereinafter defined), the Board of Directors believes it
imperative that Sonat and the Board of Directors be able to rely upon Executive
to continue in Executive's position, and that Sonat be able to receive and rely
upon Executive's advice, if requested, as to the best interests of Sonat and its
stockholders without concern that Executive might be distracted by the personal
uncertainties and risks created by such a proposal or threat;
WHEREAS, should Sonat receive any such proposals, in addition to
Executive's regular duties, Executive may be called upon to assist in the
assessment of such proposals, to advise management and the Board of Directors as
to whether such proposals would be in the best interests of Sonat and its
stockholders, and to take such other actions as the Board of Directors might
determine to be appropriate;
WHEREAS, Executive is a key executive and, pursuant to action taken by
the Executive Compensation Committee and the Board of Directors, has previously
entered into a severance agreement with Sonat; and
WHEREAS, the Executive Compensation Committee and the Board of
Directors have approved certain revisions to such severance agreement, Executive
agrees to such revisions, and Executive and Sonat desire to amend and restate
such severance agreement in order to consolidate the terms thereof into a single
document;
NOW, THEREFORE, Sonat and Executive agree as follows:
1. Services During Certain Events. In the event a third person begins a
tender or exchange offer, circulates a proxy to stockholders, or takes other
steps to effect a Change of Control, Executive agrees not to voluntarily leave
the employ of Sonat or its subsidiaries, and to render the services contemplated
in the recitals to this Agreement, until the third person has abandoned or
terminated his efforts to effect a Change of Control or until a Change of
Control has occurred.
2. Termination Following Change of Control. Except as provided in
Section 4 hereof, Sonat will provide or cause to be provided to Executive the
rights and benefits described in Section 3 hereof in the event that Executive's
employment is terminated:
(a) at any time within three years following a Change of
Control by Sonat or its subsidiaries for reasons other than for "cause"
(as such term is defined in Section 4 hereof) or other than as a
consequence of Executive's death, permanent disability or retirement at
or after the normal retirement date as provided under Sonat's
Retirement Plan as in effect immediately preceding such date ("Normal
Retirement Date");
(b) at any time within three years following a Change of
Control by Executive following the occurrence of any of the following
events without Executive's written consent:
(i) the assignment of Executive to any duties or
responsibilities that are inconsistent with Executive's
position, duties, responsibilities or status immediately
preceding such Change of Control, or a change in reporting
responsibilities or titles in effect at such time resulting in
a reduction of Executive's responsibilities or position;
(ii) the reduction of Executive's annual salary
(including any deferred portions thereof), annual or long-term
cash or stock bonus opportunities, or level of benefits or
supplemental compensation; or
(iii) the transfer of Executive to a location
requiring a change in Executive's residence or a material
increase in the amount of travel normally required of
Executive in connection with Executive's employment; or
(c) by Executive for any reason during the 30-day period
immediately following the first anniversary of the date of the Change
of Control.
For purposes of this Agreement, "Change of Control" shall
mean:
A. The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13(d)-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding shares of common stock of Sonat (the
"Outstanding Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Sonat entitled to vote generally in the
election of directors (the "Outstanding Voting Securities"); provided, however,
that for purposes of this subsection A, the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from Sonat, (ii)
any acquisition by Sonat, (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by Sonat or any corporation controlled by
Sonat or (iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection C; or
B. Individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board of Directors; provided, however that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by Sonat's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board of Directors; or
C. Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets of Sonat
(a "Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock and
Outstanding Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns Sonat or all or substantially all of Sonat's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Common Stock and Outstanding Voting Securities, as the case
may be, (ii) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of Sonat or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board of Directors, providing for
such Business Combination.
3. Rights and Benefits upon Termination. In the event of the
termination of Executive's employment under any of the circumstances set forth
in Section 2 hereof ("Termination"), Sonat agrees to provide or cause to be
provided to Executive the following rights and benefits:
(a) Lump Sum Payment at Termination. Executive shall be
entitled to receive within 30 days of Termination a lump-sum payment in
cash in the amount of three times Executive's Earnings (as such term is
defined in this Section 3(a)); provided, however, that if there are
fewer than 36 months remaining from the date of Termination to
Executive's Normal Retirement Date, the amount calculated pursuant to
this paragraph will be reduced by multiplying such amount by a
fraction, the numerator of which is the number of months (including any
fraction of a month) so remaining to Executive's Normal Retirement Date
and the denominator of which is 36.
For purposes of this Agreement, "Earnings" shall mean
the sum of (1) Executive's Annual Base Pay (as defined below), (2)
Executive's Recent Cash Bonus (as defined below), and (3) Executive's
Recent Long-Term Compensation (as defined below).
