<PAGE> 1
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
Commission file number 1-7179
---------------------
SONAT INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 63-0647939
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
TELEPHONE 205-325-3800
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF JANUARY 31, 1999 -- $2,230,348,507.
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR
VALUE, OUTSTANDING ON JANUARY 31, 1999 -- 110,038,562
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT DATED AS OF MARCH 22, 1999,
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT ON FORM 10-K.
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SONAT INC.
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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ITEM PAGE
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PART I
Item 1. Business.................................................... I-1
I-1
Proposed Merger with El Paso Energy Corporation...........
I-2
Exploration and Production................................
I-2
Sonat Exploration Company..............................
I-4
Consolidated Oil and Gas Reserves....................
I-5
Consolidated Wells and Acreage.......................
I-9
Consolidated Exploratory and Development Wells.......
I-9
Consolidated Net Production, Unit Prices, and
Production Costs....................................
I-10
Consolidated Development, Exploration, and
Acquisition Expenditures............................
I-10
Competition and Current Business Conditions............
I-11
Natural Gas Transmission..................................
I-11
Southern Natural Gas Company...........................
I-11
Florida Gas Transmission Company.......................
I-11
Sea Robin Pipeline Company.............................
I-11
South Georgia Natural Gas Company......................
I-12
Destin Pipeline Company, L.L.C.........................
I-12
Etowah LNG Company, L.L.C..............................
I-12
Southern LNG Inc.......................................
I-13
Markets -- Transportation..............................
I-15
Markets -- System Expansions...........................
I-17
Gas Sales and Supplies.................................
I-17
Rate and Regulatory Proceedings........................
I-18
Storage Fields.........................................
I-18
Competition and Current Business Conditions............
I-20
Energy Services...........................................
I-20
Sonat Energy Services Company..........................
I-20
Sonat Marketing Company L.P..........................
I-20
Sonat Public Service Company L.L.C...................
I-20
Unicom Gas Services LLC..............................
I-20
Stone & Webster Sonat Energy Resources, LLC..........
I-21
Sonat Power Marketing L.P............................
I-21
Sonat Power Inc......................................
I-21
West Georgia Generating Company L.P..................
I-21
Sonat Intrastate-Alabama Inc.........................
I-22
Sonat Power Systems Inc................................
I-22
Competition and Current Business Conditions............
I-24
Governmental Regulation...................................
I-24
Exploration and Production.............................
I-24
Natural Gas Transmission...............................
I-25
Energy Services........................................
I-25
Environmental Matters.....................................
I-25
Year 2000 Project.........................................
I-25
Cautionary Statement Concerning Forward-Looking
Statements.............................................
Item 2. Properties.................................................. I-26
Item 3. Legal Proceedings........................................... I-26
Item 4. Submission of Matters to a Vote of Security Holders......... I-27
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM PAGE
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Executive Officers of the Registrant..................................... I-27
PART II
Item 5. Market for Registrant's Common Equity and Related II-33
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... II-44
Item 7. Management's Discussion and Analysis of Financial Condition II-2
and Results of
Operations..................................................
Item 7A. Quantitative and Qualitative Disclosures About Market II-10
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. II-16
Item 9. Changes in and Disagreements with Accountants on Accounting II-45
and Financial
Disclosure..................................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... III-1
Item 11. Executive Compensation...................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and III-1
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form IV-1
8-K.........................................................
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS
Sonat Inc. ("Sonat" or the "Company") is a diversified energy holding
company. It is engaged through Sonat Exploration Company and Sonat Exploration
GOM Inc. (collectively "Exploration") in domestic oil and natural gas
exploration and production, through Southern Natural Gas Company ("Southern")
and Citrus Corp. ("Citrus") in the transmission and storage of natural gas, and
through Sonat Energy Services Company ("Sonat Energy Services") in natural gas
and electric power marketing and electric generation.
Exploration operates primarily in Texas, Oklahoma, Louisiana, Arkansas,
Alabama, and the Gulf of Mexico. In January 1998 Sonat completed a $1.3 billion
merger, accounted for as a pooling-of-interests, with Zilkha Energy Company
("Zilkha"), a privately owned oil and gas exploration, development, and
production company operating primarily offshore in the shallow waters of the
Gulf of Mexico. Following the merger, Zilkha was renamed Sonat Exploration GOM
Inc.
Southern is a major transporter of natural gas to the southeastern United
States. Its natural gas pipeline system extends primarily from gas producing
areas of Texas, Louisiana, and the Gulf of Mexico to markets in a seven-state
area of the Southeast. Sonat and Enron Corp., an unaffiliated company, each owns
a one-half interest in Citrus, a holding company that owns 100 percent of
Florida Gas Transmission Company ("Florida Gas"). Florida Gas is an interstate
natural gas pipeline that serves the State of Florida.
Sonat Energy Services' largest subsidiary, Sonat Marketing Company L.P.
("Sonat Marketing"), sells natural gas throughout much of the United States,
principally the area east of the Rocky Mountains. Another subsidiary of Sonat
Energy Services, Sonat Power Marketing L.P. ("Power Marketing"), markets
electric power throughout the area of the United States east of the Rocky
Mountains. Sonat Energy Services owns 65 percent and subsidiaries of AGL
Resources, Inc., an unaffiliated company ("AGL Resources"), own 35 percent of
Sonat Marketing and Power Marketing.
Sonat was incorporated under the laws of Delaware in 1973 in connection
with a reorganization of Southern. At March 1, 1999, Sonat and its subsidiaries
employed approximately 1,890 people.
Sonat's principal executive offices are located at 1900 Fifth Avenue North,
AmSouth-Sonat Tower, Birmingham, Alabama 35203, and its telephone number is
(205) 325-3800.
Additional business information is contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the Notes to
Consolidated Financial Statements in Part II of this report, which are
incorporated herein by reference. Reference is made to Note 13 of the Notes to
Consolidated Financial Statements contained in Part II of this report for
further information with respect to the portions of Sonat's revenues, operating
profit, capital expenditures, and identifiable assets attributable to each of
its business segments.
PROPOSED MERGER WITH EL PASO ENERGY CORPORATION
On March 13, 1999, Sonat and El Paso Energy Corporation ("El Paso") entered
into an Agreement and Plan of Merger (the "Merger Agreement"), providing for,
among other things, the merger of El Paso and the Company. Under the terms of
the Merger Agreement, the Company's shareholders will receive one share of El
Paso common stock, par value $3.00 per share ("El Paso Common Stock"), for each
share of common stock, par value $1.00 per share, of the Company ("Company
Common Stock"), they own. The merger is subject to certain customary conditions,
including, among others, approval by the stockholders of the Company and receipt
of certain required government approvals. In the event El Paso stockholder
approval for the issuance of El Paso Common Stock in the merger is not obtained,
El Paso has agreed to issue an amount of El Paso Common Stock not to exceed, in
the aggregate, 19.9 percent of the outstanding El Paso Common Stock, with the
balance of the merger consideration to be paid in the form of non-convertible
long-term preferred stock (the "Preferred Stock"). The Preferred Stock will bear
a dividend rate designed to cause the stock to have a value equal to the greater
of $32 or the value of the El Paso Common Stock as of the time of
I-1
<PAGE> 5
the Company's shareholder vote, subject to a cap of $44.50. The Preferred Stock
will be redeemable in 21 years and will not be convertible.
In connection with the Merger Agreement, on March 13, 1999, the Company and
El Paso also entered into cross option agreements, pursuant to which, among
other things, (i) El Paso has been granted an option to purchase up to 19.9
percent of the Company Common Stock, exercisable if the Merger Agreement is
terminated under certain circumstances as set forth therein and (ii) the Company
has been granted an option to purchase up to 19.9 percent of the El Paso Common
Stock, exercisable if the Merger Agreement is terminated under certain
circumstances as set forth therein.
EXPLORATION AND PRODUCTION
Sonat is engaged in the exploration for and the acquisition, development,
and production of oil and natural gas through its wholly owned subsidiary, Sonat
Exploration Company, and its subsidiary companies and Sonat Exploration GOM Inc.
On January 30, 1998, Sonat closed the merger of one of its wholly owned
subsidiaries with Zilkha, a privately owned oil and gas exploration,
development, and production company operating primarily offshore in the shallow
waters of the Gulf of Mexico, for $1.3 billion. Following the merger, Zilkha was
renamed Sonat Exploration GOM Inc. ("Sonat GOM"), which is a wholly owned
subsidiary of Sonat. See Note 3 of the Notes to Consolidated Financial
Statements in Part II of this report for additional details regarding the
merger. Unless the context specifically indicates otherwise, the term
"Exploration" as used below shall include both Sonat Exploration Company and its
subsidiary companies and Sonat GOM and all numbers shall be consolidated numbers
for Exploration as so defined.
SONAT EXPLORATION COMPANY
Exploration's principal office is located in Houston, Texas. Exploration
also has offices in Tyler and Midland, Texas, and Oklahoma City, Oklahoma. The
oil and gas properties of Exploration are principally located onshore in the
Southern coastal states, in various states in the Southwest, and in federal
waters offshore Louisiana and Texas. Exploration holds the industry's largest
net leasehold position in the shallow water area (less than 600 feet) of the
Gulf of Mexico.
As of December 31, 1998, Exploration had operations or properties in 12
states. Exploration had working interests in approximately 1.7 million gross
acres or 1.1 million net acres onshore as of December 31, 1998. Of this onshore
acreage, approximately 570,000 gross or 332,000 net acres were producing oil or
gas. In addition, as of such date (but excluding properties sold on January 15,
1999), Exploration had a working interest in 397 federal offshore blocks in the
Gulf of Mexico and 26 state offshore blocks, totaling approximately 1.9 million
gross acres or 1.8 million net acres, of which 41 were located in deep water
areas. Of these blocks, 85 were producing oil or gas and 338 lease blocks
(covering approximately 1.6 million net acres) were undeveloped. Exploration has
licensed or contracted to license three dimensional ("3-D") seismic data
covering 6,232 lease blocks in both shallow and deep water areas of the Gulf of
Mexico.
Following the merger with Zilkha, Sonat undertook a comprehensive review of
its exploration and production business and determined that its return on
invested capital would fall short of its goals. At that time, Exploration
undertook a thorough review of each producing area to determine which properties
were earning an acceptable financial return and which were not. Exploration also
reviewed its cost structure and looked at ways to operate more efficiently. As a
consequence, a major restructuring program was announced in April 1998. Program
steps, which have been completed, included the sale of certain oil and gas
properties, consolidation of certain business units, and a substantial work
force reduction. Oil and gas properties sold, including its Austin Chalk
properties, had proved reserves of approximately 430 billion cubic feet ("Bcf")
of natural gas equivalent ("Bcfe"), or approximately 17 percent of Exploration's
proved reserves as of December 31, 1997, and daily net production of
approximately 170 million cubic feet ("MMcf") of natural gas equivalent
("MMcfe"). Proceeds of approximately $317 million from these sales were used to
reduce debt. Production fell to 276 Bcfe in 1998 from 318 Bcfe in 1997, due
primarily to these property sales.
I-2
<PAGE> 6
Business units were consolidated from seven to three. This action, together with
related staff reductions, reduced Exploration's workforce by approximately 25
percent.
In addition, Exploration reviewed all of its oil and natural gas reserves
in 1998. Proved reserves were adjusted downward by a net 426 Bcfe from year-end
1997 proved reserves in addition to the 430 Bcfe reduction as a result of the
property sales. As a result of these revisions and the property sales,
Exploration's total proved reserves were approximately 1.6 trillion cubic feet
("Tcf") of natural gas equivalent at the end of 1998, compared to approximately
2.6 Tcf at the end of 1997. Approximately 89 percent of Exploration's proved
reserves are natural gas.
In 1998 Exploration participated in the drilling of 291 development wells,
of which 92 percent were successful. Exploration also participated in the
drilling of a total of 40 exploratory wells in 1998 (18 offshore and 22
onshore), 19 of which were successful (eight offshore and 11 onshore). Of the
total of 331 wells in which Exploration participated in drilling in 1998, it
operated 275. Exploration failed to replace the reserves it produced during
1998.
During 1999 Exploration has budgeted to drill approximately 25 exploratory
wells and 11 development wells on its acreage positions in the Gulf of Mexico.
Exploration also added to its deep-water holdings in the Gulf of Mexico by
successfully bidding on 28 deep-water blocks during 1998. Exploration intends to
continue to acquire prospective deep-water blocks to add to its inventory of
drillable prospects.
Exploration's restructuring program particularly impacted its onshore
operations since almost all of the properties sold in 1998 were onshore. The
most significant of these were Exploration's Austin Chalk and Arkoma Basin
properties. Exploration had maintained an active drilling program in the Austin
Chalk Trend in East Texas and West Louisiana from 1993 through 1997, but the
economics of continued development were not attractive. The Arkoma Basin
properties were nearing completion of Exploration's development program for them
and continued exploration and development entailed more risk than Exploration
thought was justified.
Exploration's onshore exploration effort over the past few years had been
dominated by the Cotton Valley Pinnacle Reef trend in East Texas. Its drilling
success rate and the initial flow rates from the reef wells were encouraging,
but during 1998 the production rates from these wells dropped substantially, and
Exploration has significantly curtailed its reef exploration program.
Strategically, Exploration is now emphasizing a disciplined onshore
exploration program to capitalize on its excellent land position and seismic
holdings. Exploration anticipates drilling approximately 34 exploratory wells,
plus a coalbed methane pilot project in Sheridan, Wyoming, and 244 development
wells on its onshore acreage during 1999.
Exploration will pursue producing property acquisitions that can be
integrated efficiently into its existing operations and that offer development
drilling opportunities. Exploration is also interested in expanding its coalbed
methane drilling operations following its success in Alabama's Black Warrior
Basin, where its daily production has risen from 18 to 55 MMcf per day in the
past three years. Exploration recently acquired 38,000 acres in Wyoming's Powder
River Basin and has begun a pilot program there to test the feasibility of what
could become a significant coalbed methane drilling program.
PennzEnergy Company, an unaffiliated company ("PennzEnergy"), and
Exploration recently announced that they have formed a joint venture to develop
mineral interests underlain by coalbed methane at the 700,000 - acre Vermejo
Park Ranch in northeast New Mexico. Under the terms of the definitive joint
venture agreement, Exploration will pay up to $10 million in cash and fund a
substantial development program to earn a 36-year lease covering part of
PennzEnergy's mineral interest in Vermejo Park Ranch and adjacent holdings.
PennzEnergy will initially participate with a 25-percent working interest in the
venture, and will increase its working interest incrementally to 50 percent as
the project reaches defined milestones. In addition to its working interest,
PennzEnergy will retain a 25-percent royalty in its lease to Exploration.
Closing of the transaction is subject to certain preferential rights held by the
landowner.
I-3
<PAGE> 7
In 1999 PennzEnergy and Exploration expect to drill a minimum of 35 wells.
Plans call for drilling 80 wells in 2000 and 150 wells each year thereafter.
Reserves associated with the joint venture properties are estimated to exceed
one Tcf of coalbed methane. To accommodate near-term gas sales generated by the
development program, Exploration has agreed to construct at its own expense
during 1999 a gathering line north from Vermejo Park Ranch to interconnect with
a regional transportation pipeline. Longer-term plans call for Exploration to
arrange for transportation on a newly constructed natural gas pipeline that will
connect to the national pipeline grid. Exploration has an option to discontinue
participation in the joint venture beyond September 1, 2000. In that event,
however, Exploration's interest in the project, including any related
improvements made, would be assigned to PennzEnergy at no cost.
Changes in Exploration's capital program may occur during the year since
the number, type, and timing of prospects drilled are subject to continual
revision as a result of many factors, including the number of new prospects
identified and secured through exploration and joint ventures with others, the
number of prospects identified through ongoing geologic evaluation or seismic
reprocessing efforts, rig availability and cost, lease expiration dates, the
availability of capital to fund such projects, initial test results, the price
of oil and gas, weather, and other general and economic conditions. While
maintaining an active drilling program, Exploration has also continued its cost
control and productivity improvement efforts.
Exploration's business is subject to all of the operating risks normally
associated with the exploration for and production of oil and gas, including
blowouts, cratering, pollution, and fires, each of which could result in damage
to or destruction of oil and gas wells, formations, production facilities, or
properties or in personal injury. Sonat maintains broad insurance coverage on
behalf of Exploration with respect to losses resulting from these operating
hazards.
See "Governmental Regulation -- Exploration and Production" below for
information concerning the effect of various laws and governmental regulations
on Exploration's operations.
CONSOLIDATED OIL AND GAS RESERVES. As of December 31, 1998, Exploration's
net proved reserves totaled 30 million barrels of crude oil, condensate, and
natural gas liquids and 1,422 Bcf of natural gas. As of December 31, 1997,
Exploration's net proved reserves amounted to 73 million barrels of crude oil,
condensate, and natural gas liquids and 2,161 Bcf of natural gas. For additional
information concerning reserves, see Note 14 of the Notes to Consolidated
Financial Statements in Part II of this report.
The following table sets forth certain information on the total proved
reserves for Exploration as of December 31, 1998. Information in the following
table is based upon the reserve report prepared by Exploration dated January 1,
1999. Ryder Scott Company Petroleum Engineers ("Ryder Scott") has issued its
report dated March 10, 1999, in which it reviewed certain of Exploration's
onshore properties, which account for approximately 62 percent of Exploration's
total net proved reserves. William M. Cobb & Associates, Inc. ("Cobb") has
issued its report dated January 14, 1999, in which it reviewed all of Sonat
GOM's offshore properties (the former Zilkha acreage), which account for
approximately 15 percent of Exploration's total net proved reserves. All of such
reserve reports were done in accordance with the rules and regulations of the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
NET PROVED RESERVES
-------------------------------
GAS LIQUIDS TOTAL
--------- ------- ---------
(MMCF) (MBBL) (MMCFE)
<S> <C> <C> <C>
Producing................................................... 931,600 17,552 1,036,900
Non-Producing............................................... 191,000 7,191 234,200
Undeveloped................................................. 299,700 4,974 329,500
--------- ------ ---------
Total Proved...................................... 1,422,300 29,717 1,600,600
========= ====== =========
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of Exploration. The
reserve data set forth herein represents only estimates. Reservoir engineering
is a subjective process of estimating underground accumulations of crude oil and
natural gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretations and judgment. As a result, estimates
I-4
<PAGE> 8
of different engineers often vary. In addition, results of drilling, testing,
and production subsequent to the date of an estimate may justify revision of
such estimate. Accordingly, reserve estimates are often different from the
quantities of crude oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. In general, the volume of production
from oil and gas properties owned by Exploration declines as reserves are
depleted. Except to the extent Exploration conducts successful exploration and
development activities or acquires additional properties containing proved
reserves, or both, the proved reserves of Exploration will decline as reserves
are produced.
Exploration relies on its own technical staff for the selection of its
drilling prospects. Leases on desirable, nonproducing offshore prospects are
typically acquired in federal and state waters by acquisition or through a
competitive bidding process from the federal or state governments. Exploration
has, and may in the future, bid with other companies for leases on prospective
offshore acreage. Onshore leases are acquired by Exploration and by independent
lease brokers at the direction of Exploration's staff, through farmouts, through
participation in prospects developed by others, or by acquisition. Exploration
may, as it has in the past, enter into joint venture arrangements where
exploration and development activity is performed on behalf of the joint venture
by whichever company is designated as operator. Drilling for Exploration is
conducted by independent drilling contractors.
There have been no oil or gas reserve estimates filed or included in any
reports to any federal agency within the last twelve months, except Form EIA-23
Annual Survey of Domestic Oil and Gas Reserves filed with the Federal Energy
Regulatory Commission (the "FERC") and Form 9-1866 (Request for Reservoir
Maximum Efficient Rate) filed with the Minerals Management Service of the U.S.
Department of the Interior (the "MMS"). There are no material differences in the
reserves reflected in such reports and the estimated reserves as reflected in
Note 14 of the Notes to Consolidated Financial Statements in Part II of this
report, except for differences resulting from actual production, acquisitions,
property sales, and necessary reserve revisions and additions to reflect actual
experience.
CONSOLIDATED WELLS AND ACREAGE. The following tables detail the gross
lease acreage of both producing and nonproducing onshore properties and offshore
lease blocks in which Exploration had an interest at December 31, 1998
(excluding properties sold on January 15, 1999). The map on page I-8 following
the tables generally depicts the areas in which Exploration had significant
lease interests as of December 31, 1998.
SONAT EXPLORATION COMPANY
ONSHORE GROSS LEASE ACREAGE
<TABLE>
<CAPTION>
NON-
STATE PRODUCING PRODUCING TOTAL
- ----- --------- ------------- ---------
<S> <C> <C> <C>
Alabama..................................................... 10,670 33,057 43,727
Arkansas.................................................... 19,933 28,048 47,981
Louisiana................................................... 125,504 334,379 459,883
Montana..................................................... 9,392 -- 9,392
New Mexico.................................................. 6,450 648 7,098
Oklahoma.................................................... 209,447 56,399 265,846
Texas....................................................... 185,169 643,559 828,728
Wyoming..................................................... 1,673 -- 1,673
Other....................................................... 1,637 160 1,797
------- --------- ---------
Total............................................. 569,875 1,096,250 1,666,125
======= ========= =========
</TABLE>
I-5
<PAGE> 9
OFFSHORE GROSS LEASE BLOCKS*
<TABLE>
<CAPTION>
AREA PRODUCING NON-PRODUCING TOTAL
---- --------- ------------- -----
<S> <C> <C> <C>
Alaminos Canyon............................................. -- 4 4
Atwater Valley 402.......................................... -- 1 1
Brazos...................................................... 1(1) 7 8
East Breaks................................................. -- 28 28
East Cameron................................................ 8(2) 15 23
Eugene Island............................................... 10 9 19
Galveston................................................... 2 6 8
Grand Isle.................................................. 2 14 16
Green Canyon................................................ -- 1 1
High Island................................................. 3(3) 26 29
Main Pass................................................... 4 6 10
Matagorda................................................... -- 1 1
Mississippi Canyon.......................................... 3(4) 6 9
Mobile...................................................... -- 1 1
Mustang Island.............................................. 3 1 4
Sabine Pass................................................. 3 -- 3
Ship Shoal.................................................. 2 17 19
South Marsh Island.......................................... 6 9 15
South Pass.................................................. -- 3 3
South Pelto................................................. 5(5) 6 11
South Timbalier............................................. 3(6) 32 35
Vermilion................................................... 2(7) 26 28
Viosca Knoll................................................ -- 18 18
West Cameron................................................ 20(8) 66 86
West Delta.................................................. 2 15 17
-- --- ---
Federal........................................... 79 318 397
LOUISIANA
Atchafalaya Bay............................................. 1 3 4
Grand Isle.................................................. 3(9) 10 13
Sabine Pass................................................. 1 -- 1
West Cameron................................................ -- 1 1
-- --- ---
Louisiana......................................... 5 14 19
TEXAS
High Island................................................. 1(10) 4 5
Sabine Pass................................................. -- 2 2
-- --- ---
Texas............................................. 1 6 7
-- --- ---
State............................................. 6 20 26
-- --- ---
TOTAL............................................. 85 338 423
== === ===
</TABLE>
- ---------------
* Excludes blocks sold to Energy Resource Technology, Inc. on January 15, 1999.
(1) Sonat GOM has a 3.887429% working interest and Sonat Exploration
Development I Company, its wholly owned subsidiary ("SEDCO"), has a
12.310191% working interest in Brazos 491. The SEDCO interest is subject to
the UBS Asset Management 90% net profit interest.
(2) Sonat GOM has a 15% back-in override in East Cameron 328 when, commencing
September 15, 1996, one million barrels of oil has been produced; and,
Exploration has a 40.73% working interest below 10,500 feet in East Cameron
223; and a 31.23% working interest below 10,500 feet in East Cameron 231.
I-6
<PAGE> 10
(3) Exploration only has a 3% override in High Island 139; and Sonat GOM has a
back-in 8.2875% override in High Island 116 when, commencing July 1, 1996,
45 Bcf of gas has been produced. High Island 355A has been included in the
lease count; however, the lease was released on January 31, 1999.
(4) Exploration is not a lessee of one of the four producing blocks,
Mississippi Canyon 150, but this block has been unitized with the three
producing lease blocks in the area in which Exploration has a working
interest.
(5) Sonat GOM has a 7.58333% before payout overriding royalty interest ("BPO
ORRI")/8.5% after payout overriding royalty interest ("APO ORRI") or 25%
after payout working interest in South Pelto 18 (operating rights from
surface to 20,000 feet). Sonat GOM owns 100% in the remaining lease.
(6) Sonat GOM has a 7.613333% BPO/10.893333% APO ORRI in the South Timbalier 11
(operating rights from surface to 25,000 feet). Sonat GOM owns 100% in the
remaining lease.
(7) Sonat GOM has a 7.583333% BPO/6.8333333% APO ORRI only in the Vermilion 87
(operating rights from surface to 6,780 feet). Sonat GOM owns 100% in the
remaining lease.
(8) Exploration has a 12.5% working interest below 9,500 feet in West Cameron
290, which is one of the producing blocks; and Exploration only has an
overriding royalty interest in West Cameron 421.
(9) Sonat GOM owns a 70% working interest below the Q-60 Sand, and does not own
an interest in the producing well.
(10) High Island 11-L (State Lease) -- This well has been categorized as
producing; however, it is shut-in.
The following table sets forth information concerning Exploration's
consolidated working interests in oil and gas properties as of December 31, 1998
(excluding properties sold on January 15, 1999).
<TABLE>
<CAPTION>
TOTAL NUMBER OF
PRODUCTIVE
WELLS NUMBER OF
---------------- DEVELOPED UNDEVELOPED WELLS BEING
OIL GAS ACRES ACRES DRILLED
---- ------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Gross.................................. 150 2,112(1) 861,540 2,727,737 35
Net.................................... 106 1,317 512,386 2,365,707 24
</TABLE>
- ---------------
(1) Twenty of these wells are multiple completions.
I-7
<PAGE> 11
SONAT EXPLORATION INTERESTS
(SONAT EXPLORATION MAP)
SONAT GOM INTERESTS
(SONAT INTERESTS MAP)
I-8
<PAGE> 12
CONSOLIDATED EXPLORATORY AND DEVELOPMENT WELLS. The following table sets
forth certain consolidated information regarding exploratory and development
wells drilled during the years 1996 through 1998.
<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
WELLS DRILLED WELLS DRILLED
------------------ ---------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Productive.............................................. 24.4 19.4 14.9 210.7 296.1 204.2
Dry..................................................... 6.0 14.9 18.6 5.4 19.3 18.1
</TABLE>
For information concerning Exploration's (i) capitalized costs of oil and
gas producing activities, (ii) costs incurred in oil and gas producing
activities, (iii) net revenues from oil and gas production, (iv) estimated
proved oil and gas reserves, (v) estimated future oil and gas net revenues, and
(vi) present value of estimated future net revenues from estimated production of
proved oil and gas reserves, see Note 14 of the Notes to Consolidated Financial
Statements in Part II of this report. The standardized measures of discounted
future net cash flows relating to Exploration's oil (including condensate) and
gas reserves are calculated as prescribed by Statement of Financial Accounting
Standards No. 69. The standardized measures of Exploration's proved oil and gas
reserves presented in Part II of this report do not represent Sonat's estimate
of their fair market value and are not otherwise representative of the value
thereof, but rather, as stipulated and required by the Financial Accounting
Standards Board, are intended solely to assist financial statement users in
making comparisons between companies.
The information contained in the foregoing table should not be considered
indicative of future drilling performance, nor should it be assumed that there
is any necessary correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered from such wells.
CONSOLIDATED NET PRODUCTION, UNIT PRICES, AND PRODUCTION COSTS. As of
December 31, 1998, Exploration had an ownership interest in 2,262 gross (1,423
net) productive wells, including 2,112 gross (1,317 net) productive natural gas
wells and 150 gross (106 net) productive oil wells. Of these wells, 2,122
producing wells were onshore and 140 producing wells were offshore. Reference is
made to the table in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Part II of this report showing the consolidated net
production (sales volumes) of oil and condensate, natural gas liquids, and
natural gas for 1996 to 1998 and the average sales prices for those years
(including transfers). The average production (lifting) costs per unit of oil
and gas was $.33 in 1998, $.37 in 1997, and $.30 in 1996. The average production
cost is calculated by converting all units of production to the equivalent
thousand cubic feet ("Mcf") of gas using the relative energy content method.
Exploration sells its crude oil production generally at posted prices,
subject to adjustments for gravity and transportation. Exploration sells its
natural gas primarily to Sonat Marketing at spot-market prices. Exploration also
sells some of its gas under long-term contracts directly to pipelines,
distribution companies, and end-users. Exploration sells natural gas liquids at
market prices under monthly or long-term contracts. Sales of natural gas by
Exploration to affiliates accounted for approximately 68 percent of
Exploration's revenues in 1998, 54 percent in 1997, and 56 percent in 1996.
During 1993 Sonat Marketing entered into agreements with Exploration
pursuant to which Sonat Marketing purchases substantially all of Exploration's
natural gas production that is not sold under pre-existing term dedications. The
purchase prices for natural gas covered by these agreements is based on
representative index prices agreed upon by Exploration and Sonat Marketing as
representing the market value of the gas. A portion of Exploration's production
is hedged by entering into intercompany swaps with Sonat Marketing to reduce the
risks associated with spot-market price volatility. See Note 4 of the Notes to
Consolidated Financial Statements contained in Part II of this report.
I-9
<PAGE> 13
The following table sets forth certain information regarding the net
production volumes, average sales prices received, and average production costs
associated with Exploration's sales of oil and natural gas for the periods
indicated.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net Production:
Gas (Bcf)................................................. 226 266 268
Oil and Condensate (MMBbls)............................... 6.5 6.8 6.8
Natural Gas Liquids (MMBbls).............................. 1.8 1.8 2.2
Total (Bcfe)...................................... 276 318 322
Average Sales Price:
Gas ($/Mcf)............................................... 1.95 2.26 2.19
Oil and Condensate ($/Bbl)................................ 13.14 19.57 18.48
Natural Gas Liquids ($/Bbl)............................... 8.83 11.90 12.03
Average Production Cost:
($/Mcfe)(1)............................................... 0.33 0.37 0.30
</TABLE>
- ---------------
(1) Includes direct lifting costs (labor, repairs and maintenance, materials,
and supplies) and the administrative costs of production offices, insurance,
and property and severance taxes.
CONSOLIDATED DEVELOPMENT, EXPLORATION, AND ACQUISITION EXPENDITURES. The
following table sets forth certain information regarding the costs incurred by
Exploration in its development, exploration, and acquisition activities during
the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
($ THOUSANDS)
<S> <C> <C> <C>
Development Costs........................................... $375,296 $490,979 $308,755
Exploration Costs:
Proved Acquisitions....................................... 1,592 5,811 61,441
Lease Acquisitions and Delay Rentals...................... 58,809 86,789 73,602
Seismic Acquisition and Reprocessing...................... 52,998 102,450 48,301
Drilling.................................................. 92,364 176,580 128,001
-------- -------- --------
Total Capital Expenditures........................ $581,059 $862,609 $620,100
======== ======== ========
</TABLE>
COMPETITION AND CURRENT BUSINESS CONDITIONS
The oil and gas business is highly competitive in the search for and
acquisition of additional reserves and in the marketing of oil and natural gas.
Exploration's competitors include the major and intermediate size oil companies,
independent oil and gas concerns, and individual producers or operators.
Exploration's realized natural gas prices averaged $1.95 per thousand cubic
feet in 1998, down from $2.26 in 1997. Oil and condensate prices averaged $13.14
per barrel in 1998 versus $19.57 per barrel in 1997. Exploration hedged a
portion of its 1998 production, which reduced its realized price for natural gas
by $.02 per Mcf. See Part II of this report in Note 4 of the Notes to
Consolidated Financial Statements and in Management's Discussion and Analysis of
Financial Condition and Results of Operations following the caption "Hedging
Activities" for a discussion of oil and gas production hedged in the future.
Exploration has a 1999 capital budget of $335 million; however, given
Sonat's debt levels, Exploration will limit its expenditures to the total of
operating cash flow and the proceeds of any property sales. Exploration expects
to sell its West Texas and other non-strategic properties in 1999. Due to the
decline in oil field services costs, the 1999 drilling program should be
comparable to Exploration's 1998 program. Given the
I-10
<PAGE> 14
many opportunities emerging in the Gulf of Mexico and in coalbed methane areas
onshore, Exploration will increase exploration while reducing its onshore
development program. This could result in lower near-term production, but
Exploration believes it will result in greater long-term production and
profitability. Actual expenditures for such activities may vary from these
estimates for a number of reasons, including those discussed under the caption
Cautionary Statement Concerning Forward-Looking Statements contained below in
this Part I of this report.
NATURAL GAS TRANSMISSION
Sonat owns interests in approximately 14,000 miles of natural gas pipelines
extending across the southeastern United States from Texas to South Carolina and
Florida. The principal business of Sonat's pipelines is the transmission and
storage of natural gas in interstate commerce.
Sonat's interstate pipeline businesses are subject to regulation by the
FERC and the U.S. Department of Transportation under the terms of the Natural
Gas Policy Act of 1978 ("NGPA"), the Natural Gas Act ("NGA"), and various
pipeline safety and environmental laws. See "Governmental Regulation -- Natural
Gas Transmission" below for information concerning the regulation of natural gas
transmission operations.
SOUTHERN NATURAL GAS COMPANY
Sonat's principal operating company in the pipeline group is Southern, a
wholly owned subsidiary of Sonat, which owns approximately 7,300 miles of
interstate natural gas pipelines. Southern's interstate pipeline system extends
from gas fields in Texas, Louisiana, Mississippi, Alabama, and the Gulf of
Mexico to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South
Carolina, and Tennessee. Southern is the principal pipeline supplier to the
growing Southeastern markets of Alabama and Georgia. Southern's interstate
pipeline system has a firm daily delivery capacity of 2.5 Bcf of natural gas. A
map of Southern's pipeline system, including pipelines of its subsidiaries and
joint ventures, as well as of the pipeline system of Florida Gas, appears on
page I-19.
FLORIDA GAS TRANSMISSION COMPANY
Florida Gas is the primary pipeline transporter of natural gas in the State
of Florida and the sole pipeline transporter to peninsular Florida. Florida Gas
is operated by a subsidiary of Enron Corp., an unaffiliated company, which owns
the other 50 percent of Citrus. Florida Gas owns approximately 4,800 miles of
interstate natural gas pipelines that extend from south Texas to a point near
Miami, Florida. Its system has a firm daily delivery capacity of 1.5 Bcf of
natural gas. See the map on page I-19. For additional information regarding
Citrus, see Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in Part II of this report, and the Consolidated
Financial Statements of Citrus contained in Part IV of this report.
SEA ROBIN PIPELINE COMPANY
Sea Robin Pipeline Company ("Sea Robin"), a wholly owned subsidiary of
Southern, owns an approximately 430-mile interstate natural gas pipeline system
located in the Gulf of Mexico. Sea Robin gathers natural gas and condensate for
others and delivers those products to shore for condensate removal and gas
processing and redelivery to one independent storage company and five downstream
transmission pipelines, including Southern. See the system map on page I-19. Sea
Robin transported approximately 238 Bcf of natural gas in 1998 compared to 278
Bcf in 1997. These Sea Robin volumes are included within the Southern
transportation volumes discussed below.
SOUTH GEORGIA NATURAL GAS COMPANY
South Georgia Natural Gas Company ("South Georgia"), a wholly owned
subsidiary of Southern, owns an approximately 910-mile interstate natural gas
transmission system located in eastern Alabama, southern Georgia, and the
Florida Panhandle. See the system map on page I-19. South Georgia transported
I-11
<PAGE> 15
approximately 39 Bcf of natural gas in 1998 compared to 38 Bcf in 1997. These
South Georgia volumes are included within the Southern transportation volumes
discussed below.
DESTIN PIPELINE COMPANY, L.L.C.
Destin Pipeline Company, L.L.C. ("Destin"), is owned one-third each by
Southern and subsidiaries of Shell Oil Company ("Shell") and BP Amoco
Corporation ("BP Amoco"). Destin owns a 223-mile interstate pipeline system that
transports natural gas from the growing eastern Gulf of Mexico production area,
with an additional 31-mile extension scheduled to go in service in the second
quarter of 1999. Destin's pipeline system extends northward into Mississippi,
where it connects with five other interstate pipelines, including Southern and
Florida Gas. See the system map on page I-19. The pipeline has a firm daily
delivery capacity of 1.0 Bcf of natural gas. Southern is the operator of the
system. Destin's pipeline system was partially completed and in service in
September 1998 and was fully in service in March 1999. As of March 1999, the
total capital to be expended by Destin is estimated to be $475 million,
including two substantial extensions of the original mainline system that were
constructed in late 1998 and early 1999.
Destin's FERC Gas Tariff includes a flexible firm transportation service,
which provides for levels of firm transportation capacity that may vary
quarterly, with the transportation provided at a volumetric rate provided
certain minimum throughput levels are maintained. Under the flexible firm
service, Destin's transportation revenue will fluctuate based on the levels of
gas production from its shippers. To be eligible for Destin's flexible firm
service, a shipper must make a life-of-reserves commitment of production from
offshore leases with estimated proven recoverable reserves of 100 Bcf or more.
Shell, BP Amoco, and other shippers have dedicated their production from
certain leases in the eastern Gulf of Mexico to Destin for transportation under
Destin's flexible firm rate schedule. Discussions are underway with other
prospective shippers.
ETOWAH LNG COMPANY, L.L.C.
In December 1997 an affiliate of AGL Resources and Southern formed a new
entity, Etowah LNG Company, L.L.C. ("Etowah"), to jointly construct, own, and
operate a new liquefied natural gas ("LNG") 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 each will own 50 percent of Etowah, 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 ("AGLC"), and
Southern's pipeline. Etowah will provide natural gas storage and peaking
services to AGLC and the city of Austell, Georgia. The new facility will cost
approximately $90 million. AGLC has subscribed for 200 MMcf per day of
deliverability capacity from Etowah, which represents two-thirds of its
anticipated available capacity, for a term of 20 years. The agreement for Etowah
to provide services to AGLC includes, however, provisions allowing AGLC 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") or if AGLC determines it should not proceed with the agreement.
In September 1998 the Georgia PSC issued an order approving the agreement, but
allowed for further review of it. The parties extended the time period during
which AGLC may terminate the agreement. AGLC has advised Southern that it is
reevaluating the timing and extent of its needs for firm peaking services and
will advise Southern whether it will proceed with this project during the third
quarter of 1999. If AGLC exercises its option to terminate its service agreement
with Etowah, the project would not go forward and AGLC would be obligated to
reimburse Etowah for all of its costs incurred in the project.
SOUTHERN LNG INC.
Southern LNG Inc. ("Southern LNG"), formerly known as Southern Energy
Company, a wholly owned subsidiary of Southern, owns an LNG receiving and
regasification terminal near Savannah, Georgia, which was constructed for a
project, now terminated, to import LNG from Algeria. The terminal has been
inactive since the early 1980s. In 1992 the FERC approved a settlement relating
to Southern LNG's facilities. The
I-12
<PAGE> 16
settlement resolved a number of outstanding rate and accounting issues. Southern
LNG must determine by the end of 1999 whether to file with the FERC to abandon
its facility. If it abandons the facility, Southern LNG would nevertheless be
allowed to recover most of its remaining investment in the facility pursuant to
the settlement.
MARKETS -- TRANSPORTATION
Sonat's pipelines provide natural gas transportation services for their
distribution customers, primarily for residential and commercial end use,
industrial customers, electric generation companies, gas producers, other gas
pipelines, and gas marketing and trading companies. Southern provides
transportation service in both its gas supply and market areas. The principal
industries served directly by Sonat's pipeline systems and indirectly through
their customers' distribution systems include the electric generation,
fertilizer, chemical, pulp and paper, textile, primary metals, stone, clay, and
glass industries.
Transportation volumes in 1998 for Southern and all of its subsidiaries
were 984 Bcf, compared with transportation volumes in 1997 of 1,007 Bcf. Sales
to distribution customers, including municipalities and gas districts, accounted
for most of 1998 sales of 12 Bcf and 1997 sales of 65 Bcf. In each of 1998 and
1997, the volumes associated with the 1998 and 1997 sales are not accounted for
as sales volumes, but rather are included in transportation volumes because all
sales are made at the receipt points where the gas enters Southern's pipeline
system. In 1998 Florida Gas transported 465 Bcf of natural gas, compared to 471
Bcf in 1997.
Sonat's pipelines provide transportation service under rate schedules that
are subject to FERC regulatory authority. Rates for transportation service
depend on whether service is on a firm or interruptible basis and the location
of the service on Southern's pipeline system. Firm service is transportation
service for which the shipper pays a fixed monthly fee to reserve capacity in
the pipeline system (the "Reservation Fee"). The shipper may not use this
capacity it has reserved at all times, but the firm transportation customers of
Southern and Florida Gas (with the exception of certain small customers) must
pay the monthly Reservation Fee regardless of the volumes shipped. Shippers are
able to resell their unused firm capacity pursuant to FERC rules and
regulations. Interruptible service is only available when pipeline capacity is
available and may be interrupted by the pipeline as needed when use of the
pipeline is at its greatest, typically during winter periods. For most
pipelines, including Southern and Florida Gas, FERC requires a rate design,
known as straight-fixed-variable ("SFV"), that is designed to allow pipelines to
recover substantially all of their fixed costs, a return on their equity
investment in facilities, and income taxes in the Reservation Fee. Pipelines
charge transportation rates for interruptible service for actual volumes
transported. Rates for transportation service are discounted by Southern and
Florida Gas in individual instances to respond to competition in the markets
they serve.
I-13
<PAGE> 17
Southern's and Florida Gas' contracts to provide firm transportation
service for their customers are for varying amounts and periods of time. The
following chart describes the expiration dates and amounts of service covered
under the various firm transportation agreements of Southern and Florida Gas
with their firm transportation customers.
EXPIRATION DATES OF
FIRM TRANSPORTATION CONTRACTS
(MCF/D)
<TABLE>
<CAPTION>
YEAR SOUTHERN FLORIDA GAS
- ---- --------- -----------
<S> <C> <C>
1999........................................................ 162,022 30,764
2000........................................................ 190,433 380,012
2001........................................................ 21,994 -0-
2002........................................................ 771,125 -0-
2003........................................................ 281,341 12,416
2004........................................................ 35,504 7,121
2005........................................................ 165,198 429,378
2006........................................................ 45,108 216
2007........................................................ 309,523 31,048
2008........................................................ 356,254 -0-
2009........................................................ 13,000 6,931
Beyond 2009................................................. 98,783 586,752
--------- ---------
Total............................................. 2,450,285 1,484,638
========= =========
</TABLE>
Substantially all of the firm transportation capacity currently available
in Southern's two largest market areas is fully subscribed. Nearly all of
Southern's firm transportation contracts contain evergreen provisions that
automatically extend the term for additional months or years unless notice of
termination is given by one of the parties. There can be no assurance that the
existing customers of Southern or Florida Gas will extend their firm service
agreements at the same levels when their current service agreements expire.
Transportation capacity reservation fees to Southern, combined with sales
by Sonat Marketing, from one distribution customer, AGLC, and its subsidiary,
Chattanooga Gas Company ("Chattanooga"), accounted for approximately four
percent of Sonat's 1998 consolidated revenues. Reservation fees to Southern from
AGLC and Chattanooga accounted for approximately 34 percent of Southern's 1998
consolidated revenues. Transportation capacity reservation fees to Southern,
combined with sales by Sonat Marketing, from another distribution customer,
Alabama Gas Corporation ("Alabama Gas"), accounted for approximately four
percent of Sonat's 1998 consolidated revenues. Reservation fees to Southern from
Alabama Gas accounted for approximately 12 percent of Southern's 1998
consolidated revenues. No other customer accounted for as much as ten percent of
Southern's consolidated revenues for 1998.
Sonat's pipelines hold easements acquired through either purchase or
condemnation for all of their pipeline rights-of-way. Such easements remain
valid until the pipeline traversing it is abandoned. Each company has the power
to eminent domain if needed in connection with acquiring additional
rights-of-way for expansion projects.
Sonat's pipeline businesses are subject to operating risks associated with
the transmission of natural gas through a pipeline system, which could result in
property damage and personal injury. Sonat has a comprehensive safety program to
address these risks. Southern has consistently ranked at or near the top of its
industry peer group in safety performance. Sonat maintains broad insurance
coverage on behalf of Southern and its other subsidiaries insuring against
financial loss resulting from these operating risks.
For additional information regarding Southern's transportation and sales of
gas, see Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in Part II of this report.
I-14
<PAGE> 18
MARKETS -- SYSTEM EXPANSIONS
Southern continually seeks to expand its pipeline system (i) to reach new
markets, (ii) to increase delivery capacity to existing markets to serve the
increasing gas demands in its market area, and (iii) to connect new gas
supplies, principally in the Gulf of Mexico, to deliver gas not only into
Southern's system but also into the interstate pipeline grid.
Demand for natural gas in the six Southeastern states that comprise
Southern's principal market area, Alabama, Florida, Georgia, Mississippi, South
Carolina, and Tennessee, has grown at an annual average rate of 3.5 percent in
the last ten years, compared to the national annual average growth rate for gas
demand of 2.6 percent during such period. Natural gas demand in peninsular
Florida, the principal market served by Florida Gas, has grown even faster, at
an annual rate of 5.2 percent in the last ten years.
In November 1998 Southern placed in service an expansion to its pipeline
system that will serve firm transportation commitments totaling 65 million cubic
feet of natural gas per day from customers in eastern Tennessee, Georgia, and
Alabama. Another expansion to North Alabama, which originally received FERC
approval in May 1997, has now received the necessary FERC and other regulatory
authorizations to change the route of the pipeline as it crosses the Wheeler
National Wildlife Refuge, although the certificate order from the FERC is on
appeal for judicial review and the permit from the U.S. Fish & Wildlife Service
is on administrative appeal. Barring further unforeseen delays, it is expected
that the pipeline will be completed and ready for service for the 1999-2000
winter heating season. The 122-mile expansion will provide 78 million
cubic-feet-per-day capacity to the participating customers.
In addition to the general growth in gas demand throughout the Southeast,
the use of natural gas to generate electric power represents a significant
growth prospect in the market areas of Southern and Florida Gas. Since 1994,
electric utilities served by Southern have added 23 gas-fired combustion turbine
generation units with generating capacity of 1,980 megawatts. These units, which
have consumed in excess of 200 MMcf of natural gas on a peak day, are used
primarily to meet the utilities' peak generation loads in the summer and winter
months.