"Annual Base Pay" shall mean the greater of (1) the
annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) immediately before the Change of Control, and (2) the
annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) immediately before the date of Termination.
"Recent Cash Bonus" shall mean the product of
Executive's Annual Base Pay multiplied by the greater of:
(1) the quotient determined by
dividing (a) the sum of the amounts payable
to Executive upon the occurrence of a Change
of Control pursuant to Section 2.6 of
Sonat's Performance Award Plan, Section 2.6
of Sonat's Cash Bonus Plan, and Section 2.6
of Sonat's Performance Award and Cash Bonus
Plan (regardless of whether such amounts are
paid in a lump sum or in installments), by
(b) the annualized amount of Executive's
rate of base pay (as shown in Sonat's
payroll records) immediately before the
Change of Control; and
(2) the highest quotient determined,
for the calendar year in which the Change of
Control occurs and for each of the two
preceding calendar years, by dividing (a)
the sum of the bonuses paid to Executive
under the Performance Award Plan, the Cash
Bonus Plan, and the Performance Award and
Cash Bonus Plan during the first calendar
quarter of such calendar year (including for
this purpose any amount receipt of which was
deferred by the Executive
Compensation Committee
pursuant to the terms of such Plans, or by
Executive pursuant to the terms of Sonat's
Deferred Compensation Plan), by (b) the
annualized amount of Executive's rate of
base pay (as shown in Sonat's payroll
records) at the time of such payment.
Notwithstanding the foregoing, if at the
time of the Change of Control the amount
paid to Executive under clause (1) above is
with respect to a bonus opportunity
established for the preceding calendar year
(or a portion thereof), the quotients
calculated pursuant to this clause (2) shall
be determined for each of the three calendar
years before the calendar year in which the
Change of Control occurs.
"Recent Long-Term Compensation" shall mean the product of
Executive's Annual Base Pay multiplied by the average of the quotients
determined, for each of the three calendar years before the date of the Change
of Control, by dividing (a) the Grant Value (as defined below) for the regular
annual grant of stock options and/or restricted stock made under Sonat's
Executive Award Plan during the fourth calendar quarter of such calendar year by
(b) the annualized amount of Executive's rate of base pay (as shown in Sonat's
payroll records) on the date of such grant. Grant Value shall mean, with respect
to any such annual grant during any fourth calendar quarter, the sum of (1) the
product of the number of stock options granted to Executive multiplied by the
value of each such stock option at the date of grant (as determined or approved
by the Executive Compensation Committee at the date of grant), plus (2) the
product of the number of shares of restricted stock granted to Executive
multiplied by the value of a share of restricted stock at the date of grant (as
determined or approved by the Executive Compensation Committee at the date of
grant). Notwithstanding the foregoing, if the Change of Control occurs in the
fourth calendar quarter of a calendar year and after the regular annual grant of
stock options and/or restricted stock for such year, the quotients calculated as
described above shall be determined for such calendar year and for the two
preceding calendar years. If the quotient determined for any calendar year is
zero, such quotient shall be disregarded (and no additional quotients shall be
calculated in substitution therefor).
(b) Retirement Benefits. If at the date of Termination,
Executive is not otherwise entitled to receive an early retirement
benefit under the terms of a qualified defined benefit retirement plan
of Sonat or its subsidiaries, Sonat shall pay in cash to Executive, in
the form of a cash lump sum (a "Severance Retirement Benefit"), an
amount equal to the Actuarial Equivalent (as defined below) of the
excess, if any, of (1) the monthly benefit calculated under the early
retirement provisions of the Retirement Plan (as in effect immediately
prior to the Change of Control), using the early retirement reduction
factors applicable as of the later of age 55 or Executive's actual age
at the date of Termination, and (2) the monthly benefit payable to
Executive under the Retirement Plan (as in effect on the date of
Executive's Termination), assuming the following for purposes of
clauses (1) and (2): (A) the benefit is payable in the form of a single
life annuity as of the later of the date Executive attains age 55 and
the date of Termination; (B) the benefit is calculated based on
Executive's actual service and actual earnings history at the date of
Termination; (C) Executive is fully vested in the benefit; and (D) the
benefit is calculated under the assumption that Sections 401(a)(17) and
415 of the Internal Revenue Code of 1986, as amended (the "Code"), are
nonexistent and the provisions of the Retirement Plan incorporating
such Code Sections are inoperative. The determination of Executive's
Severance Retirement Benefit shall not include the value of any
benefits under the "cash balance" portion of the Retirement Plan. The
Severance Retirement Benefit shall be paid as soon as practicable (and
within 30 days) after the date of Termination, and shall not be
affected by the settlement option or date of commencement of any
benefits actually payable under the Retirement Plan or Sonat's
Supplemental Benefit Plan.
(c) Survivors' Benefits. If Executive is entitled to receive a
Severance Retirement Benefit under Section 3(b) and on the date of
Termination Executive either (1) has an Eligible Spouse (as such term
is defined in the Retirement Plan as in effect immediately prior to the
Change of Control, and determined as if Executive had died on the date
of Termination), or (2) does not have an Eligible Spouse (as defined
above) but does have one or more Eligible Children (as such term is
defined in the Retirement Plan as in effect immediately prior to the
Change of Control, and determined as if Executive had died on the date
of Termination), Sonat shall pay to Executive, in the form of a cash
lump sum (the "Severance Survivors' Benefit"), an amount equal to the
Actuarial Equivalent of the monthly survivors' benefit payable to such
Eligible Spouse or Eligible Children (as the case may be) under the
Retirement Plan (as in effect immediately prior to the Change of
Control) with respect to Executive if Executive's retirement benefit
were calculated under the early retirement provisions of such plan,
using the early retirement benefit reduction factors applicable as of
the later of age 55 or Executive's actual age at the date of
Termination, and assuming (A) the retirement benefit is payable as of
the later of the date Executive attains age 55 and the date of
Termination; (B) the retirement benefit is calculated based on
Executive's actual service and actual earnings history at the date of
Termination; (C) Executive is fully vested in the retirement benefit;
and (D) the retirement benefit and survivors' benefit are calculated
under the assumption that Code Sections 401(a)(17) and 415 are
nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in such Code Sections are
inoperative. The determination of Executive's Severance Survivors'
Benefit shall not include the value of any benefits under the "cash
balance" portion of the Retirement Plan.
The Severance Survivors' Benefit shall be paid as soon as practicable
(and within 30 days) after the date of Termination and shall not be
affected by any settlement option or date of commencement of any
benefits actually payable under the Retirement Plan or the Supplemental
Benefit Plan.
(d) Insurance and Other Special Benefits. To the extent
Executive is eligible thereunder, Executive shall continue to be
covered by the life and dependent life insurance, medical and dental
insurance, and accident and disability insurance plans of Sonat and its
subsidiaries or any successor plan or program in effect at Termination
for employees in the same class or category as Executive, subject to
the terms of such plans and to Executive's making any required
contributions thereto. In the event Executive is ineligible to continue
to be so covered under the terms of any such benefit plan or program,
or in the event Executive is eligible but the benefits applicable to
Executive are not substantially equivalent to the benefits applicable
to Executive immediately prior to Termination, then, for a period of 36
months following Termination (or until Executive's Normal Retirement
Date, whichever is sooner), Sonat shall provide such substantially
equivalent benefits, or such additional benefits as may be necessary to
make the benefits applicable to Executive substantially equivalent to
those in effect before Termination, through other sources; provided,
however, that if during such period Executive should enter into the
employ of another company or firm which provides substantially similar
benefit coverage, Executive's participation in the comparable benefit
provided by Sonat either directly or through such other sources shall
cease. Nothing contained in this paragraph shall be deemed to require
or permit termination or restriction of Executive's coverage under any
plan or program of Sonat or any of its subsidiaries or any successor
plan or program thereto to which Executive is entitled under the terms
of such plan or program, whether at the end of the aforementioned
36-month period or at any other time. Executive shall be entitled to
continuation ("COBRA") coverage under Code Section 4980B upon the
termination of the coverage provided under this Section 3(d) to the
same extent as if such coverage had not been provided. Upon the
occurrence of both (1) the termination of the medical coverage
(including any COBRA coverage elected by Executive) provided under this
Section 3(d), and (2) Executive's attainment of age 55, Executive shall
be eligible for such retiree medical coverage as may be available
generally to early or normal retirees of Sonat, or to former employees
in the same class or category as Executive, subject to the terms of
such coverage and to Executive's making any required contributions
thereto.
(e) Relocation Assistance. Should Executive move his or her
residence in order to pursue other business opportunities within three
years of the date of Termination (or until Executive's Normal
Retirement Date, whichever is sooner), Sonat shall reimburse Executive
for any expenses incurred in that relocation (including taxes payable
on the reimbursement) which are not reimbursed by another employer;
provided, however, that Executive shall be entitled to such
reimbursement with respect to only one such relocation, it being agreed
that in the event of more than one such relocation, Executive shall be
entitled to specify the relocation for which reimbursement hereunder is
to be made. Benefits under this provision will include the assistance,
at no cost to Executive, in selling Executive's home and other
assistance which was customarily provided to executives transferred
within Sonat or between Sonat and its subsidiaries prior to the Change
of Control.