In late 1998 Southern completed a $10 million, 34 million
cubic-feet-per-day expansion in Alabama that primarily provides firm service to
a 100-megawatt base load gas-fired electric generation plant operated by Alabama
Power Company, a subsidiary of Southern Company. Units of Southern Company had
previously installed 19 natural gas-fired peaking turbines that are served by
Southern's pipeline, but this is the first natural gas-fired electric generation
facility in Southern's market designed for year-round use.
On March 3, 1999, Carolina Power & Light Company ("CP&L") and Southern
announced plans to form a 50/50 joint venture to construct, own, and operate a
175-mile, 30-inch, natural gas pipeline from the terminus of Southern's pipeline
system in Aiken, South Carolina, to an interconnect with the pipeline system of
North Carolina Natural Gas Corporation ("NCNG") in Robeson County, North
Carolina. The new Palmetto Interstate Pipeline ("Palmetto") will provide a
significant interstate natural gas pipeline connection in eastern North
Carolina.
Palmetto has a planned initial capacity of 200 million to 300 million cubic
feet of natural gas per day and will be expanded to accommodate future growth.
CP&L plans to subscribe for a substantial portion of the capacity in Palmetto to
fuel new electric generation being developed for its customers in the Carolinas,
with the remainder to be used to increase the region's natural gas availability.
An open season will start soon for customers to subscribe to firm capacity on
the pipeline. Depending upon the resulting firm subscription, the capital cost
for Palmetto is expected to be $200 million to $250 million.
The proposed schedule calls for the new pipeline to be operational in April
2002. Construction is scheduled to begin in the summer of 2001, following the
completion of engineering and environmental preparation and federal and state
permitting. The exact route of the pipeline has not yet been determined, but the
pipeline route likely will cross portions of Aiken, Lexington, Richland, Sumter,
Lee, Darlington, Marlboro, and Dillon counties in South Carolina and Robeson
County, North Carolina. A detailed environmental analysis is under way to
establish the most environmentally sound path.
I-15
<PAGE> 19
As part of the project Southern will undertake a major expansion of its
existing interstate pipeline system, consisting of extensive pipeline looping
and additional compression at points from Mississippi to Aiken. The extent of
Southern's pipeline expansion, which is expected to cost in excess of $200
million, will depend on capacity requirements. This expansion will provide
significant rate and operational benefits to Southern's existing customers.
CP&L is considering sites in North Carolina and northeastern South Carolina
for new electric generation to be fueled by the new pipeline. CP&L plans to
build about 4,000 megawatts of natural gas-fueled generation by 2007. Some of
the new electric generation will be served in conjunction with NCNG, a natural
gas distribution company headquartered in Fayetteville, North Carolina, which
owns natural gas pipelines that currently serve eastern North Carolina. CP&L is
in the process of acquiring NCNG.
The construction of Palmetto and expansion of the Southern system require
approval by the FERC as well as other federal and state agencies and is likely
to be challenged on both environmental grounds and economic grounds by certain
of its competitors, environmental groups, or landowners. Construction is also
subject to execution of definitive agreements between CP&L and Southern.
In November 1998 Florida Gas filed with the FERC for approval of a Phase IV
expansion that will increase system firm capacity by 272 MMcf per day, or 19
percent. More than 90 percent of this new capacity is for Florida's growing
electric generation requirements. This $351 million expansion includes 205 miles
of pipeline that will extend the Florida Gas system to the Fort Myers area.
Subject to regulatory approval, Phase IV is scheduled to be placed into service
in mid-2001.
Another growth area for Sonat's pipeline business is in expanding
production area pipeline capacity to receive and transport projected increases
in gas production from the Gulf of Mexico, driven by deep water developments. In
March 1997 Southern placed in service a $14 million expansion project that
allows producers to transport, under 10-year contracts, 140 MMcf per day of
natural gas from offshore Louisiana to interconnections between Southern and
other pipelines in South Louisiana. In addition, as described above, the initial
construction of the Destin pipeline system has been completed. Destin, which
connects with five interstate pipelines in Mississippi, including Southern and
Florida Gas, enables producers to deliver gas from the eastern deepwater Gulf of
Mexico to interstate markets. In June 1998 the FERC approved Destin's
application to extend its pipeline system approximately 12 miles to transport
additional gas reserves committed by other producers to Destin's system. This
extension was partially completed and in service in December 1998 and was placed
fully in service in January 1999. In July 1998 the FERC also approved another
Destin application to extend its pipeline by approximately 31 miles to transport
additional gas reserves committed by other producers to Destin's system. This
extension is expected to be in service in the second quarter of 1999.
Under FERC regulations, a pipeline is allowed to charge rates that are
designed to recover fully its cost of providing service to the pipeline's
customers, including a reasonable rate of return on its investment in the
facilities it uses to provide its service, which is referred to as the rate base
of the pipeline. The allowed rate of return includes both a cost of debt
component and a return on equity component. The cumulative effect of capital
investment required to serve the existing and pending projects in the three
growth segments of Sonat's pipeline business described above - market area,
electric generation, and production area demand -- together
I-16
<PAGE> 20
with capital investment for necessary pipeline repair and replacements, has
resulted in the growth in rate base for Sonat's pipeline businesses as shown in
the table below.
RATE BASE ($ MILLION)
<TABLE>
<CAPTION>
SOUTHERN AND FLORIDA
YEAR SUBSIDIARIES(1) GAS(2)
- ---- --------------- -------
<S> <C> <C>
1994........................................................ $ 735 $ 239
1995........................................................ 735 1,250
1996........................................................ 768 1,237
1997........................................................ 843 1,223
1998........................................................ 1,146 1,193
1999 (Estimated)............................................ 1,329 1,234
2000 (Estimated)............................................ 1,334 1,214
</TABLE>
- ---------------
(1) Includes proportionate shares of the rate bases of Destin, Etowah, and other
joint ventures attributable to Southern's ownership interests.
(2) 100 percent of the rate base of Florida Gas, which is 50-percent owned by
Sonat.
The amounts estimated for 1999 and 2000 in the foregoing table include (i)
currently planned capital expenditures for those years for maintenance, repair,
and replacement of the pipeline system, (ii) projects that have received FERC
approval and are currently under construction, and (iii) projects that have been
agreed to but for which FERC approval has not yet been obtained. The above
numbers include no amounts for Palmetto or for the related expansion capital to
be spent by Southern. No assurance can be given that such projects, which are
subject to protest by customers, competitors, the staff of the FERC, and other
interested parties, such as environmental groups and landowners, will be
approved by the FERC or, if approved, that such construction will not be delayed
for environmental, weather, or other reasons. A pipeline cannot reflect a change
in its rate base in its rates until it files a new rate case and a pipeline's
rate of return is subject to change every time it files a new rate case.
Consequently, there can also be no assurance that the rate of return a pipeline
is permitted by the FERC to earn on its rate base in the future will be equal to
the returns effectively earned in the past. Thus, the changes in rate base
projected above do not necessarily equate to an expected change in earnings.
GAS SALES AND SUPPLIES
As a result of its restructuring pursuant to FERC directive, Southern
terminated or renegotiated to market pricing substantially all of its gas supply
contracts through which it had historically obtained its long-term gas supply.
At December 31, 1998, Southern had five remaining long-term gas supply
contracts. Pending the termination or expiration of the few remaining supply
contracts, Southern's remaining gas supply is being sold on a month-to-month
basis. Except for such sales, Southern's participation in gas supply activities
will be limited to the purchase and sale of volumes of gas from time to time as
may be required for system management purposes.
RATE AND REGULATORY PROCEEDINGS
Periodically, Southern and its subsidiaries and Florida Gas 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 and
its subsidiaries and Florida Gas provide reserves relating to such amounts
collected subject to refund, as appropriate, and make refunds upon establishment
of the final rates.
At December 31, 1998, Southern's currently effective rates are established
by a settlement that was approved by a FERC order issued in 1995, which order is
now final and nonappealable. All of Southern's customers are parties to the
settlement. Under the terms of the settlement, Southern is required to file a
new rate case no later than September 1, 1999, to become effective, after normal
suspension by the FERC, by March 1, 2000.
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<PAGE> 21
The current effective rates of Florida Gas were established by an
uncontested settlement that was approved by the FERC in September 1997. The
settlement provides that, except in certain limited circumstances, Florida Gas
will not file a general rate case to be effective prior to October 1, 2000, but
it must file a new rate case no later than October 1, 2001.
STORAGE FIELDS
Southern owns and operates Muldon Storage Field ("Muldon"), a large
underground natural gas storage field in Mississippi connected to its pipeline
system. The certificated working storage capacity of Muldon is 31 Bcf of gas.
Southern and Tennessee Gas Pipeline Company ("Tennessee"), a subsidiary of El
Paso, each owns 50-percent of the Bear Creek Storage Field ("Bear Creek"), an
underground natural gas storage field located in Louisiana. Southern operates
Bear Creek, which provides storage service to Southern, Tennessee, and their
customers. Bear Creek has a total certificated working storage capacity of 65
Bcf of gas, half of which is committed to Southern.
COMPETITION AND CURRENT BUSINESS CONDITIONS
The natural gas transmission industry, although regulated, is very
competitive. Customers purchase gas supply from producers and gas marketing
companies in unregulated transactions and contract with Southern for
transportation and storage services to deliver such gas supply to their markets.
Southern's three largest customers are each able to obtain a significant portion
of their natural gas requirements through transportation by other pipelines. In
addition, Southern competes with several pipelines for the transportation and
storage business of many of its other customers. The competition with such
pipelines is intense, and Southern and Florida Gas must at times discount their
transportation rates in order to maintain market share and revenues. Recently,
two other pipeline companies announced their intent to create new pipeline
systems to serve Florida markets.
Natural gas is sold in competition principally with fuel oil, coal,
liquefied petroleum gases, electricity, and heavy crude oil. An important
consideration in the markets of Southern and Florida Gas is the ability of
natural gas to compete with alternate fuels, which are fuels to which a
potential end user of gas may switch depending on the price of the fuel and
other factors. Residual fuel oil, the principal competitive alternate fuel in
the market area of Southern and Florida Gas, has been at certain times in the
past, and may be at times in the future, priced at or below the comparable price
of natural gas in industrial and electric generation markets. Some parts of
Southern's market area are also served by one or more other pipeline systems
that can provide transportation service in competition with Southern.
As described above, for most pipelines the FERC requires the SFV rate
design that permits pipelines to recover substantially all of their fixed costs,
a return on equity, and income taxes in the capacity reservation component of
their rates. The firm transportation customers of Southern and Florida Gas (with
the exception of certain small customers) must pay these reservation charges
regardless of the volumes shipped. Accordingly, the SFV rate design should
result in relative stability in the revenues, earnings, and cash flows of
interstate pipelines, including Southern and Florida Gas, compared to other rate
design methodologies. This is particularly true at Florida Gas, which faces
intense competition in the Florida market from residual fuel oil that affects
the volumes of gas it transports. There can be no assurance, however, that the
existing customers of Southern or Florida Gas will extend their firm service
agreements at the same levels when their current service agreements expire. As
described above, Destin's rates are designed to recover all of its fixed and
variable costs, including a return on equity and income taxes, through a
volumetric rate design. In order to receive firm service at a volumetric rate,
Destin's customers must commit to Destin all of their gas production from
certain specified areas. Sea Robin's customers principally subscribe for
interruptible service, so its revenues are highly dependent on the volumes of
gas it transports.
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SONAT PIPELINE SYSTEMS
(SONAT PIPELINE SYSTEMS)
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<PAGE> 23
ENERGY SERVICES
SONAT ENERGY SERVICES COMPANY
Sonat Energy Services, which is a wholly owned subsidiary of Sonat, acts as
a holding company for Sonat's companies engaged in natural gas and electric
power marketing, power generation, and intrastate natural gas transmission.
SONAT MARKETING COMPANY L.P. Sonat Marketing's principal offices are in
Birmingham, Alabama and Houston, Texas. It also has regional offices in Tyler,
Texas, Oklahoma City, Oklahoma, and Atlanta, Georgia. It purchases natural gas
principally from gas producers and other marketing companies and resells the gas
to industrial and commercial users, gas distribution companies, gas pipelines,
and other marketing companies throughout much of the United States, principally
the area east of the Rocky Mountains. Sonat Marketing also offers a variety of
risk-management, transportation, and storage services to its customers.
Sonat Marketing's total natural gas trading volumes rose sharply in 1998 as
financial volumes more than doubled. In response to the increasing price risk
management requirements of its customers, Sonat Marketing makes a market in
financial instruments used to hedge gas prices and regional pricing differences
("basis differences"). Physical trading volumes declined by approximately five
percent in 1998 reflecting primarily movement of certain basis transactions from
physical to financial markets. Sonat Marketing sold 1,225 Bcf of natural gas in
1998 compared to sales of 1,288 Bcf in 1997. Its daily physical natural gas
sales volumes were 3.4 Bcf per day at the end of 1998 compared to 4.2 Bcf per
day at the end of 1997. Its daily derivative settlement volumes were 18.5 Bcf
per day at the end of 1998 compared to 6.8 Bcf per day at the end of 1997. A map
showing Sonat Marketing's areas of operations appears on page I-23.
Sonat Marketing purchases at index-based prices all of the natural gas
production of Exploration that is not sold under pre-existing term dedications.
Sonat Marketing remarkets this gas as part of its marketing operations. Sonat
Marketing uses derivative financial instruments as a market maker to manage the
risks associated with its purchase and sale activities and to hedge the price
volatility associated with Exploration's natural gas and oil production. See
Part II of this report in Notes 1 and 4 of the Notes to Consolidated Financial
Statements and in Management's Discussion and Analysis of Financial Condition
and Results of Operations under the caption "Market Risk" for additional
information regarding its derivatives activities.
SONAT PUBLIC SERVICE COMPANY L.L.C. Sonat Public Service Company L.L.C.
("Sonat Public Service") was formed in late 1996 as a joint venture of Sonat
Marketing and PSNC Production Corporation, a wholly owned subsidiary of Public
Service Company of North Carolina, Inc., an unaffiliated company. Sonat Public
Service, which is headquartered in Gastonia, North Carolina, markets natural gas
and related services to small industrial and large commercial customers
throughout the Mid-Atlantic region, including the District of Columbia and the
states of North Carolina, South Carolina, Maryland, and Virginia. In addition,
Sonat Public Service provides gas supply management services to Public Service
Company of North Carolina as well as municipalities in the Mid-Atlantic region.
Sonat Public Service sold 30 Bcf of natural gas in 1998 compared to sales of 17
Bcf in 1997.
UNICOM GAS SERVICES LLC. Unicom Gas Services LLC ("Unicom Gas Services")
was formed in August 1997 as a joint venture of Sonat Marketing and Unicom
Energy Services Inc., a wholly owned subsidiary of Unicom Corporation, an
unaffiliated company. Unicom Gas Services, which is headquartered in Chicago,
Illinois, markets natural gas and related services to industrial and commercial
customers in the Midwest region. Unicom Gas Services sold 14 Bcf of natural gas
in 1998 compared to sales of 0.2 Bcf in 1997.
STONE & WEBSTER SONAT ENERGY RESOURCES LLC. Stone & Webster Sonat Energy
Resources LLC ("S&W Sonat") was formed in September 1998 as a joint venture of
Sonat Marketing and Stone & Webster Engineers & Constructors, Inc., a wholly
owned subsidiary of Stone & Webster, Inc., an unaffiliated company. S&W Sonat,
which is headquartered in Boston, Massachusetts, focuses on providing large
industrial, commercial, and governmental customers in North America with a
variety of bundled energy management services. These services include building
or upgrading power and steam generation equipment, commodity
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<PAGE> 24
supply (natural gas, fossil fuels, and electricity), risk management, metering,
billing, and operations and maintenance, as well as selected asset ownership.
SONAT POWER MARKETING L.P. Power Marketing, which is headquartered in
Birmingham, Alabama, markets electric power throughout the area of the United
States east of the Rocky Mountains. Significant changes are underway in the
electric industry that create new opportunities for marketing companies. The
FERC has initiated, and more than half of the states are considering, regulatory
changes to promote competition and give purchasers of electricity choices other
than their traditional utilities, similar to the unbundling that occurred in the
natural gas industry. Power Marketing was created to take advantage of these
opportunities through the expected growth of wholesale power marketing. A map
showing Power Marketing's areas of operations appears on page I-23.
Power Marketing continued to grow during 1998. Its sales volumes increased
from 8.8 million megawatt hours in 1997 to 10.5 million megawatt hours in 1998.
It became profitable in 1998 as both sales volumes and margins increased over
1997 levels. Its financial results also benefited from volatility in electricity
prices.
Power Marketing utilizes derivative instruments in managing commodity price
risk. See Part II of this report in Notes 1 and 4 of the Notes to Consolidated
Financial Statements and in Management's Discussion and Analysis of Financial
Condition and Results of Operations under the caption "Market Risk" for
additional information regarding its derivatives activities.
SONAT POWER INC. Sonat Power Inc. ("Sonat Power") is a wholly owned
subsidiary of Sonat Energy Services. In February 1998 Sonat Mid-Georgia L.L.C.
("Sonat Mid-Georgia"), a wholly owned subsidiary of Sonat Power, acquired a
fifty-percent limited partnership interest in Mid-Georgia Cogen L.P.
("Mid-Georgia Cogen"), which owns and operates an approximate 300-megawatt
electric power plant in Georgia. The remaining fifty percent is owned by NCP
Perry Incorporated, as a limited partner, and NCP Houston Power Incorporated, as
both a limited and a general partner, both of which are wholly owned
subsidiaries of GPU, Inc., an unaffiliated company. Sonat Power's equity
investment is approximately $28 million as of December 31, 1998. The plant began
commercial operation in June 1998. This project is supported by a long-term
power sales agreement as well as a long-term fuel purchase agreement.
Sonat Power is also the joint owner, with The AES Corporation, an
unaffiliated company, of a project to construct a natural gas-fueled power plant
near San Francisco, California. Because of regulatory and other developments,
the current outlook for and timing of this project are uncertain.
WEST GEORGIA GENERATING COMPANY L.P. West Georgia Generating Company L.P.
("West Georgia"), formerly Cataula Generating Company, L.P., is a wholly owned
subsidiary of Sonat Energy Services. It was acquired in September 1998 from
affiliates of U.S. Generating Company, an unaffiliated company. At that time it
acquired the right to develop a 680-megawatt peaking plant in western Georgia
and an associated contract to sell a significant portion of the plant's output
to Georgia Power Company ("Georgia Power"). This plant is expected to have a
total capital cost of approximately $230 million, approximately $26 million of
which had been expended through December 31, 1998. West Georgia originally
planned to develop the plant in Harris County, Georgia, but as a result of the
revocation by the Harris County Board of Commissioners of the previously issued
special-use permit, West Georgia will develop the plant in Upson County,
Georgia. If the project experiences additional delays in permitting or
construction, it could result in an inability to have the plant available in
time to meet its obligation to make 205 megawatts of electric capacity available
to Georgia Power beginning June 1, 2000. In that event, West Georgia would be
required to source electric capacity from the market at prices potentially in
excess of the prices received from Georgia Power. West Georgia anticipates,
however, that it will begin commercial operations in time to meet its
contractual commitments to Georgia Power. See Note 10 of the Notes to
Consolidated Financial Statements contained in Part II of this report.
SONAT INTRASTATE-ALABAMA INC. 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
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<PAGE> 25
Southern. SIA's throughput in 1998, which includes both transportation and
sales, was approximately 52 Bcf of natural gas compared to 42 Bcf in 1997.
SONAT POWER SYSTEMS INC.
Sonat Power Systems Inc. ("Sonat Power Systems"), a wholly owned subsidiary
of Sonat, formed a strategic alliance in 1997 with AlliedSignal Power Systems
Inc. ("AlliedSignal"), a wholly owned subsidiary of AlliedSignal Inc., an
unaffiliated company, to market and support AlliedSignal's TurboGenerator(TM)
products. The TurboGenerator(TM) unit is a small, self-contained 75-kilowatt
power source fueled by natural gas. The size is ideal for smaller commercial
establishments, but these units can also be used together to meet the power
needs for larger applications. Through this alliance, Sonat Power Systems is the
exclusive distributor of the TurboGenerator(TM) unit in 13 Southern states from
Texas to Maryland, plus the District of Columbia. In December 1998 Sonat Power
Systems acquired an option from AlliedSignal to become the exclusive distributor
in Mexico of TurboGenerator(TM) units outside the oil and gas industry.
During 1998 AlliedSignal tested and further enhanced the TurboGenerator(TM)
unit. Sonat Power Systems anticipates placing a number of prototype
TurboGenerator(TM) units with significant regional customers in the third
quarter of 1999. AlliedSignal expects to begin commercial production in mid-1999
and Sonat Power Systems' sales could increase to 50 units per month after the
commencement of commercial production. The success of Sonat Power Systems will
substantially depend on the ability of AlliedSignal to produce a commercially
viable TurboGenerator(TM) unit and the market demand for such units.
COMPETITION AND CURRENT BUSINESS CONDITIONS
Competition in the gas marketing and power marketing businesses is intense
and is expected to remain so due to the large number of industry participants,
although there is a trend toward consolidation in the gas marketing industry.
By acquiring an interest in an electric power plant, acquiring the rights
to develop another power plant, and forming a new energy marketing joint
venture, Sonat Energy Services continued to expand the scope of its businesses
in 1998. In addition, total volumes increased at both Sonat Marketing and Power
Marketing. Power marketing margins improved substantially as increasingly open
markets and a volatile summer environment created good opportunities. Margins in
the natural gas marketing business remained low, however, as declining prices
and increased storage inventories created a difficult environment. In addition,
Sonat Marketing took charges in order to reconcile gas imbalance and other
accounts with various pipelines, storage facilities, and customers. At Sonat
Energy Services earnings before interest and taxes declined from $7 million in
1997 to a loss of $7 million in 1998. Both Sonat Marketing and Power Marketing
expect margins to remain under intense pressure in 1999.
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<PAGE> 26
SONAT ENERGY SERVICES
AREAS OF OPERATIONS
(AREA OF OPERATIONS)
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<PAGE> 27
GOVERNMENTAL REGULATION
EXPLORATION AND PRODUCTION
The federal government and the states in which Exploration has oil and gas
production and owns interests in producing properties regulate various matters
affecting Exploration's oil and gas production, including the drilling and
spacing of wells, conservation, forced pooling, and protection of correlative
rights among interest owners.
The operations of Exploration under federal oil and gas leases are subject
to certain statutes and regulations of the U.S. Department of the Interior that
currently impose liability upon lessees for the cost of clean-up of pollution
resulting from their operations. Royalty obligations on all federal leases are
regulated by the MMS, which has promulgated valuation guidelines for the payment
of royalty by producers. To the extent the MMS finally determines valuation
based on a method other than actual sales proceeds received, producers could be
required to pay royalties at a rate higher than actual sales proceeds.
Other federal, state, and local laws and regulations relating to the
protection of the environment may affect Exploration's oil and gas operations,
both directly and indirectly, through their effect on the construction and
operation of facilities, drilling operations, production, or the delay or
prevention of future offshore lease sales. Sonat maintains substantial insurance
on behalf of Exploration for oil pollution liability. Exploration is also
subject to various governmental safety regulations in the jurisdictions in which
it operates.
NATURAL GAS TRANSMISSION
Southern, its interstate transmission subsidiaries, and Florida Gas are
subject to regulation by the FERC under the NGA and the NGPA.
The NGA grants to the FERC authority to regulate the construction and
operation of pipeline and related facilities utilized in the transportation and
sale of natural gas in interstate commerce, including the extension,
enlargement, or abandonment of such facilities. Southern, its interstate
transmission subsidiaries, and Florida Gas hold required certificates of public
convenience and necessity issued by the FERC authorizing them to construct and
operate all pipelines, facilities, and properties now in operation for which
certificates are required, and to transport and sell natural gas in interstate
commerce.
The FERC regulates rates for the transportation of natural gas in
interstate commerce. The maximum transportation rates for gas delivered by SIA
into interstate commerce are also regulated by the FERC. As necessary, Southern,
its interstate transmission subsidiaries, Florida Gas, and SIA file with the
FERC applications for changes in their transportation rates and charges designed
to allow them to recover fully their costs of providing such service to their
customers, including a reasonable rate of return on their investment in
facilities. These rates are normally allowed to become effective, subject to
refund, until such time as the FERC rules on the actual level of rates. See
"Rate and Regulatory Proceedings" above.
In July 1998 FERC issued a Notice of Proposed Rulemaking ("NOPR") in which
it seeks comments on a wide range of initiatives to change the manner in which
short-term (less than one year) transportation markets are regulated. Among
other things, the NOPR proposes the following: (i) removing the price cap for
the short-term capacity market; (ii) establishing procedures to make pipeline
and shipper-owned capacity more comparable; (iii) auctioning all available
short-term pipeline capacity on a daily basis with the pipeline unable to set a
reserve price above variable costs; (iv) changing policies on pipeline
penalties, nomination procedures, and services; (v) permitting the negotiation
of terms and conditions of service; and (vi) potentially modifying the
procedures for certificating new pipeline construction. Also in July 1998 FERC
issued a Notice of Inquiry ("NOI") seeking comments on FERC's policy for pricing
long-term capacity. Comments on the NOPR and NOI are due in April 1999. It is
unclear when and what action, if any, FERC will take in connection with the NOPR
and NOI and the comments received in response to them, but the resulting
regulatory changes could have a significant impact on the businesses of Southern
and its natural gas transmission subsidiaries and Florida Gas.
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<PAGE> 28
Southern, its natural gas transmission subsidiaries, Florida Gas, and SIA
are subject to the Natural Gas Pipeline Safety Act of 1968, as amended, which
regulates pipeline and LNG plant safety requirements, and to the National
Environmental Policy Act and other environmental legislation. Each of them has a
continuing program of inspection designed to keep all of their facilities in
compliance with pollution control and pipeline safety requirements and believe
that they are in substantial compliance with applicable requirements. Southern's
capital expenditures to comply with environmental and pipeline safety
regulations were approximately $23 million in 1998 and $23 million in 1997.
Southern anticipates that such expenditures will be approximately $4 million in
1999.
ENERGY SERVICES
Gas sold by Sonat Marketing and other natural gas marketing companies is
not regulated by the FERC. Power Marketing, Mid-Georgia Cogen, and West Georgia
are subject to the regulatory jurisdiction of the FERC under the Federal Power
Act with respect to rates, terms, and conditions of service, and certain
reporting requirements, including sales in the wholesale power market. Each of
those companies sells or will sell wholesale power under its market-based rate
schedule, which has been approved by and is on file with the FERC.
ENVIRONMENTAL MATTERS
Various environmental matters relating to, or that could affect, Sonat or
one or more of its subsidiaries are described in Part II of this report in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Environmental Issues," which is incorporated
herein by reference.
YEAR 2000 PROJECT
The year 2000 issues as they relate to Sonat are discussed in Part II of
this report in Management's Discussion and Analysis of Financial Condition and
Results of Operations under the caption "Year 2000 Project," which is
incorporated herein by reference.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This report, including the information incorporated by reference herein,
contains 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 may differ materially from those 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 internal 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.
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<PAGE> 29
ITEM 2. PROPERTIES
A description of Sonat's and its subsidiaries' principal properties is
included under Item 1. Business above and is hereby incorporated by reference
herein.
ITEM 3. LEGAL PROCEEDINGS
For information regarding various environmental matters relating to, or
that could affect, Sonat or one or more of its subsidiaries, see Management's
Discussion and Analysis of Financial Condition and Results of Operations in Part
II of this report under the caption "Environmental Issues."
Aline Moye v. Exxon Corporation, et al., CV No. 98-20, is a class action
lawsuit filed in state court in Monroe County, Alabama in January 1998 on behalf
of royalty owners in the Big Escambia Creek Gas Field ("Field") in Alabama,
against Exxon Corporation, a gas producer in the Field, Southern, which
purchased or transported gas from the Field, and five other named defendants,
alleging that the methods used by the defendants to measure the heating content
and volume of natural gas produced from the Field have caused the producer(s) of
this gas to underpay royalties owed to the royalty owners. The complaint seeks
recovery of actual damages based upon the allegedly unpaid royalties as well as
punitive damages, the amount of which are not specified in the complaint.
Although it cannot predict the outcome, Southern believes that the methods of
measurement were appropriate and intends to defend the suit vigorously.
United States of America ex rel. Jack J. Grynberg v. Southern Natural Gas
Company, et al., U.S. District Court, E.D. La., CV No. 97-2087. Southern
received a letter from the United States Department of Justice on August 31,
1998, enclosing a copy of a complaint that was filed, but not served, by Jack J.
Grynberg in 1997 against Southern, its wholly owned subsidiary, Sea Robin, and a
number of affiliated companies in the United States District Court for the
Eastern District of Louisiana. Grynberg filed the suit on behalf of the United
States Government under 31 U.S.C. sec.3729, et seq., commonly known as the False
Claims Act, alleging that the methods used by the defendants to measure the
heating content and volume of gas purchased or transported by them have caused
producers of natural gas to underpay royalties owed by the producers to the
United States. The complaint also alleges that the defendants deprived the
United States of appropriate royalties by selling gas to affiliated companies at
artificially low prices, which were the basis for payment of royalties to the
United States, and that the affiliates resold the gas to third parties at higher
prices. The complaint seeks recovery of actual damages based upon the unpaid
royalties owed, the amount of which is not specified in the complaint. Such
damages may be trebled under the False Claims Act. The Complaint is similar to
76 other complaints that Grynberg has filed in various federal district courts
against virtually every firm that has purchased gas from federal leases in the
past ten years.
The complaint makes allegations similar to those in a 1995 complaint that
Grynberg filed under the False Claims Act against Southern, Sea Robin, and 68
other defendants in the United States District Court for the District of
Columbia, which was dismissed on procedural grounds. The Justice Department has
requested Southern and the defendants in the other 76 cases to address the
allegations in the complaints in order for the Justice Department to determine
whether to intervene and take over the cases as provided by the False Claims
Act, which Southern and the other defendants have done. Southern believes that
its and Sea Robin's measurement practices conformed to Department of Interior
regulations, industry standards, and the terms of the applicable tariffs, which
are filed with the FERC. Southern also believes that the prices its affiliates
paid were equal to the prices paid in comparable arms-length transactions and
are in compliance with applicable Department of Interior regulations. As a
result, Southern believes that it and its affiliates have meritorious defenses
to the complaint and intends to defend the suit vigorously whenever it is served
and the suit goes forward.
Southern Natural Gas Company v. O. D. Chafin, et al., Circuit Court of
Cullman County, CV No. 96-217. Southern initiated a proceeding in 1996 to obtain
a right-of-entry to the subject property in order to perform pipeline surveys.
In September 1997, Chafin, et al., filed a class-action counterclaim against
Southern that seeks (i) to keep any condemnation action in state court (Southern
had filed condemnation actions in federal court), (ii) to enjoin construction of
the North Alabama pipeline project, and (iii) unspecified compensatory and
punitive damages. Chafin, et al. also filed a motion for conditional class
certification, which
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<PAGE> 30
the Court granted ex parte. In October 1997, Southern filed to dismiss the
counterclaim and to reconsider the class certification. The court did not rule
on Southern's motion, but placed the case on its administrative (inactive)
docket, where it remains. Southern believes that it is procedurally incorrect
for a counterclaim to be filed to a right-of-entry action and that Southern has
meritorious defenses to the counterclaim and class certification. Since the
filing of the motion for conditional class certification, the Alabama Supreme
Court has decided several cases that would prevent the type of ex parte action
taken by the Cullman County Circuit Court.
Sonat and its subsidiaries are involved in a number of other lawsuits, all
of which have arisen in the ordinary course of business. Sonat does not believe
that any ultimate liability resulting from any of these other pending lawsuits
will have a material adverse effect on it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Sonat did not submit any matter to a vote of its security holders during
the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER OFFICE AGE
- ------- ------ ---
<S> <C> <C>
Ronald L. Kuehn, Jr........................ Chairman of the Board, President, and Chief
Executive Officer........................ 63
James A. Rubright.......................... Executive Vice President................... 52
William A. Smith........................... Executive Vice President and General
Counsel.................................. 54
Richard B. Bates........................... Senior Vice President...................... 45
John B. Holmes, Jr......................... Senior Vice President...................... 51
James E. Moylan, Jr........................ Senior Vice President and Chief Financial
Officer.................................. 48
Thomas W. Barker, Jr....................... Vice President-Finance..................... 54
Beverley T. Krannich....................... Vice President-Human Resources and
Secretary................................ 48
John M. Musgrave........................... Vice President-Planning and Treasurer...... 48
</TABLE>
There is no family relationship between any of the above-named executive
officers.
The officers of Sonat are elected annually by the Board of Directors. The
identification of an individual as an executive officer in this report does not
constitute a determination by Sonat or its Board of Directors that such
individual is an officer of Sonat for purposes of Section 16 of the Securities
Exchange Act of 1934.
Ronald L. Kuehn, Jr. was elected Chairman of the Board of Sonat effective
March 28, 1986. Mr. Kuehn has served as Director of Sonat since April 30, 1981,
as President of Sonat since January 1, 1982, and as Chief Executive Officer of
Sonat since June 1, 1984, and currently serves in those capacities. Mr. Kuehn
also serves as Director of various Sonat subsidiaries.
James A. Rubright was elected Executive Vice President of Sonat effective
May 1, 1998, and currently serves in that capacity. Mr. Rubright has executive
oversight responsibility for Sonat's natural gas transmission businesses and
Sonat Energy Services. During the past five years Mr. Rubright has served as an
officer of Southern, Sonat Exploration, and Sonat Energy Services.
William A. Smith was elected Executive Vice President of Sonat effective
March 1, 1991, and General Counsel effective July 1, 1997, and currently serves
in those capacities. Mr. Smith also serves as Executive Vice President and
General Counsel of Exploration and Sonat Energy Services.
Richard B. Bates was elected Senior Vice President of Sonat effective May
1, 1995, and currently serves in that capacity. Mr. Bates has served as
President of Sonat Energy Services and Sonat Marketing since January 1, 1994,
Power Marketing and Sonat Power since June 1, 1996, and Sonat Power Systems
since September 23, 1997.
I-27
<PAGE> 31
John B. Holmes, Jr. was elected Senior Vice President of Sonat effective
May 1, 1998, and currently serves in that capacity. Mr. Holmes also serves as
President of Exploration. Prior to his election as Senior Vice President, Mr.
Holmes was President of Zilkha.
James E. Moylan, Jr. was elected Chief Financial Officer of Sonat effective
July 1, 1997, and Senior Vice President of Sonat effective May 1, 1995, and
currently serves in those capacities. Mr. Moylan has served as Senior Vice
President and Chief Financial Officer of Exploration and Executive Vice
President and Chief Financial Officer of Sonat Energy Services since January 1,
1999.
Thomas W. Barker, Jr. was elected Vice President-Finance of Sonat effective
June 15, 1984, and currently serves in that capacity. Mr. Barker also serves as
Vice President-Finance of Exploration and Southern.
Beverley T. Krannich was elected Vice President-Human Resources of Sonat
effective June 1, 1987, and Secretary of Sonat effective May 11, 1984, and
currently serves in those capacities. Ms. Krannich also serves as Vice
President-Human Resources of Exploration and Southern.
John M. Musgrave was elected Vice President-Planning of Sonat effective May
1, 1998, and Treasurer of Sonat effective July 1, 1997, and currently serves in
those capacities. Mr. Musgrave also serves as Treasurer of Southern and Sonat
Energy Services and Assistant Treasurer of Exploration. During the past five
years Mr. Musgrave has served as an officer of Sonat, Exploration, Southern, and
Sonat Energy Services.
I-28
<PAGE> 32
PART II
<TABLE>
<CAPTION>
ITEM PAGE
---- -----
<S> <C> <C>
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... II-33
Item 6. Selected Financial Data..................................... II-44
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. II-2
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... II-10
Item 8. Financial Statements and Supplementary Data................. II-16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-45
</TABLE>
---------------------
The financial data following on pages II-2 through II-44 is reproduced
from, and the Table of Contents below is taken from, the Sonat Inc. Annual
Report to Stockholders for 1998. An index to the financial statements and
financial statement schedules may be found under Item 14. "EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K" in Part IV of this report.
---------------------
FINANCIAL INFORMATION CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Report of Management........................................ 36
Report of Ernst & Young LLP, Independent Auditors........... 37
Consolidated Financial Statements
Consolidated Balance Sheets............................ 38
Consolidated Statements of Operations.................. 40
Consolidated Statements of Changes in Stockholders'
Equity................................................ 41
Consolidated Statements of Cash Flows.................. 42
Notes to Consolidated Financial Statements.................. 43
Selected Consolidated Financial Data........................ 65
</TABLE>
II-1
<PAGE> 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sonat Inc. and Subsidiaries
PROPOSED MERGER WITH EL PASO ENERGY CORPORATION
On March 13, 1999, Sonat and El Paso Energy Corporation ("El Paso") entered
into an Agreement and Plan of Merger (the "Merger Agreement"), providing for,
among other things, the merger of El Paso and the Company. Under the terms of
the Merger Agreement, the Company's shareholders will receive one share of El
Paso common stock, par value $3.00 per share ("El Paso Common Stock"), for each
share of common stock, par value $1.00 per share, of the Company ("Company
Common Stock"), they own. The merger is subject to certain customary conditions,
including, among others, approval by the stockholders of the Company and receipt
of certain required government approvals. In the event El Paso stockholder
approval for the issuance of El Paso Common Stock in the merger is not obtained,
El Paso has agreed to issue an amount of El Paso Common Stock not to exceed, in
the aggregate, 19.9 percent of the outstanding El Paso Common Stock, with the
balance of the merger consideration to be paid in the form of non-convertible
long-term preferred stock (the "Preferred Stock"). The Preferred Stock will bear
a dividend rate designed to cause the stock to have a value equal to the greater
of $32 and the value of the El Paso Common Stock as of the time of the Company's
shareholder vote, subject to a cap of $44.50. The Preferred Stock will be
redeemable in 21 years and will not be convertible.
In connection with the Merger Agreement, on March 13, 1999, the Company and
El Paso also entered into cross option agreements, pursuant to which, among
other things, (i) El Paso has been granted an option to purchase up to 19.9
percent of the Company Common Stock, exercisable if the Merger Agreement is
terminated under certain circumstances as set forth therein and (ii) the Company
has been granted an option to purchase up to 19.9 percent of the El Paso Common
Stock, exercisable if the Merger Agreement is terminated under certain
circumstances as set forth therein.
RESULTS OF OPERATIONS
Earnings Before Interest and Taxes
Business segment operating results for Sonat Inc. and its subsidiaries (the
Company) are presented in the table below. The table also shows significant
unusual items in 1998 and 1997 that affect earnings before interest and taxes
(EBIT) and net income comparisons. Each significant unusual item is discussed in
the respective segment discussions in the following pages. The table is
presented because management believes this information enhances the analysis of
results of operations.
<TABLE>
<CAPTION>
(In Millions)
--------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) Before Interest
and Taxes:
Exploration and Production $ (936.2) $ 181.0 $ 252.8
Natural Gas Transmission 233.3 225.9 204.8
Energy Services (6.8) 7.1 5.8
Other 7.7 6.9 4.5
- ---------------------------------------------------------------------------
(702.0) 420.9 467.9
- ---------------------------------------------------------------------------
Unusual Items (Expense)
Income Included Above:
Exploration and Production
Ceiling test charges (1,035.2) -- --
Restructuring costs (15.0) -- --
Merger expenses -- (50.4) --
- ---------------------------------------------------------------------------
(1,050.2) (50.4) --
Earnings Before Interest
and Taxes, Excluding
Unusual Items $ 348.2 $ 471.3 $ 467.9
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Millions,
Except Per-Share Amounts)
--------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) As Reported $(530.5) $218.0 $255.8
- ---------------------------------------------------------------------------
Unusual Items (Expense)
Income Included Above:
Exploration and Production
Ceiling test charges (672.9) -- --
Restructuring costs (9.7) -- --
Merger expenses -- (32.7) --
- ---------------------------------------------------------------------------
(682.6) (32.7) --
- ---------------------------------------------------------------------------
Net Income Excluding
Unusual Items $ 152.1 $250.7 $255.8
===========================================================================
Earnings (Loss) Per Share of
Common Stock $ (4.82) $ 1.98 $ 2.32
===========================================================================
Earnings (Loss) Per Share of
Common Stock -
Assuming Dilution $ (4.82) $ 1.95 $ 2.29
===========================================================================
Earnings Per Share of Common
Stock Excluding Unusual Items $ 1.38 $ 2.28 $ 2.32
===========================================================================
Earnings Per Share of Common
Stock Excluding Unusual Items -
Assuming Dilution $ 1.38 $ 2.24 $ 2.29
===========================================================================
</TABLE>
23
II-2
<PAGE> 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
EXPLORATION AND PRODUCTION
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas in the United States through
Sonat Exploration Company and Sonat Exploration GOM (Sonat Exploration). Most of
Sonat Exploration's natural gas production is sold to Sonat Marketing Company
L.P. (Sonat Marketing), the Company's majority-owned affiliate operating in the
Energy Services segment.
In January 1998, the Company completed its merger with Zilkha Energy
Company (see Note 3 of the Notes to Consolidated Financial Statements) and 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
Consolidated Financial Statements). The financial statements and other
information for all periods presented have been restated to reflect the results
of the merger with Zilkha Energy Company, accounted for on a
pooling-of-interests basis, and the change in accounting.
Following the merger with Zilkha Energy, the Company undertook a
comprehensive review of its exploration and production business to improve its
overall financial performance. As a consequence, a major restructuring program
was announced in April 1998. Program steps, which have been completed, included
the sale of certain oil and gas properties, consolidation of certain business
units and a substantial work force reduction. In 1998, oil and gas properties
sold, including the Company's Austin Chalk properties, had proved reserves of
approximately 430 billion cubic feet of natural gas equivalent (Bcfe) and daily
net production of approximately 170 million cubic feet (MMcf) of natural gas
equivalent. Business units were consolidated from seven to three. This action,
together with related staff reductions, reduced Sonat Exploration's work force
by approximately 220 people, or one-fourth.
In addition, the Company reviewed all of its oil and natural gas
reserves in 1998. Proved reserves were revised downward by a net 426 Bcfe from
year-end 1997 proved reserves.
During 1998, 40 onshore and offshore exploratory wells were completed,
19 of which were successful. Sonat Exploration had very good drilling results in
the Gulf of Mexico during the fourth quarter, as it was successful on all four
of the exploratory wells drilled. In response to significantly lower day rates
for offshore drilling rigs, Sonat Exploration has increased its Gulf of Mexico
activity substantially to a five- to six-rig program, from the one- to two-rig
program that was maintained for most of 1998. Proved reserves at
December 31,1998, were 1.6 trillion cubic feet of natural gas equivalent.
Exploration and Production
<TABLE>
<CAPTION>
(In Millions)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 535.2 $755.1 $730.3
- --------------------------------------------------------------------------------
Costs and Expenses:
Operating and maintenance 72.7 82.6 77.3
General and administrative 35.0 107.7 39.9
Depreciation, depletion and
amortization 291.6 341.3 332.1
Ceiling test charges 1,035.2 -- --
Restructuring costs 15.0 -- --
Taxes and other 24.6 45.7 28.3
- --------------------------------------------------------------------------------
1,474.1 577.3 477.6
- --------------------------------------------------------------------------------
Operating Income (Loss) (938.9) 177.8 252.7
Other Income 2.7 3.2 .1
- --------------------------------------------------------------------------------
Earnings (Loss) Before Interest
and Taxes as Reported (936.2) 181.0 252.8
Unusual Items 1,050.2 50.4 --
- --------------------------------------------------------------------------------
Earnings Before Interest and Taxes
Excluding Unusual Items $ 114.0 $231.4 $252.8
================================================================================
Proved Reserves (Bcfe) 1,601 2,598 2,402
Net Sales Volumes:
Gas (Bcf) 226 266 268
Oil and condensate (MBbls) 6,560 6,760 6,817
Natural gas liquids (MBbls) 1,767 1,805 2,161
================================================================================
Average Sales Prices:
Gas ($/Mcf) $ 1.95 $ 2.26 $ 2.19
Oil and condensate ($/Bbl) 13.14 19.57 18.48
Natural gas liquids ($/Bbl) 8.83 11.90 12.03
================================================================================
</TABLE>
1998 VERSUS 1997. EBIT decreased $117.4 million after excluding the
recognition of ceiling test charges of $1,035.2 million in 1998 (see Notes 2 and
16 of the Notes to Consolidated Financial Statements), $15.0 million of
restructuring costs in 1998 and $50.4 million of expenses in 1997 associated
with Sonat's merger with Zilkha Energy Company (see Note 3 of the Notes to
Consolidated Financial Statements). The decrease in EBIT was primarily due to
lower energy prices and production volumes, partly offset by lower costs and
expenses.
Natural gas production decreased to 226 billion cubic feet (Bcf) from
266 Bcf in 1997. Average realized natural gas prices decreased 14 percent to
$1.95 per thousand cubic feet (Mcf) in 1998 from $2.26 per Mcf in 1997. Realized
oil and condensate prices decreased 33 percent to an average of $13.14 per
barrel from $19.57 per barrel in 1997.
24
II-3
<PAGE> 35
Costs and expenses were $103.0 million lower after excluding the
unusual items in 1998 and 1997. General and administrative expense decreased 48
percent primarily as a result of executive compensation expense for Sonat
Exploration GOM, which was included in the 1997 period. Depreciation, depletion
and amortization expense decreased 15 percent due to property sales and lower
volumes. Taxes and other expenses, after excluding merger-related expenses in
1997, decreased 30 percent due to a contract termination fee incurred by Sonat
Exploration GOM in 1997 and lower production related severance taxes.
1997 VERSUS 1996. EBIT decreased $21.4 million, after excluding
expenses of $50.4 million in 1997 associated with Sonat's merger with Zilkha
Energy Company. The decrease in EBIT was attributable to higher operating
expenses partially offset by increased revenues resulting from higher gas and
oil and condensate prices. Natural gas prices increased 3 percent to $2.26 per
Mcf and oil and condensate prices increased 6 percent to $19.57 per barrel on
average for the year.
Costs and expenses increased 21 percent in 1997 as compared to the 1996
period. Operating and maintenance expense increased $5.3 million as a result of
a higher level of drilling activity. General and administrative expense
increased primarily due to higher executive compensation and severance bonuses
of $54.3 million at Zilkha Energy. Taxes and other expenses include $10.5
million of merger expenses and a contract termination fee in 1997. The increase
in Other Income resulted from a gain on the sale of marketable securities.