(f) Other Benefit Plans. The specific arrangements referred to
in this Section 3 are not intended to exclude Executive's participation
in other benefit plans in which Executive currently participates or
which are available to executive personnel generally in the class or
category of Executive or to preclude other compensation or benefits as
may be authorized by the Board of Directors from time to time.
(g) Duty to Mitigate. Executive's entitlement to benefits
hereunder shall not be governed by any duty to mitigate damages by
seeking further employment nor offset by any compensation which
Executive may receive from future employment.
(h) Payment Obligations Absolute. Sonat's obligation to pay or
cause to be paid to Executive the benefits and to make the arrangements
provided in this Section 3 shall be absolute and unconditional and
shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other
right, which Sonat may have against Executive or anyone else. All
amounts payable by or on behalf of Sonat hereunder shall be paid
without notice or demand. Each and every payment made hereunder by or
on behalf of Sonat shall be final and Sonat and its subsidiaries shall
not, for any reason whatsoever, seek to recover all or any part of such
payment from Executive or from whomever shall be entitled thereto.
(i) Actuarial Equivalent. "Actuarial Equivalent" shall mean a
benefit actuarially equal in value to the 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
Agreement) 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 Executive's Termination (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
Executive's Termination, the interest rate shall be the yield on
substantially similar securities on the business day preceding the date
of Executive's Termination as determined by AmSouth Bank N.A. upon the
request of either Sonat or Executive.
The Severance Survivors' Benefit shall be valued as a
reversionary annuity commencing upon the death of Executive. For
purposes of calculating the Severance Survivors' Benefit, (1) it shall
be assumed that Executive, Executive's Eligible Spouse, and Executive's
Eligible Children do not die before the later of the date Executive
attains age 55 and the date of Executive's Termination, and (2) if
Executive has Eligible Children (but not an Eligible Spouse), it shall
be assumed that each Eligible Child remains an Eligible Child until the
date such Eligible Child attains age 25 and that such Eligible Child
does not die before such date.
4. Conditions to the Obligations of Sonat. Sonat shall have no
obligation to provide or cause to be provided to Executive the rights and
benefits described in Section 3 hereof if either of the following events shall
occur:
(a) Termination for Cause. Sonat or its subsidiaries shall
terminate Executive's employment for "cause". For purposes of this
Agreement, termination of employment for "cause" shall mean termination
solely for dishonesty, conviction of a felony, or willful unauthorized
disclosure of confidential information of Sonat.
(b) Resignation as Director. Executive shall not, promptly
after Termination and upon receiving a written request to do so, resign
as a director and/or officer of each subsidiary and affiliate of Sonat
of which Executive is then serving as a director and/or officer.
5. Confidentiality; Non-Solicitation; Cooperation.
(a) Confidentiality. Executive agrees that at all times following
Termination, Executive will not, without the prior written consent of Sonat,
disclose to any person, firm or corporation any confidential information of
Sonat or its subsidiaries which is now known to Executive or which hereafter may
become known to Executive as a result of Executive's employment or association
with Sonat and which could be helpful to a competitor, unless such disclosure is
required under the terms of a valid and effective subpoena or order issued by a
court or governmental body; provided, however, that the foregoing shall not
apply to confidential information which becomes publicly disseminated by means
other than a breach of this Agreement.
(b) Non-Solicitation. Executive agrees that for a period of three years
following the date of Termination (or until Executive's Normal Retirement Date,
whichever is sooner) Executive will not induce, either directly or indirectly,
any employee of senior to manager level of Sonat or any of its subsidiaries to
terminate his or her employment.
(c) Cooperation. Executive agrees that, at all times following
Termination, Executive will furnish such information and render such assistance
and cooperation as may reasonably be requested in connection with any litigation
or legal proceedings concerning Sonat or any of its subsidiaries (other than any
legal proceedings concerning Executive's employment). In connection with such
cooperation, Sonat will pay or reimburse Executive for reasonable expenses.
(d) Remedies for Breach. It is recognized that damages in the event of
breach of this Section 5 by Executive would be difficult, if not impossible, to
ascertain, and it is therefore agreed that Sonat, in addition to and without
limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and Executive hereby waives any and all defenses
Executive may have on the ground of lack of jurisdiction or competence of the
court to grant such an injunction or other equitable relief. The existence of
this right shall not preclude Sonat from pursuing any other rights and remedies
at law or in equity which Sonat may have.