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 Notes 1 and 4 of the Notes to 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 $4.3 million, $49.3 million and $47.7 million in the 1998, 1997
and 1996 periods, respectively, as a result of hedging activities. There were no
oil hedging activities reflected in the 1998 period. Hedging activities
decreased oil revenues by $.5 million and $19.2 million in 1997 and 1996,
respectively.
A portion of Sonat Exploration's future gas production is hedged
through the year 2012 as follows:
<TABLE>
<CAPTION>
Volumes Weighted Average Price
(Bcf) (per Mcf)
- ----------------------------------------------------------------------
<S> <C> <C>
1999 52.2 $2.01
2000 34.9 $2.05
2001 4.2 $2.31
2002-2012 43.7 $3.31
- ----------------------------------------------------------------------
135.0 $2.45
======================================================================
</TABLE>
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 Corp. (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 BP Amoco Corporation
joined with Southern Natural Gas in the ownership of Destin Pipeline Company
L.L.C. (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, BP Amoco and other
shippers have made substantial firm transportation commitments to Destin.
Construction of the pipeline began in December 1997. The pipeline was partially
completed and in service in September 1998 and was fully in service in March
1999. In June 1998, the Federal Energy Regulatory Commission (FERC) approved
Destin's application to extend its pipeline system approximately 12 miles to
transport additional gas reserves committed by other producers to Destin's
system. This extension was partially completed and in service in December 1998
and was placed fully in service in January 1999. In July 1998 the FERC also
approved another Destin application to extend its pipeline by approximately 31
miles to transport additional gas reserves committed by other producers to
Destin's system. This extension is expected to be in service in the second
quarter of 1999. The total capital to be expended by Destin is now estimated to
be $467 million.
Southern Natural Gas placed in service two expansions to its pipeline
system during 1998 and expects to place a 122-mile, 78
million-cubic-foot-per-day expansion to North Alabama in service this year. The
two expansions placed in service during 1998 include firm transportation
commitments totaling 65 million cubic feet of natural gas per day from customers
in eastern
25
II-4
<PAGE> 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Tennessee, Georgia and Alabama and 34 million cubic feet per day from Alabama
Power Company and two other customers.
In December 1998, Florida Gas Transmission Company (Florida Gas) filed
with the FERC for approval of a Phase IV expansion that will increase system
firm capacity by 272 MMcf per day, or 19 percent. More than 90 percent of this
new capacity is for Florida's growing electric generation requirements. This
$351 million expansion includes 205 miles of pipeline that will extend the
Florida Gas system to the Fort Myers area. Subject to regulatory approval,
Phase IV is scheduled to be placed into service in mid-2001.
Southern Natural Gas Company and Subsidiaries
<TABLE>
<CAPTION>
(In Millions)
----------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Market transportation
and storage $326.0 $313.2 $323.2
Supply transportation 43.3 48.5 46.6
Other 24.9 31.6 29.0
- --------------------------------------------------------------------------
Total Revenues 394.2 393.3 398.8
- --------------------------------------------------------------------------
Costs and Expenses:
Operating and maintenance 84.4 75.4 74.9
General and administrative 57.0 71.3 91.6
Depreciation and amortization 46.3 47.8 48.3
Taxes, other than income 21.3 19.9 18.1
- --------------------------------------------------------------------------
209.0 214.4 232.9
- --------------------------------------------------------------------------
Operating Income 185.2 178.9 165.9
Other Income:
Equity in earnings of
unconsolidated affiliates 19.7 11.8 9.6
Other 5.1 7.1 6.7
- --------------------------------------------------------------------------
24.8 18.9 16.3
- --------------------------------------------------------------------------
Earnings Before Interest and Taxes $210.0 $197.8 $182.2
==========================================================================
<CAPTION>
(Billion Cubic Feet)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Volumes:
Market transportation 612 611 630
Supply transportation 372 396 315
Intrastate (1) - - 38
- --------------------------------------------------------------------------
Total Volumes 984 1,007 983
==========================================================================
Transition gas sales 12 65 69
==========================================================================
</TABLE>
(1)Southern's investment in Sonat Intrastate-Alabama Inc., a small intrastate
pipeline subsidiary, was transferred to Sonat Inc. on January 1, 1997.
Citrus Corp.
<TABLE>
<CAPTION>
(In Millions)
---------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Allocated Expenses Included in EBIT $ 1.1 $ 0.5 $ 0.3
==========================================================================
Equity in Earnings of Citrus Corp. $24.4 $28.7 $22.9
==========================================================================
<CAPTION>
(Billion Cubic Feet)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Florida Gas Volumes (100%):
Market transportation 424 443 428
Supply transportation 41 28 29
- --------------------------------------------------------------------------
Total Volumes 465 471 457
==========================================================================
</TABLE>
1998 VERSUS 1997.
Southern - EBIT was $210.0 million in 1998 compared with $197.8 million in 1997.
EBIT improved primarily due to lower general and administrative expenses and
higher equity in earnings of unconsolidated affiliates. System expansions also
increased operating results, partly offset by declining results at Sea Robin
Pipeline Company (Sea Robin) as a result of lower interruptible throughput.
The market transportation and storage revenue increase was due to
higher firm transportation revenues associated with expansion projects completed
in 1998. Supply transportation revenues decreased primarily due to lower
interruptible throughput on the Sea Robin system. Operating and maintenance
expense increased primarily due to the difference in proceeds recognized on the
disposition of assets between 1997 and 1998, offset by favorable fuel expenses
in 1998. Both 1998 and 1997 periods include positive effects related to the sale
of assets. General and administrative expenses decreased primarily due to lower
stock-based compensation, employee benefit, insurance and professional services
expenses.
Equity in earnings of unconsolidated affiliates increased primarily due
to the inclusion of Southern's share of earnings in Destin, slightly offset by
lower earnings from Bear Creek Storage Company. Destin's earnings increase was
the result of higher allowance for funds used during construction (AFUDC)
capitalized in 1998 as compared with 1997 levels. The Company expects Destin's
1999 earnings will be lower than 1998 as operating revenues are adversely
affected by currently anticipated delays in the development of the substantial
offshore discoveries of Shell and BP Amoco that are dedicated to the Destin
system. Other, net decreased in 1998 compared with 1997 primarily due
26
II-5
<PAGE> 37
to a non-recurring gain in 1997 on the termination of Southern's interest rate
forward agreement of $2.4 million. This decrease was slightly offset by higher
AFUDC.
Citrus - Equity in earnings of Citrus declined by $4.3 million to $24.4
million in 1998. This decline is due primarily to a gain recognized in 1997 on
the restructuring of the marketing arrangement for Citrus Trading Company
between Sonat and Enron Corp. and a favorable adjustment to estimated state
income taxes in 1997. Partially offsetting these items were the recognition of
supply credits on a gas supply agreement in 1998, lower net interest expense and
lower operating expenses.
1997 VERSUS 1996.
Southern - EBIT for Southern was $197.8 million in 1997 compared with
$182.2 million in 1996. EBIT improved primarily due to lower general and
administrative expenses. Also favorably impacting EBIT were expansions and
improved results at Sea Robin. Partly offsetting was warmer winter weather
during 1997 which negatively affected operating results.
Market transportation revenues decreased primarily due to lower volumes
resulting from warmer weather and the transfer of Southern's ownership of a
small intrastate pipeline to Sonat, which was immaterial to operating results,
partially offset by increased revenues from expansions. Supply transportation
revenues increased due to higher volumes. Operating and maintenance expense
increased slightly primarily due to higher fuel expense. Operating and
maintenance expense in both periods included positive effects related to the
disposition of assets. General and administrative expenses decreased primarily
due to lower stock-based compensation and employee benefit expenses in 1997 and
a $9.0 million donation to the Sonat Foundation in 1996.
Equity in earnings of unconsolidated affiliates increased primarily due
to the inclusion of Southern's share of earnings in the Destin Pipeline joint
venture and slightly higher earnings from Bear Creek Storage Company. Other, net
increased in 1997 compared with 1996 primarily due to higher levels of AFUDC at
Southern recognized during construction of its expansions, offset slightly by
lower gains recognized on the termination of an interest rate forward agreement
associated with an anticipated financing that did not occur.
Citrus - Equity in earnings of Citrus increased $5.8 million over 1996
to $28.7 million. 1997 results reflect a gain recognized on the restructuring of
the marketing arrangement for Citrus Trading Company between Sonat and Enron
Corp. and a favorable adjustment to estimated state income taxes. The effect of
higher revenues at Florida Gas from higher rates in conjunction with its rate
filing that was effective in March 1997 and higher interruptible transportation
volumes was offset by a gain on sale of assets recognized in 1996, lower trading
margins at Citrus Trading and higher operating expenses.
NATURAL GAS SALES AND SUPPLY
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated or are assigned. As
a result of its restructuring pursuant to FERC directives in past years,
Southern 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 or expiration of the few remaining supply
contracts, Southern's remaining gas supply is being sold on a month-to-month
basis. Because Southern is primarily a gas transporter and does not realize
significant margins on gas sales, the net of gas sales revenues and natural gas
cost is included in other revenue.
Except for the sale of its remaining gas supply described above,
Southern's participation in gas supply activities will be limited to the
purchase and sale of gas from time to time as may be required for system
management purposes.
Southern's annual purchase commitments total less than $21 million per
year for 1999 and subsequent years. Based on Southern's current expectations
with respect to natural gas prices in 1999 and the years following, an
immaterial volume of gas 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 were resolved. The settlement requires Southern Natural Gas
to file a new rate case no later than September 1, 1999. Southern expects the
rates filed in that rate case to become effective after normal suspension by the
FERC on March 1, 2000, subject to refund upon conclusion of the rate case.
27
II-6
<PAGE> 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
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. (See Market Risk and Note 4 of the Notes to 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 an equity investment of approximately $28 million. The power plant
began operations in June 1998. In September 1998, a subsidiary of Sonat Energy
Services acquired the rights to develop a 680-megawatt natural gas-fired peaking
power plant in west central Georgia. This power plant, which will have a total
capital cost of approximately $230 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 (including sales and transportation) for
1998 was 52 Bcf compared with 42Bcf in 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. On December
28,1998, Sonat Power Systems executed an amendment to its existing development
and distribution agreement with AlliedSignal granting Sonat Power Systems the
option to become the exclusive distributor of the power generator group of
products in Mexico.
Energy Services
<TABLE>
<CAPTION>
(In Millions)
----------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $3,192.4 $3,725.2 $2,592.7
==============================================================================
Operating Margin $ 35.4 $ 50.1 $ 36.2
==============================================================================
Operating Income (Loss) $ (13.8) $ 10.6 $ 10.2
==============================================================================
Earnings (Loss) Before Interest
and Taxes $ (6.8) $ 7.1 $ 5.8
==============================================================================
<CAPTION>
(Billion Cubic Feet)
----------------------------------------
<S> <C> <C> <C>
Sonat Marketing Gas Sales
Volumes (100%) 1,225 1,288 968
==============================================================================
<CAPTION>
(Thousands of Megawatt Hours)
----------------------------------------
<S> <C> <C> <C>
Sonat Power Marketing Sales
Volumes (100%) 10,533 8,768 2,969
==============================================================================
<CAPTION>
(Billion Cubic Feet)
----------------------------------------
<S> <C> <C> <C>
Financial Volumes Notional
Settlements Third Parties - -- -- --
Natural Gas 3,939 1,560 --
==============================================================================
</TABLE>
1998 VERSUS 1997. EBIT decreased in the 1998 period compared to the
1997 period due to lower margins at Sonat Marketing and a $5.6 million revision
of accounting estimate recognized to reconcile gas imbalance and other accounts
with various natural gas pipelines, storage facilities and customers. Sonat
Marketing's physical sales volumes were down slightly compared with 1997.
However, notional volumes from natural gas derivative settlements increased 153
percent in 1998, reflecting an increase in Sonat Marketing's financial
transactions on behalf of customers and an increase in market making of
derivative products for its own account and to manage its basis positions. Sonat
Power Marketing became profitable in 1998, as both sales volumes and margins
increased over 1997 levels. Sonat Power Marketing's financial results also
benefited from volatility
28
II-7
<PAGE> 39
in electricity prices. Operating costs increased in 1998, as Sonat Energy
Services continued to expand its scope of business. The 1998 period also
includes the contribution from the 50 percent-owned Mid-Georgia Cogen plant.
1997 VERSUS 1996. EBIT increased $1.3 million to $7.1 million in 1997.
The principal reason for the increase was the recognition of mark-to-market
income from origination activities in the fourth quarter of 1997, which more
than offset a decrease in unit margins. At the end of 1997, Sonat Marketing's
gas sales volumes reached 4.2 Bcf per day, up from 3.3 Bcf per day at the end of
1996. Sonat Power Marketing also increased its sales volumes sharply, but was
not profitable in the extremely competitive power marketing business. Operating
costs increased due to business growth.
OTHER STATEMENTS OF OPERATIONS ITEMS
<TABLE>
<CAPTION>
(In Millions)
---------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Interest Expense, Net $126.3 $97.2 $88.9
===================================================================
</TABLE>
1998 VERSUS 1997. Net interest expense increased in 1998 compared with
1997 due to higher average debt levels, slightly offset by the effect of lower
average interest rates. Additional interest on taxes caused an increase in other
interest expense. Interest capitalized decreased due to lower interest
capitalized at Sonat Exploration.
1997 VERSUS 1996. Net interest expense increased in 1997 compared with
1996 due to higher average debt levels. The effect of lower interest rates on
debt and average regulatory reserve balances slightly offset the effect of
higher average debt levels.
<TABLE>
<CAPTION>
(In Millions)
------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense (Benefit) $(297.7) $105.8 $123.2
===================================================================
</TABLE>
1998 VERSUS 1997. Income tax expense decreased in 1998 compared with 1997 due
to lower pretax earnings primarily related to the ceiling test charges in 1998.
Excluding these charges, the effective tax rate decreased slightly due to the
effect of tax preference items on lower pretax earnings.
1997 VERSUS 1996. Income tax expense decreased in 1997 compared with 1996 due
to lower pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
<TABLE>
<CAPTION>
(In Millions)
-----------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities $509.9 $633.6 $656.7
===================================================================
</TABLE>
1998 VERSUS 1997. Cash flows from operations decreased $123.7 million
compared with the 1997 period primarily due to lower operating results at Sonat
Exploration. Operating results for the Company's segments 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 for income tax purposes 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
inventory primarily represents the purchase of natural gas inventory by Sonat
Energy Services in 1997 as well as purchases of material for Sonat Exploration's
Cotton Valley Pinnacle Reef trend drilling program in the 1997 period. The
change in restricted cash, accrued long-term compensation and other current
liabilities primarily represents the payment of certain expenses associated with
the merger between the Company and Zilkha Energy in January 1998 (see Note 3 of
the Notes to Consolidated Financial Statements).
1997 VERSUS 1996. Cash flows from operations decreased compared with
the 1996 period due to the funding of a $116.0 million liability for transaction
and other costs in connection with the merger with Zilkha Energy (see Note 3 of
the Notes to Consolidated Financial Statements). Absent this item, cash flows
from operations improved compared with the 1996 period due to improved cash
flows at both Sonat Exploration and Southern. Partly offsetting the increase was
a decrease in Energy Services' cash flows due to the impact of higher energy
prices on working capital, including broker deposits.
The 1996 period included $34.0 million in cash refunds paid to
customers at Southern. Other than those refunds, the change in gas supply
realignment costs and the change in reserves for regulatory matters were
attributable to the recording of a customer settlement by Southern in the second
quarter of 1996 (the Customer Settlement). Deferred income taxes and accrued
income taxes reflect the impact of higher deductions for intangible drilling
costs at Sonat Exploration in 1997 and the Customer
29
II-8
<PAGE> 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Settlement in 1996. The change in accounts receivable and accounts payable is
primarily attributable to high receivable and payable balances in December 1996
reflecting higher natural gas prices. The change in inventory primarily reflects
the purchase of material for Sonat Exploration's Cotton Valley Pinnacle Reef
trend drilling program and the purchase of natural gas inventory under an asset
management agreement at Sonat Marketing.
The change in Other, net is primarily due to $41.2 million of accrual
reversals related to the Customer Settlement and a decrease in interruptible
transportation revenue credits of $13.5 million, both of which occurred in 1996.
<TABLE>
<CAPTION>
(In Millions)
----------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Investing Activities $(646.9) $(1,019.6) $(621.0)
=======================================================================
</TABLE>
1998 VERSUS 1997. Net cash used in investing activities was
$372.7 million lower in 1998 compared with 1997. The decrease was primarily
attributable to proceeds from the sale of certain oil and gas properties. The
sale of those properties also contributed to lower capital expenditures at Sonat
Exploration in the current period. Higher investments in the Destin and the
Mid-Georgia Cogen joint ventures partially offset these decreases.
1997 VERSUS 1996. Net cash used in investing activities was $398.6
million higher in 1997 compared with 1996, primarily due to higher capital
expenditures (see table following) resulting from increased developmental
drilling at Sonat Exploration. The increase in investments in unconsolidated
affiliates primarily reflects Southern's investment of $39.1 million in Destin
during 1997.
Capital expenditures for the Company's business segments (excluding
unconsolidated affiliates) were as follows:
<TABLE>
<CAPTION>
(In Millions)
--------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production $581.1 $ 862.6 $620.1
Natural Gas Transmission 222.1 144.3 130.4
Energy Services 10.0 11.0 4.7
Other 5.9 4.5 6.0
- --------------------------------------------------------------------
Total $819.1 $1,022.4 $761.2
====================================================================
</TABLE>
The Company's investments in unconsolidated affiliates were as follows:
<TABLE>
<CAPTION>
(In Millions)
------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission $ 89.5 $ 44.8 $ 0.3
Energy Services 57.7 0.4 5.0
- ------------------------------------------------------------------
Total $147.2 $ 45.2 $ 5.3
==================================================================
<CAPTION>
(In Millions)
------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Financing Activities $116.8 $365.3 $(38.4)
==================================================================
</TABLE>
1998 VERSUS 1997. Financing activities provided $116.8 million in 1998
compared with $365.3 million in 1997. Increased borrowings helped finance
capital and other corporate expenditures. The $325.3 million net proceeds from
the disposal of assets, principally oil and gas properties, were primarily used
to repay borrowings under the Company's floating rate facilities in the current
period.
1997 VERSUS 1996. Financing activities provided $365.3 million in 1997
compared with requiring $38.4 million in 1996. The change was primarily
attributable to increased borrowings, which helped finance higher capital
expenditures, the Company's stock repurchase program and the funding of the
liability for transaction and other costs in connection with the merger with
Zilkha Energy in 1997.
30
II-9
<PAGE> 41
Capital Resources
At December 31, 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 $696.1
million of commercial paper and $24.3 million of borrowings from the short-term
lines of credit outstanding at December 31, 1998, $529.6 million was available
to the Company under such lines of credit and revolving credit agreement at
December 31, 1998.
In late January 1999, Sonat completed a new 364-day $400.0 million
revolving credit facility with 11 banks. In connection with this new credit
facility, the Company terminated existing lines of credit providing for up to
$700.0 million of borrowings.
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
$100.0 million in debt under its registration statement in the third quarter of
1998.
The Company's capital expenditures and other investing requirements for
1999 are expected to total $529 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 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.
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 as well as
offsetting physical positions 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 and crude oil commodity
futures, swap and option contracts. Sonat Marketing 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 Company's non-trading (hedging) and trading activities are
implemented under a set of policies approved by the Board of Directors.
Established procedures and processes are employed to manage and monitor these
activities and 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 Consolidated Financial Statements.
Sonat Energy Services manages its commodity price risks through its
subsidiaries, Sonat Marketing Company and Sonat Power Marketing. Sonat Marketing
and Sonat Power Marketing each manage commodity risks at a portfolio level by
utilizing Value-at-Risk models for natural gas and electricity commodities,
respectively. Each Value-at-Risk model includes energy commodity transactions,
both physical and derivative (commodity futures, swaps and options) for both
trading and non-trading activities. The Value-at-Risk models use historical or
variance co-variance simulation methods to determine commodity risk exposure
(the loss that could occur over a two-day period) due to changes in natural gas,
electricity or crude oil commodity prices within a 95 percent confidence level.
Value-at-Risk models are routinely backtested against market prices and
volatilities to assess the quality of Value-at-Risk measures. The Risk Oversight
Committee and management monitor the portfolio Value-at-Risk to ensure
compliance with Board limits.
31
II-10
<PAGE> 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Value-at-Risk data for Energy Services for 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------
Average Maximum Minimum
- -------------------------------------------------------
<S> <C> <C> <C>
1998 $973 $1,792 $685
=======================================================
1997 $593 $ 752 $473
=======================================================
</TABLE>
The Value-at-Risk for non-trading activities was immaterial.
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.
Short-term debt averaged $661.3 million in 1998. Excess cash generated by or
contributed to joint venture projects is invested on a short-term basis pending
distribution or expenditure on capital projects. Such short-term investments
averaged $18.2 million in 1998. 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. At December 31, 1998, 37 percent of the Company's debt had
variable rates compared with 38 percent in 1997. The effects of changes in the
fixed and variable components of debt essentially offset. Fixed rate long-term
debt which was $923.7 million (fair value of $966.4 million) at December 31,
1997, increased 31 percent. Additionally, variable rate debt increased due to a
56 percent increase in commercial paper which was $446.6 million at December 31,
1997. The Company's amount of variable rate long-term debt decreased from $130.0
million at December 31, 1997, which slightly offset the effect of the increase
in variable rate commercial paper. Overall the Company's debt increased
primarily due to the merger with Zilkha Energy. The Company used restricted cash
deposits of $116.0 million at December 31, 1997, to pay certain merger-related
expenses. 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.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. The weighted-average variable rate is the current effective
rate. Municipal bonds are used to satisfy obligations under various
non-qualified benefit plans of the Company. Broker deposits of $29.9 million
with a return of 4.1 percent at December 31, 1998, were excluded from the table.
Interest Rate Risk Instruments
Principal Amount by Expected Maturity and Average Interest Rate
<TABLE>
<CAPTION>
(Dollars in Millions)
--------------------------------------------------------------------------------------
Fair
There- Value
1999 2000 2001 2002 2003 after Total 12/31/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Notes Receivable $ 50.4 $ -- $ -- $ -- $ -- $ -- $ 50.4 $ 50.4
Average Interest Rate 7.9%
Municipal Bonds $ 1.5 $3.3 $ 4.4 $ .9 $7.0 $ 26.9 $ 44.0 $ 47.2
Average Interest Rate 4.9% 4.9% 4.8% 4.8% 4.8% 4.7%
Liabilities:
Commercial Paper $696.1 $ -- $ -- $ -- $ -- $ -- $ 696.1 $ 696.1
Average Interest Rate 6.0%
Long-term Debt,
including Current
Portion:
Fixed Rate $109.8 $2.8 $200.2 $200.0 $ -- $700.0 $1,212.8 $1,258.4
Average Interest Rate 7.5% 7.4% 7.1% 6.8% 6.7% 6.8%
Variable Rate $ 24.3 $ -- $ -- $ -- $ -- $ -- $ 24.3 $ 24.3
Average Interest Rate 5.9%
=============================================================================================================================
</TABLE>
32
II-11
<PAGE> 43
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the past
several years and has not significantly affected the profitability of the
Company. In prior periods of high general inflation, oil and gas prices
generally increased at comparable rates; however, there is no assurance that
this will be the case in the current environment or in possible future periods
of high inflation. In addition, inflation can affect the day rates that Sonat
Exploration pays for drilling rigs. Margins in the Energy Services segment are
highly sensitive to competitive pressures and may not reflect the effects of
inflation. The results of operations in the Company's three major business
segments will be affected by future changes in oil and gas prices and the
interrelationship between oil, gas and other energy prices.
ENVIRONMENTAL ISSUES
The operations and properties of Sonat Exploration, Southern, Energy Services,
and their subsidiaries are subject to extensive and changing federal, state and
local laws and regulations relating to environmental protection, including the
generation, storage, handling, emission, transportation and discharge of
materials into the environment, and relating to safety and health. The recent
trend in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may
require the acquisition of a permit or other authorization before construction
or drilling commences and for certain other activities, limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness or wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from operations. The permits required for
various operations are subject to revocation, modification and renewal by
issuing authorities. The Company believes that its operations currently are in
substantial compliance with applicable environmental regulations.
Governmental authorities have the power to enforce compliance with
their regulations, and violations are subject to fines or injunction, or both.
The Company does not expect environmental compliance matters to have a material
adverse effect on its financial position or results of operations. It is also
not anticipated that the Company will be required in the near future to expend
amounts that are material to its financial condition or operations by reason of
environmental laws and regulations, but because such laws and regulations are
frequently changed and may impose increasingly stricter requirements, the
Company is unable to predict the ultimate cost of complying with such laws and
regulations.
Southern has been notified that it is or may be a potentially
responsible party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) in connection with one Superfund site
for which the amount of its liability has not been settled. The Company has
determined that the aggregate maximum amount of loss reasonably likely to be
attributed to it, after giving effect to likely contributions by other PRPs,
would not be material to its financial position or results of operations.
However, liability for PRPs under CERCLA (and applicable state law) is joint and
several among all PRPs. Although volumetric allocation is a factor in assessing
liability, it is not necessarily determinative; thus, the ultimate liability at
this site could be substantially greater than the maximum amount estimated by
the Company.
In the operation of their natural gas pipeline systems, Southern and
its wholly owned subsidiaries, South Georgia Natural Gas Company (South Georgia)
and Sea Robin, have used, and continue to use at several locations, gas meters
containing elemental mercury. Southern, South Georgia and Sea Robin plan to
remove all remaining mercury meters during the course of regularly scheduled
facilities upgrades. Mercury and mercury meters are handled pursuant to
procedures that are designed to protect employees and the environment and to
comply with Occupational Safety and Health Administration standards. It is
generally believed in the natural gas pipeline industry that, in the course of
normal maintenance and replacement operations, elemental mercury may have been
released from mercury meters. Based on its previous determination that its
pipeline meters may in the past have been the source of small releases of
elemental mercury, Southern and Sea Robin have completed the characterization of
their sites in Alabama, Georgia, Louisiana and Mississippi. Characterization of
potential sites on the pipeline system of South Georgia has not yet commenced.
At this time, only the State of Georgia has issued formal guidelines for
remediation of mercury sites, although the State of Louisiana has issued
informal guidance. Southern filed copies of the characterization reports with
the State of Georgia and the State is evaluating what remediation actions, if
any, are necessary. Southern is unable to estimate the cost of mercury
remediation because costs will vary based on a number of factors particular to
each site and because regulatory guidance is still uncertain for all sites.
Based on its experience with other remediation projects, industry experience to
date with
33
II-12
<PAGE> 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
remediation of mercury and its preliminary characterization data, Southern
believes that the cost of its characterization and remediation of any mercury
contamination will not be material to the Company's financial position or
results of operations.
The Company generally considers environmental assessment and
remediation costs and costs associated with compliance with environmental
standards incurred by Southern, South Georgia and Sea Robin to be recoverable
through rates since they are prudent costs incurred in the ordinary course of
business and, accordingly, generally will seek recovery of such costs through
rate filings, although no assurance can be given with regard to their ultimate
recovery.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In November 1998, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue 98-10- Accounting for Contracts Involved in Energy
Trading and Risk Management Activities. The EITF consensus establishes guidance
on the accounting for energy trading contracts prior to the adoption of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. It requires
energy trading contracts to be marked-to-market, with gains and losses included
in earnings and separately disclosed in the financial statements or footnotes.
The consensus is to be applied to financial statements issued for fiscal years
beginning after December 15, 1998. The effect of initial application should be
reported as the cumulative effect of a change in an accounting principle in
accordance with Opinion No. 20. The consensus will require energy contracts that
qualify as energy trading contracts under this consensus to be marked-to-market
at the Company's subsidiaries, Sonat Marketing and Sonat Power Marketing. Sonat
Marketing currently accounts for its energy contracts at market value. Sonat
Power Marketing will be required to value its energy trading contracts at market
value. The impact to the Company will not be material.
YEAR 2000 PROJECT
The following disclosure contains forward-looking statements. The Company's
ability to meet its objectives identified below is dependent upon several
factors that could cause actual results to differ materially from those set
forth below, including the timely provision of necessary upgrades and
modifications by suppliers. In addition, the Company cannot guarantee that third
parties on whom it depends for essential services will convert their critical
systems and processes in a timely manner. Each of the phases of the Company's
Year 2000 project is progressing, and the Company believes that it is taking all
reasonable and appropriate steps necessary to be able to operate in the Year
2000 and beyond.
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, remediation, testing and contingency planning 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 continues to contact entities with whom
34
II-13
<PAGE> 45
it has a material relationship, such as natural gas suppliers, pipelines,
electric utilities, telecommunication service providers, banks and other
suppliers of goods and services, 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 remediation and testing phases
of the Year 2000 project. The remediation phase includes completing the
replacement of mainframe systems with Year 2000-ready 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 has completed remediation and
testing for approximately 80 percent of its critical systems. The remaining
critical systems and non-critical systems are scheduled to be remediated and
tested by June 30, 1999.
The Company relies on producers of natural gas, natural gas pipelines,
natural gas distribution companies, natural gas marketing companies and electric
transmission providers to conduct its basic operations. External infrastructure,
such as electric, telecommunication and water service is also necessary for the
Company's basic operations. Should any third party with which the Company has a
material relationship fail, the impact could become a significant challenge to
the Company's ability to perform its basic operations. Due to the nature of the
Company's business, extensive contingency plans are already in place, including
plans to provide pipeline system reliability. Because of the additional
uncertainties caused by the Year 2000 problem, the Company is developing
additional contingency plans as practicable for critical systems, service
providers and business partners. A consulting firm has been engaged to assist in
this effort. These plans involve developing contingencies for failures that may
result from the Year 2000 problem, and include plans to establish control
centers to facilitate communications in the event of a telecommunications
failure and staffing at selected locations on the Company's pipeline system. The
Company is scheduled to have these plans completed by June 30, 1999.
The estimated cost to the Company of the Year 2000 project for capital
as well as general and administrative costs is expected to be less than
$10 million. As of December 31, 1998, the Company has incurred approximately
$4.5 million in Year 2000 project costs. The Company expects to fund Year 2000
expenditures from normal operations. The timing of expenditures is not
indicative of readiness efforts or progress to date.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Annual 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 performance can also be adversly 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.
35
II-14
<PAGE> 46
Report of Management
Sonat Inc. and Subsidiaries
Management of the Company is responsible for the preparation and integrity of
all financial data included in this annual report. The Consolidated Financial
Statements have been prepared in conformity with generally accepted accounting
principles and necessarily include amounts based on estimates and judgments of
management.
The Company's accounting systems include controls designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that the financial records are adequate and reliable for preparation of
financial statements and other financial data. The concept of reasonable
assurance is based on the recognition that the cost of internal controls should
not exceed the related benefits. An integral part of the internal controls is
the selection, training and development of qualified accounting and internal
audit personnel.
The Company engages the firm of Ernst & Young LLP as independent
auditors to audit the Company's Consolidated Financial Statements and express
their opinion thereon. Their audit is conducted in accordance with generally
accepted auditing standards and includes a review and evaluation of the
Company's internal controls and other procedures as they consider appropriate.
The Report of Ernst & Young LLP, Independent Auditors, appears on the facing
page. Internal audit activities are coordinated with the independent auditors to
maximize audit effectiveness.
The Audit Committee of the Board of Directors is composed solely of
directors who are not active or retired officers or employees of the Company. It
recommends a firm to serve as independent auditors of the Company, subject to
nomination by the Board of Directors and election by the stockholders, approves
all audit and other professional services rendered by the independent auditors
and regularly reviews their independence. The Audit Committee reviews and
reports on significant accounting decisions and transactions and the scope and
results of audits by the Company's internal auditing staff and the independent
auditors. It reviews with management compliance with the Company's business
ethics and conflict of interest policies and reviews with independent auditors
the adequacy of the Company's internal controls. The internal auditors and the
independent auditors have free access to the Audit Committee, without
management's presence, to discuss the Company's internal controls and the
results of their audits.
/s/ James E. Moylan, Jr.
James E. Moylan, Jr.
Senior Vice President and Chief Financial Officer
February 25,1999
36
II-15
<PAGE> 47
Report of Ernst & Young LLP, Independent Auditors
Sonat Inc. and Subsidiaries
The Board of Directors and Stockholders
Sonat Inc.
We have audited the accompanying consolidated balance sheets of Sonat Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 financial statements of Zilkha Energy
Company, a wholly owned subsidiary, which statements reflect net income
constituting approximately 17 percent of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Zilkha Energy
Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and, for 1996, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sonat
Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in
1998 the Company changed its method of accounting for oil and gas operations.
/s/ Ernst & Young LLP
Birmingham, Alabama
January 19, 1999
37
II-16
<PAGE> 48
Consolidated Balance Sheets
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997(*)
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,104 $ 27,278
Restricted cash (Note 1) -- 115,956
Notes receivable from affiliates 50,359 64
Accounts receivable 388,075 619,517
Inventories (Note 5) 69,093 65,161
Gas imbalance receivables 7,673 16,644
Assets from trading activities (Note 4) 229,801 92,150
Other 48,404 44,037
- ---------------------------------------------------------------------------
Total Current Assets 800,509 980,807
- ---------------------------------------------------------------------------
Investments and Advances:
Unconsolidated affiliates (Note 6) 635,692 495,234
Other investments 61,316 58,384
- ---------------------------------------------------------------------------
697,008 553,618
- ---------------------------------------------------------------------------
Plant, Property and Equipment, including
$148,615,000 in 1998 and $201,208,000
in 1997, excluded from full-cost
amortization base used for oil and
gas properties (Notes 7 and 14) 8,399,934 7,830,697
Less Accumulated Depreciation,
Depletion and Amortization 5,703,767 4,264,917
- ---------------------------------------------------------------------------
2,696,167 3,565,780
- ---------------------------------------------------------------------------
Deferred Charges and Other:
Assets from trading activities (Note 4) 25,694 9,638
Other 141,716 142,271
- ---------------------------------------------------------------------------
167,410 151,909
- ---------------------------------------------------------------------------
Total Assets $4,361,094 $5,252,114
===========================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
38
II-17
<PAGE> 49
Consolidated Balance Sheets
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
December 31, 1998 1997(*)
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year (Note 8) $ 109,835 $ 14,508
Unsecured notes (Note 8) 720,361 446,721
Accounts payable 401,357 615,322
Accrued income taxes 21,700 18,274
Accrued interest 47,864 37,242
Accrued long-term compensation -- 73,799
Gas imbalance payables 11,497 14,320
Liabilities from trading activities (Note 4) 223,628 85,398
Other 40,357 75,299
- --------------------------------------------------------------------------------
Total Current Liabilities 1,576,599 1,380,883
- --------------------------------------------------------------------------------
Long-Term Debt (Note 8) 1,099,484 1,235,984
- --------------------------------------------------------------------------------
Deferred Credits and Other:
Deferred income taxes (Note 9) 163,964 485,950
Liabilities from trading activities (Note 4) 12,564 5,014
Other 179,232 182,507
- --------------------------------------------------------------------------------
355,760 673,471
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, $1.00 par; 400,000,000 shares
authorized, 111,387,520 and 111,385,858
shares issued in 1998 and 1997, respectively
(Note 11) 111,388 111,385
Other capital 68,804 56,401
Retained earnings 1,209,527 1,858,871
- --------------------------------------------------------------------------------
1,389,719 2,026,657
- --------------------------------------------------------------------------------
Less treasury stock at cost, 1,345,673
and 1,438,793 shares in 1998 and
1997, respectively (Note 11) 60,468 64,881
- --------------------------------------------------------------------------------
Total Stockholders' Equity 1,329,251 1,961,776
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $4,361,094 $5,252,114
================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
39
II-18
<PAGE> 50
Consolidated Statements of Operations
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
----------------------------------------------------
Years Ended December 31, 1998 1997(*) 1996(*)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Notes 1 and 13) $ 3,709,818 $ 4,372,497 $ 3,203,610
- ----------------------------------------------------------------------------------------------------
Costs and Expenses:
Natural gas cost 2,393,027 2,949,766 1,973,147
Electric power cost 351,942 224,294 65,699
Operating and maintenance 163,386 181,911 155,781
General and administrative 117,749 202,754 145,571
Depreciation, depletion and amortization 349,465 397,955 383,903
Ceiling test charges (Note 2) 1,035,178 -- --
Restructuring costs (Note 3) 15,017 -- --
Taxes, other than income 47,418 43,800 47,447
- ----------------------------------------------------------------------------------------------------
4,473,182 4,000,480 2,771,548
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) (763,364) 372,017 432,062
- ----------------------------------------------------------------------------------------------------
Other Income (Loss), Net:
Equity in earnings of unconsolidated
affiliates (Note 6) 48,777 43,021 34,211
Minority interest 4,082 (4,395) (4,907)
Other income, net 8,495 10,296 6,525
- ----------------------------------------------------------------------------------------------------
61,354 48,922 35,829
- ----------------------------------------------------------------------------------------------------
Earnings (Loss) Before Interest and Taxes (702,010) 420,939 467,891
- ----------------------------------------------------------------------------------------------------
Interest:
Interest income 5,459 4,908 4,874
Interest expense (136,837) (109,548) (101,403)
Interest capitalized 5,123 7,448 7,642
- ----------------------------------------------------------------------------------------------------
(126,255) (97,192) (88,887)
- ----------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (828,265) 323,747 379,004
Income Tax Expense (Benefit) (Note 9) (297,748) 105,751 123,164
- ----------------------------------------------------------------------------------------------------
Net Income (Loss) $ (530,517) $ 217,996 $ 255,840
====================================================================================================
Earnings (Loss) Per Share of Common
Stock (Note 11) $ (4.82) $ 1.98 $ 2.32
Earnings (Loss) Per Share of Common
Stock - Assuming Dilution (Note 11) (4.82) 1.95 2.29
====================================================================================================
Weighted Average Shares Outstanding 110,020 110,099 110,370
Weighted Average Shares Outstanding
- Assuming Dilution 110,020 111,669 111,722
====================================================================================================
Dividends Paid Per Share $ 1.08 $ 1.08 $ 1.08
====================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
40
II-19
<PAGE> 51
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------------------------------------
1998 1997(*) 1996(*)
--------------------------------------------------------------------------------
Years Ended December 31, Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock, $1.00 Par; 400,000,000
Shares Authorized (Note 11):
Balance at beginning of year 111,385 $ 111,385 111,391 $ 111,391 111,402 $ 111,402
Issued (canceled) 3 3 (6) (6) (11) (11)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 111,388 111,388 111,385 111,385 111,391 111,391
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income:
Balance at beginning of year 3,222 10,140 6,614
Realized net (gains)/losses in value of
securities (net of tax expense/(benefit)
of $683,000, $1,216,000, and $(86,000)) (1,269) (2,259) 160
Change in unrealized gains (losses)
on securities, (net of tax expense/
(benefit) of $(202,000), $(2,509,000),
and $1,812,000) (376) (4,659) 3,366
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,577 3,222 10,140
- ------------------------------------------------------------------------------------------------------------------------------------
Other Capital:
Balance at beginning of year 53,179 50,522 58,643
Tax benefit from utilization of NOL
carryforward 11,505 -- --
Other 2,543 2,657 (8,121)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 67,227 53,179 50,522
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year 1,858,871 1,733,653 1,371,757
Adjustment to beginning balance for Sonat
Exploration's change to full cost (Note 2) -- -- 199,196
Net income (loss) (530,517) 217,996 255,840
Cash dividends paid by Sonat at
$1.08 per share (118,827) (92,778) (93,140)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,209,527 1,858,871 1,733,653
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock, at cost:
Balance at beginning of year (1,438) (64,881) (831) (29,703) (1,077) (31,534)
Additions (56) (2,284) (1,058) (54,056) (775) (30,966)
Issued 148 6,697 451 18,878 1,021 32,797
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,346) (60,468) (1,438) (64,881) (831) (29,703)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 110,042 $1,329,251 109,947 $1,961,776 110,560 $1,876,003
====================================================================================================================================
Comprehensive Income (Loss) $ (532,162) $ 211,078 $ 259,366
====================================================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
41
II-20
<PAGE> 52
Consolidated Statements of Cash Flows
Consolidated Financial Statements
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------
Years Ended December 31, 1998 1997(*) 1996(*)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (530,517) $ 217,996 $ 255,840
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization,
including ceiling test charges 1,384,643 397,955 383,903
Deferred income taxes (321,986) 85,249 100,302
Equity in earnings of unconsolidated
affiliates, less distributions (38,255) (31,914) (23,040)
Reserves for regulatory matters (4,237) (10,212) (167,154)
Gas supply realignment costs 1,067 7,514 187,929
Change in:
Accounts receivable 231,442 (7,781) (261,932)
Inventories (3,932) (34,111) (7,002)
Accounts payable (213,965) 79,947 226,370
Accrued interest and income taxes, net 14,319 (2,248) 30,695
Accrued long-term compensation (73,799) 57,493 1,266
Other current assets 4,333 (4,256) (3,589)
Other current liabilities (37,765) 13,452 6,534
Net change from trading activities (7,927) (11,376) --
Net change in restricted cash 115,956 (115,956) --
Other, net (9,515) (8,114) (73,385)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 509,862 633,638 656,737
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Plant, property and equipment additions (819,135) (1,022,353) (761,211)
Net proceeds from disposal of assets 325,333 49,842 149,367
Investments in unconsolidated affiliates and other (153,048) (47,127) (9,143)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (646,850) (1,019,638) (620,987)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 500,000 2,025,041 987,088
Payments of long-term debt (539,500) (1,812,023) (862,877)
Changes in short-term borrowings 273,640 288,691 (60,870)
- -------------------------------------------------------------------------------------------------------------
Net changes in debt 234,140 501,709 63,341
Dividends paid (118,827) (92,778) (93,140)
Treasury stock purchases (1,289) (53,176) (30,914)
Other 2,790 9,514 22,264
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 116,814 365,269 (38,449)
- -------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (20,174) (20,731) (2,699)
Cash and Cash Equivalents at Beginning of Year 27,278 48,009 50,708
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 7,104 $ 27,278 $ 48,009
=============================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid For:
Interest, net of amount capitalized $ 119,898 $ 99,426 $ 75,870
Income taxes paid (refunds received), net 7,408 20,124 (4,914)
=============================================================================================================
</TABLE>
(*) Restated, See Note 2
See accompanying notes.
42
II-21
<PAGE> 53
Notes to Consolidated Financial Statements
Sonat Inc. and Subsidiaries
NOTE 1 Business Description and Significant
Accounting Policies
Business Description - The Consolidated Financial Statements of Sonat Inc.
(Sonat) and its subsidiaries (the Company) reflect operations in the Exploration
and Production, Natural Gas Transmission and Energy Services segments. The
Exploration and Production segment is engaged in exploration, development and
production of domestic oil and natural gas. The Natural Gas Transmission segment
is primarily engaged in the interstate transmission and storage of natural gas.
The Energy Services segment is primarily engaged in the marketing of natural gas
and electric power and in power generation. For further description of business
segments, see Note 13. For a description of financial instruments, credit risk
and contingencies, see Notes 4 and 10.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of Sonat and its subsidiaries. The Consolidated Financial
Statements have been restated for a change to the full cost method of accounting
for the Company's oil and gas operations (see Note 2). Intercompany transactions
and accounts have been eliminated in consolidation. The equity method of
accounting is used for investments in affiliates owned 50 percent or less.
Use of Estimates in the Preparation of Financial Statements - In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - Cash equivalents are typically money-market
investments in the form of repurchase agreements, certificates of deposit and
time deposits with maturities of three months or less at the time of purchase.
These investments are accounted for at cost.
Restricted Cash - At December 31, 1997, the Company had $116.0 million
of restricted cash. The restricted cash was held in trust by the issuing bank,
was restricted as to withdrawal and use, and was invested in cash equivalents.
The restricted cash was used to pay certain merger expenses in 1998 (see Note
3).
Inventories - Inventories consist primarily of materials and supplies
and gas stored underground. Gas stored underground is carried at fair value,
which approximates average cost. Inventories of materials and supplies utilized
for ongoing replacements and expansions are reviewed regularly and adjusted to
their net realizable value.
Gas Imbalance Receivables and Payables - For the Natural Gas
Transmission segment, gas imbalances represent the difference between gas
receipts from and gas deliveries to the Company's transportation and storage
customers. Gas imbalances arise when these customers deliver more or less gas
into the pipeline than they take out. Imbalances incurred prior to
implementation of Order No. 636 are settled through exchange of gas. Imbalances
incurred after implementation of Order No. 636 are settled monthly. For the
Energy Services segment, imbalances are subject to the terms of the various
pipelines.
Plant, Property and Equipment and Depreciation - Plant, property and
equipment is carried at cost. The Company provides for depreciation on a
composite or straight-line basis, except for oil and gas properties. (See Notes
7 and 14.)
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Other than for oil and gas properties no impairment was required
in any of the three years in the period ended December 31, 1998. See Notes 2 and
16 for ceiling test charges related to oil and gas properties.
Oil and Gas Properties - The Company utilizes the full cost method of
accounting for its oil and gas properties. 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 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.
Accounting for Regulated Operations - The regulated operations of the
Company are subject to the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of
Regulation. Accordingly, the Company records certain assets and liabilities that
result from the effects of the rate-making process that would not be recorded
under generally accepted accounting principles for non-regulated entities. The
regulatory assets and regulatory liabilities of the Company are primarily
classified as Deferred Charges and Other
43
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<PAGE> 54
Notes to Consolidated Financial Statements
Note 1 (continued)
and Deferred Credits and Other, respectively, in the Consolidated Balance
Sheets.
Revenue Recognition - Revenue is recognized in the Exploration and
Production segment when deliveries of oil and natural gas are made. The
Company's Natural Gas Transmission segment recognizes revenue from natural gas
transportation in the period the service is provided. Reserves are provided on
revenues collected subject to refund when appropriate. Revenues are recognized
in the Energy Services segment when deliveries of the physical commodities are
made and, for the segment's trading portfolio, as changes in the fair value of
items in the portfolio occur.
Commodity Price-Risk Management Activities - The Company uses
derivative instruments (commodity futures contracts, options and price swap
agreements) both to hedge its commodity price risk on natural gas, crude oil and
electricity, and as a market maker (trading activity) in natural gas and crude
oil.