6. Certain Additional Payments by Sonat. (a) Anything in this Agreement
to the contrary notwithstanding and except as set forth below, in the event it
shall be determined that any payment or distribution by Sonat to or for the
benefit of Executive, or any benefit, arrangement regarding the exercise or
vesting of options, restricted stock, or other securities of Sonat, or other
plan, agreement or arrangement regarding a change of control of Sonat (whether
determined pursuant to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this Section 6) (any
such payment, distribution, benefit, arrangement, plan, or agreement being
referred to as a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "Excise
Tax"), then Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive of all
federal, state, local, employment and payroll taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any federal, state, local, employment and payroll taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 6(a), if it shall be determined that Executive is entitled to a Gross-Up
Payment, but that Executive, after taking into account the Payments and the
Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000
(taking into account both federal, state, local, employment and payroll taxes
and any Excise Tax) as compared to the net after-tax proceeds to Executive
resulting from an elimination of the Gross-Up Payment and a reduction of the
Payments, in the aggregate, to an amount (the "Reduced Amount") such that the
receipt of Payments would not give rise to any Excise Tax, then no Gross-Up
Payment shall be made to Executive and the Payments, in the aggregate, shall be
reduced to the Reduced Amount.
(b) Subject to the provisions of Section 6(c), all determinations
required to be made under this Section 6, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by
Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to Sonat and Executive within 15 business days of the receipt
of notice from Executive that there has been a Payment or such earlier time as
is requested by Sonat. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting a Change of
Control, Executive shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Sonat. Any Gross-Up Payment shall be
paid by Sonat to Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon Sonat and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by Sonat should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that Sonat exhausts
its remedies pursuant to Section 6(c) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by Sonat to or for the benefit of Executive.
(c) Executive shall notify Sonat in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by Sonat
of a Gross-Up Payment. Such notification shall be given as soon as practicable
but no later than ten business days after Executive is informed in writing of
such claim and shall apprise Sonat of the nature of such claim and the date on
which such claim is requested to be paid. Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which it
gives such notice to Sonat (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Sonat notifies Executive
in writing prior to the expiration of such period that it desires to contest
such claim, Executive shall:
(i) give Sonat any information reasonably requested by Sonat
relating to such claim,
(ii) take such action in connection with contesting such claim
as Sonat shall reasonably request in writing from time to time,
including without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by Sonat,
(iii) cooperate with Sonat in good faith in order effectively
to contest such claim, and
(iv) permit Sonat to participate in any proceedings relating
to such claim;
provided, however, that Sonat shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold Executive harmless, on an after-tax basis,
for any Excise Tax or federal, state, local, employment and payroll tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 6(c), Sonat shall control all proceedings
taken in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at its sole option,
either direct Executive to pay the tax claimed and sue for a refund or to
contest the claim in any permissible manner, and Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as Sonat shall
determine; provided, however, that if Sonat directs Executive to pay such claim
and sue for a refund, Sonat shall advance the amount of such payment to
Executive, on an interest-free basis, and shall indemnify and hold Executive
harmless on an after-tax basis, from any Excise Tax or federal, state, local,
employment or payroll tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, Sonat's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder, and Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to Sonat's complying with the
requirements of Section 6(c)) promptly pay to Sonat the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by Sonat
pursuant to Section 6(c), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and Sonat does not notify
Executive in writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
7. Term of Agreement. This Agreement shall terminate on July 31, 1999;
provided, however, that this Agreement shall automatically renew for successive
one-year terms unless the Board of Directors notifies Executive in writing at
least 30 days prior to a July 31 expiration date that it does not desire to
renew the Agreement for an additional term. This Agreement shall also terminate
if and when the Executive Compensation Committee determines that Executive is no
longer a key executive for purposes of being a party to an executive severance
agreement with Sonat and so notifies Executive in writing. The preceding
provisions of this Section 7 to the contrary notwithstanding, this Agreement
shall not terminate (i) within three years after a Change of Control or (ii)
during any period of time when Sonat has reason to believe that any third person
has begun a tender or exchange offer, circulated a proxy to stockholders, or
taken other steps or formulated plans to effect a Change of Control, such period
of time to end when, in the opinion of the Executive Compensation Committee, the
third person has abandoned or terminated his efforts or plans to effect a Change
of Control.
8. Expenses. Sonat shall pay or reimburse Executive for all costs and
expenses, including, without limitation, court costs and attorneys' fees,
incurred by Executive as a result of any claim, action or proceeding (including,
without limitation, a claim, action or proceeding by Executive against Sonat)
arising out of, or challenging the validity or enforceability of, this Agreement
or any provision hereof. Sonat shall pay or reimburse such costs and expenses
promptly (and within 30 days) after Executive has submitted supporting
documentation.
9. Miscellaneous.
(a) Assignment. No right, benefit or interest hereunder shall be
subject to assignment, anticipation, alienation, sale, encumbrance, charge,
pledge, hypothecation or set-off in respect of any claim, debt or obligation, or
to execution, attachment, levy or similar process; provided, however, that
Executive may assign any right, benefit or interest hereunder if such assignment
is permitted under the terms of any plan or policy of insurance or annuity
contract governing such right, benefit or interest.
(b) Construction of Agreement. Nothing in this Agreement shall be
construed to amend any provision of any plan or policy of Sonat and its
subsidiaries. This Agreement is not, and nothing herein shall be deemed to
create, a commitment of continued employment of Executive by Sonat or any of its
subsidiaries.
(c) Amendment. This Agreement may not be amended, modified or cancelled
except by written agreement of the parties.
(d) Waiver. No provision of this Agreement may be waived except by a
writing signed by the party to be bound thereby.
Executive may at any time or from time to time waive any or
all of the rights and benefits provided for herein which have not been received
by Executive at the time of such waiver. In addition, prior to the last day of
the calendar year in which Executive's Termination occurs, Executive may waive
any or all rights and benefits provided for herein which have been received by
Executive; provided that prior to the end of such year Executive repays to Sonat
(or, if the benefit was received from an employee benefit plan trust, to such
trust) the amount of the benefit received together with interest thereon at the
minimum rate required to avoid imputed income. Any waiver of benefits pursuant
to this paragraph shall be irrevocable. If Executive waives a right or benefit
provided for herein and such waiver is determined by the Internal Revenue
Service not to be effective, Sonat shall indemnify Executive for any federal
income and excise taxes Executive incurs as a result of that determination, so
as to put Executive in the position Executive would have been in had the waiver
been given effect.
(e) Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall remain in full force and effect to
the fullest extent permitted by law.
(f) Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's personal representative and heirs, and
Sonat and any successor organization or organizations which shall succeed to
substantially all of the business and property of Sonat, whether by means of
merger, consolidation, acquisition of substantially all of the assets of Sonat
or otherwise, including by operation of law.
(g) Taxes. Any payment or delivery required under this Agreement shall
be subject to all requirements of the law with regard to withholding of taxes,
filing, making of reports and the like, and Sonat shall use its best efforts to
satisfy promptly all such requirements.
(h) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
(i) Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the matters covered
hereby, and incorporates into one document any previous severance agreement
executed by the parties and all amendments thereto as of the date hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as July
23, 1998.
SONAT INC.
By:
Ronald L. Kuehn, Jr.
Chairman of the Board, President
and Chief Executive Officer
Thomas W. Barker, Jr.
<PAGE>
SCHEDULE OF SONAT INC. EXECUTIVES WITH
SEVERANCE AGREEMENTS
DATED JULY 23, 1998
Richard B. Bates
John B. Holmes
Beverley T. Krannich
James E. Moylan, Jr.
John M. Musgrave
James A. Rubright
William A. Smith
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Years Ended December 31,
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Earnings from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(858,316) $263,521 $322,472 $379,004 $393,896 $174,553 $355,254
Fixed charges (see computation below) 143,794 122,590 168,981 162,291 174,634 133,902 130,671
Less allowance for interest
capitalized (4,093) (5,658) (7,448) (7,642) (8,072) (7,736) (4,330)
--------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $(718,615) $380,453 $484,005 $533,653 $560,458 $300,719 $481,595
========= ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 137,267 $116,757 $160,829 $154,769 $167,068 $126,193 $123,620
Rentals(b) 6,527 5,833 8,152 7,522 7,566 7,709 7,051
--------- -------- -------- -------- -------- -------- --------
$ 143,794 $122,590 $168,981 $162,291 $174,634 $133,902 $130,671
========= ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges (c) 3.1 2.9 3.3 3.2 2.3 3.7
========= ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
(c) Earnings from continuing operations for the nine months ended September 30,
1998 reflect ceiling test charges for the impairment of certain oil and gas
properties and restructuring expenses primarily associated with a reduction
in work force. Earnings before income taxes were reduced $1,050.2 million
as a result of the ceiling test charges and restructuring charge. Because
of these charges, earnings were inadequate to cover fixed charges of $143.8
million for the nine months ended September 30, 1998. The coverage
deficiency was $862.4 million for the nine month period.
EXHIBIT 18
The Board of Directors and Stockholders
Sonat Inc.
Note 2 of Notes to Condensed Consolidated Financial Statements of Sonat Inc.
included in its Form 10-Q for the nine months ended September 30, 1998 describes
a change in the method of accounting for oil and gas properties from the
successful efforts method to the full cost method. You have advised us that you
believe that the change is to a preferable method in your circumstances because
of the following reasons:
1. The Company has changed its oil and gas exploration and production
strategic direction from acquisitions of producing properties with
significant development potential to an exploratory and development
drilling growth strategy. The Company believes that, due to its change in
strategic direction, the full cost method provides for a better matching of
revenues and expenses versus the successful efforts method, and the full
cost method more fairly presents the cost of the reserves acquired in the
statement of financial position.