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 30 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.
Non-Trading Activities - Derivative positions taken specifically to
mitigate market price risk associated with significant physical transactions are
accounted for using hedge accounting provided they meet hedge accounting
criteria. Under hedge accounting, gains and losses from futures are deferred in
the Consolidated Balance Sheets in Deferred Credits and Other and recognized in
earnings in conjunction with the earnings recognition of the underlying
physical. Each net payment/receipt due or owed under the swap agreement is
recognized in earnings during the period to which the payment/receipt relates,
and there is no recognition in the 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. Cash flows from hedging activities are
recognized in the same section of the Consolidated Statements of Cash Flows as
the hedged transaction.
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 is not maintained, the gains or
losses associated with the hedging instruments are immediately recognized to the
extent that correlation is lost.
Trading Activities - The Company's trading portfolio consists of short-
and long-term energy-related purchase and sale commitments (physical and
derivative). All of these trading positions are reported at fair value and
recorded under the heading of Assets and Liabilities from Trading Activities
(current and long-term) in the Consolidated Balance Sheets. The change in fair
value is recognized in revenues as it occurs. Fair value is subject to change
and reflects an 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 (see
Note 4).
Environmental Expenditures - The Company provides for environmental
liabilities when environmental assessments and/or remediation are probable and
such costs to the Company can be reasonably estimated. Accruals for
environmental remediation liabilities are not material and have not been
discounted.
Stock-Based Compensation - The Company follows the provisions of
Accounting Principles Board Opinion (APB) No. 25 for its stock-based
compensation awards (see Note 11).
Capitalized Interest - The Company capitalizes interest costs
associated with non-producing leases and exploration and major development
projects until the related properties are evaluated and subject to depletion.
The Company also capitalizes interest costs on major projects during
construction. Interest is capitalized on borrowed funds and, where regulation by
the Federal Energy Regulatory Commission (FERC) exists, on internally generated
funds. The weighted average rate used by regulated subsidiaries is calculated in
accordance with FERC rules. Rates used by unregulated subsidiaries approximate
the average interest rate on related debt. Interest capitalized on internally
generated funds is included in Other income, net.
Income Taxes - The Company follows a liability and asset approach in
accounting for income taxes. Deferred tax liabilities
44
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<PAGE> 55
and assets are determined using the tax rate for the period in which those
amounts are expected to be paid or received. (See Note 9.)
Gas Supply Realignment Costs - Included in the Consolidated Statements
of Cash Flows are gas supply realignment costs that were incurred by the Company
to amend or terminate, or to purchase gas at above-market prices under its gas
purchase contracts as a result of the separation of its sales, transportation
and storage services mandated by FERC directive.
Recent Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 on
January 1, 1998, and has presented comprehensive income for all periods
presented in the Consolidated Statements of Changes in Stockholders' Equity.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, which establishes standards for the
way public companies report information about operating segments in annual
financial statements. SFAS No. 131, which is based on the management approach to
segment reporting, also establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the countries in which the entity holds assets and
reports revenue. The Company adopted SFAS No. 131 on January 1, 1998. (See Note
13.)
NOTE 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 capital spending is 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.
The Company has restated all prior consolidated 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 oil and gas properties is not overstated. Sonat
Exploration performed ceiling tests for each of the 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
Consolidated Statement of Operations. Future quarterly full cost ceiling tests
will be based on the then-current NYMEX prices for both natural gas and oil,
after adjustments.
Since the net carrying value of the Company's oil and natural gas
properties has been reduced due to the full cost ceiling limitation such that
the present value of the Company's proved oil and gas reserves does not exceed
the Company's net oil and natural gas properties recorded on its balance sheet,
there is an increased risk of future property write-downs due to factors that
negatively affect the estimated present value of proved oil and gas reserves,
including volatile oil and natural gas prices, downward revisions in estimated
proved oil and natural gas quantities and unsuccessful exploratory operations
(see Note 16).
The effect of the accounting change on net income (loss) is as follows:
<TABLE>
<CAPTION>
(In Thousands,
Except Per-Share Amounts)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Effect on:
Net income $(258,351) $130,584 $18,006
Earnings (loss) per share of
common stock (2.35) 1.19 .16
Earnings (loss) per share of
common stock -
assuming dilution (2.35) 1.17 .16
- ----------------------------------------------------------------------------
</TABLE>
The effect of the accounting change on earnings by quarter for 1998 and 1997
is as follows (per-share amounts are on a diluted basis):
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
------------------------------------------------
Amount Per Share Amount Per Share
1998 1997
- -------------------------------------------------------------------
<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 59,193 .54 35,726 .32
- -------------------------------------------------------------------
</TABLE>
45
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<PAGE> 56
Notes to Consolidated Financial Statements
NOTE 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.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling-of-interests under APB No. 16. Accordingly, all prior period
consolidated financial statements and notes have been restated to include Sonat
Exploration GOM in the Company's consolidated financial statements for all
periods presented.
There were no transactions between Sonat and Sonat Exploration GOM
prior to the combination. Certain changes were made to the Sonat Exploration GOM
financial statements to conform to Sonat's basis of accounting presentation.
The following are the revenues and net income (loss) for the previously
separate companies and the combined amounts presented in these consolidated
financial statements.
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------
Month of Years Ended December 31,
January 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sonat Inc. $380,302 $4,175,218 $3,038,425
Sonat Exploration GOM 14,186 197,279 165,185
- -------------------------------------------------------------------------
Combined $394,488 $4,372,497 $3,203,610
=========================================================================
Net Income (Loss):
Sonat Inc. $ 13,459 $ 219,011 $ 213,409
Sonat Exploration GOM 3,492 (1,015) 42,431
- -------------------------------------------------------------------------
Combined $ 16,951 $ 217,996 $ 255,840
=========================================================================
</TABLE>
In connection with the merger, Sonat Exploration GOM recorded charges
of $50.4 million ($32.7 million after taxes) to operating expenses in 1997 for
direct and other merger-related costs pertaining to the merger transaction.
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 Consolidated Balance Sheet was
used to settle this liability and certain other merger-related expenses. During
the years ended December 31, 1997 and 1996, $61.8 million and $12.0 million,
respectively, were expensed related to the deferred compensation plans.
All debt of Sonat Exploration GOM was paid off in connection with the
merger.
Sonat Exploration Restructuring - On April 23, 1998, the Company
announced a restructuring of Sonat Exploration. The restructuring included
significant property sales and certain cost-reduction activities associated
with a reduction in work force. Oil and natural gas properties having
approximately 430 billion cubic feet of natural gas equivalent reserves and
daily net production of approximately 170 million cubic feet of natural gas
equivalent were sold.
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.
NOTE 4 Financial Instruments
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. The Company manages its trading
positions with strict policies and procedures and limits its risk to changes in
the value of its outstanding positions through the use of Value-at-Risk models
and the establishment of offsetting positions. 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.
At December 31, 1998 and 1997, the Company's trading portfolio 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 absolute
notional volumes and terms are:
<TABLE>
<CAPTION>
1998
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 1,506 1,454 60 months
Crude Oil (Thousands of Barrels) 5,640 2,310 60 months
- ---------------------------------------------------------------------------
</TABLE>
The 60-month term deals begin in 2002 and end in 2006.
<TABLE>
<CAPTION>
1997
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 372 284 33 months
- ---------------------------------------------------------------------------
</TABLE>
46
II-25
<PAGE> 57
The 33-month term deals were ongoing at December 31, 1997, and end in
2000.
The amounts disclosed in the following table represent the
end-of-period fair value and the average fair value of the natural gas trading
portfolio.
<TABLE>
<CAPTION>
In Thousands)
-----------------------------------------------------
Fair Value
(Carrying Amount) Average Fair Value
as of for the Year Ended
-----------------------------------------------------
December 31, 1998 1997 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets $255,495 $101,788 $140,774 $52,899
Liabilities 236,192 90,412 126,236 49,848
- --------------------------------------------------------------------------
</TABLE>
Net trading gains for 1998 and 1997 are $13.1 million and $15.0
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. Sonat
Exploration hedges a portion of its production by entering into intercompany
swaps with Sonat Marketing Company L.P. (Sonat Marketing). The exposure that
Sonat Marketing assumes from Sonat Exploration is then hedged by entering into
derivative instruments with third parties. Sonat Marketing and Sonat Power
Marketing also hedge third-party purchases and sales by entering into commodity
futures, swaps and options.
At December 31, 1998 and 1997, the Company had outstanding energy
commodity futures, swaps and options for purposes other than trading. 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 absolute notional volumes and terms are:
<TABLE>
<CAPTION>
1998
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 17 103 24 months
Electricity (Thousands of MWh) 39 45 4 months
- ---------------------------------------------------------------------------
</TABLE>
The 24-month term deals were ongoing at December 31, 1998 and end in 2000.
<TABLE>
<CAPTION>
1997
-------------------------------------
Notional Volume Maximum
----------------
Commodity Buy Sell Term
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (TBtu) 38 214 58 months
Crude Oil (Thousands of Barrels) -- 480 12 months
- ---------------------------------------------------------------------------
</TABLE>
The 58-month term deals were ongoing at December 31, 1997 and end in 2002.
The information in the following table represents the fair value of
outstanding financial derivative positions held for purposes other than trading.
Not included are the related physical positions that these derivative positions
hedge.
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
Fair Value as of
December 31, 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Natural Gas:
Futures $ (439) $ (873)
Swaps (7,158) (27,458)
Options -- (516)
Electricity:
Futures 1 --
Options 12 --
- ---------------------------------------------------------------------------
</TABLE>
Deferred amounts on open futures positions will mature over 1999 and
2000.
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
established 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 December 31, 1998, the market value
of the Company's in-the-money swaps and options was $21.0 million, and two
counterparties posted additional collateral in the amount of $.5 million.
Reserves for credit risk are established as necessary.
Financial Risk
On January 22, 1996, the Company entered into a forward rate agreement to hedge
the interest rate risk of an anticipated future borrowing under an existing
shelf registration statement. In September 1996, due to revised expectations of
external financing requirements, 50 percent of the forward rate agreement was
liquidated resulting in a gain of $3.9 million. A gain of $2.4 million was
recognized upon final settlement of this agreement in 1997.
47
II-26
<PAGE> 58
Notes to Consolidated Financial Statements
Note 4 (continued)
Other Financial Instruments
The carrying amounts and fair values of the Company's financial instruments,
other than derivative instruments, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
December 31, 1998 Carrying Amounts Fair Value
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $ 7,104 $ 7,104
Notes Receivable 50,359 50,359
Investment in Debt and
Equity Securities 47,130 47,511
Gas Supply Realignment Costs 2,562 2,562
Unsecured Notes 720,361 720,361
Long-Term Debt 1,209,319 1,258,370
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
December 31, 1997 Carrying Amounts Fair Value
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents $ 27,278 $ 27,278
Restricted Cash 115,956 115,956
Investment in Debt and
Equity Securities 52,231 53,101
Gas Supply Realignment Costs 3,630 3,630
Unsecured Notes 446,721 446,721
Long-Term Debt 1,250,492 1,294,854
- -------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for balance sheet financial instruments:
Cash and cash equivalents, restricted cash, notes receivable, gas
supply realignment (GSR) costs and unsecured notes - The carrying amount
reported in the Consolidated Balance Sheets approximates its fair value.
Investment in debt and equity securities - The fair values for
marketable debt and equity securities are based on quoted market prices.
Long-term debt - The fair values of the Company's long-term debt are
based on quoted market values or estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
All of the Company's financial instruments, other than certain
derivative instruments, are held for purposes other than trading.
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents, investments and accounts
receivable.
The Company's cash equivalents, restricted cash deposits and short-term
investments represent securities placed with various high investment grade
institutions. This investment practice limits the Company's exposure to
concentrations of credit risk.
Accounts receivable of the Exploration and Production segment are
primarily from joint-interest partners, oil and gas marketing companies and
pipeline companies. A majority of its revenues are from Sonat Marketing, which
is headquartered in the Southeast. Accounts receivable of the Natural Gas
Transmission segment relate to business conducted with gas distribution
companies, municipalities, gas districts, industrial customers and interstate
pipeline companies in the Southeast. Accounts receivable of the Energy Services
segment primarily relate to trading with other marketing companies, industrial
end users and local distribution companies, with primary concentration in the
Gulf Coast, Southeastern, Northeastern and Midwestern markets.
The Company performs ongoing credit evaluations of its customers'
financial condition and, in some circumstances, requires collateral from its
customers. Accounts receivable are stated net of valuation allowances of $9.3
million in 1998 and $8.2 million in 1997.
NOTE 5 Inventories
The table below shows the values of various categories of the Company's
inventories by segment.
<TABLE>
<CAPTION>
(In Thousands)
---------------------------
December 31, 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Exploration and Production:
Materials and supplies $15,560 $16,954
Natural Gas Transmission:
Materials and supplies 20,190 21,529
Energy Services:
Materials and supplies 210 247
Gas stored underground 33,125 26,418
Other 8 13
- ----------------------------------------------------------------
$69,093 $65,161
================================================================
</TABLE>
NOTE 6 Unconsolidated Affiliates
At December 31, 1998, the Company's investments in unconsolidated affiliates
totaled $635.7 million, and the Company's share of underlying equity in net
assets of the investees was $691.3 million. The difference is primarily due to
the excess over cost of the Company's share of the underlying equity in net
assets of Citrus Corp., which is being amortized over the depreciable life of
Citrus' assets. Through December 31, 1998, the Company's cumulative equity in
earnings of these unconsolidated affiliates was $377.9 million and cumulative
dividends received from them totaled $182.8 million.
48
II-27
<PAGE> 59
The following table presents the components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPANY'S SHARE OF REPORTED
EARNINGS (LOSSES)
Exploration and Production $ 455 $ 445 $ 408
- ------------------------------------------------------------------------------------
Natural Gas Transmission:
Citrus Corp. (including
$1,383,000 of amortization
of basis difference
each year) 24,371 28,676 22,902
Bear Creek Storage 9,531 10,679 10,184
Destin 9,968 1,276 --
Other 167 (106) (554)
- ------------------------------------------------------------------------------------
44,037 40,525 32,532
- ------------------------------------------------------------------------------------
Energy Services 2,885 817 9
- ------------------------------------------------------------------------------------
Other 1,400 1,234 1,262
- ------------------------------------------------------------------------------------
$48,777 $ 43,021 $ 34,211
====================================================================================
</TABLE>
Natural Gas Transmission Affiliates - Sonat owns 50 percent of Citrus,
the parent company of Florida Gas Transmission Company. Southern owns a
one-third interest in Destin Pipeline Company, L.L.C. (Destin) and a subsidiary
of Southern owns 50 percent of Bear Creek Storage Company, an underground gas
storage company.
The following is summarized financial information for Citrus:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $591,005 $735,402 $769,860
Expenses:
Natural gas cost 269,818 416,953 429,367
Operating expenses 102,001 107,370 94,573
Depreciation and
amortization 51,771 60,470 83,563
Interest and other 92,715 78,563 92,079
Income taxes 28,726 17,460 27,240
- --------------------------------------------------------------------------------
Income Reported $ 45,974 $ 54,586 $ 43,038
================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 81,133 $ 79,390
Net transmission plant and property 2,342,641 2,346,123
Other 83,629 67,671
- --------------------------------------------------------------------------------
$2,507,403 $2,493,184
================================================================================
Liabilities and Equity:
Current $ 300,368 $ 132,134
Long-term debt and other liabilities 1,296,735 1,496,724
Stockholders' equity 910,300 864,326
- --------------------------------------------------------------------------------
$2,507,403 $2,493,184
================================================================================
</TABLE>
The following is summarized financial information for Bear Creek. No
provision for income taxes has been included since its income taxes are paid
directly by the joint venture participants.
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $35,744 $36,226 $36,258
Expenses:
Operating expenses 6,819 4,440 4,817
Depreciation 5,441 5,430 5,415
Other expenses, net 4,422 4,997 5,657
- -----------------------------------------------------------------------------
Income Reported $19,062 $21,359 $20,369
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 11,687 $ 6,503
Net plant and property 144,519 149,334
Other -- 296
- -------------------------------------------------------------
$156,206 $156,133
=============================================================
Liabilities and Equity:
Current $ 7,968 $ 8,298
Long-term debt and
other liabilities 43,140 48,799
Participants' equity 105,098 99,036
- -------------------------------------------------------------
$156,206 $156,133
=============================================================
</TABLE>
In 1995, Southern executed a Capital Contribution Agreement in
connection with the project financing for Bear Creek from The Prudential
Insurance Company of America. In the event that Bear Creek does not refinance
the remaining principal, this agreement provides that Southern and its partner
will contribute $21.0 million each to Bear Creek on October 31, 2000, to provide
funds to enable Bear Creek to make a principal payment due under the financing.
In April 1997, units of Shell Oil Company and BP Amoco Corporation
joined with Southern Natural Gas in the ownership of Destin, a 1
billion-cubic-foot-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 was fully in service in March 1999. The FERC has approved two
extensions of Destin which extend its pipeline by
49
II-28
<PAGE> 60
Notes to Consolidated Financial Statements
Note 6 (continued)
43 miles. The following is summarized financial information for Destin.
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Revenues $ 11,978 $1,049
Expenses (Income):
Operating expenses 820 --
Depreciation and amortization 641 --
Interest and other (19,388) 2,778
- --------------------------------------------------------------------
Income Reported $ 29,905 $3,827
====================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current $ 23,867 $ 54,885
Net transmission plant and property 417,102 81,864
Other 12,626 1,429
- ----------------------------------------------------------------------------
$453,595 $138,178
============================================================================
Liabilities and Equity:
Current $140,792 $ 4,315
Long-term debt and other liabilities 19,571 2,236
Stockholders' equity 293,232 131,627
- ----------------------------------------------------------------------------
$453,595 $138,178
============================================================================
</TABLE>
In November 1998 Destin issued bonds to the Mississippi Business
Finance Corporation (MBFC) in the amount of $135.0 million. The three members of
Destin each purchased $45.0 million of these bonds from the MBFC, which loaned
the proceeds from the sale of the bonds to Destin. Destin used the proceeds from
this loan to finance the construction of its pipeline project, which allowed it
to return invested capital to its three members.
NOTE 7 Plant, Property and Equipment and Depreciation
Plant, property and equipment, by business segment, is shown in the following
table:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production:
Costs subject to amortization $5,420,473 $5,022,140
Costs not subject to amortization 148,615 201,208
- ----------------------------------------------------------------------------
5,569,088 5,223,348
- ----------------------------------------------------------------------------
Natural Gas Transmission:
Mainline transmission property 1,642,291 1,295,247
Gas supply 506,965 660,700
Gas gathering 10,261 16,568
Underground storage facilities 61,494 60,684
Liquefied natural gas facilities 154,076 154,076
Other 297,138 269,498
- ----------------------------------------------------------------------------
2,672,225 2,456,773
- ----------------------------------------------------------------------------
Energy Services:
Intrastate pipeline 56,012 55,834
Other 32,168 22,334
- ----------------------------------------------------------------------------
88,180 78,168
- ----------------------------------------------------------------------------
Other 70,441 72,408
- ----------------------------------------------------------------------------
$8,399,934 $7,830,697
============================================================================
</TABLE>
Plant, property and equipment includes construction work in progress of
$142.6 million and $137.1 million at December 31, 1998 and 1997, respectively.
Plant, property and equipment also includes $142.1 million and $130.1 million of
gas stored underground at December 31, 1998 and 1997, respectively.
The accumulated depreciation, depletion and amortization amounts, by
business segment, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Exploration and Production $4,093,898 $2,700,122
- ----------------------------------------------------------------------------
Natural Gas Transmission:
Mainline transmission property 866,198 844,885
Gas supply 449,485 434,205
Gas gathering 6,206 11,072
Underground storage facilities 47,850 45,869
Liquefied natural gas facilities 123,802 118,981
Other 40,449 42,815
- ----------------------------------------------------------------------------
1,533,990 1,497,827
- ----------------------------------------------------------------------------
Energy Services:
Intrastate pipeline 29,727 26,819
Other 10,570 6,435
- ----------------------------------------------------------------------------
40,297 33,254
- ----------------------------------------------------------------------------
Other 35,582 33,714
- ----------------------------------------------------------------------------
$5,703,767 $4,264,917
============================================================================
</TABLE>
50
II-29
<PAGE> 61
The annual depreciation rates or useful productive lives, by business
segment, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission:
Mainline transmission property 2.0% 2.0% 2.0%
Gas supply 2.9% 2.9% 2.9%
Gas gathering 2.8% 2.8% 2.8%
Underground storage facilities 3.3% 3.3% 3.3%
Liquefied natural gas facilities 3.2% 3.2% 3.2%
Energy Services
Intrastate pipeline 20 yrs. 20 yrs. --
Other 5 yrs. 5 yrs. 5 yrs.
Other 5-38 yrs. 5-38 yrs. 5-38 yrs.
========================================================================================
</TABLE>
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 proved reserves. Certain unevaluated properties are excluded from the
amortization base until a determination has been made as to the existence of
proved reserves. Also included in amortization on a unit-of-production basis are
the estimated future dismantlement and abandonment costs and estimated future
development costs for proved undeveloped reserves.
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 FERC directives, reduced the loss for the year ended
December 31, 1998, by approximately $4.6 million.
NOTE 8 Debt and Lines of Credit
Long-Term Debt - Long-term debt consists of:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Sonat Inc.
Revolving Credit Agreement at
rates based on prime,
international or money-market
lending rates (an effective
rate of 6.14% at December 31,
1997) expiring on
June 30, 2001 $ -- $ 130,000
6.75% Notes due October 1, 2007 100,000 100,000
6 7/8% Notes due June 1, 2005 200,000 200,000
9 1/2% Notes due August 15, 1999 100,000 100,000
6 5/8% Notes due February 1, 2008 100,000 --
7% Notes due February 1, 2018 100,000 --
9% Notes due May 1, 2001 100,000 100,000
8.24% Senior Notes due through
December 31, 2000 4,100 6,200
Sonat Exploration GOM Inc.
Senior Revolving Credit Facility (an
effective rate of 7.22% at
December 31, 1997) expiring
on October 31, 1999 -- 145,000
10.6% Senior Subordinated Notes
due July 26, 2001 -- 50,000
Southern Natural Gas Company
6.125% Notes due September 15, 2008 100,000 --
6.70% Notes due October 1, 2007 100,000 100,000
7.85% Notes due January 15, 2002 100,000 100,000
8 5/8% Notes due May 1, 2002 100,000 100,000
8 7/8% Notes due February 15, 2001 100,000 100,000
Southern LNG Inc.
Promissory Note (an effective rate of
6.75% at December 31, 1998 and
1997) due through April 1, 1999 5,000 10,000
Capital Leases and Other 3,754 11,042
- -----------------------------------------------------------------------------------------
Total Outstanding 1,212,854 1,252,242
Less Long-Term Debt Due Within
One Year (109,835) (14,508)
Less Unamortized Debt Discount (3,535) (1,750)
- -----------------------------------------------------------------------------------------
$ 1,099,484 $ 1,235,984
=========================================================================================
</TABLE>
51
II-30
<PAGE> 62
Notes to Consolidated Financial Statements
Note 8 (continued)
Annual maturities of long-term debt at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Years (In Thousands)
- --------------------------------------------------------------------
<S> <C>
1999 $ 109,835
2000 2,805
2001 200,214
2002 200,000
2003 --
2004-2018 700,000
- --------------------------------------------------------------------
$1,212,854
====================================================================
</TABLE>
Sonat has a bank revolving credit agreement that provides for periodic
borrowings and repayments of up to $500.0 million through June 30, 2001.
Borrowings are supported by unsecured promissory notes that, at the option of
the Company, will bear interest at the banks' prevailing prime or international
lending rate, or such rates as the banks may competitively bid. During 1998,
$200.0 million was borrowed and $330.0 million was repaid under the revolving
credit agreement, resulting in no balance outstanding at December 31, 1998.
In January 1998, Sonat made two public offerings of Notes pursuant to a
shelf registration statement. In one offering, Sonat issued $100.0 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 $100.0 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.
At December 31, 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 December 31,
1998, Sonat had $24.3 million outstanding under its agreement at a rate of 5.87
percent. No amounts were outstanding under Southern Natural Gas' agreement.
In late January 1999, Sonat completed a new 364-day $400.0 million
revolving credit facility with 11 banks. In connection with this new credit
facility, the Company terminated existing lines of credit providing for up to
$700.0 million of borrowings.
Sonat had $696.1 million and $446.6 million, respectively, in
commercial paper outstanding at average rates of 5.96 percent and 6.31 percent
at December 31, 1998 and 1997, respectively.
NOTE 9 Income Taxes
An analysis of the Company's income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 18,548 $ 12,435 $ 18,841
State 5,690 8,067 4,021
- ----------------------------------------------------------------------------------------
24,238 20,502 22,862
- ----------------------------------------------------------------------------------------
Deferred:
Federal (325,663) 82,777 94,911
State 3,677 2,472 5,391
- ----------------------------------------------------------------------------------------
(321,986) 85,249 100,302
- ----------------------------------------------------------------------------------------
Income Tax Expense (Benefit) $(297,748) $105,751 $123,164
========================================================================================
</TABLE>
Net deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $240,098 $ 585,314
Inventories 11,130 11,573
Other 17,078 10,468
- --------------------------------------------------------------------------
Total deferred tax liabilities 268,306 607,355
- --------------------------------------------------------------------------
Deferred Tax Assets:
GSR and other transition costs 8,531 10,210
Employee benefits 7,708 36,607
Net operating loss carryforwards 33,098 46,065
Tax credit carryforwards 22,859 14,713
Other accounting accruals 12,066 7,954
Other 20,080 17,361
- --------------------------------------------------------------------------
104,342 132,910
Less valuation allowance -- (11,505)
- --------------------------------------------------------------------------
Total deferred tax assets 104,342 121,405
- --------------------------------------------------------------------------
Net Deferred Tax Liabilities $163,964 $ 485,950
==========================================================================
</TABLE>
52
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<PAGE> 63
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. During 1998, the Company removed its
valuation allowance related to net operating loss carryforwards because based on
the weight of available evidence, it is more likely than not that the remaining
deferred tax assets will be realized.
At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $94.6 million for income tax purposes which
expire between 2001 and 2017. The Company has tax credit carryforwards of
approximately $22.9 million which can be carried forward indefinitely.
Consolidated income tax expense (benefit) is different from the amount
computed by applying the U.S. federal income tax rate to income (loss) before
income tax. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense (Benefit)
at Statutory Federal Income
Tax Rates $(289,893) $ 113,311 $ 132,651
Increases (Decreases)
Resulting From:
State income taxes, net
of federal income
tax benefit 6,089 6,851 6,118
Non-conventional fuel
tax credits (6,844) (7,220) (9,465)
Refunds and adjustment
of accrued tax position (110) 47 880
Dividend exclusion (6,824) (8,029) (6,413)
Other (166) 791 (607)
- ------------------------------------------------------------------------------------------
Income Tax Expense
(Benefit) $(297,748) $ 105,751 $ 123,164
==========================================================================================
</TABLE>
NOTE 10 Commitments and Contingencies
Rate Matters - Periodically, Southern makes 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 December 31, 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.
Other Matters - In September 1998, West Georgia Generating Company
L.P., formerly Cataula Generating Company, L.P. (West Georgia), acquired the
right to develop a 680-megawatt peaking plant in west central Georgia and an
associated contract to sell a significant portion of the plant's output to
Georgia Power Company. Although West Georgia originally planned to develop the
plant in Harris County, Georgia, as a result of the revocation by the Harris
County Board of Commissioners of the previously issued special-use permit, West
Georgia is in the process of finalizing alternate sites for the location of the
plant. If the project experiences additional delays in site finalization,
permitting or construction, it could result in an inability to have the plant
available in time to meet its obligation to make 205 megawatts of electric
capacity available to Georgia Power beginning June 1, 2000. In that event, West
Georgia would be required to source electric capacity from the market at prices
in excess of the prices received from Georgia Power. However, West Georgia
anticipates that it will be successful in relocating the plant to one of its
alternative sites and commencing construction in time to meet its contractual
commitments to Georgia Power.
53
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<PAGE> 64
Notes to Consolidated Financial Statements
Note 10 (continued)
Sonat Marketing was formed in September 1995 and is jointly owned by
a subsidiary of the Company and a subsidiary of AGL Resources, Inc. Sonat's
wholly owned subsidiary, Sonat Marketing Company, contributed all of its assets
and liabilities except $32.0 million of accounts receivable in exchange for a 65
percent ownership interest in Sonat Marketing, and a subsidiary of AGL
Resources, contributed $32.0 million in cash to Sonat Marketing in exchange for
a 35 percent ownership interest. AGL Resources has certain rights to resell to
the Company its interest in Sonat Marketing, including a right until August 31,
2000, to receive the greater of fair market value or a formula price. The pretax
gain on the transaction of approximately $23 million, which is included in Other
Deferred Credits in the Consolidated Balance Sheets, has been deferred.
Leases - The Company has operating lease commitments expiring at
various dates, principally for office space and equipment. The Company has no
significant capital leases.
Rental expense for all operating leases is summarized below.
Rental Expense
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Non-Affiliated Operating Leases $19,904 $20,377 $18,444
Affiliated Operating Leases 3,950 3,544 3,680
- -----------------------------------------------------------------
$23,854 $23,921 $22,124
=================================================================
</TABLE>
At December 31, 1998, future minimum payments for non-cancelable
operating leases for the years 1999 through 2003 are $12 million or less per
year. Future minimum rentals to be received under subleases for the years 1999
and 2000 are less than $2 million per year.
NOTE 11 Capital Stock and Stock-Based Compensation Per-share prices of the
Company's common stock, based on the New York Stock Exchange listing of
composite transactions, and dividends paid per common share for the last two
years are summarized below.
Price Range and Dividends Paid Per Common Share
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------------------
Quarter 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price Range High-Low
First $45 5/8 - $38 7/8 $57 - $45 1/2
Second 44 13/16 - 36 59 1/8 - 50 5/8
Third 38 9/16 - 25 7/8 54 1/4 - 45 3/8
Fourth 31 3/8 - 26 5/16 51 5/16 - 42 1/4
=======================================================================
Dividend Rate (Note)
First $ .27 $ .27
Second .27 .27
Third .27 .27
Fourth .27 .27
- -----------------------------------------------------------------------
$ 1.08 $ 1.08
=======================================================================
Shareholders of
Record at Year-End 10,589 11,258
=======================================================================
</TABLE>
Note: The dividend rate is the actual rate paid per common share of Sonat
stock, exclusive of shares issued for the merger in January 1998 (see Note 3).
The Company had no restrictions on the payment of dividends at December
31, 1998.
The Company has a Preference Share Rights Plan (the Plan) designed to
protect the interest of stockholders in the event of a hostile attempt to take
over the Company and to make it more difficult for a person to gain control of
the Company in a manner or on terms not approved by the Board of Directors. The
Plan provides for the issuance of one right with respect to each outstanding
share of common stock. The rights issued under the Plan are redeemable at any
time by the Company before their expiration on February 3, 2006, unless certain
triggering events have occurred. The rights outstanding under the Plan are
exercisable for one one-hundredth of a share of Series A Participating
Preference Stock, par value $1.00, with each share having substantially the
rights and preferences of 100 shares of common stock. As of December 31, 1998,
1,000,000 shares of Series A Participating Preference Stock were reserved for
issuance under this Plan.
54
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<PAGE> 65
Earnings Per Share - The following table presents the computation of
basic and diluted earnings (loss) per share of common stock:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $(530,517) $217,996 $255,840
===========================================================================
Denominator:
Denominator for Basic
Earnings (Loss) Per Share:
Weighted average number
of shares of common
stock outstanding 110,020 110,099 110,370
Effect of Dilutive Securities:
Common stock equivalents
applicable to outstanding
stock options (Note) -- 1,570 1,352
- ---------------------------------------------------------------------------
Denominator for Earnings
(Loss) Per Share -
Assuming Dilution:
Adjusted weighted
average shares using
treasury stock method
for assumed conversions 110,020 111,669 111,722
===========================================================================
Earnings (Loss) Per Share
of Common Stock $ (4.82) $ 1.98 $ 2.32
===========================================================================
Earnings (Loss) Per Share
of Common Stock -
Assuming Dilution $ (4.82) $ 1.95 $ 2.29
===========================================================================
</TABLE>
Note: The addition of 1,002,000 potential common shares for the 1998 period
would be antidilutive in the computation of diluted earnings per share and are
therefore not included.
Executive Award Plan - The Company has an Executive Award Plan that
provides awards to certain key employees in the form of stock options,
restricted stock and stock appreciation rights (SARs) in tandem with any or all
stock options. In years prior to 1991, tax offset payments were generally
provided in conjunction with these awards. SARs permit the holder of an
exercisable option to surrender that option for an amount equal to the excess of
the market price of the common stock on the date of exercise over the option
price (appreciation). The appreciation is payable in cash, common stock or a
combination of both. SARs are subject to the same terms and conditions as the
options to which they are related. Commencing in November 1995, the Company has
issued, in tandem with its regular stock options, SARs that are exercisable only
in the event of a change in control (limited SARs). In November 1995, the
Company also issued limited SARs to certain key employees with respect to all of
their then outstanding options. No other SARs have been issued since 1990. At
December 31, 1998, 89,000 SARs relating to the earlier periods were outstanding.
All options granted since December 1992 have 10-year terms and vest and become
fully exercisable at the end of five years of continued employment. Options
issued after 1992 also contain an acceleration provision dependent upon a
specified increase in the Company's stock price. Options granted prior to
December 1992 vested over three years and had no accelerated vesting provisions.
The Company issued 18,400 shares of restricted stock with a $35.48 per share
market value to employees during 1998, 80,100 shares with a $43 13/16 per share
market value during 1997 and 97,000 shares with a $52.00 per share market value
during 1996. At December 31, 1998, 229,798 of the 550,200 cumulative restricted
shares issued have vested. A new plan was authorized during 1995 which made an
additional four million shares available for issuance.
The Company has elected to follow APB No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting for its employee
stock options. Under APB No. 25, compensation expense is recognized for the
difference between the option price and market value on the measurement date for
variable stock option awards and restricted stock grants. No compensation
expense is recognized for options the Company issued after 1990 because the
exercise price of the stock options equals the market price of the underlying
stock on the date of grant.
Stock-based compensation increased pretax income by $5.8 million in
1998 and $2.0 million in 1997 and decreased it by $13.2 million in 1996.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been
determined as if the Company had
55
II-34
<PAGE> 66
Notes to Consolidated Financial Statements
Note 11 (continued)
accounted for its employee stock options under the fair value method of the
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: interest rates (zero-coupon
U.S. government issues with a remaining life of six years) of 4.95 percent, 5.93
percent and 6.10 percent; dividend yields of 3.54 percent, 2.47 percent and 2.35
percent; volatility factors of the expected market price of the Company's common
stock of .292, .266 and .255; and a weighted-average expected life of the
options of six years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
--------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss):
As reported $ (530,517) $ 217,996 $ 255,840
Pro forma (533,027) 216,773 253,173
Earnings (Loss) Per Share:
As reported $ (4.82) $ 1.98 $ 2.32
Pro forma (4.84) 1.97 2.29
Earnings (Loss) Per Share -
Assuming Dilution:
As reported $ (4.82) $ 1.95 $ 2.29
Pro forma (4.84) 1.94 2.27
============================================================================
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period, which is
five years for the awards. However, since all of the 1995 stock option grants
vested under an accelerated vesting clause in 1996, the entire remaining cost
for that award is reflected in 1996. Because the Company's stock options vest
generally over five years and additional awards are typically made each year,
the above pro forma disclosures are not likely to be representative of the
effects on pro forma net income or loss for future years.
A summary of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,416,219 $32.74
Granted 1,323,100 30.48
Exercised (190,424) 19.80
Forfeited (68,480) 45.79
- ---------------------------------------------------------------------------
Outstanding - End of Year 5,480,415 32.48
===========================================================================
Exercisable - End of Year 3,444,075 30.25
===========================================================================
Shares Authorized for Future Grants 1,561,000
===========================================================================
Fair Value of Options Granted During the Year $ 7.53
===========================================================================
<CAPTION>
1997
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,178,226 $30.16
Granted 712,400 43.81
Exercised (453,907) 25.69
Forfeited (20,500) 46.90
- ---------------------------------------------------------------------------
Outstanding - End of Year 4,416,219 32.74
===========================================================================
Exercisable - End of Year 3,217,419 27.38
===========================================================================
Shares Authorized for Future Grants 2,884,700
===========================================================================
Fair Value of Options Granted During the Year $ 12.50
===========================================================================
<CAPTION>
1996
- ---------------------------------------------------------------------------
Weighted-Avg.
Options Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - Beginning of Year 4,578,600 $25.24
Granted 633,700 52.00
Exercised (1,013,954) 21.58
Forfeited (20,120) 31.81
- ---------------------------------------------------------------------------
Outstanding - End of Year 4,178,226 30.16
===========================================================================
Exercisable - End of Year 3,544,526 26.26
===========================================================================
Shares Authorized for Future Grants 3,597,100
===========================================================================
Fair Value of Options Granted During the Year $ 14.87
===========================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------
Weighted-Avg.
Number Remaining
Range of Exercise Outstanding Contractual Weighted-Avg.
Prices 12/31/98 Life Exercise Price
- -------------------------------------------------------------------
<S> <C> <C> <C>
$ 13.625 - $17.4375 365,050 2.9 $16.31
$ 21.125 - $ 29.125 2,345,130 7.1 26.42
$ 30.00 - $ 32.25 1,266,815 5.8 30.99
$43.8125 - $ 52.00 1,503,420 8.6 47.14
- -------------------------------------------------------------------
5,480,415
<CAPTION>
Options Exercisable
---------------------------
Number
Range of Exercise Exercisable Weighted-Avg.
Prices 12/31/98 Exercise Price
- ---------------------------------------------------
<S> <S> <C>
$ 13.625 - $17.4375 365,050 $16.31
$ 21.125 - $ 29.125 1,262,630 25.54
$ 30.00 - $ 32.25 1,266,815 30.99
$43.8125 - $ 52.00 549,580 48.64
- ---------------------------------------------------
3,444,075
===================================================
</TABLE>
56
II-35
<PAGE> 67
Directors' Restricted Stock Plan - The Company has a Restricted Stock
Plan for non-employee members of the Board of Directors. Full rights vest over a
maximum of five years. The Company issued 24,000 shares under this plan in 1998.
The Company did not issue any shares under this plan during 1997 and 1996. At
December 31, 1998, 35,860 of the 61,460 cumulative shares granted have vested.
Treasury Stock - Shares held in treasury are being reissued in
connection with employee stock options and restricted stock programs.
Serial Preference Stock - At December 31, 1998 and 1997, there were
10,000,000 shares of $1.00 par value Serial Preference Stock authorized, with
none issued.
NOTE 12 Retirement Plans and Other
Postemployment Benefits
Retirement Plans - The Company has a trusteed, non-contributory, tax qualified
defined benefit retirement plan (the Retirement Plan) covering substantially all
employees of the Company. A supplemental benefit plan (the Supplemental Plan)
that provides retirement benefits in excess of those allowed under the Company's
tax qualified retirement plan is also in effect for the Company.
Amounts are being placed in a trust established to provide benefits
under the Supplemental Plan. However, this trust is not subject to any funding
requirements. At December 31, 1998, this trust had assets with a fair market
value of $47.5 million available to pay benefits. These assets are not
considered plan assets under SFAS No. 87, Employers' Accounting for Pensions.
The following tables set forth the benefit obligation and assets of the
plans and the changes in the benefit obligation and plan assets:
<TABLE>
<CAPTION>
(In Thousands)
------------------------
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1, $ 372,687 $ 386,825
Service cost 10,892 7,848
Interest cost 28,209 26,858
Amendments (341) --
Actuarial loss (gain) 31,351 (25,959)
Effect of curtailment (5,518) (3,096)
Effect of special termination benefits 4,121 3,252
Benefits paid (24,020) (23,041)
- --------------------------------------------------------------------
Benefit obligation at December 31, $ 417,381 $ 372,687
====================================================================
Change in Plan Assets:
Fair value at January 1, $ 550,982 $ 459,033
Return on plan assets 76,312 111,983
Contributions 3,395 3,007
Benefits paid (24,020) (23,041)
- --------------------------------------------------------------------
Fair value at December 31, $ 606,669 $ 550,982
====================================================================
</TABLE>
The following table sets forth the funded status of the plans and the
amount of the net pension asset or liability recognized in the Company's
Consolidated Balance Sheets:
<TABLE>
<CAPTION>
(In Thousands)
------------------------
December 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Funded Status $ 189,288 $ 178,295
Unrecognized Net Assets at Transition (7,612) (9,292)
Unrecognized Net Gain (166,188) (172,566)
Unrecognized Prior Service Cost 5,516 7,088
Net Unamortized Deferred Charge from
Early Retirement Termination Benefits 453 598
- --------------------------------------------------------------------
Net Pension Asset Recognized in the
Consolidated Balance Sheets $ 21,457 $ 4,123
====================================================================
Total Recognized Amounts in the
Consolidated Balance Sheets Consist of:
Prepaid benefit cost $ 53,642 $ 33,170
Accrued benefit liability (33,893) (29,887)
Intangible asset 1,255 242
Net unamortized deferred charge from
early retirement termination benefits 453 598
- --------------------------------------------------------------------
$ 21,457 $ 4,123
====================================================================
</TABLE>
57
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<PAGE> 68
Notes to Consolidated Financial Statements
Note 12 (continued)
The projected benefit obligation and accumulated benefit obligation for
the pension plan with accumulated benefit obligations in excess of plan assets
were $51.1 million and $33.9 million, respectively, as of December 31, 1998, and
$40.4 million and $29.9 million, respectively, as of December 31, 1997.
The assumed rates used to measure the projected benefit obligations and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 7.5% 7.0%
Long-Term Rate of Return 10.5% 9.5% 9.5%
Increase in Future Compensation Levels
(Composite Rate):
Retirement and Supplemental Plans 5.0% 5.0% 5.0%
==================================================================
</TABLE>
The Company's net periodic pension income consists of the following
components:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 10,892 $ 7,848 $ 8,818
Interest Cost 28,209 26,858 26,550
Expected Return (48,586) (40,107) (37,795)
Amortization of Prior
Service Cost 816 868 868
Amortization of Net Asset
at Transition (1,679) (1,679) (1,679)
Amortization of Net Gain (3,054) (2,379) 76
Curtailment Gain (4,803) (2,959) --
Special Termination
Benefits Loss 4,121 3,252 --
- --------------------------------------------------------------------
Net Periodic Pension Income $(14,084) $ (8,298) $ (3,162)
====================================================================
</TABLE>
Other Postemployment Benefits - The Company has plans that provide for
postretirement health care and life insurance benefits to substantially all of
its employees when they retire. The Company accrues the cost of postretirement
health care and life insurance benefits within the employees' active service
periods. The Company has elected to amortize the transition obligation over a
20-year period.
The following tables set forth the benefit obligation and assets of the
Company's postretirement health care and life insurance plans and the changes in
the benefit obligation and plan assets:
<TABLE>
<CAPTION>
(In Thousands)
----------------------
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at January 1, $ 82,956 $ 95,027
Service cost 2,005 2,137
Interest cost 5,870 6,575
Plan participants' contributions 987 904
Actuarial loss (gain) 1,695 (14,833)
Effect of curtailment (1,389) 233
Effect of special termination benefits 1,824 100
Benefits paid (6,836) (7,187)
- ------------------------------------------------------------------
Benefit obligation at December 31, $ 87,112 $ 82,956
==================================================================
Change in Plan Assets:
Fair value at January 1, $ 38,923 $ 32,595
Return on plan assets 6,276 4,109
Employer's contribution 9,614 8,502
Plan participants' contributions 987 904
Benefits paid (6,836) (7,187)
- ------------------------------------------------------------------
Fair value at December 31, $ 48,964 $ 38,923
==================================================================
</TABLE>
The following table sets forth the funded status and amount of the net
pension asset or liability at December 31, 1998 and 1997, for the Company's
postretirement health care and life insurance plans:
<TABLE>
<CAPTION>
(In Thousands)
----------------------
December 31, 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Funded Status $(38,148) $(44,033)
Unrecognized Net Obligation at Transition 43,151 51,994
Unrecognized Net Gain (32,918) (31,649)
Net Unamortized Deferred Charge From
Early Retirement Termination Benefit 1,442 1,980
- ------------------------------------------------------------------
Accrued Postretirement Benefit Liability $(26,473) $(21,708)
==================================================================
Total Recognized Amounts in the
Consolidated Balance Sheets Consist of:
Prepaid benefit cost $ -- $ 204
Accrued benefit liability (27,915) (23,892)
Net unamortized deferred charge from
early retirement termination benefit 1,442 1,980
- ------------------------------------------------------------------
$(26,473) $(21,708)
==================================================================
</TABLE>
58
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<PAGE> 69
The assumed rates used to measure the projected benefit obligation and
the expected earnings of plan assets are:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 7.0% 7.5% 7.0%
Long-Term Rate of Return:
Medical assets (after tax) 6.5% 5.5% 5.5%
Life insurance assets 10.5% 7.5% 7.5%
========================================================
</TABLE>
The rate of increase in the per capita costs of covered health care
benefits is assumed to be 4.5 percent in 1999 and for all future years.
The Company's net periodic cost for postretirement health care and life
insurance benefits consists of the following components:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 2,005 $ 2,137 $ 2,161
Interest Cost 5,870 6,575 6,387
Expected Return on Plan Assets (2,772) (2,069) (1,617)
Amortization of Net Obligation
at Transition 3,469 3,597 3,597
Amortization of Net Gain (1,722) (820) (367)
Curtailment Loss 4,180 1,866 --
Special Termination Benefits Loss 1,824 100 --
- ---------------------------------------------------------------------------
$ 12,854 $ 11,386 $ 10,161
===========================================================================
</TABLE>
A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
- -------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components $1,156 $ (939)
Effect on postretirement benefit obligation 8,964 (7,684)
=========================================================================
</TABLE>
NOTE 13 Business Segment Analysis
The Company's consolidated financial statements reflect operations in three
segments: Exploration and Production, Natural Gas Transmission and Energy
Services.
The Company is engaged in the exploration for and the acquisition,
development and production of oil and natural gas through its Exploration and
Production segment. The oil and gas properties of the Exploration and Production
segment are located principally onshore in the Southern coastal states, in
various states in the Southwest, and in federal waters offshore Louisiana and
Texas. It derives a significant portion of its revenues from sales to Sonat
Marketing (included in the Energy Services segment).