2. Reporting annual operating results and financial position on a successful
efforts basis for a company that provides for its growth through
exploration drilling provides a different reflection of the operating
success of the company and the cost of acquiring reserves. The Company
believes that for a growing exploratory company a better presentation of
economic results is provided through the application of full cost method of
accounting. The full cost method accurately matches the cost of reserves
obtained through an exploratory drilling program with the revenues produced
through selling these reserves over a company's business cycle.
There are no authoritative criteria for determining a preferable accounting
method for oil and gas properties based on the particular circumstances;
however, we conclude that the change in the method of accounting for oil and gas
properties is to an acceptable alternative method which, based on your business
judgment to make this change for the reasons cited above, is preferable in your
circumstances. We have not conducted an audit in accordance with generally
accepted auditing standards of any financial statements of the Company as of any
date or for any period subsequent to December 31, 1997; and therefore, we do not
express any opinion on any financial statements of Sonat Inc. subsequent to that
date.
October 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,620
<SECURITIES> 0
<RECEIVABLES> 351,363
<ALLOWANCES> 0
<INVENTORY> 71,440
<CURRENT-ASSETS> 601,086
<PP&E> 8,457,665
<DEPRECIATION> 5,818,460
<TOTAL-ASSETS> 4,108,495
<CURRENT-LIABILITIES> 1,327,190
<BONDS> 1,100,591
0
0
<COMMON> 111,388
<OTHER-SE> 1,231,251
<TOTAL-LIABILITY-AND-EQUITY> 4,108,495
<SALES> 2,505,024
<TOTAL-REVENUES> 2,908,772
<CGS> 2,142,088
<TOTAL-COSTS> 2,260,916
<OTHER-EXPENSES> 1,314,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,300
<INCOME-PRETAX> (849,801)
<INCOME-TAX> (304,039)
<INCOME-CONTINUING> (545,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (545,762)
<EPS-PRIMARY> (4.96)
<EPS-DILUTED> (4.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,139
<SECURITIES> 0
<RECEIVABLES> 434,500
<ALLOWANCES> 0
<INVENTORY> 63,021
<CURRENT-ASSETS> 681,375
<PP&E> 8,312,960
<DEPRECIATION> 5,037,593
<TOTAL-ASSETS> 4,779,621
<CURRENT-LIABILITIES> 1,500,819
<BONDS> 1,101,691
0
0
<COMMON> 111,388
<OTHER-SE> 1,508,825
<TOTAL-LIABILITY-AND-EQUITY> 4,779,621
<SALES> 1,735,754
<TOTAL-REVENUES> 2,034,275
<CGS> 1,495,829
<TOTAL-COSTS> 1,575,559
<OTHER-EXPENSES> 773,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,050
<INCOME-PRETAX> (448,688)
<INCOME-TAX> (161,342)
<INCOME-CONTINUING> (287,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (287,346)
<EPS-PRIMARY> (2.61)
<EPS-DILUTED> (2.61)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,393
<SECURITIES> 0
<RECEIVABLES> 491,925
<ALLOWANCES> 0
<INVENTORY> 45,029
<CURRENT-ASSETS> 734,112
<PP&E> 8,094,406
<DEPRECIATION> 4,390,931
<TOTAL-ASSETS> 5,186,381
<CURRENT-LIABILITIES> 1,358,301
<BONDS> 1,106,600
0
0
<COMMON> 111,385
<OTHER-SE> 1,852,272
<TOTAL-LIABILITY-AND-EQUITY> 5,186,381
<SALES> 936,194
<TOTAL-REVENUES> 1,109,143
<CGS> 828,674
<TOTAL-COSTS> 869,158
<OTHER-EXPENSES> 136,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,706
<INCOME-PRETAX> 40,792
<INCOME-TAX> 12,842
<INCOME-CONTINUING> 27,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,950
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 143,234
<SECURITIES> 0
<RECEIVABLES> 619,581
<ALLOWANCES> 0
<INVENTORY> 65,161
<CURRENT-ASSETS> 980,807
<PP&E> 6,079,239
<DEPRECIATION> 3,096,541
<TOTAL-ASSETS> 4,718,809
<CURRENT-LIABILITIES> 1,380,883
<BONDS> 1,237,734
0
0
<COMMON> 111,385
<OTHER-SE> 1,502,605
<TOTAL-LIABILITY-AND-EQUITY> 4,718,809
<SALES> 3,694,942
<TOTAL-REVENUES> 4,371,902
<CGS> 3,174,060
<TOTAL-COSTS> 3,510,673
<OTHER-EXPENSES> 410,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,100
<INCOME-PRETAX> 122,849
<INCOME-TAX> 35,437
<INCOME-CONTINUING> 87,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,412
<EPS-PRIMARY> .79
<EPS-DILUTED> .78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 119,606
<SECURITIES> 0
<RECEIVABLES> 536,977
<ALLOWANCES> 0
<INVENTORY> 42,760
<CURRENT-ASSETS> 838,995
<PP&E> 7,607,718
<DEPRECIATION> 4,186,115
<TOTAL-ASSETS> 4,945,330
<CURRENT-LIABILITIES> 961,129
<BONDS> 1,351,097
0
0
<COMMON> 111,389
<OTHER-SE> 1,833,881
<TOTAL-LIABILITY-AND-EQUITY> 4,945,330
<SALES> 2,557,057
<TOTAL-REVENUES> 3,053,169
<CGS> 2,188,555
<TOTAL-COSTS> 2,321,221
<OTHER-EXPENSES> 290,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,476
<INCOME-PRETAX> 263,828
<INCOME-TAX> 87,636
<INCOME-CONTINUING> 176,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176,192
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 40,737
<SECURITIES> 0
<RECEIVABLES> 451,386
<ALLOWANCES> 0
<INVENTORY> 54,105
<CURRENT-ASSETS> 612,839
<PP&E> 7,297,719
<DEPRECIATION> 4,044,238
<TOTAL-ASSETS> 4,509,751
<CURRENT-LIABILITIES> 921,474
<BONDS> 1,031,137
0
0
<COMMON> 111,389
<OTHER-SE> 1,804,262
<TOTAL-LIABILITY-AND-EQUITY> 4,509,751
<SALES> 1,647,773
<TOTAL-REVENUES> 1,979,454
<CGS> 1,399,247
<TOTAL-COSTS> 1,482,068
<OTHER-EXPENSES> 188,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,504
<INCOME-PRETAX> 186,339
<INCOME-TAX> 62,495
<INCOME-CONTINUING> 123,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,844
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 39,430
<SECURITIES> 0
<RECEIVABLES> 404,042
<ALLOWANCES> 0
<INVENTORY> 31,614
<CURRENT-ASSETS> 517,214
<PP&E> 7,062,702
<DEPRECIATION> 3,959,172
<TOTAL-ASSETS> 4,272,162
<CURRENT-LIABILITIES> 769,944
<BONDS> 978,882
0
0
<COMMON> 111,389
<OTHER-SE> 1,805,142
<TOTAL-LIABILITY-AND-EQUITY> 4,272,162
<SALES> 955,960
<TOTAL-REVENUES> 1,123,529
<CGS> 807,984
<TOTAL-COSTS> 846,391
<OTHER-EXPENSES> 97,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,810
<INCOME-PRETAX> 132,009
<INCOME-TAX> 44,471
<INCOME-CONTINUING> 87,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,538
<EPS-PRIMARY> .79
<EPS-DILUTED> .78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 48,009
<SECURITIES> 0
<RECEIVABLES> 611,800
<ALLOWANCES> 0
<INVENTORY> 31,050
<CURRENT-ASSETS> 747,462
<PP&E> 6,863,417
<DEPRECIATION> 3,901,097
<TOTAL-ASSETS> 4,363,874
<CURRENT-LIABILITIES> 905,930
<BONDS> 980,755
0
0
<COMMON> 111,391
<OTHER-SE> 1,776,117
<TOTAL-LIABILITY-AND-EQUITY> 4,363,874
<SALES> 2,556,822
<TOTAL-REVENUES> 3,203,610
<CGS> 2,038,846
<TOTAL-COSTS> 2,194,627
<OTHER-EXPENSES> 388,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,761
<INCOME-PRETAX> 379,004
<INCOME-TAX> 123,164
<INCOME-CONTINUING> 255,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255,840
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 50,708
<SECURITIES> 0
<RECEIVABLES> 351,552
<ALLOWANCES> 0
<INVENTORY> 23,956
<CURRENT-ASSETS> 532,783
<PP&E> 6,223,911
<DEPRECIATION> 3,495,075
<TOTAL-ASSETS> 4,014,528
<CURRENT-LIABILITIES> 681,299
<BONDS> 805,813
0
0
<COMMON> 111,402
<OTHER-SE> 1,624,986
<TOTAL-LIABILITY-AND-EQUITY> 4,014,528
<SALES> 1,236,953
<TOTAL-REVENUES> 1,902,399
<CGS> 913,054
<TOTAL-COSTS> 1,090,246
<OTHER-EXPENSES> 369,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,139
<INCOME-PRETAX> 404,664
<INCOME-TAX> 136,139
<INCOME-CONTINUING> 268,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268,525
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.41
</TABLE>