The principal business of the Natural Gas Transmission segment is the
transmission and storage of natural gas in interstate commerce. Its transmission
systems are located in the Southeastern United States. Transportation service is
provided for its distribution customers primarily for residential and commercial
end use; industrial customers; electric generation companies; gas producers;
other gas pipelines; and gas marketing and trading companies. It provides
transportation service in both its gas supply and market areas. The principal
industries served directly by the natural gas transmission segment's pipeline
system and indirectly through its distribution customers' systems include the
electric generation, fertilizer, chemical, pulp and paper, textile, primary
metals, stone, clay and glass industries.
The Energy Services segment is engaged primarily in natural gas and
electric power marketing for industrial and commercial users, gas distribution
companies and gas producers throughout the Gulf Coast, Southeastern, Midwestern
and Northeastern United States and development of power systems and power
plants.
The Company's results of operations, revenues from major customers,
capital expenditures and assets by business segment are shown in the following
tables. Intersegment sales are primarily gas sales by the Exploration and
Production segment and transportation revenue by the Natural Gas Transmission
segment and are priced at market rates. The Company has no foreign operations.
59
II-38
<PAGE> 70
Notes to Consolidated Financial Statements
Note 13 (continued)
Business Segment Analysis
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1998 Production Transmission Services Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $ 173,874 $ 357,678 $ 3,191,320 $ 3,722,872
Intersegment Revenues 361,380 36,538 1,048 398,966
Interest Income 80 3,494 3,023 6,597
Interest Expense 78,071 40,114 4,255 122,440
Interest Capitalized 2,371 2,506 246 5,123
Depreciation, Depletion and Amortization 291,586 46,281 7,032 344,899
Unusual Items 1,050,195 -- -- 1,050,195
Equity in Earnings of Unconsolidated Affiliates 455 44,037 2,885 47,377
Earnings (Loss) Before Interest and Taxes (936,230) 233,268 (6,820) (709,782)
Investment in Unconsolidated Affiliates 6,090 549,520 69,212 624,822
Segment Assets 1,635,597 1,961,994 762,547 4,360,138
Capital Expenditures 581,059 222,165 9,971 813,195
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1997 Production Transmission Services Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $ 345,520 $ 359,163 $3,725,186 $4,429,869
Intersegment Revenues 409,555 34,129 -- 443,684
Interest Income 1,261 2,233 2,670 6,164
Interest Expense 64,540 30,612 1,874 97,026
Interest Capitalized 5,599 1,849 -- 7,448
Depreciation, Depletion and Amortization 341,278 47,769 5,557 394,604
Unusual Items 50,374 -- -- 50,374
Equity in Earnings of Unconsolidated Affiliates 445 40,525 817 41,787
Earnings Before Interest and Taxes 180,972 225,905 7,063 413,940
Investment in Unconsolidated Affiliates 5,679 467,453 9,192 482,324
Segment Assets 2,764,381 1,757,851 744,626 5,266,858
Capital Expenditures 862,609 144,269 10,978 1,017,856
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------------
Exploration Natural
and Gas Energy
Year Ended December 31, 1996 Production Transmission Services Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from External Customers $319,730 $ 362,194 $2,589,468 $3,271,392
Intersegment Revenues 410,520 36,634 3,234 450,388
Interest Income 1,092 5,077 5,008 11,177
Interest Expense 57,059 38,060 984 96,103
Interest Capitalized 6,658 984 -- 7,642
Depreciation, Depletion and Amortization 332,129 48,292 1,729 382,150
Equity in Earnings of Unconsolidated Affiliates 408 32,532 9 32,949
Earnings Before Interest and Taxes 252,845 204,782 5,841 463,468
Capital Expenditures 620,100 130,418 4,736 755,254
============================================================================================================
</TABLE>
60
II-39
<PAGE> 71
The following table reconciles the total of the Company's reportable
segments' revenues to the Company's consolidated revenues:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues for
Reportable Segments $ 4,121,838 $ 4,873,553 $ 3,721,780
Other Revenues 17 15 (524)
Elimination of
Intersegment Revenues (398,966) (443,684) (450,388)
Other Reclassifications (13,071) (57,387) (67,258)
- --------------------------------------------------------------------------
Total Consolidated
Revenues $ 3,709,818 $ 4,372,497 $ 3,203,610
==========================================================================
</TABLE>
The following table reconciles the total of the Company's reportable
segments' earnings before interest and taxes (EBIT) to the Company's
consolidated EBIT:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Total EBIT for
Reportable Segments $(709,782) $413,940 $463,468
Other EBIT 7,772 6,999 4,423
- -------------------------------------------------------------------
Total Consolidated EBIT $(702,010) $420,939 $467,891
===================================================================
</TABLE>
The following table reconciles the total of the Company's reportable
segments' assets to the Company's consolidated assets:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Total Assets for Reportable Segments $ 4,360,138 $ 5,266,858
Other Assets 2,874,572 2,885,865
Elimination of Intercompany
Receivables and Payables (2,850,311) (2,867,051)
Other Eliminations (23,305) (33,558)
- ---------------------------------------------------------------------
Total Consolidated Assets $ 4,361,094 $ 5,252,114
=====================================================================
</TABLE>
Revenues from Major Customers
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Enron and affiliates:
Exploration and production $ 63,265 $181,206 $167,843
Natural gas transmission 3 180 156
Energy services 157,950 264,399 202,130
- ------------------------------------------------------------------
$221,218 $445,785 $370,129
==================================================================
Atlanta Gas Light:
Natural gas transmission $134,045 $130,425 $134,062
Energy services 17,303 51,069 54,191
- ------------------------------------------------------------------
$151,348 $181,494 $188,253
==================================================================
Alabama Gas Corporation:
Natural gas transmission $ 47,956 $ 48,300 $ 38,662
Energy services 105,134 87,994 86,062
- ------------------------------------------------------------------
$153,090 $136,294 $124,724
==================================================================
</TABLE>
All of the major customers or their affiliates participate with the
Company in certain joint venture operations.
NOTE 14 Oil and Gas Operations (Unaudited)
At December 31, 1998, the Company had interests in oil and gas properties that
are located primarily in Texas, Louisiana, Oklahoma, Arkansas, Alabama, and
offshore Louisiana and Texas in the Gulf of Mexico. The Company does not own or
lease any oil and gas properties outside the United States.
Capitalized costs relating to oil and gas producing activities and
related accumulated depreciation, depletion and amortization were as follows:
Capitalized Costs
<TABLE>
<CAPTION>
(In Thousands)
-------------------------
December 31, 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Oil and Gas Properties:
Costs subject to amortization $5,420,473 $5,022,140
Costs not subject to amortization 148,615 201,208
- ---------------------------------------------------------------
5,569,088 5,223,348
Less Accumulated Depreciation,
Depletion and Amortization 4,093,898 2,700,122
- ---------------------------------------------------------------
$1,475,190 $2,523,226
===============================================================
</TABLE>
61
II-40
<PAGE> 72
Notes to Consolidated Financial Statements
Note 14 (continued)
Costs incurred in oil and gas producing activities, whether capitalized
or expensed, were as follows:
Costs Incurred
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Property Acquisition Costs:
Proved properties $ 1,592 $ 5,811 $ 61,441
Unproved properties 48,292 77,935 72,705
Exploration Costs 155,879 287,884 177,199
Development Costs 371,500 488,724 295,821
- -----------------------------------------------------------------------
Total Costs $577,263 $860,354 $607,166
=======================================================================
</TABLE>
An analysis of the capitalized costs by year of expenditure of oil and
gas properties that are not being amortized as of December 31, 1998, pending
determination of proved reserves follows:
Capitalized Costs Not Being Amortized
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------------------
Cumulative Costs Excluded for Cumulative
Balance Years Ended Dec.31, Balance
---------------------------------------------------------------
DEC. 31, 1998 1998 1997 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Acquisition $ 93,931 $39,559 $24,220 $18,386 $11,766
Exploration 54,684 41,573 12,644 467 --
- ----------------------------------------------------------------------------
$148,615 $81,132 $36,864 $18,853 $11,766
============================================================================
</TABLE>
Projects presently excluded from amortization are in various stages of
evaluation. The majority of these costs are expected to be included in the
amortization calculation in the years 1999 through 2003. Total amortization
expense, including ceiling test charges, per unit of production was $4.81,
$1.41, and $1.03 per thousand cubic feet equivalent in 1998, 1997 and 1996,
respectively.
Net quantities of proved developed and undeveloped reserves of natural
gas and crude oil, including condensate and natural gas liquids, and changes in
such quantities were as follows:
Reserve Data
<TABLE>
<CAPTION>
Liquids Gas Liquids Gas Liquids Gas
(MBbls) (Bcf) (MBbls) (Bcf) (MBbls) (Bcf)
--------------------------------------------------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved (Developed and Undeveloped) Reserves, Net:
Beginning of year 72,882 2,160.6 65,984 2,006.4 55,304 1,711.7
Revisions of previous estimates (12,816) (349.4) 4,506 156.6 4,134 58.0
Extensions, discoveries and other additions 1,688 118.5 10,540 287.1 21,307 457.2
Purchases of reserves in place -- 5.9 850 20.6 2,158 151.3
Sales of reserves in place (23,710) (287.6) (433) (43.7) (7,941) (103.5)
Production (8,327) (225.7) (8,565) (266.4) (8,978) (268.3)
- --------------------------------------------------------------------------------------------------------------------------------
End of Year 29,717 1,422.3 72,882 2,160.6 65,984 2,006.4
================================================================================================================================
Proved Developed Reserves:
Beginning of year 45,225 1,557.5 33,327 1,395.8 30,455 1,184.1
End of year 24,743 1,122.6 45,225 1,557.5 33,327 1,395.8
================================================================================================================================
</TABLE>
MBbls-Thousands of barrels
Bcf-Billion cubic feet
62
II-41
<PAGE> 73
The significant changes to reserves, other than acquisitions,
dispositions or production, are due to reservoir performance in existing fields
and drilling of additional wells in existing fields. There were no major
discoveries or other events, favorable or adverse, that may be considered to
have caused a significant change in the estimated proved reserves since December
31, 1998.
Results of operations from producing activities by fiscal year were as
follows:
Results of Operations
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Sales $ 179,258 $ 347,219 $ 331,757
Affiliated sales 361,380 409,555 410,520
- -----------------------------------------------------------------------
Total 540,638 756,774 742,277
Production Costs (91,470) (116,112) (96,235)
Depreciation, Depletion
and Amortization (1,326,765) (341,278) (332,129)
- -----------------------------------------------------------------------
(877,597) 299,384 313,913
Income Tax (Expense)
Benefit 313,497 (97,603) (100,488)
- ------------------------ ----------------------------------------------
Results of Operations from
Producing Activities
(Excluding Corporate
Overhead and Interest
Costs) $ (564,100) $ 201,781 $ 213,425
=======================================================================
</TABLE>
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves follows:
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------
December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Future Cash Inflows $ 3,124,205 $ 6,059,477 $ 8,551,630
Future Production and
Development Costs (1,027,931) (1,889,348) (1,881,447)
Future Income Tax
Expenses (317,572) (912,059) (1,776,403)
- -----------------------------------------------------------------------
Future Net Cash Flows 1,778,702 3,258,070 4,893,780
- -----------------------------------------------------------------------
10% Annual Discount
for Estimated Timing
of Cash Flows (616,435) (1,058,622) (1,499,656)
- -----------------------------------------------------------------------
Standardized Measure
of Discounted Future
Net Cash Flows $ 1,162,267 $ 2,199,448 $ 3,394,124
=======================================================================
</TABLE>
For the calculations in the preceding table, estimated future cash
inflows from estimated future production of proved reserves were computed using
realized oil and gas prices for the month of December of each respective year.
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Sales and Transfers of
Oil and Gas
Produced, Net of
Production Costs $ (449,168) $ (640,662) $ (646,042)
Net Changes in Prices
and Production Costs (389,252) (1,858,640) 1,583,674
Extensions, Discoveries
and Improved
Recovery, Less
Related Costs 71,557 328,665 1,156,729
Changes in Estimated
Future Development
Costs 36,269 (83,805) 28,320
Development Costs
Incurred During the
Period 182,447 228,798 60,259
Revisions of Previous
Quantity Estimates (413,484) 175,081 164,214
Accretion of Discount 268,797 449,400 185,091
Net Change in Income
Taxes 379,228 611,352 (891,355)
Purchases of Reserves
in Place 4,441 23,628 318,084
Sales of Reserves
in Place (468,770) (47,170) (256,706)
Changes in Production
Rates (Timing) and
Other (259,246) (381,323) 49,465
- ----------------------------------------------------------------------
$(1,037,181) $(1,194,676) $1,751,733
======================================================================
</TABLE>
63
II-42
<PAGE> 74
Notes to Consolidated Financial Statements
NOTE 15 Quarterly Results (Unaudited)
Selected unaudited quarterly data is shown below:
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998(1)(2)
Revenues $1,109,143 $ 925,132 $ 874,497 $ 801,046
Operating Income (Loss) 59,474 (474,888) (389,322) 41,372
Earnings (Loss) Before Interest and Taxes 69,298 (457,199) (368,801) 54,692
Net Income (Loss) 27,950 (315,296) (258,416) 15,245
=========================================================================================================================
Earnings (Loss) Per Share of Common Stock $ .25 $ (2.87) $ (2.35) $ .14
=========================================================================================================================
Earnings (Loss) Per Share of Common Stock - Assuming Dilution $ .25 $ (2.87) $ (2.35) $ .14
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In Thousands, Except Per-Share Amounts)
-------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997(2)(3)
Revenues $1,123,529 $ 855,925 $1,073,715 $1,319,328
Operating Income 138,220 67,153 91,507 75,137
Earnings Before Interest and Taxes 153,637 78,011 100,994 88,297
Net Income 87,538 36,306 52,348 41,804
=========================================================================================================================
Earnings Per Share of Common Stock $ .79 $ .33 $ .48 $ .38
=========================================================================================================================
Earnings Per Share of Common Stock - Assuming Dilution $ .78 $ .32 $ .47 $ .38
=========================================================================================================================
</TABLE>
(1) See Note 2 for information on quarterly ceiling test charges recorded
in 1998.
(2) In September 1998, the Company changed its accounting method for its
oil and gas operations (see Note 2).
(3) Net income for the fourth quarter of 1997 includes a charge of $32.7
million, or $.29 per share (diluted), related to merger expenses (see
Note 3)
NOTE 16 Subsequent Event (Unaudited)
The Company recognized a $1,035.2 Million non-cash write-down of its oil and
natural gas properties as a result of its change to the full cost method of
accounting during the third quarter of 1998.
Due to the substantial recent volatility in oil and gas prices and their
effect on the carrying value of the Company's proved oil and gas reserves, there
can be no assurance that future write-downs will not be required as a result of
factors that may negatively affect the present value of proved oil and natural
gas reserves and the carrying value of oil and natural gas properties, including
volatile oil and natural gas prices, downward revisions in estimated proved oil
and natural gas reserve quantities and unsuccessful drilling activities.
Based on current market prices and current estimates, the Company
anticipates a first quarter ceiling test write-down of approximately $200
million. This estimate is based upon a number of assumptions that are subject to
change dependent on future events, however, including changes in oil and gas
prices and the impact of reserve changes during the quarter.
64
II-43
<PAGE> 75
Selected Consolidated Financial Data (Unaudited)
Sonat Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In Millions, Except Per-Share Amounts)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,709.8 $ 4,372.5 $ 3,203.6 $ 1,902.4 $ 1,481.9
Costs and Expenses 4,473.2 4,000.5 2,771.5 1,626.7 1,281.3
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (763.4) 372.0 432.1 275.7 200.6
Other Income, Net 61.4 48.9 35.8 226.1 55.9
- -------------------------------------------------------------------------------------------------------------------------------
EBIT (702.0) 420.9 467.9 501.8 256.5
Interest Expense, Net (126.2) (97.2) (88.9) (97.1) (77.3)
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (828.2) 323.7 379.0 404.7 179.2
Income Tax Expense (Loss) (297.7) 105.7 123.2 136.2 23.5
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (530.5) $ 218.0 $ 255.8 $ 268.5 $ 155.7
===============================================================================================================================
Earnings (Loss) Per Share $ (4.82) $ 1.98 $ 2.32 $ 2.43 $ 1.40
Earnings (Loss) Per Share - Assuming Dilution $ (4.82) $ 1.95 $ 2.29 $ 2.41 $ 1.39
Weighted Average Shares Outstanding (thousands) 110,020 110,099 110,370 110,428 111,278
Weighted Average Shares Outstanding -
Assuming Dilution (thousands) 110,020 111,669 111,722 111,261 112,228
Dividend Rate $ 1.08 $ 1.08 $ 1.08 $ 1.08 $ 1.08
===============================================================================================================================
Assets $ 4,361.1 $ 5,252.1 $ 4,362.8 $ 4,013.3 $ 3,885.1
Debt Maturing within One Year 830.2 461.2 215.7 241.7 225.3
Long-Term Debt 1,099.5 1,236.0 979.7 804.6 993.4
Stockholders' Equity 1,329.3 1,961.8 1,876.0 1,716.1 1,548.9
- -------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 3,259.0 $ 3,659.0 $ 3,071.4 $ 2,762.4 $ 2,767.6
===============================================================================================================================
</TABLE>
Note: The 1994-1997 periods have been restated to reflect the change to the full
cost method of accounting for the Company's oil and gas operations (see Note 2).
65
II-44
<PAGE> 76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Sonat has not had a change in accountants within twenty-four months prior
to the date of its most recent financial statements or in any period subsequent
to such date.
II-45
<PAGE> 77
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Directors and nominees for Director of Sonat
required by Item 401 of Regulation S-K is presented under the heading "Election
of Directors" in the Proxy Statement of Sonat Inc. dated as of March 22, 1999
(the "Proxy Statement"), which information is hereby incorporated by reference
herein. A copy of the Proxy Statement is filed as an exhibit to this report on
Form 10-K. Information regarding the executive officers of Sonat is presented
following Item 4 of this report, as permitted by General Instruction G(3) to
Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K regarding executive
compensation is presented under the headings "Compensation of Outside Directors"
and "Compensation of Executive Officers" in the Proxy Statement, which
information is hereby incorporated by reference herein. Notwithstanding the
foregoing, the information provided under the headings "Report of the Executive
Compensation Committee" and "Performance Graph" in the Proxy Statement are not
incorporated by reference herein. A copy of the Proxy Statement is filed as an
exhibit to this report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial
owners and management required by Item 403 of Regulation S-K is presented under
the heading "Ownership of Common Stock by Directors and Executive Officers" in
the Proxy Statement, which information is hereby incorporated by reference
herein. A copy of the Proxy Statement is filed as an exhibit to this report on
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
required by Item 404 of Regulation S-K is presented on pages 1 and 2 of in the
Proxy Statement, which information is hereby incorporated by reference herein. A
copy of the Proxy Statement is filed as an exhibit to this report on Form 10-K.
III-1
<PAGE> 78
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules, and
Exhibits
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Included in Part II of this report:
Report of Ernst & Young LLP, Independent Auditors......... II-16
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... II-17
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996...................... II-19
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997, and
1996................................................... II-20
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996...................... II-21
Notes to Consolidated Financial Statements................ II-22
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Included in Part IV of this report:
Consolidated Schedules for each of the three years in the
period ended December 31, 1998:
II. Valuation and Qualifying Accounts.................. IV-9
Consolidated Financial Statements of Citrus Corp.
(50-percent-owned joint venture) at December 31,
1998.................................................. IV-10
</TABLE>
All other financial statement schedules have been omitted as not applicable
or because the subject matter is either not present or is not present in amounts
sufficient to require submission of the schedule, in accordance with the
instructions contained in Regulation S-X, or the required information is
included in the financial statements or notes thereto.
Financial statements of 50-percent-or-less-owned companies and joint
ventures, other than Citrus Corp., are not presented herein because such
companies and joint ventures do not meet the significance test.
IV-1
<PAGE> 79
3. EXHIBITS(1)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3 (a) Restated Certificate of Incorporation of Sonat Inc.
(Restating the Certificate of Incorporation as in effect as
of April 28, 1994) filed as Exhibit 3(a) to Form 10-Q of
Sonat Inc. for the quarter ended March 31, 1994
3 (b) By-Laws of Sonat Inc. as amended and in effect December 1,
1995, filed as Exhibit 3-(b) to Form 10-K of Sonat Inc. for
the year 1995
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Rights Agreement dated as of January 8, 1996, between Sonat
Inc. and Chemical Mellon Shareholder Services, L.L.C., as
Rights Agent, with exhibits, and (1) Amendment No. 1 dated
as of November 22, 1998, filed as Exhibit 99 to Form 8-A of
Sonat Inc. dated January 10, 1996, except (1), which was
filed as Exhibit 4.1 to Form 8-K of Sonat Inc. dated January
30, 1998
4.2 Registration Rights Agreement, dated as of January 30, 1998,
by and between Sonat Inc., Selim K. Zilkha, Michael Zilkha,
the Selim K. Zilkha Trust and the Selim K. Zilkha (1996)
Annuity Trust, filed as Exhibit 10.1 to Form 8-K of Sonat
Inc. dated January 30, 1998
4.3 Form of Indenture dated June 1, 1986, from Sonat Inc. to
Manufacturers Hanover Trust Company, Trustee, as amended by
(1) First Supplemental Indenture dated June 1, 1995, between
Sonat Inc. and Chemical Bank, successor by merger to
Manufacturers Hanover Trust Company, as Trustee, filed as
Exhibit 4-(1) to Amendment No. 1 to Registration Statement
No. 33-5947 dated June 4, 1986, except(1), which was filed
as Exhibit 4-(1) to Form 8-K of Sonat Inc. dated June 6,
1995
4.4 Specimen Note of Sonat Inc. for the $200 million 6 7/8%
Notes due June 1, 2005, issued under Registration Statement
No. 33-62166, filed as Exhibit 4-(2) to Form 8-K of Sonat
Inc. dated June 6, 1995
4.5 Specimen Note of Sonat Inc. for the $100 million 9 1/2%
Notes due August 15, 1999, issued under Registration
Statement No. 33-5947, filed as Exhibit 4-2(c) to Form 10-K
of Sonat Inc. for the year 1996
4.6 Specimen Note of Sonat Inc. for the $100 million 9% Notes
due May 1, 2001, issued under Registration Statement No.
33-5947, filed as Exhibit 4-(2) to Form 8-K of Sonat Inc.
dated April 30, 1991
4.7 Specimen Note of Sonat Inc. for the $100 million 6.75% Notes
due October 1, 2007, issued under Registration Statement No.
33-62166, filed as Exhibit 4-(3) to Form 8-K of Sonat Inc.
dated September 25, 1997
4.8 Specimen Note of Sonat Inc. for the $100 million 6 5/8%
Notes due February 1, 2008, issued under Registration
Statement No. 33-62166, filed as Exhibit 4-(3) to Form 8-K
of Sonat Inc. dated January 27, 1998
4.9 Specimen Note of Sonat Inc. for the $100 million 7% Notes
due February 1, 2018, issued under Registration Statement
No. 33-62166, filed as Exhibit 4-(3) to Form 8-K of Sonat
Inc. dated January 29, 1998
</TABLE>
- ---------------
(1) Sonat will furnish to requesting security holders any exhibit on this list
upon the payment of a fee of $.10 per page up to a maximum of $5.00 per
exhibit. Requests must be made in writing and should be addressed to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham,
Alabama 35202.
IV-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
4.10 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
as amended by (1) First Supplemental Indenture, dated as of
September 30, 1997, between Southern Natural Gas Company and
The Chase Manhattan Bank (formerly Chemical Bank, successor
by merger to Manufacturers Hanover Trust Company), filed as
Exhibit 4-(1) to Registration Statement No. 33-47266 of
Southern Natural Gas Company dated April 16, 1992, except
(1) which was filed as Exhibit 4-(2) to Form 8-K of Southern
Natural Gas Company dated September 25, 1997
4.11 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4.12 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated January
14, 1992
4.13 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266, filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996
4.14 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997
4.15 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998
4.16 $400 Million Note Agreement dated November 3, 1986, between
Citrus Corp. and the Purchasers named therein, filed as
Exhibit 4-(5) to Form 10-K of Sonat Inc. for the year 1990
4.17 Credit Agreement dated as of June 1, 1996, among Sonat Inc.,
the Banks named therein, and The Chase Manhattan Bank
(National Association), and Morgan Guaranty Trust Company of
New York, as Co-Agents, filed as Exhibit 4 to Form 10-Q of
Sonat Inc. for the quarter ended June 30, 1996
4.18 Credit Agreement dated as of January 20, 1999, among Sonat
Inc., the Banks named therein, The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and SunTrust
Bank, Atlanta, as Documentation Agent, filed herewith
4.19 Certificate of Designations of Series A Participating
Preference Stock of Sonat Inc. dated January 8, 1996, as
filed with the Secretary of State of the State of Delaware
January 16, 1996, filed as Exhibit 4.6 to Form 10-K of Sonat
Inc. for the year 1995
COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.1 Supplemental Benefit Plan of Sonat Inc. as Amended and
Restated effective January 1, 1997, filed herewith
10.2 Executive Award Plan of Sonat Inc. as Amended and Restated
as of July 23, 1998, filed as Exhibit 10.1 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1998
10.3 Restricted Stock Plan for Directors of Sonat Inc. (as
Amended and Restated as of February 26, 1998), filed as
Exhibit 10.3 to Form 10-K of Sonat Inc. for the year 1997
10.4 Performance Award Plan of Sonat Inc. effective as of January
27, 1994, (1) amendment dated December 1, 1995, and (2)
amendment dated July 23, 1998, filed as Exhibit 10-(7) to
Form 10-K of Sonat Inc. for the year 1993, except (1), which
was filed as Exhibit 10.7 to Form 10-K of Sonat Inc. for the
year 1995, and (2), which was filed as Exhibit 10.2 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1998
</TABLE>
IV-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
10.5 Cash Bonus Plan of Sonat Inc. effective as of January 27,
1994, (1) amendment dated December 1, 1995, and (2)
amendment dated July 23, 1998, filed as Exhibit 10-(8) to
Form 10-K of Sonat Inc. for the year 1993, except (1), which
was filed as Exhibit 10.8 to Form 10-K of Sonat Inc. for the
year 1995, and (2), which was filed as Exhibit 10.4 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1998
10.6 Sonat Inc. Retirement Plan for Directors as Amended and
Restated as of December 2, 1994, and (1) amendment dated
December 1, 1995, filed as Exhibit 10.9 to Form 10-K of
Sonat Inc. for the year 1994, except (1), which was filed as
Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1995
10.7 Executive Severance Agreement dated 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, filed as
Exhibit 10.6 to Form 10-Q of Sonat Inc. for the quarter
ended September 30, 1998
10.8 Executive Severance Agreement dated July 23, 1998, between
Sonat Inc. and Ronald L. Kuehn, Jr., filed as Exhibit 10.5
to Form 10-Q of Sonat Inc. for the quarter ended September
30, 1998
10.9 Directors' Fees Deferral Plan of Sonat Inc. as Amended and
Restated as of January 1, 1997, filed as Exhibit 10.9 to
Form 10-K of Sonat Inc. for the year 1997
10.10 Indemnity Agreement dated December 4, 1987, between Sonat
Inc. and Ronald L. Kuehn, Jr. and schedule identifying
substantially identical indemnity agreements between Sonat
Inc. and other directors of Sonat Inc. and (1) Indemnity
Agreement dated September 1, 1994, between Sonat Inc. and
Adrian M. Tocklin, (2) Indemnity Agreement dated November 1,
1995, between Sonat Inc. and Max L. Lukens, (3) Indemnity
Agreement dated January 30, 1998, between Sonat Inc. and
Michael S. Zilkha, and (4) Indemnity Agreement dated January
30, 1998, between Sonat Inc. and Selim K. Zilkha, filed as
Exhibit 10-(11) to Form 10-K of Sonat Inc. for the year
1992, except (1), which was filed as Exhibit 10.3 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1994,
(2), which was filed as Exhibit 10.12 to Form 10-K of Sonat
Inc. for the year 1995, and (3) and (4), which were filed as
Exhibit 10.11 to Form 10-K of Sonat Inc. for the year 1997
10.11 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Section 415 Retirement Plan
Benefits and Vesting Benefits under the Supplemental Benefit
Plan and Early Retirement Benefits under the Executive
Severance Agreements, filed as Exhibit 10-(15) to Form 10-K
of Sonat Inc. for the year 1991
10.12 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Section 415 Stock Purchase Plan
Benefits under the Supplemental Benefit Plan, filed as
Exhibit 10-(16) to Form 10-K of Sonat Inc. for the year 1991
10.13 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Benefits under the Retirement Plan
for Directors, filed as Exhibit 10-(17) to Form 10-K of
Sonat Inc. for the year 1991
10.14 Form of Sonat Inc. Executive Life Insurance Program Split
Dollar Agreement, Collateral Assignment Agreement, and
Program Description, each dated as of July 1, 1990, with (1)
schedule identifying the persons participating in such
Programs, filed as Exhibit 10-(20) to Form 10-K of Sonat
Inc. for the year 1990, except (1), which was filed as
Exhibit 10-15 to Form 10-K of Sonat Inc. for the year 1997
10.15 Sonat Inc. Deferred Compensation Plan -- Plan Summary dated
November 1998, filed herewith
OTHER MATERIAL CONTRACTS
10.16 Capital Stock Agreement among Sonat Inc., Enron Corp.,
Houston Natural Gas Corporation, and Citrus Corp. dated June
30, 1986, filed as Exhibit 10-(26) to Form 10-K of Sonat
Inc. for the year 1991
</TABLE>
IV-4
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
10.17 Agreement and Plan of Merger dated as of March 13, 1999,
between El Paso Energy Corporation and Sonat Inc., filed as
Exhibit 2.1 to Form 8-K of Sonat Inc. dated March 15, 1999
10.18 Form of Certificate of Designation, Preferences and Rights
of the % Senior Cumulative Exchangeable Preferred Stock
of El Paso Energy Corporation (incorporated by reference,
filed as Exhibit E to Exhibit 2.1 of the Form 8-K of Sonat
Inc. dated March 15, 1999)
10.19 El Paso Energy Corporation Stock Option Agreement, dated
March 13, 1999, filed as Exhibit 99.1 to Form 8-K of Sonat
Inc. dated March 15, 1999
10.20 Sonat Inc. Stock Option Agreement, dated March 13, 1999,
filed as Exhibit 99.2 to Form 8-K of Sonat Inc. dated March
15, 1999
10.21 Voting Agreement, dated March 13, 1999, between El Paso
Corporation and Selim K. Zilkha, in his individual capacity
and in his capacity as trustee of the Selim K. Zilkha Trust,
and Michael Zilkha, filed as Exhibit 99.3 to Form 8-K of
Sonat Inc. dated March 15, 1999
10.22 Voting Agreement, dated March 13, 1999 between El Paso
Energy Corporation and Ronald L. Kuehn, Jr., filed as
Exhibit 99.4 to Form 8-K of Sonat Inc. dated March 15, 1999
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed
herewith
21 Subsidiaries of Sonat Inc., filed herewith
22 Proxy Statement of Sonat Inc. dated as of March 22, 1999,
which is not to be deemed "filed" as part of this Form 10-K,
except to the extent incorporated by reference under Items
10, 11, 12 and 13 of Part III of this Form 10-K, filed
herewith
23.1 Consent of Ernst & Young LLP, Independent Auditors, dated
March 19, 1999, filed herewith
23.2 Consent of William M. Cobb & Associates, Inc., Independent
Petroleum Engineers, dated March 4, 1999, filed herewith
23.3 Consent of Ryder Scott Company, Petroleum Engineers, dated
March 8, 1999, filed herewith
23.4 Consent of KPMG LLP, Independent Auditors, dated March 19,
1999, filed herewith
23.5 Consent of KPMG LLP, Independent Auditors, dated March 19,
1999, filed herewith.
24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Thomas
W. Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and
John C. Griffin to sign the Sonat Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1998, on behalf
of certain directors and officers of the registrant, filed
herewith
27 Financial Data Schedule for the period ended December 31,
1998, filed herewith, electronically only
99.1 Report of Ryder Scott Company, Petroleum Engineers, dated
March 10, 1999, filed herewith
99.2 Report of William M. Cobb & Associates, Inc. dated January
14, 1999, filed herewith
</TABLE>
Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission, which were physically filed as noted above, are hereby
incorporated herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934 and made a part hereof with the same effect as if filed
herewith.
Certain instruments relating to long-term debt of Sonat and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of Sonat and its subsidiaries on a consolidated basis. Sonat
agrees to furnish a copy of each such instrument to the Commission upon request.
IV-5
<PAGE> 83
(b) Reports on Form 8-K
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 that reflected the adoption of the full cost method of accounting for
its exploration and production business segment.
The Company filed a report on Form 8-K on January 7, 1999, reporting
certain information under Item 5 restating the Company's financial statements
for the years 1997, 1996, and 1995 as a result of the conversion to full cost
accounting for its exploration and production business segment.
The Company filed a report on Form 8-K on March 3, 1999, reporting certain
information under Item 5 relating to the Company's announcement of a joint
venture to build a pipeline to North Carolina and the current estimate of an
expected first quarter ceiling test charge under full cost accounting provisions
for exploration and production operations of approximately $200 million, after
tax.
The Company filed a report on Form 8-K on March 15, 1999, reporting certain
information under Item 5 relating to the announcement regarding the proposed
merger of the Company with El Paso Energy Corporation.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K have been filed
electronically with this report on Form 10-K.
IV-6
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SONAT INC.
By: /s/ RONALD L. KUEHN, JR.
------------------------------------
RONALD L. KUEHN, JR.
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE
OFFICER
Dated: March 24, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
(i) Principal Executive Officer:
/s/ RONALD L. KUEHN, JR. Chairman of the Board, March 24, 1999
- ----------------------------------------------------- President, and Chief
(RONALD L. KUEHN, JR.) Executive Officer
(ii) Principal Financial and Accounting Officer:
/s/ JAMES E. MOYLAN, JR. Senior Vice President and Chief March 24, 1999
- ----------------------------------------------------- Financial Officer
(JAMES E. MOYLAN, JR.)
(iii) Directors:*
William O. Bourke Jerome J. Richardson
Ronald L. Kuehn, Jr. Adrian M. Tocklin
Robert J. Lanigan James B. Williams
Max L. Lukens Joe B. Wyatt
Charles Marshall Michael S. Zilkha
Benjamin F. Payton Selim K. Zilkha
John J. Phelan, Jr.
* Signed on behalf of each of these persons and on his behalf:
By: /s/ WILLIAM A. SMITH
-------------------------------------------------
WILLIAM A. SMITH
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
AS AUTHORIZED BY CERTAIN POWERS OF ATTORNEY
DATED FEBRUARY 25, 1999, AND MARCH 1, 1999, FILED
HEREWITH AS EXHIBIT 24
</TABLE>
IV-7
<PAGE> 85
(This page intentionally left blank)
IV-8
<PAGE> 86
SONAT INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND AT END
DESCRIPTION OF YEAR EXPENSES OTHER(a) OF YEAR
- ----------- ---------- -------- -------- -------
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts.................... $ 8,160 $ 2,145 $ (1,005) $ 9,300
Valuation allowance on deferred tax assets......... 11,505 -- (11,505)(b) --
Valuation allowance on assets from trading
activities...................................... 18,048 4,487 -- 22,535
Actualization Reserve on Accounts Receivable....... 1,050 13,988 (10,750) 4,288
Allowance for restructuring activities............. -- 15,017 (9,197) 5,820
1997
Allowance for doubtful accounts.................... 9,679 116 (1,635) 8,160
Valuation allowance on deferred tax assets......... 11,505 -- -- 11,505
Valuation allowance on assets from trading
activities...................................... -- 18,048 -- 18,048
Actualization Reserve on Accounts Receivable....... -- 2,191 (1,141) 1,050
1996
Allowance for doubtful accounts.................... 10,198 3,615 (4,134) 9,679
Valuation allowance on deferred tax assets......... 11,505 -- -- 11,505
</TABLE>
- ---------------
(a) Accounts charged off net of recoveries, except as otherwise noted.
(b) Tax benefit from utilization of NOL carryforward.
IV-9
<PAGE> 87
CITRUS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
REPORT OF INDEPENDENT AUDITORS NO.
- ------------------------------ --------
<S> <C>
Report of Independent Auditors IV-12
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - Assets IV-13
Consolidated Balance Sheets - Liabilities and
Stockholders' Equity IV-14
Consolidated Statements of Income and Retained Earnings IV-15
Consolidated Statements of Cash Flows IV-16
Notes to Consolidated Financial Statements IV-17
</TABLE>
IV-10
<PAGE> 88
(This page intentionally left blank)
IV-11
<PAGE> 89
Report of Independent Auditors
Board of Directors
Citrus Corp.
We have audited the accompanying consolidated balance sheets of Citrus Corp. and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and retained earnings and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citrus Corp. and
Subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Birmingham, Alabama
February 26, 1999
IV-12
<PAGE> 90
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31,
------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,495 $ 17,274
Trade and other receivables
Customers, net 52,767 43,724
Affiliated companies 227 28
Income taxes 6,145 818
Commodity adjustment costs 3,940 5,399
Materials and supplies 3,489 2,730
Other 10,070 9,417
------------------------------------
Total Current Assets 81,133 79,390
------------------------------------
Deferred Charges
Unamortized debt expense 5,580 6,241
Commodity adjustment costs 25,520 29,419
Other 52,529 32,011
------------------------------------
Total Deferred Charges 83,629 67,671
------------------------------------
Property, Plant and Equipment, at cost 2,850,007 2,810,061
Less -- accumulated depreciation and amortization 507,366 463,938
------------------------------------
Net Property, Plant and Equipment 2,342,641 2,346,123
------------------------------------
TOTAL ASSETS $ 2,507,403 $ 2,493,184
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-13
<PAGE> 91
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31,
----------------------------------
(In Thousands, Except Share Data) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ -- $ 20,000
Notes payable to Enron 10,300 --
Long-term debt due within one year 225,750 44,250
Accounts payable
Trade 23,796 26,650
Affiliated companies 12,651 13,857
Accrued liabilities
Interest 16,121 16,996
Income taxes 518 --
Other taxes 7,850 6,662
Other 3,382 3,719
----------------------------------
Total Current Liabilities 300,368 132,134
----------------------------------
Long-Term Debt 755,000 980,750
----------------------------------
Deferred Credits
Deferred income taxes 506,585 483,190
Other 35,150 32,784
----------------------------------
Total Deferred Credits 541,735 515,974
----------------------------------
Commitments and Contingencies (Notes 8 and 9)
Stockholders' Equity
Common stock, $1 par value; 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 634,271 634,271
Retained earnings 276,028 230,054
----------------------------------
Total Stockholders' Equity 910,300 864,326
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,507,403 $2,493,184
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-14
<PAGE> 92
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------
(In Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gas sales $ 284,831 $ 426,559 $ 445,148
Gas transportation and other, net 306,174 308,843 324,712
-------------------------------------------------
591,005 735,402 769,860
-------------------------------------------------
Costs and Expenses
Natural gas purchased 269,818 416,953 429,367
Operations and maintenance 78,061 82,653 74,413
Depreciation 26,349 26,103 26,651
Amortization 25,422 34,367 56,912
Taxes - other than income taxes 23,940 24,717 20,160
-------------------------------------------------
423,590 584,793 607,503
-------------------------------------------------
Operating Income 167,415 150,609 162,357
-------------------------------------------------
Other Income (Expense)
Interest expense, net (88,289) (93,471) (97,363)
Allowance for funds used during
construction 1,241 599 (153)
Other, net (5,667) 14,309 5,437
-------------------------------------------------
(92,715) (78,563) (92,079)
-------------------------------------------------
Income Before Income Taxes 74,700 72,046 70,278
Income Tax Expense 28,726 17,460 27,240
-------------------------------------------------
Net Income 45,974 54,586 43,038
Retained Earnings, Beginning of Year 230,054 175,468 132,430
-------------------------------------------------
Retained Earnings, End of Year $ 276,028 $ 230,054 $ 175,468
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-15
<PAGE> 93
CITRUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 45,974 $ 54,586 $ 43,038
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 51,771 60,470 83,563
Deferred income taxes 23,395 8,621 8,539
Allowance for funds used during construction (1,241) (599) 153
Gain on sale of assets (720) (504) (7,387)
Changes in assets and liabilities
Trade and other receivables (14,569) 25,127 (6,963)
Materials and supplies (759) (173) (178)
Accounts payable (4,060) (17,764) 7,380
Accrued liabilities 831 667 (543)
Other current assets and liabilities (990) (8,208) (2,547)
Contract reformation settlements and adjustments -- (1,826) (4,931)
Other, net (16,606) 12,244 (2,225)
----------------------------------------------
Net Cash Provided by Operating Activities 83,026 132,641 117,899
----------------------------------------------
Cash Flows From Investing Activities
Additions to property, plant and equipment (44,639) (31,261) (29,000)
Allowance for funds used during construction 1,241 599 (153)
Net proceeds from sale of assets 720 504 7,387
Disposition of property, plant and equipment, net 823 (16) 3,081
----------------------------------------------
Net Cash Used in Investing Activities (41,855) (30,174) (18,685)
----------------------------------------------
Cash Flows From Financing Activities
Short-term bank borrowings, net (9,700) 5,000 (55,000)
Payment on long-term debt (44,250) (100,000) --
TCR remittances -- (6,256) (31,136)
----------------------------------------------
Net Cash Used in Financing Activities (53,950) (101,256) (86,136)
----------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (12,779) 1,211 13,078
Cash and Cash Equivalents, Beginning of Year 17,274 16,063 2,985
----------------------------------------------
Cash and Cash Equivalents, End of Year $ 4,495 $ 17,274 $ 16,063
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<S> <C> <C> <C>
Additional cash flow information:
The Company made the following interest and income tax
payments:
Interest paid $ 94,187 $ 103,363 $ 106,206
Income taxes paid 10,150 9,708 20,766
</TABLE>
IV-16
<PAGE> 94
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) REPORTING ENTITY
Citrus Corp. (the Company), a holding company formed in 1986,
owns 100% of the stock of Florida Gas Transmission Company
(Transmission), Citrus Trading Corp. (Trading) and Citrus Energy
Services, Inc. (CESI). The stock of the Company is owned 50% by Sonat
Inc. (Sonat) and 50% by Houston Pipe Line Company, a subsidiary of
Enron Corp. (Enron).
Transmission, an interstate gas pipeline extending from South
Texas to South Florida, is engaged in the interstate transmission of
natural gas and is subject to the jurisdiction of the Federal Energy
Regulatory Commission (FERC).
Trading is engaged in the sale of natural gas primarily to
Florida Power& Light Co., a large electric utility in the state of
Florida, to local distribution customers, and to end users, the
majority of which are in the State of Florida.
CESI began operations in February 1996 and provides construction,
operations and maintenance services primarily to affiliates and
customers of Transmission and Trading.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and accounts have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers as cash
equivalents all highly liquid short-term investments with maturities
of three months or less at the time of purchase. These investments are
accounted for at cost, which approximates estimated fair value.
MATERIALS AND SUPPLIES - Materials and supplies are valued at
actual cost. Materials transferred out of warehouses are priced out at
average cost.
REVENUE RECOGNITION - Gas sales revenue is recognized when gas is
sold. Gas transportation revenue is recognized when the service is
provided.
ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES - To manage the
risks of price fluctuations, Trading, from time to time, has entered
into swap agreements in certain energy products. All related gains and
losses are recognized currently in income as adjustments to costs and
expenses. Trading uses the settlement method of accounting for its
commodity swaps. Commodity swaps are settled monthly and gains and
losses are recognized immediately. The effects of commodity swaps,
none of which has been material for any of the periods presented, are
recorded as an adjustment to natural gas purchased.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The allowance for
funds used during construction consists, in general, of the net cost
of borrowed and equity funds used for construction purposes and a
reasonable rate on other funds when so used (the AFUDC rate). The
allowance is determined by applying the AFUDC rate to construction
work orders. Capitalization begins at the time the Company begins the
continuous accumulation of costs in a construction work order on a
planned progressive basis and ends when the facilities are placed in
service.
IV-17
<PAGE> 95
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
DEPRECIATION, AMORTIZATION AND MAINTENANCE POLICIES - Property,
Plant and Equipment consists primarily of natural gas pipeline. The
Company amortizes that portion of its investment in Transmission and
other subsidiaries which is in excess of historical cost (acquisition
adjustment) on a straight-line basis at an annual rate of 1.9% based
upon the estimated remaining useful life of the pipeline system.
Transmission has provided for depreciation of assets on a
straight-line basis at an annual composite rate of 1.42%, 1.42% and
1.45% for 1998, 1997 and 1996, respectively. Depreciation rates are
based on the estimated useful lives of the individual assets.
In 1994, Trading entered into an agreement with a major customer,
which provides significant future benefits over previous gas sales
contracts. The agreement required Trading to make approximately $55
million in deposits on the customers' behalf over sixteen months.
Trading is amortizing the total amounts paid on a volumetric basis
over the term of the new agreement. Amortization of these payments is
included in amortization expense.
Transmission amortized contract reformation costs based on firm
contract quantities and volume deliveries, and FERC-approved recovery
rates. Such amortization is included in amortization expense.
Transmission charges to maintenance the costs of repairs and
renewal of items determined to be less than units of property. Costs
of replacements and renewals of units of property are capitalized. The
original costs of units of property retired are charged to the
depreciation reserves, net of salvage and removal costs.
ACCOUNTING FOR REGULATED OPERATION - The regulated operations of
Transmission are subject to the provisions of Statement of Financial
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." Accordingly, Transmission records certain assets and
liabilities that result from the effects of the rate-making process
that would not be recorded under generally accepted accounting
principles for non-regulated entities. The regulated assets and
regulatory liabilities of Transmission are primarily classified as
Deferred Charges and Deferred Credits, respectively, in the
Consolidated Balance Sheets.
INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No.
109 provides for an asset and liability approach to accounting for
income taxes. Under this approach, deferred tax assets and liabilities
are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts in the consolidated financial
statements have been reclassified in 1997 and 1996 to conform with the
1998 presentation.
COMPREHENSIVE INCOME - The Company has not recognized any items
of comprehensive income for the year ended December 31, 1998.
IV-18
<PAGE> 96
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt outstanding at December 31, 1998 and 1997 was as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Citrus Corp.
11.10% Notes due 1998-2006 $ 155,750 $ 175,000
8.49% Notes due 2007-2009 90,000 90,000
----------------- -----------------
245,750 265,000
----------------- -----------------
Transmission
9.30% Notes due 1998 -- 25,000
8.14% Notes due 1999 200,000 200,000
9.75% Notes due 1999-2008 65,000 65,000
8.63% Notes due 2004 250,000 250,000
10.11% Notes due 2009-2013 70,000 70,000
9.19% Notes due 2005-2024 150,000 150,000
----------------- -----------------
735,000 760,000
----------------- -----------------
Total Outstanding 980,750 1,025,000
Less Long-Term Debt Due Within One Year 225,750 44,250
----------------- -----------------
$ 755,000 $ 980,750
================= =================
</TABLE>
Annual maturities and sinking fund requirements on long-term debt
outstanding as of December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $ 225,750
2000 25,750
2001 25,750
2002 25,750
2003 25,750
Thereafter 652,000
-----------------
$ 980,750
=================
</TABLE>
The Company has a note agreement that contains certain
restrictions, which among other things limit the incurrence of
additional debt, the sale of assets and the payment of dividends. The
agreements relating to Transmission's promissory notes include, among
other things, restrictions as to the payment of dividends.
The Company had no committed lines of credit at December 31, 1998.
Transmission has a committed line of credit of $70.0 million, which was
available at December 31, 1998, and uncommitted facilities for up to
$20.0 million, which were available at December 31, 1998. Transmission
had an additional line of credit with Enron of $50 million of which
$10.3 million was outstanding with a rate of 5.21% at December 31, 1998,
and was repaid on January 4, 1999.
IV-19
<PAGE> 97
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued)
The Company entered into a series of interest rate swap
transactions in 1998. The agreements, which terminate in 1999, hedge
changes in interest rates related to a debt issue forecasted for the
fourth quarter of 1999. The swaps qualify for hedge accounting and are
not reflected in the Company's Consolidated Balance. The aggregate
notional amount of the swaps is $160 million. The unrealized loss at
December 31, 1998 related to the swaps was $1.2 million. Gains or losses
will be recognized over the life of the debt issued. The Company is
exposed to credit risk in the event of nonperformance by counterparties.
There are no collateral requirements related to the agreements.
(4) INCOME TAXES
The principal components of the Company's net deferred income tax
liabilities at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Deferred income tax assets
Alternative minimum tax credit $ 23,230 $ 20,360
Other 8,150 5,588
---------------- ----------------
31,380 25,948
---------------- ----------------
Deferred income tax liabilities
Depreciation and amortization 515,748 492,629
Contract reformation costs 17,611 13,167
Other 4,606 3,342
---------------- ----------------
537,965 509,138
---------------- ----------------
Net deferred income tax liabilities $ 506,585 $ 483,190
================ ================
</TABLE>
Total income tax expense for the years ended December 31, 1998,
1997 and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Payable currently
Federal $ 4,963 $ 6,441 $ 15,445
State 368 2,398 3,256
---------------- ---------------- ----------------
5,331 8,839 18,701
---------------- ---------------- ----------------
Payment deferred
Federal 19,908 23,300 7,847
State 3,487 (14,679) 692
---------------- ---------------- ----------------
23,395 8,621 8,539
---------------- ---------------- ----------------
Total income tax expense $ 28,726 $ 17,460 $ 27,240
================ ================ ================
</TABLE>
The 1997 income tax provision includes benefits of approximately
$10 million from the reduction of the deferred income tax liability due
to the reevaluation of state tax requirements.
IV-20
<PAGE> 98
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) INCOME TAXES (continued)
The differences between taxes computed at the U.S. federal
statutory rate and the Company's effective tax rate for the years ended
December 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Statutory federal income tax provision $ 26,145 $ 25,216 $ 24,597
Net state income taxes 2,506 (7,983) 2,566
Other 75 227 77
---------------- ---------------- ----------------
Income tax expense $ 28,726 $ 17,460 $ 27,240
================ ================ ================
</TABLE>
The Company has an alternative minimum tax (AMT) credit which can
be used to offset regular income taxes payable in future years. The AMT
credit has an indefinite carry-forward period. For financial statement
purposes, the Company has recognized the benefit of the AMT credit
carry-forward as a reduction of deferred tax liabilities.
(5) EMPLOYEE BENEFIT PLANS
The employees of the Company and its subsidiaries are covered
under Enron's employee benefit plans. Enron maintains a retirement
plan (the Enron Plan) which is a noncontributory defined benefit plan
covering substantially all employees in the United States and certain
employees in foreign countries. The benefit accrual is in the form of
a cash balance of 5% of annual base pay. Pension expenses charged by
Enron were immaterial in 1998, 1997 and 1996.
As of December 31, 1998, the plan net assets for the Enron Plan
in which the employees of the Company participate was greater than the
actuarial present value of projected plan benefit obligations by
approximately $87 million. Included in this amount are assets from a
defined benefit plan for an acquired company. The assumed discount
rate was 6.75%. The rate of return on plan assets used in determining
the actuarial present value of projected plan benefits was 9.0% to
10.5%. The assumed rate of increase in wages was 4.0% to 9.5%.
The Company accounts for post-retirement benefit costs over the
service lives of the employees expected to be eligible to receive such
benefits. The Company is amortizing the transition obligation, which
existed at January 1, 1993, over a period of approximately 19 years.
The Company's net periodic post-retirement benefit cost charged by
Enron was $1.4, $1.4 and $1.5 million for 1998, 1997 and 1996,
respectively, substantially all of which relates to Transmission and
are being recovered through rates. The measurement of the accumulated
post-retirement benefit obligation (APBO) assumes a 6.75% discount
rate and a health care cost trend rate of 7% in 1998 decreasing to 5%
by 2003. The APBO exceeded plan assets by $74 million as of its most
recent valuation date of December 31, 1998.
IV-21
<PAGE> 99
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) MAJOR CUSTOMERS
Revenues from individual customers exceeding 10% of total
revenues for the years ended December 31, 1998, 1997 and 1996 were
approximately as follows (in millions):
<TABLE>
<CAPTION>
Customers 1998 1997 1996
--------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Florida Power & Light Company $ 283.3 $ 424.1 $ 465.5
Enron Capital and Trade Resources 68.8 51.4 19.3
</TABLE>
At December 31, 1998 and 1997, the Company's subsidiaries had
receivables of approximately $29.9 and $19.8 million from Florida Power
& Light Company and receivables of approximately $6.1 and $6.9 million
from Enron Capital and Trade Resources, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company incurs certain corporate administrative expenses
including employee benefit costs from Enron and its affiliates. The
Company was charged approximately $11.9, $11.8 and $11.9 million for
these expenses for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company's subsidiaries provide natural gas sales and
transport services to Enron and Sonat affiliates at rates equal to
rates charged to non-affiliated customers in the same class of
service. Revenues related to these services amounted to approximately
$68.9, $51.5 and $19.8 million for the years ended December 31, 1998,
1997 and 1996, respectively. The Company's subsidiaries purchased gas
from affiliates of Sonat of approximately $73.7, $121.8 and $139.8
million for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company's subsidiaries also purchased gas from
affiliates of Enron of approximately $135.0, $219.1 and $252.6 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company had an agreement with an affiliate of Enron in which
the affiliate managed the operations of Trading in exchange for a $1.2
million annual fee from November 1, 1993 to October 31, 1997.
Effective November 1, 1997, the operations of the contracts held by
Trading were divided between affiliates of Enron and Sonat.
Additionally, the Enron affiliate made a payment of $20 million in
1997 to Trading to compensate it for lost future business. The fee
charged is now based on a volumetric payment of $.005/MMBtu, or
approximately 50% of the prior arrangement. Under this agreement,
Trading is guaranteed an earnings stream based on all firm long-term
contracts in place at November 1, 1997.
(8) RATE MATTERS
Transmission has been authorized by the FERC to recover certain
transition costs incurred through the reformation of gas purchase
contracts related to Transmission's former jurisdictional sales
services. Transmission's Order No. 636 restructuring settlement,
effective November 1, 1993, allows Transmission to recover 100% of any
transition costs from $106 million up to $160 million, and 75% of
payments exceeding $160 million. Transmission has no gas purchase
contracts with accrued take-or-pay obligations that have not yet been
terminated. All transition costs eligible for recovery have been fully
recovered.
Transmission's currently effective rates were established
pursuant to a Stipulation and Agreement Settlement ("Rate Case
Settlement") which resolved all issues in Transmission's
IV-22
<PAGE> 100
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RATE MATTERS (continued)
Section 4 rate filing in FERC Docket No. 96-366. The Rate Case
Settlement, approved by FERC Order issued September 24, 1997, provided
that Transmission cannot file a general rate case to increase its base
tariff rates prior to October 1, 2000 (except in certain limited
circumstances) and must file no later than October 1, 2001. The Rate
Case Settlement also provided that the rate charged pursuant to
Transmission's rate schedule FTS-2 will decrease effective March 1,
1999 and March 1, 2000.
On December 1, 1998, Transmission filed an application with the
FERC to construct 205 miles of pipeline in order to extend the
pipeline to Ft. Meyers, Florida and to expand capacity by 272,000
MMBtu/day. Expansion costs are currently estimated at $351 million.
Transmission requested that expansion costs be rolled in to the FTS-2
(Phase III Expansion) service. Settlement proceedings with shippers
and the FERC are currently ongoing.
(9) COMMITMENTS AND CONTINGENCIES
The FERC's Division of Audits (DOA) completed a compliance review
of Transmission's books and records for the period of January 1, 1991
through December 31, 1994. Among other things, the FERC auditors
questioned certain aspects of Transmission's procedures for accounting
for the costs of financing Transmission's Phase III expansion
facilities and proposed adjustments to the amount of AFUDC capitalized
during construction of its Phase III expansion facilities. Pursuant to
an agreement among Transmission, FERC staff and customer intervenors,
Transmission filed a settlement agreement on July 30, 1996, which was
approved by FERC order issued September 27, 1996. The settlement
provided for a reduction of $18.75 million in its Gas Plant in Service
account. In addition, the settlement provided that Transmission would
restructure its capital accounts by removing approximately $348
million of excess donated capital on its books related to the Phase
III construction. The settlement was without prejudice to Transmission
seeking Commission approval to recover the $18.75 million, required to
be removed from its plant account, in the rate case filed by
Transmission on August 30, 1996. As a result of the Rate Case
Settlement, Transmission will amortize the $18.75 million over a
period not to exceed fifty-five months commencing March 1, 1997. The
$18.75 million will be recovered over the amortization period.
The DOA conducted a review of Transmission's books and records as
to the construction costs of the Phase III expansion. The FERC's
Division of Enforcement (DOE) conducted an informal investigation as
to the possible non-compliance with certain environmental conditions
attached to the FERC certificate authorizing the Phase III expansion.
By order issued November 27, 1996, the FERC consolidated the Phase III
cost audit and the DOE informal investigation with Transmission's rate
case in Docket No. RP96-366-000. Pursuant to the Rate Case Settlement,
the DOA review and DOE investigations have been terminated with no
disallowance of any Phase III project costs.
(10) CONCENTRATIONS OF CREDIT RISK AND OTHER FINANCIAL INSTRUMENTS
The Company and its subsidiaries have a concentration of customers
in the electric and gas utility industries. These concentrations of
customers may impact the Company's overall exposure to credit risk,
either positively or negatively, in that the customers may be
similarly affected by changes in economic or other conditions. Credit
losses incurred on receivables in these industries compare favorably
to losses experienced in the Company's receivable portfolio as a
whole. The
IV-23
<PAGE> 101
CITRUS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) CONCENTRATIONS OF CREDIT RISK AND OTHER FINANCIAL
INSTRUMENTS (continued)
Company and its subsidiaries also have a concentration of customers
located in the southeastern United States, primarily within the State
of Florida. Receivables are generally not collateralized. The
Company's management believes that the portfolio of receivables, which
includes local distribution companies and municipalities, is well
diversified and that such diversification minimizes any potential
credit risk.
The carrying amounts and fair value of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 4,495 $ 4,495 $ 17,274 $ 17,274
Notes payable to banks -- -- 20,000 20,000
Notes payable to Enron 10,300 10,300 -- --
Long-term debt 980,750 1,116,250 1,025,000 1,176,389
</TABLE>
The carrying amount of cash and cash equivalents and notes payable
reasonably approximate their fair value. The fair value of long-term
debt is based upon market quotations of similar debt at interest rates
currently available.
(11) YEAR 2000 PROJECT (UNAUDITED)
The Company continues to assess and modify its computer systems
to ensure they will operate properly in 2000. The Company has not
incurred material Year 2000 costs to date, and management anticipates
that the costs which will be incurred in the future will not have a
material impact on the Company's financial position or results of
operations.
(12) SUBSEQUENT EVENT (UNAUDITED)
On March 15, 1999, Sonat announced the execution of definitive
agreements for a merger with El Paso Energy Corporation. It is
expected that the merger will be completed during the third or fourth
quarter of 1999, subject to certain required governmental approvals.
IV-24
<PAGE> 102
APPENDIX TO ANNUAL REPORT ON FORM 10-K
OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1998
In compliance with Section 304 of Regulation S-T, the following information
describes pictorial and/or graphic materials contained herein:
<TABLE>
<CAPTION>
PAGE DESCRIPTION
<S> <C>
I-8 Map of the Southwestern and Southcentral
United States (Montana, Wyoming, Colorado,
Kansas, New Mexico, Texas, Oklahoma, Arkansas,
Louisiana, Mississippi, and Alabama) generally
showing the gas reserve basins and areas in
which Exploration has significant lease
interest. These leases are described on pages
I-2 through I-5 and in the chart on page I-5.
I-8 Map of the Gulf of Mexico, offshore Texas,
Louisiana and Mississippi, showing the
location of leases and seismic data held by
Sonat GOM as described on pages I-2 through
I-5 and in the chart on page I-6.
I-18 Map of the Southeastern United States showing
the approximate location of Sonat's pipeline
systems as described on pages I-11 and I-12,
the underground storage facilities of Southern
as described on page I-18, and the proposed
projects as described on pages I-15 through
I-17.
I-23 Map of the United States showing areas of
operations of Sonat Energy Services as
described on pages I-20 and I-21.
</TABLE>
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
3 (a) Restated Certificate of Incorporation of Sonat Inc.
(Restating the Certificate of Incorporation as in effect as
of April 28, 1994) filed as Exhibit 3(a) to Form 10-Q of
Sonat Inc. for the quarter ended March 31, 1994
3 (b) By-Laws of Sonat Inc. as amended and in effect December 1,
1995, filed as Exhibit 3-(b) to Form 10-K of Sonat Inc. for
the year 1995
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.1 Rights Agreement dated as of January 8, 1996, between Sonat
Inc. and Chemical Mellon Shareholder Services, L.L.C., as
Rights Agent, with exhibits, and (1) Amendment No. 1 dated
as of November 22, 1998, filed as Exhibit 99 to Form 8-A of
Sonat Inc. dated January 10, 1996, except (1), which was
filed as Exhibit 4.1 to Form 8-K of Sonat Inc. dated January
30, 1998
4.2 Registration Rights Agreement, dated as of January 30, 1998,
by and between Sonat Inc., Selim K. Zilkha, Michael Zilkha,
the Selim K. Zilkha Trust and the Selim K. Zilkha (1996)
Annuity Trust, filed as Exhibit 10.1 to Form 8-K of Sonat
Inc. dated January 30, 1998
4.3 Form of Indenture dated June 1, 1986, from Sonat Inc. to
Manufacturers Hanover Trust Company, Trustee, as amended by
(1) First Supplemental Indenture dated June 1, 1995, between
Sonat Inc. and Chemical Bank, successor by merger to
Manufacturers Hanover Trust Company, as Trustee, filed as
Exhibit 4-(1) to Amendment No. 1 to Registration Statement
No. 33-5947 dated June 4, 1986, except(1), which was filed
as Exhibit 4-(1) to Form 8-K of Sonat Inc. dated June 6,
1995
4.4 Specimen Note of Sonat Inc. for the $200 million 6 7/8%
Notes due June 1, 2005, issued under Registration Statement
No. 33-62166, filed as Exhibit 4-(2) to Form 8-K of Sonat
Inc. dated June 6, 1995
4.5 Specimen Note of Sonat Inc. for the $100 million 9 1/2%
Notes due August 15, 1999, issued under Registration
Statement No. 33-5947, filed as Exhibit 4-2(c) to Form 10-K
of Sonat Inc. for the year 1996
4.6 Specimen Note of Sonat Inc. for the $100 million 9% Notes
due May 1, 2001, issued under Registration Statement No.
33-5947, filed as Exhibit 4-(2) to Form 8-K of Sonat Inc.
dated April 30, 1991
4.7 Specimen Note of Sonat Inc. for the $100 million 6.75% Notes
due October 1, 2007, issued under Registration Statement No.
33-62166, filed as Exhibit 4-(3) to Form 8-K of Sonat Inc.
dated September 25, 1997
4.8 Specimen Note of Sonat Inc. for the $100 million 6 5/8%
Notes due February 1, 2008, issued under Registration
Statement No. 33-62166, filed as Exhibit 4-(3) to Form 8-K
of Sonat Inc. dated January 27, 1998
4.9 Specimen Note of Sonat Inc. for the $100 million 7% Notes
due February 1, 2018, issued under Registration Statement
No. 33-62166, filed as Exhibit 4-(3) to Form 8-K of Sonat
Inc. dated January 29, 1998
</TABLE>
- ---------------
(1) Sonat will furnish to requesting security holders any exhibit on this list
upon the payment of a fee of $.10 per page up to a maximum of $5.00 per
exhibit. Requests must be made in writing and should be addressed to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham,
Alabama 35202.
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
4.10 Form of Indenture dated June 1, 1987, from Southern Natural
Gas Company to Manufacturers Hanover Trust Company, Trustee,
as amended by (1) First Supplemental Indenture, dated as of
September 30, 1997, between Southern Natural Gas Company and
The Chase Manhattan Bank (formerly Chemical Bank, successor
by merger to Manufacturers Hanover Trust Company), filed as
Exhibit 4-(1) to Registration Statement No. 33-47266 of
Southern Natural Gas Company dated April 16, 1992, except
(1) which was filed as Exhibit 4-(2) to Form 8-K of Southern
Natural Gas Company dated September 25, 1997
4.11 Specimen Note of Southern Natural Gas Company for the $100
million 8 7/8% Notes due February 15, 2001, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated February
7, 1991
4.12 Specimen Note of Southern Natural Gas Company for the $100
million 7.85% Notes due January 15, 2002, issued under
Registration Statement No. 33-16190, filed as Exhibit 4-(2)
to Form 8-K of Southern Natural Gas Company dated January
14, 1992
4.13 Specimen Note of Southern Natural Gas Company for the $100
million 8 5/8% Notes due May 1, 2002, issued under
Registration Statement No. 33-47266, filed as Exhibit 4.3(d)
to Form 10-K of Sonat Inc. for the year 1996
4.14 Specimen Note of Southern Natural Gas Company for the $100
million 6.70% Notes due October 1, 2007, issued under
Registration Statement No. 33-47266, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
25, 1997
4.15 Specimen Note of Southern Natural Gas Company for the $100
million 6.125% Notes due September 15, 2008, issued under
Registration Statement No. 333-47959, filed as Exhibit 4-(3)
to Form 8-K of Southern Natural Gas Company dated September
24, 1998
4.16 $400 Million Note Agreement dated November 3, 1986, between
Citrus Corp. and the Purchasers named therein, filed as
Exhibit 4-(5) to Form 10-K of Sonat Inc. for the year 1990
4.17 Credit Agreement dated as of June 1, 1996, among Sonat Inc.,
the Banks named therein, and The Chase Manhattan Bank
(National Association), and Morgan Guaranty Trust Company of
New York, as Co-Agents, filed as Exhibit 4 to Form 10-Q of
Sonat Inc. for the quarter ended June 30, 1996
4.18 Credit Agreement dated as of January 20, 1999, among Sonat
Inc., the Banks named therein, The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and SunTrust
Bank, Atlanta, as Documentation Agent, filed herewith
4.19 Certificate of Designations of Series A Participating
Preference Stock of Sonat Inc. dated January 8, 1996, as
filed with the Secretary of State of the State of Delaware
January 16, 1996, filed as Exhibit 4.6 to Form 10-K of Sonat
Inc. for the year 1995
COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.1 Supplemental Benefit Plan of Sonat Inc. as Amended and
Restated effective January 1, 1997, filed herewith
10.2 Executive Award Plan of Sonat Inc. as Amended and Restated
as of July 23, 1998, filed as Exhibit 10.1 to Form 10-Q of
Sonat Inc. for the quarter ended September 30, 1998
10.3 Restricted Stock Plan for Directors of Sonat Inc. (as
Amended and Restated as of February 26, 1998), filed as
Exhibit 10.3 to Form 10-K of Sonat Inc. for the year 1997
10.4 Performance Award Plan of Sonat Inc. effective as of January
27, 1994, (1) amendment dated December 1, 1995, and (2)
amendment dated July 23, 1998, filed as Exhibit 10-(7) to
Form 10-K of Sonat Inc. for the year 1993, except (1), which
was filed as Exhibit 10.7 to Form 10-K of Sonat Inc. for the
year 1995, and (2), which was filed as Exhibit 10.2 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1998
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
10.5 Cash Bonus Plan of Sonat Inc. effective as of January 27,
1994, (1) amendment dated December 1, 1995, and (2)
amendment dated July 23, 1998, filed as Exhibit 10-(8) to
Form 10-K of Sonat Inc. for the year 1993, except (1), which
was filed as Exhibit 10.8 to Form 10-K of Sonat Inc. for the
year 1995, and (2), which was filed as Exhibit 10.4 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1998
10.6 Sonat Inc. Retirement Plan for Directors as Amended and
Restated as of December 2, 1994, and (1) amendment dated
December 1, 1995, filed as Exhibit 10.9 to Form 10-K of
Sonat Inc. for the year 1994, except (1), which was filed as
Exhibit 10.9 to Form 10-K of Sonat Inc. for the year 1995
10.7 Executive Severance Agreement dated 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, filed as
Exhibit 10.6 to Form 10-Q of Sonat Inc. for the quarter
ended September 30, 1998
10.8 Executive Severance Agreement dated July 23, 1998, between
Sonat Inc. and Ronald L. Kuehn, Jr., filed as Exhibit 10.5
to Form 10-Q of Sonat Inc. for the quarter ended September
30, 1998
10.9 Directors' Fees Deferral Plan of Sonat Inc. as Amended and
Restated as of January 1, 1997, filed as Exhibit 10.9 to
Form 10-K of Sonat Inc. for the year 1997
10.10 Indemnity Agreement dated December 4, 1987, between Sonat
Inc. and Ronald L. Kuehn, Jr. and schedule identifying
substantially identical indemnity agreements between Sonat
Inc. and other directors of Sonat Inc. and (1) Indemnity
Agreement dated September 1, 1994, between Sonat Inc. and
Adrian M. Tocklin, (2) Indemnity Agreement dated November 1,
1995, between Sonat Inc. and Max L. Lukens, (3) Indemnity
Agreement dated January 30, 1998, between Sonat Inc. and
Michael S. Zilkha, and (4) Indemnity Agreement dated January
30, 1998, between Sonat Inc. and Selim K. Zilkha, filed as
Exhibit 10-(11) to Form 10-K of Sonat Inc. for the year
1992, except (1), which was filed as Exhibit 10.3 to Form
10-Q of Sonat Inc. for the quarter ended September 30, 1994,
(2), which was filed as Exhibit 10.12 to Form 10-K of Sonat
Inc. for the year 1995, and (3) and (4), which were filed as
Exhibit 10.11 to Form 10-K of Sonat Inc. for the year 1997
10.11 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Section 415 Retirement Plan
Benefits and Vesting Benefits under the Supplemental Benefit
Plan and Early Retirement Benefits under the Executive
Severance Agreements, filed as Exhibit 10-(15) to Form 10-K
of Sonat Inc. for the year 1991
10.12 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Section 415 Stock Purchase Plan
Benefits under the Supplemental Benefit Plan, filed as
Exhibit 10-(16) to Form 10-K of Sonat Inc. for the year 1991
10.13 Trust Agreement dated December 19, 1986, between Sonat Inc.
and AmSouth Bank N.A. for Benefits under the Retirement Plan
for Directors, filed as Exhibit 10-(17) to Form 10-K of
Sonat Inc. for the year 1991
10.14 Form of Sonat Inc. Executive Life Insurance Program Split
Dollar Agreement, Collateral Assignment Agreement, and
Program Description, each dated as of July 1, 1990, with (1)
schedule identifying the persons participating in such
Programs, filed as Exhibit 10-(20) to Form 10-K of Sonat
Inc. for the year 1990, except (1), which was filed as
Exhibit 10-15 to Form 10-K of Sonat Inc. for the year 1997
10.15 Sonat Inc. Deferred Compensation Plan -- Plan Summary dated
November 1998, filed herewith
OTHER MATERIAL CONTRACTS
10.16 Capital Stock Agreement among Sonat Inc., Enron Corp.,
Houston Natural Gas Corporation, and Citrus Corp. dated June
30, 1986, filed as Exhibit 10-(26) to Form 10-K of Sonat
Inc. for the year 1991
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
10.17 Agreement and Plan of Merger dated as of March 13, 1999,
between El Paso Energy Corporation and Sonat Inc., filed as
Exhibit 2.1 to Form 8-K of Sonat Inc. dated March 15, 1999
10.18 Form of Certificate of Designation, Preferences and Rights
of the % Senior Cumulative Exchangeable Preferred Stock
of El Paso Energy Corporation (incorporated by reference,
filed as Exhibit E to Exhibit 2.1 of the Form 8-K of Sonat
Inc. dated March 15, 1999)
10.19 El Paso Energy Corporation Stock Option Agreement, dated
March 13, 1999, filed as Exhibit 99.1 to Form 8-K of Sonat
Inc. dated March 15, 1999
10.20 Sonat Inc. Stock Option Agreement, dated March 13, 1999,
filed as Exhibit 99.2 to Form 8-K of Sonat Inc. dated March
15, 1999
10.21 Voting Agreement, dated March 13, 1999, between El Paso
Corporation and Selim K. Zilkha, in his individual capacity
and in his capacity as trustee of the Selim K. Zilkha Trust,
and Michael Zilkha, filed as Exhibit 99.3 to Form 8-K of
Sonat Inc. dated March 15, 1999
10.22 Voting Agreement, dated March 13, 1999 between El Paso
Energy Corporation and Ronald L. Kuehn, Jr., filed as
Exhibit 99.4 to Form 8-K of Sonat Inc. dated March 15, 1999
OTHER EXHIBITS
12 Computation of Ratio of Earnings to Fixed Charges, filed
herewith
21 Subsidiaries of Sonat Inc., filed herewith
22 Proxy Statement of Sonat Inc. dated as of March 22, 1999,
which is not to be deemed "filed" as part of this Form 10-K,
except to the extent incorporated by reference under Items
10, 11, 12 and 13 of Part III of this Form 10-K, filed
herewith
23.1 Consent of Ernst & Young LLP, Independent Auditors, dated
March 19, 1999, filed herewith
23.2 Consent of William M. Cobb, Independent Petroleum Engineers,
dated March 4, 1999, filed herewith
23.3 Consent of Ryder Scott Company, Petroleum Engineers, dated
March 8, 1999, filed herewith
23.4 Consent of KPMG LLP, Independent Auditors, dated March 19,
1999, filed herewith
23.5 Consent of KPMG LLP, Independent Auditors, dated March 19,
1999, filed herewith
24 Powers of Attorney authorizing Ronald L. Kuehn, Jr.; Thomas
W. Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and
John C. Griffin to sign the Sonat Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1998, on behalf
of certain directors and officers of the registrant, filed
herewith
27 Financial Data Schedule for the period ended December 31,
1998, filed herewith, electronically only
99.1 Report of Ryder Scott Company, Petroleum Engineers, dated
March 10, 1999, filed herewith
99.2 Report of William M. Cobb & Associates, Inc. dated January
14, 1999, filed herewith
</TABLE>
<PAGE> 1
EXHIBIT 4.18
CREDIT AGREEMENT
dated as of January 20, 1999
among
SONAT INC.,
THE BANKS NAMED HEREIN,
and
THE CHASE MANHATTAN BANK,
as Administrative Agent,
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Syndication Agent
and
SUNTRUST BANK, ATLANTA,
as Documentation Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C> <C>
I. LOANS............................................................................................ 1
ss.1.01 Syndicated Loans............................................................... 1
ss.1.02 Money Market Loans............................................................. 1
ss.1.03 Swingline Commitment........................................................... 4
ss.1.04 Change of Commitments.......................................................... 5
ss.1.05 Borrowings of Syndicated Loans................................................. 6
ss.1.06 Several Commitments; Remedies Independent...................................... 8
ss.1.07 Availability of Funds.......................................................... 8
ss.1.08 Borrowings of Swingline Loans.................................................. 8
ss.1.09 Lending Offices................................................................ 9
ss.1.10 Notes.......................................................................... 9
II. PAYMENTS, INTEREST AND CERTAIN FEES.............................................................. 10
ss.2.01 Repayment of Loans............................................................. 10
ss.2.02 Interest....................................................................... 10
ss.2.03 Interest Periods............................................................... 11
ss.2.04 Prepayments.................................................................... 11
ss.2.05 Payments, etc.................................................................. 12
ss.2.06 Pro Rata Treatment; Sharing.................................................... 12
ss.2.07 Computations................................................................... 13
ss.2.08 Facility Fee................................................................... 14
ss.2.09 Administration Fee............................................................. 14
III. PROVISIONS RELATING TO FIXED RATE LOANS.......................................................... 14
ss.3.01 Additional Costs............................................................... 14
ss.3.02 Limitation on Types of Loans................................................... 17
ss.3.03 Illegality..................................................................... 17
ss.3.04 Treatment of Affected Loans.................................................... 17
ss.3.05 Compensation................................................................... 17
ss.3.06 Survival....................................................................... 18
IV. CONDITIONS....................................................................................... 18
ss.4.01 Conditions to Effectiveness.................................................... 18
ss.4.02 Conditions Precedent to Loans.................................................. 19
V. COVENANTS........................................................................................ 19
ss.5.01 Financial Statements........................................................... 19
ss.5.02 Access to Books and Inspection................................................. 20
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C> <C>
ss.5.03 Litigation..................................................................... 21
ss.5.04 Maintenance of Existence....................................................... 21
ss.5.05 Merger; Sale of Assets......................................................... 21
ss.5.06 Default; Investment Rating..................................................... 22
ss.5.07 ERISA.......................................................................... 22
ss.5.08 Liens.......................................................................... 22
ss.5.09 Total Indebtedness to Consolidated Capitalization.............................. 23
ss.5.10 [Intentionally Omitted.]....................................................... 23
ss.5.11 Insurance...................................................................... 23
ss.5.12 Maintenance of Properties...................................................... 23
ss.5.13 Public Utility Holding Company Act............................................. 24
VI. REPRESENTATIONS AND WARRANTIES................................................................... 24
ss.6.01 Corporate Existence and Powers................................................. 24
ss.6.02 Corporate Authority, etc....................................................... 24
ss.6.03 Financial Condition............................................................ 24
ss.6.04 Litigation..................................................................... 25
ss.6.05 Taxes.......................................................................... 25
ss.6.06 Approvals...................................................................... 25
ss.6.07 ERISA.......................................................................... 25
ss.6.08 Margin Regulations............................................................. 25
ss.6.09 Certain Subsidiaries........................................................... 26
ss.6.10 Investment Company Act......................................................... 26
ss.6.11 Environmental Laws............................................................. 26
ss.6.12 Year 2000 Problem.............................................................. 26
VII. EVENTS OF DEFAULT................................................................................ 26
VIII. MISCELLANEOUS.................................................................................... 28
ss.8.01 Waiver......................................................................... 28
ss.8.02 Notices and Delivery of Documents.............................................. 29
ss.8.03 Governing Law.................................................................. 29
ss.8.04 Offsets, etc................................................................... 29
ss.8.05 Disposition of Loans........................................................... 29
ss.8.06 Expenses....................................................................... 30
ss.8.07 Amendments, Waivers, etc....................................................... 30
ss.8.08 Definitions.................................................................... 31
ss.8.09 Successors and Assigns......................................................... 31
ss.8.10 Counterparts................................................................... 31
ss.8.11 Confidentiality................................................................ 32
IX. THE AGENTS....................................................................................... 32
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Article Page
- ------- ----
<S> <C> <C> <C>
ss.9.01 Appointment, Power and Immunities.............................................. 32
ss.9.02 Reliance by Agents............................................................. 32
ss.9.03 Default........................................................................ 33
ss.9.04 Rights as a Lender............................................................. 33
ss.9.05 Indemnification................................................................ 33
ss.9.06 Reports........................................................................ 34
ss.9.07 Non-Reliance on Agents and Other Banks......................................... 34
ss.9.08 Failure to Act................................................................. 34
ss.9.09 Resignation or Removal of Agents............................................... 34
ss.9.10 Documentation Agent............................................................ 35
ss.9.11 Syndication Agent.............................................................. 35
</TABLE>
SCHEDULE 1 Definitions
SCHEDULE 2 Lending Offices and/or Addresses for Notices
SCHEDULE 3 Commitments
EXHIBIT A-1 Form of Note for Syndicated Loans
EXHIBIT A-2 Form of Note for Money Market Loans
EXHIBIT A-3 Form of Note for Swingline Loans
EXHIBIT B Form of Opinion of Counsel to the Company
EXHIBIT C Form of Opinion of Special New York
Counsel to the Banks
EXHIBIT D Form of Money Market Quote Request
EXHIBIT E Form of Money Market Quote
iii
<PAGE> 5
CREDIT AGREEMENT dated as of January 20, 1999 among SONAT INC., a
Delaware corporation (the "Company"); the undersigned banks (each herein called
a "Bank"); and THE CHASE MANHATTAN BANK, as Administrative Agent, BANK OF
AMERICA National Trust AND Savings Association, as Syndication Agent and
SUNTRUST BANK, ATLANTA, as Documentation Agent (in such capacities, each such
agent being herein called an "Agent" and collectively the "Agents"); and CREDIT
LYONNAIS, NEW YORK BRANCH, as Managing Agent.
The Company has requested the Banks to extend credit to the Company for
the general corporate purposes of the Company. The Banks are prepared to do so
on the terms hereof.
Accordingly, the Company, each Bank and the Agents hereby agree as
follows:
I. LOANS
ss.1.01 Syndicated Loans. Each Bank severally agrees, on the terms of
this Agreement, to make loans to the Company in Dollars during the period from
and including the date hereof to but not including the Commitment Termination
Date in an aggregate principal amount at any one time outstanding up to but not
exceeding the amount of such Bank's Commitment as then in effect. Subject to the
terms of this Agreement, during such period the Company may borrow, repay and
reborrow the amount of the Commitments; provided that the sum of (i) the
aggregate principal amount of all Money Market Loans, plus (ii) the aggregate
principal amount of all Syndicated Loans plus (iii) the aggregate principal
amount of all Swingline Loans, at any one time outstanding shall not exceed the
aggregate amount of the Commitments at such time except that, notwithstanding
the foregoing, Money Market Loans outstanding at the time of any termination or
reduction of the Commitments pursuant to ss.1.04 hereof need not be prepaid on
account of this proviso.
ss.1.02 Money Market Loans.
(a) In addition to borrowings of Syndicated Loans, the Company may, as
set forth in this ss.1.02, request the Banks to make offers to make Money Market
Loans to the Company in Dollars. The Banks may, but shall have no obligation to,
make such offers and the Company may, but shall have no obligation to, accept
any such offers in the manner set forth in this ss.1.02. Money Market Loans
shall be Set Rate Loans, provided that:
(i) there may be no more than fifteen different Interest
Periods for both Syndicated Loans (other than Domestic Loans) and Money
Market Loans outstanding at the same time (for which purpose Interest
Periods described in different lettered clauses of the definition of
the term "Interest Period" in ss.2.03 hereof shall be deemed to be
different Interest Periods even if they are coterminous); and
(ii) the sum of (x) aggregate principal amount of all Money
Market Loans, plus (y) the aggregate principal amount of all Syndicated
Loans plus (z) the aggregate principal amount of all Swingline Loans,
at any one time outstanding shall not
<PAGE> 6
2
exceed the aggregate amount of the Commitments at such time except
that, notwithstanding the foregoing, Money Market Loans outstanding at
the time of any termination or reduction of the Commitments pursuant to
ss.1.04 hereof need not be prepaid on account of this proviso.
(b) When the Company wishes to request offers to make Money Market
Loans, it shall give each Bank notice (a "Money Market Quote Request") so as to
be received no later than 11:00 a.m. New York time on the Business Day next
preceding the date of borrowing proposed therein or such other time and date as
the Company and the Majority Banks may agree. The Company may request offers to
make Money Market Loans for up to three different Interest Periods in a single
notice (for which purpose Interest Periods in different lettered clauses of the
definition of the term "Interest Period" shall be deemed to be different
Interest Periods even if they are coterminous); provided that the request for
each separate Interest Period shall be deemed to be a separate Money Market
Quote Request for a separate borrowing (a "Money Market Borrowing"). Each such
notice shall be substantially in the form of Exhibit D hereto and shall specify
as to each Money Market Borrowing:
(i) the proposed date of such borrowing, which shall be a
Business Day;
(ii) the aggregate amount of such Money Market Borrowing,
which shall be at least $25,000,000 (or in larger multiples of
$5,000,000) but shall not cause the limits specified in ss.1.02 hereof
to be violated (without giving effect to any other Money Market
Borrowing subject to a simultaneous Money Market Quote Request);
(iii) the duration of the Interest Period applicable thereto;
and
(iv) the date on which the Money Market Quotes are to be
submitted if it is before the proposed date of borrowing (the date on
which such Money Market Quotes are to be submitted is called the
"Quotation Date").
Except as otherwise provided in this ss.1.02, no Money Market Quote Request
shall be given within five Business Days (or such other number of days as the
Company and the Majority Banks may agree) of any other Money Market Quote
Request.
(c) (i) Each Bank may submit one or more Money Market Quotes, each
containing an offer to make a Money Market Loan in response to any Money Market
Quote Request; provided that, if the Company's request under ss.1.02(b) hereof
specified more than one Interest Period, such Bank may make a single submission
containing one or more Money Market Quotes for each such Interest Period. Each
Money Market Quote must be submitted to the Company not later than 10:00 a.m.
New York time on the Quotation Date or such other time and date as the Company
and the Majority Banks may agree. Subject to ss.3.02(b), ss.3.03, ss.4.02 and
Article VII hereof, any Money Market Quote so made shall be irrevocable except
with the written consent of the Company.
<PAGE> 7
3
(ii) Each Money Market Quote shall be substantially in the
form of Exhibit E hereto and shall specify:
(A) the proposed date of borrowing and the Interest Period
therefor;
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount shall be at
least $5,000,000 or a larger multiple of $1,000,000; provided that
the aggregate principal amount of all Money Market Loans for which
a Bank submits Money Market Quotes (x) may be greater or less than
the Commitment of such Bank but (y) may not exceed the principal
amount of the Money Market Borrowing for a particular Interest
Period for which offers were requested;
(C) the rate of interest per annum (rounded upwards, if
necessary, to the nearest 1/10,000th of 1%) offered for each Money
Market Loan (the "Money Market Rate"); and
(D) the identity of the quoting Bank.
Unless otherwise agreed by the Company, no Money Market Quote shall contain
qualifying, conditional or similar language or propose terms other than or in
addition to those set forth in the applicable Money Market Quote Request and, in
particular, no Money Market Quote may be conditioned upon acceptance by the
Company of all (or some specified minimum) of the principal amount of the Money
Market Loan for which such Money Market Quote is being made.
(d) Not later than 11:30 a.m. New York time on the Quotation Date or
such other time and date as the Company and the Majority Banks may agree, the
Company shall notify each Bank of its acceptance or nonacceptance of the offers
so notified to it pursuant to ss.1.02(c)(i) hereof (and the failure of the
Company to give such notice by such time shall constitute nonacceptance). In the
case of acceptance, such notice shall specify the aggregate principal amount of
offers for each Interest Period that are accepted. The Company may accept any
Money Market Quote in whole or in part (provided that any Money Market Quote
accepted in part shall be at least $5,000,000 or in larger multiples of
$1,000,000); provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request;
(ii) the aggregate principal amount of each Money Market
Borrowing shall be at least $25,000,000 (or in larger multiples of
$5,000,000) but shall not cause the limits specified in ss.1.02 hereof
to be violated;
(iii) acceptance of offers may be made only in ascending order
of Money Market Rates, in each case commencing with the lowest rate so
offered; and
<PAGE> 8
4
(iv) the Company may not accept any offer that fails to comply
with ss.1.02(c)(ii) hereof or otherwise fails to comply with the
requirements of this Agreement (including, without limitation,
ss.1.02(a) hereof).
If offers are made by two or more Banks with the same Money Market Rates for a
greater aggregate principal amount than the amount in respect of which offers
are accepted for the related Interest Period, the principal amount of Money
Market Loans in respect of which such offers are accepted shall be allocated by
the Company among such Banks as nearly as possible (in multiples of $1,000,000)
in proportion to the aggregate principal amount of such offers. Determinations
by the Company of the amounts of Money Market Loans shall be conclusive in the
absence of manifest error. Promptly after the acceptance by the Company of any
Money Market Quote, the Company shall give Chase notice of the principal amount
of each Money Market Loan to be made pursuant to such Money Market Quote, the
rate of interest per annum and the duration of the Interest Period applicable
thereto and the name of the Bank making such Loan.
(f) Any Bank whose offer to make any Money Market Loan has been
accepted shall, not later than 1:00 p.m. New York time on the date specified for
the making of such Loan, make the amount of such Loan available to Chase at
account number 323-506909 maintained by Chase with The Chase Manhattan Bank at
its Principal Office in immediately available funds, for account of the Company.
The amount so received by Chase shall, subject to the terms and conditions of
this Agreement, be made available to the Company on such date by depositing the
same, in immediately available funds, in an account of the Company maintained
with The Chase Manhattan Bank at its Principal Office designated by the Company.
(g) The amount of any Money Market Loan made by any Bank shall not
constitute a utilization of such Bank's Commitment.
ss.1.03 Swingline Commitment. Subject to the terms and conditions
hereof, the Swingline Bank agrees to make a portion of the credit otherwise
available to the Company under the Commitments by making swingline loans
("Swingline Loans") in Dollars to the Company during the period from and
including the date hereof to but not including the Commitment Termination Date;
provided that (a) the aggregate principal amount of Swingline Loans outstanding
at any time shall not exceed the Swingline Commitment then in effect, (b) the
aggregate principal amount of Swingline Loans plus the aggregate principal
amount of Syndicated Loans made by the Swingline Bank outstanding at any time
shall not exceed the Swingline Bank's Commitment then in effect, and (c) the
Company shall not request, and the Swingline Bank shall not make, any Swingline
Loan if, after giving effect to the making of such Swingline Loan, the sum of
(i) the aggregate principal amount of all Money Market Loans, plus (ii) the
aggregate principal amount of all Syndicated Loans plus (iii) the aggregate
principal amount of all Swingline Loans, at any one time outstanding shall
exceed the aggregate amount of the Commitments at such time except that,
notwithstanding the foregoing, Money Market Loans outstanding at the time of any
termination or reduction of the Commitments pursuant to ss.1.04 hereof need not
be prepaid on account of this proviso. During such period, the Company may use
the Swingline Commitment by borrowing, repaying and reborrowing, all in
accordance with the terms and conditions hereof.
<PAGE> 9
5
ss.1.04 Change of Commitments.
(a) The Company shall have the right at any time or from time to time
upon not less than three Business Days' prior notice to Chase (specifying the
date and the aggregate amount of each such reduction or termination) to
terminate in whole, or to reduce in part, (i) the aggregate unused amount of the
Commitments (and, in accordance with ss.1.02(g) hereof, outstanding Money Market
Loans shall not constitute a utilization of the Commitments) and/or (ii) the
aggregate unused amount of the Swingline Commitment. Each such reduction of the
Commitments shall be in an aggregate amount of at least $25,000,000 and a
multiple of $1,000,000 and each such reduction of the Swingline Commitment shall
be in an aggregate amount of at least $5,000,000 and a multiple of $1,000,000.
Chase shall promptly notify each Bank of its proportionate share and the date of
each such reduction.
(b) If either (i) during any period of 12 consecutive months,
individuals who were directors of the Company at the beginning of such period
cease to constitute a majority of the board of directors of the Company (except
for changes due to the retirement or death of any such individuals) or (ii) any
Person (or group of Persons which has an agreement, arrangement or understanding
for the purpose of acquiring the shares of the Company) shall acquire, directly
or indirectly, beneficial ownership or control of more than 50% of the then
outstanding voting shares of the Company (either such event being hereinafter
referred to as a "Change in Control"), then each Bank (through Chase) may, by
notice to the Company not later than the date 20 Business Days after the Company
shall have notified the Agents of any such Change in Control, reduce the
Commitment of such Bank in an amount equal to the unused amount of such Bank's
Commitment (and, in accordance with ss.1.02(g) hereof, outstanding Money Market
Loans shall not constitute a utilization of such Bank's Commitment) and the
Swingline Bank, by such notice, may reduce the Swingline Commitment in an amount
equal to the unused amount thereof. The Company agrees, as soon as it shall
become known to one of its senior officers, to notify the Agents of any such
Change in Control (and Chase shall promptly notify the Banks thereof), but the
failure to so notify shall not preclude any Bank from reducing the unused amount
of such Bank's Commitment as aforesaid.
(c) Provided that no Default shall have occurred and be continuing, the
Company may at any time terminate the Commitment of any Bank (and, in the case
of the Swingline Bank, the Swingline Commitment) that has claimed any
compensation under ss.3.01(a) or ss.3.01(c) hereof at any time during the
preceding one-month period, in whole but not in part, by (i) giving Chase (which
shall promptly notify such Bank) not less than five Business Days' prior notice
thereof, which notice shall be irrevocable and effective only upon receipt by
Chase and shall specify the identity of such Bank and the effective date of such
termination, and (ii) paying to such Bank (and there shall become due and
payable) on such date the outstanding principal amount of all Loans made by such
Bank, interest on such principal amount accrued to such date, any amounts
payable to such Bank pursuant to Article III hereof in connection therewith and
all other amounts owing to such Bank by the Company hereunder (provided that the
obligations of the Company under Article III and ss.8.06 hereof to such Bank
shall survive such termination).
(d) Provided that no Default shall have occurred and be continuing, the
Company may at any time replace any Bank that has claimed any compensation under
ss.3.01(a) or
<PAGE> 10
6
ss.3.01(c) hereof at any time during the preceding one-month period, in whole
but not in part, by giving Chase not less than five Business Days' prior notice
(and Chase shall promptly notify such Bank), that it intends to replace such
Bank with one or more banks (which may include any other Bank under this
Agreement) selected by the Company and acceptable to Chase (which shall not
unreasonably withhold its consent). Any such replacement shall be accomplished
pursuant to documentation in form and substance satisfactory to Chase. Upon the
effective date of any replacement under this ss.1.04(d) (and as a condition
thereto), the Company shall repay to the Bank being replaced the principal of
and interest on each Loan then outstanding from such Bank together with all
other amounts owing to such Bank hereunder and such replacement bank (or banks,
as the case may be) shall make a loan (or loans) to the Company in the
(aggregate) principal amount of each such Loan so repaid which loan (or loans)
shall be of the same type and have the same maturity and interest rate as the
respective Loan so repaid), whereupon such replacement bank (or banks) shall
become a "Bank" (or "Banks") for all purposes of this Agreement having a
Commitment (or Commitments in the aggregate) (and, in the case of the Swingline
Bank, the Swingline Commitment) in the amount of such Bank being replaced and
such loan (or loans) shall be deemed a Loan (or Loans) hereunder.
(e) The Swingline Bank may terminate in its sole discretion the
Swingline Commitment by giving the Company written notice thereof at least 30
days in advance of the date of such termination.
(f) The Commitments (and, in the case of the Swingline Bank, the
Swingline Commitment) once terminated or reduced may not be reinstated, except
that the Swingline Commitment may be reinstated by agreement of the Swingline
Bank and the Company.
ss.1.05 Borrowings of Syndicated Loans.
(a) Each Syndicated Loan shall be either a Domestic Loan or Eurodollar
Loan. Syndicated Loans on the occasion of any borrowing thereof hereunder may be
Domestic Loans or Eurodollar Loans (each a "type" of Loan) or any combination
thereof; provided that there may be no more than ten Interest Periods for
Eurodollar Loans outstanding at the same time; and provided, further, that there
may be no more than fifteen different Interest Periods for both Eurodollar Loans
and Money Market Loans outstanding at the same time (for which purpose Interest
Periods described in different lettered clauses of the definition of the term
"Interest Period" in ss.2.03 hereof shall be deemed to be different Interest
Periods even if they are coterminous).
(b) The Company shall give Chase (which shall promptly notify the
Banks) notice of each borrowing hereunder of Syndicated Loans, which notice
shall be irrevocable and effective only upon receipt by Chase, shall specify
with respect to the Syndicated Loans to be borrowed (i) the aggregate amount
(which shall be at least $10,000,000 or a multiple of $1,000,000 in excess
thereof), (ii) the type or types of Loans to be borrowed and the aggregate
amount of each type, (iii) the date of such borrowing (which shall be a Business
Day), and (iv) (in the case of Eurodollar Loans) the duration of the Interest
Period therefor and shall be given not later than 11:00 a.m. New York time, in
the case of Domestic Loans, on the same day as the date
<PAGE> 11
7
of such borrowing and, in the case of Eurodollar Loans, on the day which is not
less than three Business Days prior to the date of such borrowing.
(c) If at any time during which Syndicated Loans are outstanding under
this Agreement the Company shall fail to give a notice of the type referred to
in ss.1.05(b) or otherwise to advise Chase in writing by 11:00 a.m. New York
time on the day which is not less than one Business Day prior to the maturity
date of any such Syndicated Loans that it does not intend to reborrow an amount
at least equal to the aggregate amount of such Syndicated Loans (or, if less,
the aggregate amount of the Commitments) on such maturity date, the Company
shall be deemed to have given on such first Business Day preceding such maturity
date a notice of borrowing hereunder for Domestic Loans to be made on such date
in an amount equal to the lesser of (i) the aggregate principal amount of the
Syndicated Loans which are maturing on such date or (ii) the aggregate amount of
the Commitments to be outstanding on such date (after giving effect to any
reductions of the Commitments to be effected on such date), and Chase shall
notify the Banks of such borrowing.
(d) Subject to Chase's receipt or deemed receipt of a notice of
borrowing as provided in ss.1.05(b) or ss.1.05(c) hereof and to Chase's receipt
of notice from the Swingline Bank of the outstanding principal amount of the
Swingline Loans as of the Swingline Business Day next preceding the date of such
notice of borrowing, Chase shall give each Bank not less than three Business
Days' prior notice (with respect to each borrowing of Eurodollar Loans) or
same-day notice by noon (with respect to each borrowing of Domestic Loans), as
the case may be, of each such borrowing specifying (i) the aggregate amount to
be borrowed, (ii) the date of borrowing, (iii) the type or types of Loans to be
borrowed, (iv) in the case of any Fixed Rate Loans to be borrowed, the duration
of the Interest Period therefor and (v) such Bank's pro rata portion thereof.
Each Bank's (other than the Swingline Bank's) pro rata portion of each
Syndicated Loan shall equal a fraction, the numerator of which shall be the
amount of such Bank's Commitment as of the date the notice of borrowing is given
for such Syndicated Loan and the denominator of which shall be (i) the aggregate
Commitments of all Banks as of the date such notice of borrowing is given minus
(ii) the outstanding principal amount of the Swingline Loans as of the next
preceding Swingline Business Day. The Swingline Bank's pro rata portion of each
Syndicated Loan shall equal a fraction, the numerator of which shall be (i) the
amount of the Swingline Bank's Commitment as of the date the notice of borrowing
is given with respect to such Syndicated Loan minus (ii) the outstanding
principal amount of the Swingline Loans as of the next preceding Swingline
Business Day and the denominator of which shall be (i) the aggregate Commitment
of all Banks as of the date such notice of borrowing is given minus (ii) the
outstanding principal amount of the Swingline Loans as of the next preceding
Swingline Business Day. From and including the date that notice of a borrowing
of a Syndicated Loan is given to but excluding the date that such Syndicated
Loan is made, the principal amount of such Syndicated Loan required to be made
by the Swingline Bank shall be deemed to be outstanding for purposes of clause
(b) of ss.1.03.
(e) Not later than 1:00 p.m. New York time on the date specified for
each borrowing of Syndicated Loans, each Bank shall make available to Chase, at
account number 323-506909 maintained by The Chase Manhattan Bank at its
Principal Office in immediately available funds the amount of the Syndicated
Loan or Syndicated Loans to be made by it on such
<PAGE> 12
8
date, for account of the Company. The amount so received by Chase shall, subject
to the terms and conditions of this Agreement, be made available to the Company
on such date by depositing the same, in immediately available funds, in an
account of the Company maintained with The Chase Manhattan Bank at its Principal
Office designated by the Company. If any Bank shall (i) be obligated but fail to
make available the amount of the Syndicated Loan to be made by it on the date
specified for a borrowing hereunder and (ii) have any Syndicated Loans which are
maturing on such date, such maturing Syndicated Loans shall automatically be
extended in an amount equal to (but not in excess of) the amount of the
Syndicated Loan to be made and in the type and for the Interest Period of such
Loan to be made (and such Loan which would otherwise mature on such date shall
not be considered to be past due hereunder).
ss.1.06 Several Commitments; Remedies Independent. The failure of any
Bank to make any Loan to be made by it shall not relieve any other Bank of its
obligation to make its Loan on such date, but neither any other Bank nor any
Agent shall be responsible for such failure. The amounts payable at any time by
the Company hereunder and under the Notes to each Bank shall be a separate and
independent debt and each Bank shall be entitled to protect and enforce its
rights arising out of this Agreement and the Notes, and it shall not be
necessary for any other Bank or any Agent to consent to, or to be joined as an
additional party in, any proceedings for such purposes.
ss.1.07 Availability of Funds. Unless Chase shall have been notified by
a Bank prior to the date of any borrowing hereunder that such Bank does not
intend to make available to Chase such Bank's Loans to be made on such day,
Chase may assume that such Bank has made the amount of such Loans to be made
available to Chase on such date and Chase may in reliance upon such assumption
(but shall not be required to) make available to the Company a corresponding
amount. If such proceeds are not in fact made available to Chase by such Bank,
Chase shall be entitled to recover such corresponding amount on demand from such
Bank (or, if such Bank fails to pay such corresponding amount forthwith upon
such demand, from the Company) together with interest thereon in respect of each
day during the period commencing on the date such corresponding amount was made
available to the Company and ending on (but excluding) the date Chase recovers
such corresponding amount at a rate per annum equal to the Federal Funds Rate
for such day (or if such day is not a Business Day, the next preceding Business
Day).
ss.1.08 Borrowings of Swingline Loans. (a) If on any Swingline Business
Day prior to the Commitment Termination Date the aggregate disbursements
authorized by the Company and made from the Swingline Account exceed the
aggregate cash on hand and deposits received in the Swingline Account on such
Swingline Business Day, the Swingline Bank shall make a Swingline Loan to the
Company in an amount equal to such excess (subject to the provisions of ss.1.03
hereof), unless otherwise instructed by the Company. Each Swingline Loan shall
be credited to the Swingline Account as of the date made. The outstanding
Swingline Loans shall bear interest at such rate per annum as the Company and
the Swingline Bank shall agree. Accrued interest on the outstanding Swingline
Loans shall be paid on each date on which the outstanding Swingline Loans are
paid in full and on the first Swingline Business Day of each month if there are
any outstanding Swingline Loans on the Swingline Business Day next preceding
such day. The Company shall have the right to prepay the outstanding Swingline
<PAGE> 13
9
Loans, in whole or in part, at any time. All payments with respect to Swingline
Loans shall be made at the Lending Office of the Swingline Bank. Upon request of
the Company made on any Swingline Business Day, the Swingline Bank shall give
Chase notice as promptly as practicable but in any event by no later than 11:00
a.m. New York time on the next Swingline Business Day of the outstanding
principal amount of the Swingline Loans as of the close of business on the
Swingline Business Day next preceding the date that such notice is given to
Chase.
(b) In the case of any of the Events of Default specified in paragraphs
A through I of Article VII hereof, (i) the Swingline Bank may, by notice to the
Company, terminate the Swingline Commitment hereunder and it shall thereupon
terminate, and (ii) the Swingline Bank may, by notice to the Company, declare
the outstanding Swingline Loans and Swingline Note and all other obligations of
the Company thereunder to be due and payable, whereupon the same shall become
forthwith due and payable, without further protest, presentment, notice or
demand, all of which are expressly waived by the Company. In case of any of the
Events of Default specified in paragraph J or K of Article VII hereof, without
any notice to the Company or any act by the Swingline Bank, the Swingline
Commitment hereunder shall terminate forthwith and the principal of and interest
accrued on the outstanding Swingline Loans and the Swingline Note and all other
obligations of the Company thereunder shall become and be due and payable.
ss.1.09 Lending Offices. The Loans of each type made by each Bank shall
be made and maintained at such Bank's Applicable Lending Office for Loans of
such type.
ss.1.10 Notes.
(a) The Syndicated Loans made by each Bank shall be evidenced by a
single promissory note (a "Syndicated Note") of the Company substantially in the
form of Exhibit A-1 hereto, dated the Effective Date, payable to such Bank in a
principal amount equal to the amount of its Commitment as originally in effect
and otherwise duly completed. The date, amount, type, interest rate and maturity
date of each Syndicated Loan made by each Bank to the Company, and each payment
made on account of the principal thereof, shall be recorded by such Bank on its
books and, prior to any transfer of such Note held by it, endorsed by such Bank
on the schedule attached to such Note or any continuation thereof. The failure
of any Bank to make any notation or entry or any error in such a notation or
entry shall not, however, limit or otherwise affect any obligation of the
Company under this Agreement or the Notes.
(b) The Money Market Loans made by any Bank shall be evidenced by a
single promissory note (a "Money Market Note") of the Company substantially in
the form of Exhibit A-2 hereto, dated the date of the delivery of such Note to
Chase under this Agreement, payable to such Bank and otherwise duly completed.
The date, amount, interest rate and maturity date of each Money Market Loan made
by each Bank to the Company, and each payment made on account of the principal
thereof, shall be recorded by such Bank on its books and, prior to any transfer
of such Note held by it, endorsed by such Bank on the schedule attached to such
Note or any continuation thereof. The failure of any Bank to make any notation
or entry or any error in such a notation or entry shall not, however, limit or
otherwise affect any obligation of the Company under this Agreement or the
Notes.
<PAGE> 14
10
(c) The Loans made by the Swingline Bank shall be evidenced by a single
promissory note (a "Swingline Note") of the Company substantially in the form of
Exhibit A-3 hereto, dated the Effective Date, payable to the Swingline Bank in a
principal amount equal to the amount of the Swingline Commitment as originally
in effect and otherwise duly completed. The date, amount, type, interest rate
and maturity date of each Swingline Loan made by the Swingline Bank to the
Company, and each payment made on account of the principal thereof, shall be
recorded by the Swingline Bank on its books and, prior to any transfer of such
Note held by it, endorsed by the Swingline Bank on the schedule attached to such
Note or any continuation thereof. The failure of the Swingline Bank to make any
notation or entry or any error in such a notation or entry shall not, however,
limit or otherwise affect any obligation of the Company under this Agreement or
the Notes.
II. PAYMENTS, INTEREST AND CERTAIN FEES
ss.2.01 Repayment of Loans. The Company hereby promises to pay to Chase
for account of each Bank, the principal amount of each Loan made by such Bank
(except for the Swingline Loan, as to which payments shall be made to the
Swingline Bank pursuant to ss.1.08), and such Loan shall mature, on the last day
of the Interest Period therefor.
ss.2.02 Interest. The Company hereby promises to pay to Chase for
account of each Bank, interest on the unpaid principal amount of each Loan made
by such Bank (except for the Swingline Loans, as to which payments shall be made
to the Swingline Bank pursuant to ss.1.08) for the period from and including the
date of such Loan to but excluding the date such Loan shall be paid in full, at
the following rates per annum:
(a) if such Loan is a Domestic Loan, the Base Rate (as in effect from
time to time) plus the Applicable Margin (if any);
(b) if such Loan is a Eurodollar Loan, the Fixed Rate for such Loan
for the Interest Period for such Loan plus the Applicable Margin (as in
effect from time to time during the Interest Period for such Loan); and
(c) if such Loan is a Set Rate Loan, the Money Market Rate for such
Loan for the Interest Period therefor quoted by the Bank making such Loan
and accepted by the Company in accordance with ss.1.02 hereof.
Notwithstanding the foregoing, the Company hereby promises to pay to Chase for
account of each Bank, interest at the applicable Post-Default Rate on any
principal of any Loan made by such Bank, and on any other amount payable by the
Company hereunder or under the Notes held by such Bank to or for account of such
Bank, which shall not be paid in full when due (whether at stated maturity, by
acceleration or otherwise), for the period from and including the due date
thereof to but excluding the date the same is paid in full. Accrued interest on
each Loan shall be payable on each Interest Payment Date for such Loan, except
that interest payable at the Post-Default Rate shall be payable from time to
time on demand and interest on any Eurodollar Loan that is converted into a
Domestic Loan (pursuant to ss.3.04 hereof) shall be payable on the date of
conversion (but only to the extent so converted). Promptly after the
determination of any
<PAGE> 15
11
interest rate provided for herein or any change therein, Chase shall give notice
thereof to the Banks, to which such interest is payable and to the Company.
ss.2.03 Interest Periods. As used in this Agreement, "Interest Period"
shall mean:
(a) With respect to any Eurodollar Loan, the period commencing on the
date such Eurodollar Loan is made and ending on the numerically
corresponding day in the first, second, third or sixth calendar month
thereafter, as the Company may select as provided in ss.1.05(b) hereof,
except that each Interest Period which commences on the last Business Day
of a calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end
on the last Business Day of the appropriate subsequent calendar month;
(b) With respect to any Domestic Loan, the period commencing on the
date such Domestic Loan is made and ending on the date such Loan is repaid;
(c) With respect to any Set Rate Loan, the period commencing on the
date such Set Rate Loan is made and ending on any Business Day up to 180
days thereafter, as the Company may select as provided in ss.1.02(b)
hereof; and
(d) With respect to a Swingline Loan, the period commencing on the
Swingline Business Day on which such Swingline Loan is made and ending on
the date such Swingline Loan is repaid.
Notwithstanding the foregoing: (i) no Interest Period may commence before and
end after the Commitment Termination Date; (ii) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, in the case of an Interest Period for Eurodollar
Loans, if such next succeeding Business Day falls in the next succeeding
calendar month, on the next preceding Business Day); and (iii) notwithstanding
clause (i) above, no Interest Period for any Eurodollar Loans shall have a
duration of less than one month and, if the Interest Period for any Eurodollar
Loans would otherwise be a shorter period, such Loans shall not be available
hereunder.
ss.2.04 Prepayments. (a) The Company shall have the right, at any time
or from time to time, to prepay Syndicated Loans in whole or in part, provided
that (i) the Company shall give Chase notice of each such prepayment not less
than three Business Days' prior to the date of such prepayment (which notice
shall be effective upon receipt), (ii) each partial prepayment shall be in an
aggregate principal amount which is at least $1,000,000 or a multiple thereof,
(iii) interest on the principal prepaid, accrued to the prepayment date, shall
be paid on the prepayment date and (iv) in the case of prepayment of a
Eurodollar Loan other than on the last day of the Interest Period applicable
thereto, the Company shall pay compensation, if any, due in accordance with
ss.3.05(a) with respect thereto. The Company may not prepay any Money Market
Loans. Notwithstanding the foregoing, upon not less than four Business Days'
prior notice (which shall be effective upon receipt) the Company may
simultaneously prepay all Loans then outstanding hereunder and terminate in
whole the Commitments (in which case interest on the principal
<PAGE> 16
12
prepaid, accrued to the prepayment date, together with all other amounts owing
hereunder, including without limitation under ss.3.05, shall be paid on such
prepayment date).
(b) If, after giving effect to any termination or reduction of the
Commitment of any Bank pursuant to ss.1.04(a) or (b) hereof, the outstanding
aggregate principal amount of the Syndicated Loans held by such Bank exceeds the
amount of such Bank's Commitment, the Company shall prepay or pay such
Syndicated Loans (of a type to be designated by the Company by notice to Chase
not less than four Business Days prior to the date of such termination or
reduction and, failing such notice, such prepayment or repayment shall be
applied, first, to the outstanding Domestic Loans and, next, to the extent
necessary, to the outstanding Fixed Rate Loans with the fewest number of days
remaining in the Interest Periods therefor on such termination or reduction
date) in an aggregate principal amount equal to such excess, together with
interest thereon accrued to the date of such prepayment or payment and any other
amounts payable pursuant to ss.3.05 hereof in connection therewith.
ss.2.05 Payments, etc.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Company under this
Agreement and the Notes shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to Chase at its Principal
Office, not later than 11:00 a.m. New York time on the date on which such
payment shall become due; provided that, if a new Loan is to be made by any Bank
on a date the Company is to repay any principal of an outstanding Loan of such
Bank, such Bank shall apply the proceeds of such new Loan to the payment of the
principal to be repaid and only an amount equal to the difference (if any)
between the principal to be borrowed and the principal to be repaid shall be
made available by such Bank to Chase as provided in ss.1.02 or ss.1.05 hereof
(if such principal to be borrowed exceeds such principal to be repaid) or paid
by the Company to Chase pursuant to this ss.2.05 (if such principal to be repaid
exceeds such principal to be borrowed).
(b) Each payment received by Chase under this Agreement or any Note for
account of a Bank shall be paid promptly to such Bank, in immediately available
funds, for account of such Bank's Applicable Lending Office for the Loan in
respect of which such payment is made.
(c) If the due date of any payment under this Agreement or any Note
would otherwise fall on a day which is not a Business Day (or, in the case of
any Swingline Loan or Swingline Note, a Swingline Business Day) such date shall
be extended to the next succeeding Business Day (or, in the case of any
Swingline Loan or Swingline Note, the next succeeding Swingline Business Day)
and interest shall be payable for any principal so extended for the period of
such extension.
ss.2.06 Pro Rata Treatment; Sharing.
(a) Except to the extent otherwise provided herein: (i) each borrowing
from the Banks under ss.1.01 hereof shall be made from the Banks and each
termination or reduction of the amount of the Commitments under ss.1.04 hereof
shall be applied to the Commitments of the
<PAGE> 17
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Banks, pro rata according to the amounts of their respective Commitments; (ii)
each payment of principal of Syndicated Loans by the Company shall be made for
account of the Banks pro rata in accordance with the respective unpaid principal
amounts of the Syndicated Loans held by the Banks; and (iii) each payment of
interest on Syndicated Loans by the Company shall be made for account of the
Banks pro rata in accordance with the amounts of interest on Syndicated Loans
due and payable to the respective Banks.
(b) If any Bank shall obtain payment of any principal of or interest on
any Loan made by it to the Company under this Agreement through the exercise of
any right of set-off, banker's lien or counterclaim or similar right or
otherwise, and, as a result of such payment, such Bank shall have received a
greater percentage of the principal or interest then due to such Bank hereunder
than the percentage received by any other Banks, it shall promptly purchase from
such other Banks participations in (or, if and to the extent specified by such
Bank, direct interests in) the Loans made by such other Banks (or in interest
due thereon, as the case may be) in such amounts, and make such other
adjustments from time to time as shall be equitable, to the end that all the
Banks shall share the benefit of such excess payment (net of any expenses which
may be incurred by such Bank in obtaining or preserving such excess payment) pro
rata in accordance with the unpaid principal of and/or interest on the Loans
held by each of the Banks before giving effect to such payment. To such end all
the Banks shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must otherwise
be restored.
(c) The Company agrees that any Bank so purchasing a participation (or
direct interest) in the Loans made by other Banks (or in interest due thereon,
as the case may be) may exercise all rights of set-off, bankers' lien,
counterclaim or similar rights with respect to such participation as fully as if
such Bank were a direct holder of Loans in the amount of such participation.
(d) Nothing contained herein shall require any Bank to exercise any
such right or shall affect the right of any Bank to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of the Company.
(e) If, under any applicable bankruptcy, insolvency or other similar
law, any Bank receives a secured claim in lieu of a set-off to which this
ss.2.06 applies, such Bank shall, to the extent practicable, exercise its rights
in respect of such secured claim in a manner consistent with the rights of the
Banks entitled under this ss.2.06 to share in the benefits of any recovery on
such secured claim.
(f) Notwithstanding the foregoing, this ss.2.06 shall not be applicable
to the Swingline Bank with respect to Swingline Loans.
ss.2.07 Computations. Interest on Money Market Loans and Eurodollar
Loans shall be computed on the basis of a year of 360 days and actual days
elapsed (including the first day but excluding the last day) occurring in the
period for which payable, and interest on Domestic Loans, Swingline Loans and
facility fees shall be computed on the basis of a year of 365
<PAGE> 18
14
or 366 days, as the case may be, and actual days elapsed (including the first
day but excluding the last day) occurring in the period for which payable.
ss.2.08 Facility Fee. The Company shall pay to Chase for account of
each Bank a facility fee on such Bank's Commitment (whether used or not) for the
period commencing on the Effective Date and ending on the Commitment Termination
Date (or such earlier date on which such Bank's Commitment shall have terminated
in full pursuant to ss.1.04 hereof) at a rate per annum for each day during such
period equal to the Applicable Facility Fee Rate in effect on such day. Accrued
facility fees shall be payable quarterly on the last Business Day in March,
June, September and December in each year, commencing the first such date after
the Effective Date and on the date the Commitments are terminated in full.
ss.2.09 Administration Fee. The Company agrees to pay to Chase for its
own account a non-refundable fee in the amount of $5,000 for each Quarterly
Period commencing on or prior to the date on which the Commitments are
terminated in full. Such fee shall not be pro-rated and shall be paid in arrears
on the last Business Day of each Quarterly Period in each year, commencing with
the first such Business Day after the Effective Date, and on the date the
Commitments are terminated in full.
III. PROVISIONS RELATING TO FIXED RATE LOANS. The following provisions
shall apply to all Fixed Rate Loans:
ss.3.01 Additional Costs.
(a) The Company shall pay directly to each Bank from time to time on
request pursuant to paragraph (d) of this ss.3.01 such amounts as such Bank may
determine to be necessary to compensate it for any costs which such Bank
determines are attributable to its making or maintaining of any Fixed Rate Loans
or its obligation to make any Fixed Rate Loans hereunder, or any reduction in
any amount receivable by such Bank hereunder in respect of any of such Loans or
such obligation (such increases in costs and reductions in amounts receivable
being herein called "Additional Costs"), resulting from any Regulatory Change
which:
(i) changes the basis of taxation of any amounts payable to such
Bank under this Agreement or its Notes in respect of any of such Loans
(other than taxes imposed on or measured by the overall net income of
such Bank or of its Applicable Lending Office for any of such Loans by
the jurisdiction in which such Bank has its principal office or such
Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or similar
requirements (other than in the case of any Bank for any period as to
which the Company is required to pay any amount under paragraph (e)
below, the reserves against "Eurocurrency liabilities" under Regulation
D therein referred to) relating to any extensions of credit or other
assets of, or any deposits with or other liabilities of, such Bank
(including any of such Loans or any deposits referred to in the
definition of "Fixed Base Rate" in Schedule 1 hereof), or any
commitment of such Bank (including the Commitment of such Bank
hereunder); or
<PAGE> 19
15
(iii) imposes any other condition affecting this Agreement or
its Notes (or any of such extensions of credit or liabilities) or its
Commitment.
If any Bank requests compensation from the Company under this ss.3.01(a), the
Company may, by notice to such Bank (with a copy to Chase), suspend the
obligation of such Bank to make additional Loans of the type with respect to
which such compensation is requested (in which case the provisions of ss.3.04
hereof shall be applicable) until either (A) the Regulatory Change giving rise
to such request ceases to be in effect or (B) such Bank gives notice to the
Company that it will no longer require the Company to pay Additional Costs
arising from such Regulatory Change.
(b) Without limiting the effect of the provisions of paragraph (a) of
this ss.3.01, in the event that, by reason of any Regulatory Change, any Bank
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
such Bank which includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank which includes Eurodollar
Loans or (ii) becomes subject to restrictions on the amount of such a category
of liabilities or assets which it may hold, then, if such Bank so elects by
notice to the Company (with a copy to Chase), the obligation of such Bank to
make additional Loans of such type hereunder shall be suspended until such
Regulatory Change ceases to be in effect (in which case the provisions of
ss.3.04 hereof shall be applicable).
(c) Without limiting the effect of the foregoing provisions of this
ss.3.01 (but without duplication), the Company shall pay directly to each Bank
from time to time on request pursuant to paragraph (d) of this ss.3.01 such
amounts as such Bank may determine to be necessary to compensate such Bank for
any costs which it determines are attributable to the maintenance by such Bank
(or any Applicable Lending Office), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force of law) of
any court or governmental or monetary authority (i) following any Regulatory
Change or (ii) implementing any risk-based capital guideline or requirement
(whether or not having the force of law and whether or not the failure to comply
therewith would be unlawful) heretofore or hereafter issued by any government or
governmental or supervisory authority implementing at the national level the
Basle Accord (including, without limitation, the Final Risk Based Capital
Guidelines of the Board of Governors of the Federal Reserve System (12 CFR Part
208, Appendix A; 12 CFR Part 225, Appendix A) and the Final Risk-Based Capital
Guidelines of the Office of the Comptroller of the Currency (12 CFR Part 3,
Appendix A)), of capital in respect of its Commitment or Loans (such
compensation to include, without limitation, an amount equal to any reduction of
the rate of return on assets or equity of such Bank (or any Applicable Lending
Office) to a level below that which such Bank (or any Applicable Lending Office)
could have achieved but for such law, regulation, interpretation, directive or
request). For purposes of this ss.3.01(c), "Basle Accord" shall mean the
proposals for risk-based capital framework described by the Basle Committee on
Banking Regulations and Supervisory Practices in its paper entitled
"International Convergence of Capital Measurement and Capital Standards" dated
July 1988, as amended, modified and supplemented and in effect from time to time
or any replacement thereof.
<PAGE> 20
16
(d) Each Bank will notify the Company of any event occurring after the
date of this Agreement that will entitle such Bank to compensation under
paragraph (a) or (c) of this ss.3.01 as promptly as practicable, but in any
event within 90 days, after such Bank obtains actual knowledge thereof;
provided, however, that if any Bank fails to give such notice within 90 days
after it obtains actual knowledge of such an event, such Bank shall, with
respect to compensation payable pursuant to this ss.3.01 in respect of any costs
resulting from such event, only be entitled to payment under this ss.3.01 for
costs incurred from and after the date 90 days prior to the date that such Bank
does give such notice; and provided, further, that each Bank will designate a
different Applicable Lending Office for the Loans of such Bank affected by such
event or by the matters requiring compensation pursuant to paragraph (e) of this
ss.3.01, and take other measures in its sole discretion, if such designation or
other measures will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole opinion of such Bank, result in a
material cost to, or be otherwise disadvantageous to, such Bank, except that
such Bank shall have no obligation to designate an Applicable Lending Office
located in the United States of America. Each Bank will furnish to the Company a
certificate setting forth the basis and amount of each request by such Bank for
compensation under paragraph (a) or (c) of this ss.3.01. Determinations and
allocations by any Bank for purposes of this ss.3.01 of the effect of any
Regulatory Change pursuant to paragraph (a) or (b) of this ss.3.01, or of the
effect of capital maintained pursuant to paragraph (c) of this ss.3.01, on its
costs or rate of return of maintaining Loans or its obligation to make Loans, or
on amounts receivable by it in respect of Loans, and of the amounts required to
compensate such Bank under this ss.3.01, shall be conclusive, provided that such
determinations and allocations are made on a reasonable basis.
(e) Without limiting the effect of the foregoing (but without
duplication), the Company shall pay to each Bank on the last day of each
Interest Period so long as such Bank is maintaining reserves against
"Eurocurrency liabilities" under Regulation D (or, unless the provisions of
paragraph (b) above are applicable, so long as such Bank is, by reason of any
Regulatory Change, maintaining reserves against any other category of
liabilities which includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or against any
category of extensions of credit or other assets of such Bank which includes any
Eurodollar Loans) an additional amount (determined by such Bank and notified,
not less than five Business Days prior to the end of the applicable Interest
Period, to the Company through Chase) equal to the product of the following for
each Eurodollar Loan made by such Bank for each day during such Interest Period:
(i) the principal amount of such Eurodollar Loan outstanding
on such day; and
(ii) the remainder of (x) a fraction the numerator of which
is the annual rate (expressed as a decimal) at which interest accrues
on such Eurodollar Loan for such Interest Period as provided in this
Agreement (less the Applicable Margin) and the denominator of which is
one minus the effective annual rate (expressed as a decimal) at which
such reserve requirements are imposed on such Bank on such day minus
(y) such numerator; and
(iii) 1/360.
<PAGE> 21
17
ss.3.02 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any Fixed Base Rate for
any Interest Period in accordance with the terms hereof:
(a) Chase determines, which determination shall be conclusive, that
quotations of interest rates for the relevant deposits referred to in the
definition of "Fixed Base Rate" in Schedule 1 hereof are not being provided
in the relevant amounts or for the relevant maturities for purposes of
determining rates of interest for any type of Fixed Rate Loans as provided
herein; or
(b) the Majority Banks determine, which determination shall be
conclusive, and notify (or notifies, as the case may be) Chase that the
relevant rates of interest referred to in the definition of "Fixed Base
Rate" in Schedule 1 hereof upon the basis of which the rate of interest for
Eurodollar Loans for such Interest Period is to be determined are not
likely adequately to cover the cost to such Banks (or to such quoting Bank)
of making or maintaining such type of Loans;
then Chase shall give the Company and each Bank prompt notice thereof, and so
long as such condition remains in effect, the Banks (or such quoting Bank) shall
be under no obligation to make additional Loans of such type.
ss.3.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to honor its obligation to make or maintain Eurodollar Loans
hereunder, then such Bank shall promptly notify the Company thereof (with a copy
to Chase) and such Bank's obligation to make Eurodollar Loans shall be suspended
until such time as such Bank may again make and maintain Eurodollar Loans (in
which case the provisions of ss.3.04 hereof shall be applicable).
ss.3.04 Treatment of Affected Loans. If the obligation of any Bank to
make a particular type of Fixed Rate Loans shall be suspended pursuant to
ss.3.01 or ss.3.03 hereof (Loans of such type being herein called "Affected
Loans" and such type being herein called the "Affected Type"), all Loans (other
than Money Market Loans) which would otherwise be made by such Bank as Loans of
the Affected Type shall be made instead as Domestic Loans and, if an event
referred to in ss.3.01(b) or ss.3.03 hereof has occurred and such Bank so
requests by notice to the Company with a copy to Chase, all Affected Loans of
such Bank then outstanding shall be automatically converted into Domestic Loans
on the date specified by such Bank in such notice and, to the extent that
Affected Loans are so made (or converted), all payments of principal which would
otherwise be applied to such Bank's Affected Loans shall be applied instead to
such Loans.
ss.3.05 Compensation. The Company shall pay to Chase for account of
each Bank, upon the request of such Bank through Chase, such amount or amounts
(the basis for which shall be set forth in reasonable detail in such request) as
shall be sufficient (in the reasonable opinion of such Bank) to compensate it
for any loss, cost or expense which such Bank determines is attributable to:
<PAGE> 22
18
(a) any payment or conversion of a Fixed Rate Loan or a Set Rate Loan
made by such Bank for any reason (including, without limitation, the
acceleration of the Loans pursuant to Article VII hereof) on a date other
than the last day of the Interest Period for such Loan; or
(b) any failure by the Company for any reason (including, without
limitation, the failure of any of the conditions precedent specified in
Article IV hereof to be satisfied, but excluding the failure of such Bank
to make a Loan when so obligated hereunder) to borrow a Fixed Rate Loan or
a Set Rate Loan (with respect to which, in the case of a Money Market Loan,
the Company has accepted a Money Market Quote) from such Bank on the date
for such borrowing specified in the relevant notice of borrowing given
pursuant to ss.1.05 or ss.1.02 hereof.
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid or converted
or not borrowed for the period from the date of such payment, conversion or
failure to borrow to the last day of the Interest Period for such Loan (or, in
the case of a failure to borrow, the Interest Period for such Loan which would
have commenced on the date specified for such borrowing) at the applicable rate
of interest for such Loan provided for herein minus the Applicable Margin for
such Loan over (ii) the interest component of the amount such Bank would have
bid in the London interbank market (if such Loan is a Eurodollar Loan) or the
United States secondary certificate of deposit market (if such Loan is a Set
Rate Loan) for Dollar deposits of leading banks in amounts comparable to such
principal amount and with maturities comparable to such period (as reasonably
determined by such Bank).
ss.3.06 Survival. The obligations of the Company under this Article III
shall survive the repayment of the Loans and the cancellation of the Notes.
IV. CONDITIONS
ss.4.01 Conditions to Effectiveness. The Agreement herein contemplated
shall become effective on January 20, 1999 (the "Effective Date"), provided that
on the Effective Date, Chase has received each of the following documents (with
a copy for each Bank delivered to Chase), in form and substance satisfactory to
Chase:
(i) one or more counterparts of this Agreement executed by
each of the parties hereto;
(ii) certified copies of all corporate action taken by the
Company to authorize the execution and delivery of this Agreement and
the Notes and the borrowings hereunder;
(iii) a certificate of a duly authorized officer of the
Company as to the incumbency, and setting forth a specimen signature,
of each of the persons (a) who has signed this Agreement on behalf of
<PAGE> 23
19
the Company, (b) who will sign the Notes on behalf of the Company, and
(c) who will, until replaced by other persons duly authorized for that
purpose, act as the representatives of the Company for the purpose of
signing documents in connection with this Agreement and the
transactions contemplated hereby;
(iv) the Syndicated Note and the Money Market Note for each
Bank and the Swingline Note for the Swingline Bank, all as provided in
ss.1.10 hereof, in each case duly completed and executed by the
Company;
(v) an opinion of Hughes Hubbard & Reed LLP, counsel for the
Company, substantially in the form of Exhibit B hereto, which (except
as to matters of New York or Federal law) may rely as to certain
matters upon an opinion of the Executive Vice President and General
Counsel of the Company substantially in the form attached to said
Exhibit B;
(vi) an opinion of Simpson Thacher & Bartlett, special counsel
to the Banks and the Agents, substantially in the form of Exhibit C
hereto; and
(vii) such other statements, documents, reports or
certificates as any Bank or Agent may reasonably request.
ss.4.02 Conditions Precedent to Loans. The obligation of any Bank to
make any Loan hereunder (including any Money Market Loan and such Bank's initial
Syndicated Loan on or after the Effective Date) is subject to the further
conditions precedent that, both immediately prior to such Loan and also after
giving effect thereto: (a) either (i) if such borrowing is a Money Market Loan
or will increase the outstanding aggregate principal amount of the Syndicated
Loans, no Default shall have occurred and be continuing or (ii) in the case of
any other borrowing, no Event of Default shall have occurred and be continuing;
and (b) the representations and warranties made by the Company in Article VI
(other than, if such borrowing is not a Money Market Loan and will not increase
the outstanding aggregate principal amount of the Syndicated Loans, the last
sentence of ss.6.03, ss.6.04, ss.6.05, ss.6.07, ss.6.09 and ss. 6.11 hereof)
shall be true on and as of the date of the notice or deemed notice of borrowing
for such Loans and on the date of the making of such Loans with the same force
and effect as if made on and as of each such date. The obligation of any Bank to
make a Eurodollar Loan hereunder is subject to the further condition precedent
that, both immediately prior to such Loan and also after giving effect thereto,
no Default shall have occurred and be continuing. Each notice or deemed notice
of borrowing by the Company hereunder shall constitute a certification by the
Company to the effect set forth in the two preceding sentences to the extent
applicable to the borrowing that is the subject of such notice (both as of the
date of such borrowing notice and, unless the Company otherwise notifies Chase
in such borrowing notice or prior to the date of such borrowing, as of the date
of such borrowing).
V. COVENANTS. So long as any Loan or any other amount owing by the
Company to any Agent or Bank hereunder remains outstanding or any Bank's
Commitment remains in effect:
ss.5.01 Financial Statements. The Company shall deliver to each Bank:
<PAGE> 24
20
(a) As soon as available and in any event within 60 days after the end
of each of the first three quarterly accounting periods in each fiscal
year, the 10-Q report of the Company for such period;
(b) As soon as available and in any event within 120 days after the
end of each fiscal year, the 10-K report of the Company for such fiscal
year, accompanied by (A) an opinion as to the financial statements
contained in such 10-K report of independent certified public accountants
of recognized national standing, and (B) a statement by said accountants
that in the course of their regular examination of the Company and its
Consolidated Subsidiaries for purposes of their opinion they obtained no
knowledge, except as specifically stated, of the occurrence and continuance
of any Default;
(c) With each report delivered under ss.5.01(a) or (b) hereof, (A) a
statement signed by an Appropriate Officer of the Company certifying and,
where calculations are necessary, demonstrating compliance by the Company
with the provisions of ss.5.09 hereof, and (B) a statement of an
Appropriate Officer of the Company that such officer has no knowledge,
except as specifically stated, of the occurrence and continuance of any
Default.
(d) Promptly after their becoming available:
(i) Copies of all financial statements, reports and proxy
statements which the Company shall have sent to its stockholders generally.
(ii) Copies of all regular and periodic reports, if any, which
the Company or any Restricted Subsidiary shall have filed with the
Securities and Exchange Commission, or any governmental agency substituted
therefor, or with any national securities exchange.
(e) From time to time, with reasonable promptness, such further
information regarding the business, affairs and financial position of the
Company and each Subsidiary as any Bank may reasonably request.
ss.5.02 Access to Books and Inspection. The Company shall, upon
reasonable request by any Bank, give any representative of such Bank access, at
the Company's principal office, during normal business hours to, and permit such
representative to examine, copy or make excerpts from, any and all books,
records and documents in the possession of the Company relating to its affairs
and the affairs of its Subsidiaries, excluding, however, any privileged and
confidential communications or other materials, and to inspect any of the
properties of the Company or such Subsidiaries; provided that all information
(other than publicly available information) delivered by the Company to any Bank
pursuant to this ss.5.02 is strictly confidential, and each Bank agrees that it
shall (or shall cause the persons referred to in clause (ii) below to) maintain
the confidentiality of any such information, subject to: (i) the obligation to
disclose such information pursuant to subpoena or other legal process, or to
regulatory or examining authorities or other governmental agencies having
jurisdiction, or otherwise as may be required by law; (ii) the right to disclose
such information to the independent auditors and counsel of such Bank, or to
<PAGE> 25
21
the Agents or any other Bank; and (iii) the right to disclose such information
to assignees and participants (including prospective assignees and participants)
as provided in ss.8.05 hereof.
ss.5.03 Litigation. Notwithstanding any other provision of this
Agreement, the Company shall, promptly after its becoming available, furnish to
each Bank a copy of any report filed by the Company with the Securities and
Exchange Commission which contains a statement, description or disclosure as to
any litigation or proceeding before any governmental or regulatory agencies
affecting the Company or any of its Subsidiaries.
ss.5.04 Maintenance of Existence. The Company will preserve and
maintain, and cause each of its Restricted Subsidiaries to preserve and
maintain, its corporate existence, provided that the foregoing shall not prevent
a merger or consolidation, or sale or other disposition of assets, of the
Company or any Restricted Subsidiary unless otherwise prohibited by this
Agreement.
ss.5.05 Merger; Sale of Assets. The Company shall not:
(a) merge into or consolidate with any corporation if (i) the Company
is not the surviving corporation, (ii) the Company is the surviving
corporation and a majority of the board of directors of the Company for a
period of three months after the effective date of such merger does not
consist of individuals who were directors of the Company 12 months prior to
such effective date (except for changes due to the retirement or death of
any such individuals) or (iii) after giving effect to such merger or
consolidation, a Default has occurred and is continuing; or
(b) permit any Restricted Subsidiary to be a party to any merger or
consolidation or to transfer all or substantially all of its assets, except
that any such Restricted Subsidiary may merge or consolidate with, or
transfer all or substantially all of its assets to, the Company or any of
the Company's other Subsidiaries provided that (i) the surviving entity of
such merger or consolidation or the transferee of such assets (if it is not
the Company or another Restricted Subsidiary) shall thereafter be treated
as a Restricted Subsidiary for all purposes of this Agreement and (ii)
after giving effect to such merger, consolidation or transfer of assets, no
Default shall have occurred and be continuing; or
(c) sell, assign, transfer or otherwise dispose of all or
substantially all of its assets or, in any case, any stock of or other
equity interest in any of the Restricted Subsidiaries, except that (i)
stock of or other equity interest in any such Restricted Subsidiary may be
sold, assigned or transferred by the Company to any of its wholly-owned
Subsidiaries provided that thereafter such Subsidiary shall be treated as a
Restricted Subsidiary for all purposes of this Agreement and the Company
shall not permit such Subsidiary to sell, assign, transfer or otherwise
dispose of any such stock or other equity interest except to the Company or
otherwise in accordance with this clause (c), (ii) stock of or other equity
interest in any Restricted Subsidiary may be sold, assigned, transferred or
disposed of (whether by the Company or any of its wholly-owned
Subsidiaries) so long as immediately after giving effect to such
transaction the Company
<PAGE> 26
22
and/or one or more of its wholly-owned Subsidiaries owns stock of or other
equity interests in such Restricted Subsidiary (x) representing, in the
case of a partnership, not less than 80% of the outstanding capital and
profit interests in such partnership or, in the case of any other entity,
not less than 80% of the fair market value of the outstanding stock of or
other equity interests in such Restricted Subsidiary (excluding Mandatory
Preferred Stock of such Restricted Subsidiary) and (y) representing not
less than 80% of the ordinary voting power for the election of directors or
other persons performing similar functions of such Restricted Subsidiary
(other than stock or other equity interests having such power only by
reason of the happening of a contingency) and (iii) Mandatory Preferred
Stock of any Restricted Subsidiary may be sold, assigned, transferred or
disposed of (whether by the Company or any of its Subsidiaries).
ss.5.06 Default; Investment Rating. The Company shall:
(a) as soon as it shall become known to a senior officer of the
Company, forthwith notify each Agent if any Default shall have occurred;
and
(b) if Moody's or S&P (or any successor thereto) shall have assigned a
new rating to the senior debt securities of the Company, notify each Agent
of such new rating within 30 days after it is first announced by the
applicable rating agency.
ss.5.07 ERISA. The Company will furnish to the Banks:
(a) as soon as possible and in any event within 15 days after the
Company knows or has reason to know that any Termination Event has
occurred, a statement of a senior officer of the Company describing such
Termination Event and the action, if any, which the Company proposes to
take with respect thereto;
(b) from time to time promptly after the request of any Bank, copies
of each annual report filed pursuant to Section 104 of ERISA with respect
to each Plan (including, to the extent required by Section 103 of ERISA,
the related financial and actuarial statements and opinions and other
supporting statements, certifications, schedules and information referred
to in Section 103) and each annual report filed with respect to each Plan
under Section 4065 of ERISA;
(c) promptly after receipt thereof by the Company from the PBGC,
copies of each notice received by the Company of PBGC's intention to
terminate any Plan or to have a trustee appointed to administer any Plan;
and
(d) promptly after such request, such other documents and information
relating to Plans as any Bank may reasonably request from time to time.
ss.5.08 Liens. The Company will not, and will not permit any Subsidiary
to, grant a security interest in any stock of any of the Restricted Subsidiaries
or Citrus Corp. The Company will not grant a security interest in any of its
other assets to secure Indebtedness (except as provided in the next sentence)
unless the Company simultaneously grants to any Designated Agent for the benefit
of the Banks an equal and ratable security interest in the assets subject to
<PAGE> 27
23
such security interest. The provisions of the preceding sentence shall not apply
to the grant by the Company of:
(a) Any purchase money mortgage or purchase money security
interest created to secure all or part of the purchase price of any
property (or to secure a loan made to enable the Company to acquire the
property described in such mortgage or in any applicable security
agreement); provided that such mortgage or security interest shall
extend only to the property so acquired, fixed improvements thereon,
replacements thereof and the income and profits therefrom;
(b) Any security interest on any property acquired or
constructed by the Company, and created not later than twelve months
after (i) such acquisition or completion of such construction or (ii)
commencement of operation of such property, whichever is later;
provided that such security interest shall extend only to the property
so acquired or constructed, fixed improvements thereon, replacements
thereof and income and profits therefrom;
(c) Any security interest deemed to be created as a result of
the deposit of cash or securities for the purpose of defeasance of
Indebtedness; and
(d) Any security interest in any of its cash or cash
equivalents (within the meaning of generally accepted accounting
principles) created by the Company for the purpose of securing
Derivative Obligations of the Company, provided that the aggregate
amount of all cash or cash equivalents secured by security interests
permitted by this clause (d) shall not exceed $25,000,000.
(e) Any security interest not otherwise permitted under the
preceding clauses (a) through (d) in any of its assets created by the
Company for the purpose of securing Indebtedness of the Company,
provided that the aggregate amount of all Indebtedness of the Company
secured by security interests permitted by this clause (e) shall not
exceed $10,000,000.
ss.5.09 Total Indebtedness to Consolidated Capitalization. The Company
will not at any time permit Total Indebtedness of the Company to exceed 65% of
the Consolidated Capitalization of the Company.
ss.5.10 [Intentionally Omitted.]
ss.5.11 Insurance. The Company will, and will cause each of its
Subsidiaries to, keep insured with financially sound and reputable insurers or
through self-insurance conforming with practices of similar corporations
maintaining systems of self-insurance all property of a character usually
insured by corporations engaged in the same or similar business similarly
situated against loss or damage of the kinds and in the amounts customarily
insured against by such corporations and carry such other insurance as is
usually carried by such corporations.
ss.5.12 Maintenance of Properties. The Company will, and will cause
each of its Subsidiaries to, keep all of its material properties necessary in
its business in good working order
<PAGE> 28
24
and condition appropriate for the use being made thereof, ordinary wear and tear
excepted; except, in every case, as and to the extent that the Company or its
Subsidiaries may be prevented from maintaining their respective properties by
fire, strikes, lockouts, acts of God, inability to obtain labor or materials,
governmental (including judicial) restrictions, enemy action, civil commotion or
unavoidable casualty or similar causes beyond the control of the Company;
provided, however, that nothing in this ss.5.12 shall prevent the Company or any
of its Subsidiaries from discontinuing the use, operation or maintenance of any
of such properties if such discontinuance is, in the judgment of the Company or
its applicable Subsidiary, desirable in the conduct of the business of the
Company or such Subsidiary and if such discontinuance is not disadvantageous in
any material respect to the Banks; and provided, further, that nothing in this
ss.5.12 shall prohibit any sale, assignment, transfer or other disposition
permitted by ss.5.05 hereof.
ss.5.13 Public Utility Holding Company Act. The Company will not, and
will not permit any of its Subsidiaries to, be subject to regulation under the
Public Utility Holding Company Act of 1935, as amended.
VI. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
as follows:
ss.6.01 Corporate Existence and Powers. The Company and each of its
Restricted Subsidiaries is a corporation duly incorporated and validly existing
and in good standing under the laws of the jurisdiction of its incorporation
(or, in case of any Restricted Subsidiary not a corporation, such Restricted
Subsidiary is duly organized and validly existing under the laws of the
jurisdiction of its organization) and is duly licensed or qualified to do
business and is in good standing in all states in which the Company believes the
conduct of its business or the ownership of its assets requires such
qualification, and the Company has corporate power to make this Agreement and
the Notes and to borrow hereunder.
ss.6.02 Corporate Authority, etc. The making and performance by the
Company of this Agreement and the Notes and each borrowing hereunder have been
duly authorized by all necessary corporate action and do not and will not
contravene any provision of law applicable to the Company or of the certificate
of incorporation or by-laws of the Company or result in the material breach of,
or constitute a material default or require any consent under, or result in the
creation of any material lien, charge or other security interest or encumbrance
not permitted by ss.5.08 hereof upon any property or assets of the Company or
any of its Restricted Subsidiaries pursuant to, any indenture or other agreement
or instrument to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries or any of
their respective properties may be bound or affected (or, if any such consent is
so required, the Company has obtained such consent, which is sufficient for the
purpose and remains in full force and effect, and copies thereof have been
furnished to Chase). This Agreement has been duly and validly executed and
delivered by the Company and constitutes, and each of the Notes when executed
and delivered will constitute, its legal, valid and binding obligation,
enforceable in accordance with its terms.
ss.6.03 Financial Condition. The consolidated balance sheets of the
Company and its Consolidated Subsidiaries as at December 31, 1997 and September
30, 1998 and the related
<PAGE> 29
25
statements of consolidated income and cash flows of the Company and its
Consolidated Subsidiaries for the 12 months and nine months ended on said dates,
respectively, heretofore furnished by the Company to the Banks, fairly present
in all material respects the financial condition of the Company and its
Consolidated Subsidiaries as at said dates and the results of their operations
and cash flows for the 12 months and nine months, respectively, then ended in
accordance with generally accepted accounting principles (except that (i) the
financial statements as of September 30, 1998 and for the nine months then ended
were prepared in accordance with the rules of the Securities and Exchange
Commission applicable to interim financial statements and they are subject to
normal year-end audit adjustments and (ii) the financial statements as of
December 31, 1997 and for the 12 months then ended are subject to the accounting
developments as disclosed in the Company's Report on Form 10-Q for the quarter
ended September 30, 1998). Except as disclosed in a letter dated January 20,
1999, from the Treasurer of the Company, a copy of which has been furnished to
each Bank, since December 31, 1997 there has heretofore been no material adverse
change in the financial condition or operating results of the Company and its
Consolidated Subsidiaries, taken as a whole, from that set forth in the
consolidated balance sheet and related statements as at and for the period ended
on said date.
ss.6.04 Litigation. Except as disclosed in a letter dated January 20,
1999, from the Executive Vice President and General Counsel of the Company, a
copy of which has heretofore been furnished to each Bank, there are no actions,
suits or proceedings, and no proceedings before any arbitrator or by or before
any governmental commission, board, bureau or other administrative agency,
pending, or to the knowledge of the Company threatened, against or affecting the
Company or any Subsidiary which are reasonably likely to have a material adverse
effect on the financial condition, properties or operations of the Company and
its Subsidiaries, taken as a whole.
ss.6.05 Taxes. Each of the Company and each Restricted Subsidiary has
filed all material tax returns required to be filed and paid all material taxes
shown thereon to be due, including interest and penalties, or provided adequate
reserves for payment thereof, except to the extent the same have become due and
payable but are not yet delinquent, and except for any taxes and assessments of
which the amount, applicability or validity is currently being contested in good
faith by appropriate proceedings.
ss.6.06 Approvals. No approval, license or consent of any governmental
regulatory body is requisite to the making and performance by the Company of
this Agreement, or the execution, delivery and payment of the Notes (or, if any
such approval, license or consent is so requisite, the Company has obtained the
same, which is sufficient for the purpose and remains in full force and effect,
and copies thereof have been furnished to Chase).
ss.6.07 ERISA. The Company, and each Subsidiary, has met its minimum
funding requirements under ERISA with respect to all its Plans and has not
incurred any material liabilities to PBGC or to such Plan under ERISA in
connection with any such Plan.
ss.6.08 Margin Regulations. The Company is not engaged principally, or
as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
U of the Board of Governors of the
<PAGE> 30
26
Federal Reserve System), and no part of the proceeds of any Loan will be used to
purchase or carry any such margin stock or to extend credit to others for the
purpose of purchasing or carrying any such margin stock.
ss.6.09 Certain Subsidiaries. Except as a consequence of a transaction
or transactions permitted by this Agreement, the Company directly or indirectly
owns all of the outstanding shares of common stock of each of the Restricted
Subsidiaries (except for directors' qualifying shares), and all shares of stock
of such corporations are validly issued, fully paid and non-assessable.
ss.6.10 Investment Company Act. The Company is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
ss.6.11 Environmental Laws. The Company and its Subsidiaries are in
compliance in all material respects with the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act, the Toxic Substances Control Act, as amended, the Clean Air Act,
as amended, the Clean Water Act, as amended, and each other federal, state or
local statute, law, ordinance, code, rule or regulation, regulating or imposing
liability or standards of conduct concerning, any hazardous, toxic or dangerous
waste, substance or material, except for any noncompliance that is not
reasonably likely to have a material adverse effect on the financial condition,
properties or operations of the Company and its Subsidiaries, taken as a whole.
ss.6.12 Year 2000 Problem. The Company has (i) undertaken a detailed
review and assessment of all areas within its business and operations that could
reasonably be affected by the Year 2000 Problem, (ii) developed a detailed plan
and timeline for addressing the Year 2000 Problem on a timely basis and (iii)
implemented that plan to date in accordance with such plan and timeline. To the
best of Company's knowledge, all computer applications that are material to the
Company's business and operations will on a timely basis be able to perform
date-sensitive functions for all dates on and after January 1, 2000.
All representations and warranties made herein shall survive the making
of the Loans and the delivery of the Notes hereunder.
VII. EVENTS OF DEFAULT. If any of the following "Events of Default"
shall occur and shall not have been remedied:
A. default by the Company in the payment of any principal of
any of the Notes when the same becomes due and payable;
B. default by the Company in the payment of interest on any of
the Notes or any other amounts payable under ss.1.03 or ss.2.08 hereof
which shall remain unremedied for ten days after the same becomes due
and payable;
<PAGE> 31
27
C. any representation or warranty made by the Company in
Article VI hereof or in any certificate furnished to the Agents or to
the Banks hereunder (or deemed to have been given at the time of any
borrowing hereunder) shall prove to have been incorrect when made or
deemed made, in any material respect;
D. default by the Company in the due performance or observance
of ss.5.05, ss.5.08 or ss.5.09 hereof;
E. default by the Company in the due performance or observance
of ss.5.06(a) hereof which shall remain unremedied for a period of ten
days;
F. default by the Company in the due performance or observance
of ss.5.03 or ss.5.06(b) hereof which shall remain unremedied for a
period of 30 days after such default shall have become known to an
executive officer of the Company;
G. default by the Company in the due performance or observance
of any other covenant or agreement herein contained which shall remain
unremedied for a period of 30 days after written notice thereof shall
have been given to the Company by any Bank (through any Designated
Agent);
H. default by the Company or any Restricted Subsidiary (i) in
the payment of any Indebtedness of the Company and/or one or more
Restricted Subsidiaries in an aggregate unpaid principal amount of at
least $25,000,000, beyond the period or periods of grace (if any)
provided with respect thereto, or (ii) in the performance or observance
of any other provisions in indentures, credit or loan agreements or
other agreements or instruments under which such Indebtedness in such
aggregate unpaid principal amount of the Company and/or one or more
Restricted Subsidiaries is outstanding or by which such Indebtedness is
evidenced and, in the case of clause (ii) only, if the effect of such
default is to cause, or permit the holder or holders of such
Indebtedness (or a trustee or an agent on behalf of such holder or
holders) to cause, such Indebtedness to become due prior to its stated
maturity;
I. any Termination Event shall have occurred and shall have
continued under circumstances which result in an uninsured payment or
repayment liability of the Company or any of its Subsidiaries to PBGC
in an amount which is material in relation to the financial position of
the Company and its Subsidiaries, on a consolidated basis;
J. either the Company or one or more Restricted Subsidiaries
(taken as a group) with total assets of at least $10,000,000 in the
aggregate (such Restricted Subsidiary or Subsidiaries being hereinafter
called the "Restricted Group") shall (1) apply for or consent to the
appointment of, or taking possession by, a receiver, trustee,
custodian, liquidator or other similar official of itself or of all or
a substantial part of its assets, (2) admit in writing its inability to
pay its
<PAGE> 32
28
debts, or generally become unable to pay its debts, as they become due,
(3) make a general assignment for the benefit of its creditors, (4)
commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (5) file a petition seeking to take advantage of
any other laws relating to bankruptcy, reorganization, insolvency,
winding-up or composition or readjustment of debts, or (6) acquiesce in
writing to, or fail to controvert in a timely and appropriate manner,
any petition filed against it or in any involuntary case under the
aforesaid federal bankruptcy laws; or corporate action shall be taken
by the Company or the Restricted Group for the purpose of effecting any
of the foregoing; or
K. a proceeding or case shall be commenced, without the
application or consent of the Company or the Restricted Group (as
defined in paragraph J above), in any court of competent jurisdiction,
seeking (1) its liquidation, reorganization, dissolution, winding-up,
or composition or readjustment of debts, (2) the appointment of a
receiver, trustee, custodian, liquidator or any similar official of
itself of all or a substantial part of its assets, (3) similar action
with respect to the Company or the Restricted Group under the federal
bankruptcy laws (as now or hereafter in effect) or any other laws
relating to bankruptcy, insolvency, reorganization, liquidation or
winding-up, or composition or adjustment of debts, and such proceeding
or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and
continued unstayed and in effect, for any period of 60 consecutive
days; or an order for relief against the Company or the Restricted
Group shall be entered in an involuntary case under such federal
bankruptcy laws,
THEREUPON, (in addition to the rights and remedies of the Swingline Bank
pursuant to ss.1.08(b)) (1) in the case of any of the Events of Default
specified in paragraphs A through I above, (i) any Designated Agent may and,
upon being directed so to do by the Majority Banks, shall, by notice to the
Company, terminate all Commitments hereunder and they shall thereupon terminate,
and (ii) any Designated Agent may and, upon being directed by Banks holding at
least 66-2/3% of the aggregate unpaid principal amount of the Loans shall, by
notice to the Company, declare all outstanding Loans and Notes and all other
obligations of the Company hereunder to be due and payable, whereupon the same
shall become forthwith due and payable, without further protest, presentment,
notice or demand, all of which are expressly waived by the Company, and (2) in
case of any of the Events of Default specified in paragraph J or K above,
without any notice to the Company or any act by any Designated Agent or the
Majority Banks or any Bank, all Commitments hereunder shall terminate forthwith
and the principal of and interest accrued on all the Loans and the Notes and all
other obligations of the Company hereunder shall become and be due and payable.
VIII. MISCELLANEOUS
ss.8.01 Waiver. No failure on the part of any Agent, Bank or holder of
a Note to exercise and no delay in exercising and no course of dealing with
respect to any right, power or privilege under this Agreement or the Notes shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power, or privilege under this Agreement or the Notes preclude
<PAGE> 33
29
any other or further exercise thereof or the exercise of any other right, power,
or privilege. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
ss.8.02 Notices and Delivery of Documents. Except as otherwise
specified herein, all notices and other communications hereunder shall be in
writing or by telex or telecopy, and shall be deemed to have been duly given
when transmitted by telex or telecopier or personally delivered or, in the case
of a mailed notice or other communication, three Business Days after the date
deposited in the mails, certified and postage prepaid, addressed to any party
hereto at its address given on Schedule 2 hereto or on the signature pages of,
or any schedule to, any amendment hereto, or at such other address of which any
party hereto shall have notified in writing the party giving such notice or (in
the case of a telex message) addressed to any party at any telex number which is
published as belonging to the addressee. Except as otherwise expressly provided
herein, all Notes and other documents to be delivered to any Agent under this
Agreement shall be delivered to it at its Principal Office.
ss.8.03 Governing Law. This Agreement and the Notes hereunder shall be
construed in accordance with and governed by the law of the State of New York.
ss.8.04 Offsets, etc. Upon the occurrence and during the continuance of
an Event of Default, each Bank is hereby authorized at any time and from time to
time, without notice to the Company except as required by law (any such notice
being expressly waived by the Company), to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Bank to or for the credit
or the account of the Company against any and all of the obligations of the
Company now or hereafter existing under this Agreement and the Notes held by
such Bank. Each Bank agrees promptly to notify the Company after any such
set-off and application made by such Bank, provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Banks under this ss.8.04 are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which the
Banks may have.
ss.8.05 Disposition of Loans. Each Bank may at any time, at its own
expense, assign (but only with the prior written consent of the Company, which
it may refuse or grant in its sole discretion), or sell participations in, all
or any portion of any Loans made by it to another bank or other entity; provided
that no such assignment shall be in a principal amount less than $10,000,000.
Any Bank making an assignment hereunder shall pay to Chase an administrative fee
of $2,500 with respect to each assignment. In the case of an assignment, upon
notice thereof by such Bank to the Company and the Agents, to the extent of such
assignment and the Loans so assigned, the assignee shall have the same rights
and benefits as it would have if it were a Bank hereunder and the assignor shall
cease to have the rights and benefits of a Bank hereunder (provided that the
obligations of the Company under Article III to such Bank shall survive such
assignment). In the case of a participation, except as otherwise provided in
ss.2.06(c) hereof, the participant shall not have any rights under this
Agreement or such Bank's Notes (the participant's rights against such Bank in
respect of such participations to be those set forth in the agreement executed
by such Bank in favor of the participant relating thereto) and all amounts
payable by the Company under Article III hereof shall be determined as if such
Bank had not sold such participation. The granting of any such participation
shall not relieve the grantor of its
<PAGE> 34
30
Commitment hereunder. Each Bank may furnish any information concerning the
Company or any of its Subsidiaries in the possession of such Bank from time to
time to assignees and participants (including prospective assignees and
participants) under this ss.8.05, provided that, if any such information is
confidential information consisting of or based upon information provided by the
Company, prior to furnishing any such information such Bank shall obtain the
agreement of any such assignee or participant, in favor of the Company, to
maintain the confidentiality of such information, subject to the same
requirements and exceptions as specified in ss.5.02 hereof (and such Bank shall
promptly furnish a copy of each such agreement to the Company). Any Bank may at
any time pledge or assign a security interest in all or any portion of its
rights under this Agreement to secure obligations of such Bank to a Federal
Reserve Bank, and this Section shall not apply to any such pledge or assignment
of a security interest; provided that no such pledge or assignment of a security
interest shall release a Bank from any of its obligations hereunder or
substitute any such pledgee or assignee for such Bank as a party hereto.
ss.8.06 Expenses. All statements, reports, certificates, opinions and
other documents or information furnished by the Company to the Agents or the
Banks under this Agreement shall be supplied without cost to the Agents or the
Banks. Further, the Company hereby agrees that it shall pay, on demand, whether
or not any Loan is made hereunder, (a) all reasonable out-of-pocket costs and
expenses of the Banks and the Agents incurred in connection with the
preparation, execution and delivery of this Agreement, or any amendment or
supplement thereto, and the Notes and the making of the Loans hereunder, (b) the
reasonable fees and disbursements of Simpson Thacher & Bartlett, special counsel
to the Banks, in connection therewith, and (c) all costs and expenses of
collection (including, without limitation, reasonable legal fees) incident to
the enforcement, protection or preservation of any right of any Bank under this
Agreement or the Notes.
ss.8.07 Amendments, Waivers, etc. This Agreement and the Notes may not
be amended, supplemented or modified, nor any of its terms be waived, except by
written instruments signed by the Company and the Majority Banks (and, in the
case of any amendment, supplement, modification or waiver affecting Article IX
hereof, each of the Agents); provided, however, that no such amendment,
supplement, modification or waiver shall, without the written consent of all of
the Banks: (i) extend the term of, or change the amount of, or change any of the
provisions of ss.1.04 hereof with respect to the reduction or increase of, the
Commitment of any Bank, or change the rate at which commitment or facility fees
accrue hereunder or extend the time for payment thereof, (ii) extend the
maturity of any Loan, change the rate of interest thereon, or affect in any way
the terms of payment thereof, (iii) alter the definition of "Majority Banks",
(iv) affect any provisions relating to Fixed Rate Loans, (v) alter this ss.8.07
or ss.8.09(a), (vi) waive any condition specified in Article IV, (vii) waive an
Event of Default under paragraph J or K of Article VII or modify the effect
thereof or (viii) waive or amend any representation contained in Article VI;
provided, further, that ss.1.03 and ss.1.08 hereof may be amended, supplemented
or modified, and any of the terms thereof waived, by written instrument signed
only by the Company and the Swingline Bank. Any such amendment, supplement,
modification or waiver so entered into shall apply equally to all of the Banks
and any holder of the Notes and shall be binding upon all parties hereto. Any
waiver hereunder shall be for such period and subject to such conditions as
shall be specified in such written instrument. In the case of any waiver of an
Event of Default, such Event of Default shall be deemed to be cured and not
continuing, but no such waiver shall
<PAGE> 35
31
extend to any subsequent or other Event of Default or any right, power or
privilege of the Banks hereunder in connection therewith.
ss.8.08 Definitions. Certain terms are defined in Schedule 1 hereto and
as used herein shall have meanings as so defined.
ss.8.09 Successors and Assigns. (a) This Agreement shall be binding
upon and inure to the benefit of the Banks, the Agents, the Company and their
respective successors and assigns, except that Company may not assign or
transfer any of its respective rights or obligations hereunder without the prior
written consent of all the Banks.
(b) Notwithstanding anything to the contrary contained herein, any Bank
(a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC")
of such Granting Lender, identified as such in writing from time to time by the
Granting Lender to the Agents and the Company, the option to provide to the
Company all or any part of any Loan that such Granting Lender would otherwise be
obligated to make to the Borrower pursuant to Section 1.01 or 1.02, provided
that (i) nothing herein shall constitute a commitment to make any Loan by any
SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to
provide all or any part of such Loan, the Granting Lender shall be obligated to
make such Loan pursuant to the terms hereof. The making of a Syndicated Loan by
an SPC hereunder shall utilize the Commitment of the Granting Lender to the same
extent, and as if, such Loan were made by the Granting Lender. Each party hereto
hereby agrees that no SPC shall be liable for any payment under this Agreement
for which a Bank would otherwise be liable, for so long as, and to the extent,
the related Granting Lender makes such payment. In furtherance of the foregoing,
each party hereto hereby agrees that, prior to the date that is one year and one
day after the later of (i) the payment in full of all outstanding senior
indebtedness of any SPC and (ii) the Commitment Termination Date, it will not
institute against, or join any other person in instituting against, such SPC any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings
or similar proceedings under the laws of the United States or any State thereof.
In addition, notwithstanding anything to the contrary contained in this Section
8.09(b), any SPC may (i) with notice to, but without the prior written consent
of, the Company or any Agent and without paying any processing fee therefor,
assign all or a portion of its interests in any Loans to its Granting Lender or
to any financial institutions providing liquidity and/or credit facilities to or
for the account of such SPC to fund the Loans made by such SPC or to support the
securities (if any) issued by such SPC to fund such Loans and (ii) disclose on a
confidential basis any non-public information relating to its Loans to any
rating agency, commercial paper dealer or provider of a surety, guarantee or
credit or liquidity enhancement to such SPC. In no event shall the Company be
obligated to pay to an SPC that has made a Loan any greater amount than the
Company would have been obligated to pay under this Agreement if the Granting
Lender had made such Loan. Each Granting Lender shall indemnify and hold
harmless the Company and its directors, officers, employees and agents from and
against any and all losses, liabilities, claims, damages and expenses arising
from or attributable to the making of a Loan by an SPC of such Granting Lender.
ss.8.10 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument and
any of the parties hereto may execute this Agreement by signing any such
counterpart.
<PAGE> 36
32
ss.8.11 Confidentiality. Each of the Agents and the Banks agree to
maintain the confidentiality of the Information (as defined below), except that
Information may be disclosed (a) to its Affiliates and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested
by any regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other party
to this Agreement, (e) in connection with the exercise of any remedies hereunder
or any suit, action or proceeding relation to this Agreement or the enforcement
of rights hereunder, (f) subject to any agreement containing provisions
substantially the same as those of this Section, to any assignee of or
participant in, or any prospective assignee of or participant in, any of its
rights or obligations under this Agreement, (g) with the consent of the Company
or (h) to the extent such Information (i) becomes publicly available other than
as a result of a breach of this Section or (ii) becomes available to any Agent
or any Bank on a nonconfidential basis from a source other than the Company. For
the purposes of this Section, "Information" means all information received from
the Company, its Subsidiaries or its agents relating to the Company or its
business, other than any such information that is available to any Agent or any
Bank on a nonconfidential basis prior to disclosure by the Company.
IX. THE AGENTS
ss.9.01 Appointment, Power and Immunities. Each Bank hereby irrevocably
appoints and authorizes each Designated Agent to act as its agent hereunder with
such powers as are specifically delegated to such Agent by the terms of this
Agreement, together with such other powers as are reasonably incidental thereto.
No Agent shall have any duties or responsibilities except those expressly set
forth in this Agreement, nor shall any Agent, by reason of this Agreement, have
a fiduciary relationship with any Bank. No Agent shall be responsible to the
Banks for any recitals, statements, representations or warranties contained in
this Agreement or in any information memorandum pertaining to the Company or in
any certificate or other document referred to or provided for in, or received by
any of them under, this Agreement, for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or the Notes or any
other document referred to or provided for herein or for any failure by the
Company to perform its obligations under any thereof. Each Designated Agent may
employ agents and attorneys-in-fact and shall not be answerable, except as to
money or securities received by it or its authorized agents, for the negligence
or misconduct of any such agents or attorneys-in-fact selected by it with
reasonable care. Neither the Agents nor any of their directors, officers,
employees or agents shall be liable or responsible for any action taken or
omitted to be taken by them hereunder or in connection herewith, except for
their own gross negligence or willful misconduct.
ss.9.02 Reliance by Agents. Each Agent shall be entitled to rely upon
any certificate, notice or other document (including any cable, telegram,
telecopy or telex) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper person or persons, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by Chase. Chase may deem and treat the payee of any Note as the owner
thereof for all purposes hereof unless and until a notice of the assignment
thereof satisfactory to Chase
<PAGE> 37
33
signed by such payee shall have been filed with it. As to any matters not
expressly provided for by this Agreement, each Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
written instructions signed by the Majority Banks, and such instructions of the
Majority Banks and any action taken or failure to act pursuant thereto shall be
binding on all of the Banks.
ss.9.03 Default. No Agent shall be deemed to have knowledge of the
occurrence of a Default or an Event of Default (other than nonpayment of
principal, interest or commitment or other fees) unless such Agent has received
written notice from a Bank or the Company specifying such Default or Event of
Default and stating that such notice is a "Notice of Default". In the event that
any Designated Agent receives such a notice of the occurrence of a Default or an
Event of Default, such Agent shall give prompt written notice thereof to the
other Agents and the Banks. The Designated Agents shall take such action with
respect to such Default or Event of Default as shall be reasonably directed in
writing by the Majority Banks provided that (i) unless and until the Designated
Agents shall have received such directions, the Designated Agents may take such
action, or refrain from taking such action, with respect to such Default or
Event of Default as they shall deem advisable in the best interests of the Banks
and (ii) in no event shall any Agent be required to institute any action, suit
or other proceeding in connection herewith.
ss.9.04 Rights as a Lender. With respect to its Commitment and the
Loans made by it or any collateral therefor, each of Chase, Bank of America and
SunTrust (and any successor Agent hereunder) in its capacity as a Bank under
this Agreement shall have the same rights and powers hereunder as any other Bank
and may exercise the same as though it were not acting as an Agent, and the term
"Bank" or "Banks" shall, unless the context otherwise indicates, include each of
Chase, Bank of America and SunTrust (and any successor Agent hereunder) in its
individual capacity. Each of Chase, Bank of America and SunTrust (and any
successor Agent hereunder) and their affiliates may (without having to account
therefor to any Bank) accept deposits from, lend money to and generally engage
in any kind of banking, trust or other business with the Company (and any of its
related companies) as if it were not acting as an Agent and may accept fees and
other consideration from the Company for services in connection with this
Agreement and otherwise without having to account for the same to the other
Agent and the Banks.
ss.9.05 Indemnification. The Banks severally agree to indemnify each
Agent (to the extent requested by such Agent as provided in ss.9.08 hereof
and/or to the extent not reimbursed by the Company), pro rata according to the
amounts of their respective Commitments, for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever which may be imposed
on, incurred by or asserted against such Agent in any way relating to or arising
out of this Agreement or any other documents referred to herein or the
transactions contemplated hereby (including, without limitation, the costs and
expenses which the Company is obligated to pay under ss.8.06 hereof but
excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder) or the enforcement of any of the terms hereof or of any such
other documents, provided that (a) such Agent shall have given the Banks notice
thereof and an opportunity to defend against the same at the expense of the
Banks and with counsel selected by the Majority Banks, (b) no Bank shall be
liable to an Agent for any of the foregoing to the extent they arise from such
Agent's gross negligence or willful
<PAGE> 38
34
misconduct and (c) no Bank shall be liable for any amount in respect of any
compromise or settlement of any of the foregoing unless such compromise or
settlement is approved by the Majority Banks.
ss.9.06 Reports. Promptly after its receipt thereof, each Agent (or, if
all Agents shall have received the same, Chase) will forward to each Bank a copy
of each report, notice or other document required by this Agreement to be
delivered to such Agent for such Bank.
ss.9.07 Non-Reliance on Agents and Other Banks. Each Bank agrees that
it has, independently and without reliance on any Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis of the Company and decision to enter into this Agreement and
that it will, independently and without reliance upon any Agent or any other
Bank, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking such action under this Agreement. No Agent shall be required to keep
itself informed as to the performance or observance by the Company of this
Agreement or any other document referred to or provided for herein or to make
inquiry of or to inspect the properties or books of the Company. Except for
notices, reports and other documents and information expressly required to be
furnished to the Banks by any Agent hereunder, no Agent shall have any duty or
responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of the Company (or any
of its related companies) which may come into the possession of such Agent or
any of its affiliates.
ss.9.08 Failure to Act. Except for action expressly required of any
Agent under this Agreement, such Agent shall in all cases be fully justified in
failing or refusing to act unless it shall be indemnified to its satisfaction by
the Banks against any and all liability and expense which may be incurred by it
by reason of taking or continuing to take any such action.
ss.9.09 Resignation or Removal of Agents. Subject to the appointment
and acceptance of a successor Agent as provided below, any Agent may resign at
any time by giving written notice thereof to the Banks and the Company and any
Agent may be removed at any time with or without cause by the Majority Banks.
Upon any such resignation or removal, the Majority Banks shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed by
the Majority Banks and shall have accepted such appointment within 30 days after
the retiring Agent's giving of notice of resignation or the Majority Banks'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a bank which has an office (or
an affiliate or a Subsidiary with an office) in New York, New York. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Agreement shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.
<PAGE> 39
35
ss.9.10 Documentation Agent. Nothing in this Agreement shall impose on
SunTrust, in its capacity as Documentation Agent, any duties or obligations
whatsoever.
ss.9.11 Syndication Agent. Nothing in this Agreement shall impose on
Bank of America, in its capacity as Syndication Agent, any duties or obligations
whatsoever.
<PAGE> 40
36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SONAT INC.
By:
-------------------------------
Name:
Title:
AMSOUTH BANK, as a Bank
By:
--------------------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a
Bank
By:
-------------------------------
Name:
Title:
THE BANK OF NEW YORK, as a Bank
By:
--------------------------------
Name:
Title:
<PAGE> 41
37
THE BANK OF NOVA SCOTIA, as a Bank
By:
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
as a Bank
By:
--------------------------------
Name:
Title:
CREDIT LYONNAIS, NEW YORK
BRANCH, as a Bank
By:
--------------------------------
Name:
Title:
MELLON BANK, N.A., as a Bank
By:
--------------------------------
Name:
Title:
NORTHERN TRUST, as a Bank
By:
--------------------------------
Name:
Title:
<PAGE> 42
38
REGIONS BANK, as a Bank
By:
--------------------------------
Name:
Title:
SOUTHTRUST BANK N.A., as a Bank
By:
--------------------------------
Name:
Title:
SUNTRUST BANK, ATLANTA, as a Bank
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
Agents
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:
--------------------------------
Name:
Title:
<PAGE> 43
39
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Syndication Agent
By:
--------------------------------
Name:
Title:
SUNTRUST BANK, ATLANTA,
as Documentation Agent
By:
--------------------------------
Name:
Title:
<PAGE> 44
SCHEDULE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"Additional Costs" shall have the meaning attributed thereto in
ss.3.01(a) hereof.
"Affected Loans" shall have the meaning attributed thereto in ss.3.04
hereto.
"Affected Type" shall have the meaning attributed thereto in ss.3.04
hereto.
"Agents" shall have the meaning attributed thereto in the preamble to
this Agreement.
"Annual Dates" shall mean the Quarterly Date in December of each year.
"Applicable Facility Fee Rate" shall mean, with respect to any day, the
percentage indicated below opposite the Rating Level in effect on such day:
<TABLE>
<CAPTION>
Rating Level Percentage
------------ ----------
<S> <C>
I 0.080%
II 0.100%
III 0.125%
IV 0.150%
V 0.200%
</TABLE>
"Applicable Lending Office" shall mean, with respect to each Bank, with
respect to each type of Loan, the Lending Office designated for such type of
Loan on Schedule 2 hereof, or on the signature pages of, or any schedule to, any
amendment hereto, or such other office or affiliate of such Bank as such Bank
may from time to time specify to Chase and the Company as the office at which
its Loans of such type are to be made and maintained.
"Applicable Margin" shall mean: (a) with respect to Domestic Loans,
zero; and (b) with respect to any Eurodollar Loan on any day, the percentage
indicated below opposite the Rating Level in effect on such day:
<TABLE>
<CAPTION>
Rating Level Percentage
------------ ----------
<S> <C>
I 0.320%
II 0.350%
III 0.375%
IV 0.475%
V 0.500%
</TABLE>
<PAGE> 45
2
provided, that if on such day the aggregate principal amount of the Loans
outstanding equals or exceeds 33% of the Commitments in effect on such day,
0.125% shall be added to the foregoing percentage otherwise applicable on such
day.
"Appropriate Officer" shall mean the chief executive officer, the chief
operating officer, the chief financial officer, the Vice President -
Comptroller, the Vice President - Finance or the Treasurer.
"Bank of America" shall mean Bank of America National Trust and Savings
Association, in its capacity as Syndication Agent.
"Banks" shall have the meaning attributed thereto in the preamble to
this Agreement, and which shall include the Swingline Bank in its capacity as
such.
"Base Rate" shall mean, for any day, the higher of (a) the Federal
Funds Rate for such day plus 1/2 of 1% per annum and (b) the Prime Rate for such
day. Each change in any interest rate provided for herein based upon the Base
Rate resulting from a change in the Base Rate shall take effect at the time of
such change in the Base Rate.
"Basle Accord" shall have the meaning attributed thereto in ss.3.01(c)
hereto.
"Business Day" shall mean any day on which commercial banks are not
authorized or required to close in New York City and, if such day relates to a
borrowing of, a payment or prepayment of principal of or interest on, or the
Interest Period for, a Eurodollar Loan or a notice by the Company with respect
to any such borrowing, payment, prepayment or Interest Period, which is also a
day on which dealings in Dollar deposits are carried out in the London interbank
market.
"Change in Control" shall have the meaning attributed thereto in
ss.1.04(b) hereto.
"Chase" shall mean The Chase Manhattan Bank in its capacity as the
Administrative Agent.
"Commitment" shall mean, as to each Bank, the obligation of such Bank
to make Syndicated Loans pursuant to ss.1.01 hereof in an aggregate amount at
any one time outstanding up to but not exceeding the amount set opposite such
Bank's name on Schedule 3 to this Agreement under the caption "Commitment" (as
the same may be reduced at any time or from time to time pursuant to ss.1.04
hereof).
"Commitment Termination Date" shall mean the 363rd day after the
Effective Date.
"Company" shall have the meaning attributed thereto in the preamble to
this Agreement.
"Consolidated Capitalization" shall mean, for any Person, the sum of
Total Indebtedness and Equity of such Person and its Consolidated Subsidiaries.
<PAGE> 46
3
"Consolidated Subsidiary" shall mean any Subsidiary of a Person which
was or shall be consolidated with such Person in any consolidated financial
statement furnished to the Banks under this Agreement.
"Default" shall mean an Event of Default or an event which, with the
notice or lapse of time or both specified in Article VII hereof, would become
such an Event of Default.
"Derivative Obligations" shall mean any transaction which is a rate
swap transaction, basis swap, forward rate transaction, commodity swap,
commodity option, equity or equity index swap, equity or equity index option,
bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, currency swap transaction,
cross-currency rate swap transaction, currency option or any other similar
transaction (including any option with respect to any of these transactions).
"Designated Agents" shall mean Chase and Bank of America.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Domestic Loans" shall mean Syndicated Loans which bear interest at
rates based upon the Base Rate.
"Effective Date" shall have the meaning attributed thereto in ss.4.01
hereof.
"Equity" means at any time the sum of the following, for any Person and
its Consolidated Subsidiaries:
(i) the amount of share capital liability, including common and
preferred shares (less cost of treasury shares), plus
(ii) the amount of surplus and retained earnings (or, in the case of a
surplus or retained earnings deficit minus the amount of such deficit).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, including (unless the context otherwise requires)
any rules or regulations promulgated thereunder.
"Eurodollar Loans" shall mean Syndicated Loans, the interest rates on
which are determined on the basis of rates referred to in the definition of
"Fixed Base Rate".
"Event of Default" shall mean any of the Events of Default specified in
Article VII hereof.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (i) if the day for which such rate is to
be
<PAGE> 47
4
determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to The Chase Manhattan Bank on such day on such transactions as
determined by Chase.
"Fixed Base Rate" shall mean, with respect to any Fixed Rate Loan, the
arithmetic mean (rounded upwards, if necessary, to the nearest 1/100 of 1%), as
determined by Chase, of the rate per annum quoted by each Reference Bank at
approximately 11:00 a.m. London time (or as soon thereafter as practicable) on
the date two Business Days prior to the first day of the Interest Period for
such Loan for the offering by such Reference Bank to leading banks in the London
interbank market of Dollar deposits having a term comparable to such Interest
Period and in an amount comparable to the principal amount of the Eurodollar
Loan to be made by such Reference Bank for such Interest Period. If any
Reference Bank is not participating in any Fixed Rate Loan, the Fixed Base Rate
for such Loan shall be determined by reference to the amount of the Loan which
such Reference Bank would have made had it been participating in such Loan. If
any Reference Bank does not timely furnish such information for determination of
any Fixed Base Rate, Chase shall determine such Fixed Base Rate on the basis of
information timely furnished by the remaining Reference Bank.
"Fixed Rate" shall mean, for any Fixed Rate Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Chase
to be equal to the Fixed Base Rate for such Loan for the Interest Period for
such Loan.
"Fixed Rate Loans" shall mean Eurodollar Loans.
"Indebtedness" shall mean, for any Person, all obligations for borrowed
money or purchase money obligations of such Person which in accordance with
generally accepted accounting principles would be shown on the balance sheet of
such Person as a liability; all obligations under leases required to be
capitalized under generally accepted accounting principles at the time of
entering into such lease; all guarantees of such Person in respect of
Indebtedness of others; Indebtedness of others secured by any mortgage, pledge,
security interest, encumbrance, lien or charge upon property owned by such
Person, whether or not assumed; Operating Lease Obligations; and, only as to any
Consolidated Subsidiary of the Company, any Mandatory Preferred Stock of such
Consolidated Subsidiary; provided that Indebtedness shall not include: (i) any
Indebtedness evidence of which is held in treasury (but the subsequent resale of
such Indebtedness shall be deemed to constitute the creation thereof); or (ii)
any particular Indebtedness if, upon or prior to the maturity thereof, there
shall have been deposited with the proper depositary, in trust, money or United
States government securities (or evidences of such Indebtedness as permitted by
the instrument creating such Indebtedness) in the necessary amount to pay,
redeem or satisfy such Indebtedness; or (iii) only as to the Company, any
Indebtedness of the Company to any of its Subsidiaries provided that such
Indebtedness is subordinated in right of payment to the prior payment in full of
the obligations of the Company to the Banks and the Agents under this Agreement
and the termination in full of the Commitments hereunder (including interest
accruing on such obligations after the date of any filing by the Company of any
petition in bankruptcy or the commencement of any bankruptcy, insolvency or
similar proceeding with
<PAGE> 48
5
respect to the Company) in the event that any Default under this Agreement shall
have occurred and be continuing and in the event of any insolvency, bankruptcy
or similar proceeding affecting the Company; or (iv) any indirect guarantees or
other contingent obligations in respect of Indebtedness of other Persons,
including agreements, contingent or otherwise, with such other persons or with
third persons with respect to, or to permit or assure the payment of,
obligations of such other persons, including, without limitation, agreements to
purchase or repurchase obligations of such other persons, to advance or supply
funds to, or to invest in, such other persons or to pay for properties, products
or services of such other persons (whether or not conveyed, delivered or
rendered); demand charge contracts, through-put, take-or-pay, keep-well,
make-whole or maintenance of working capital or similar agreements; or
guarantees with respect to rental or other similar periodic payments to be made
by such other Persons, including, but without limiting the generality of the
foregoing, the Guaranty Agreement dated as of June 1, 1968, as amended as of
August 1, 1968, May 1, 1970, April 13, 1973, May 26, 1973 and November 30, 1984,
between Boise Cascade Corporation, the Company and Parish of Beauregard,
Louisiana; or (v) any capitalized leases for space and/or equipment in respect
of oil and gas production platforms not in excess of $25,000,000 in the
aggregate; or (vi) any Indebtedness of Bear Creek Storage Company or Citrus
Corp. that is shown on the balance sheet of the Company as a liability and which
would not be required to be treated as Indebtedness of the Company or any of its
Subsidiaries under generally accepted accounting principles as in effect on the
date hereof but which is required to be treated as Indebtedness of the Company
or any of its Subsidiaries as a result of a change in generally accepted
accounting principles after the date hereof. For purposes of this Agreement, the
principal amount of any Indebtedness of any Person (excluding Operating Lease
Obligations and Mandatory Preferred Stock of a Consolidated Subsidiary) shall
mean the amount required in accordance with generally accepted accounting
principles to be shown as a liability on the balance sheet of such Person (or,
in the case of Indebtedness of another Person required to be treated as
Indebtedness of such Person under this Agreement, the balance sheet of such
other Person) prepared as of the applicable date.
"Interest Payment Date" shall mean, as to any Loan, the last day of the
Interest Period for such Loan and (i) with respect to a Set Rate Loan with an
Interest Period longer than 90 days, the last day of each consecutive 90 day
period (other than such last day if such last day occurs within two Business
Days of the last day of such Interest Period) occurring during such Interest
Period commencing with the first day of such Interest Period, (ii) with respect
to a Eurodollar Loan with an Interest Period longer than three months, the last
day of each consecutive three month period (other than such last day if such
last day occurs within two Business Days of the last day of such Interest
Period) occurring during such Interest Period commencing with the first day of
such Interest Period and (iii) with respect to a Domestic Loan, each Quarterly
Date that occurs prior to the end of the Interest Period for such Loan.
"Interest Period" shall mean, for any Loan, the period provided for
such Loan pursuant to ss.2.03 hereof.
"Loans" shall mean Money Market Loans, Syndicated Loans and Swingline
Loans.
"Majority Banks" shall mean Banks having at least 66-2/3% of the
aggregate amount of the Commitments; provided that, if the Commitments shall
have terminated, Majority
<PAGE> 49
6
Banks shall mean Banks and SPCs holding at least 66-2/3% of the aggregate unpaid
principal amount of the Loans.
"Mandatory Preferred Stock" shall mean, for any Person, the aggregate
stated liquidation value of any outstanding preferred stock issued by such
Person which is required to be redeemed, in whole or in part, by sinking fund or
other mandatory payments at any time prior to the Commitment Termination Date.
"Moody's" shall mean Moody's Investor Service, Inc.
"Money Market Borrowing" shall have the meaning assigned to such term
in ss.1.02(b) hereof.
"Money Market Loans" shall mean the loans provided for by ss.1.02
hereof.
"Money Market Note" shall have the meaning assigned to such term in
ss.1.10(b) hereof.
"Money Market Quote" shall mean an offer in accordance with ss.1.02(c)
hereof by a Bank to make a Money Market Loan with one single specified interest
rate.
"Money Market Quote Request" shall have the meaning assigned to such
term in ss.1.02(b) hereof.
"Money Market Rate" shall have the meaning assigned to such term in
ss.1.02(c)(ii)(C) hereof.
"Note" shall mean a Syndicated Note, a Money Market Note or a Swingline
Note.
"Operating Lease Obligations" shall mean, for the Company at any date,
if the minimum annual rental commitments of the Company and its Consolidated
Subsidiaries as lessee under leases (other than capital leases and mineral
leases) in effect on such date for the fiscal year in which such date occurs
shall exceed $30,000,000, the minimum rental commitments of the Company and its
Consolidated Subsidiaries as lessee over the remaining terms of such leases that
cause such minimum annual rental commitments to exceed $30,000,000, discounted
to present value at the rate of 10% per annum. For purposes of this definition,
rental payments under leases having the longest terms and which cannot be
canceled by the Lessee without the incurrence of a substantial penalty shall be
deemed to be those leases that cause such aggregate minimum rental commitments
to exceed $30,000,000.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean an individual, a corporation, a company, a
voluntary association, a partnership, a trust, an unincorporated organization or
a government or any agency, instrumentality or political subdivision thereof.
<PAGE> 50
7
"Plan" shall mean any employee benefit or other plan maintained by the
Company or any Subsidiary of the Company for its employees and covered by Title
IV of ERISA.
"Post-Default Rate" shall mean, in respect of any amount payable under
this Agreement which is not paid when due (whether at stated maturity, by
acceleration or otherwise), a rate per annum for each day during the period from
the due date of such amount until such amount shall be paid in full equal to 2%
above the Base Rate in effect on such day (provided that, if the amount so in
default is principal of a Fixed Rate Loan or a Money Market Loan and the due
date thereof is a day other than the last day of the Interest Period therefor,
the "Post-Default Rate" for such principal shall be, for the period from and
including such due date to but excluding the last day of the Interest Period for
such Loan, 2% above the interest rate for such Loan as provided in ss.2.02
hereof and, thereafter, the rate provided for above in this definition).
"Prime Rate" shall mean the rate of interest from time to time
announced by Chase at its Principal Office as its prime commercial lending rate.
"Principal Office" shall mean (i) with respect to Chase or The Chase
Manhattan Bank, its principal office in New York, New York, presently located at
1 Chase Manhattan Plaza, New York, N.Y. and (ii) with respect to Bank of
America, its principal office in Concord California, presently located at 1850
Gateway Boulevard, Concord, CA.
"Quarterly Dates" shall mean the last day of each March, June,
September and December, commencing on the first such date after the Effective
Date.
"Quarterly Period" shall mean the period of three consecutive calendar
months ending on each Quarterly Date.
"Quotation Date" shall have the meaning attributed thereto in
ss.1.02(b)(iv) hereof.
"Rating Level" shall mean, as of any day, the level indicated below
opposite the statement that is correct with respect to the ratings of the
Company's senior unsecured long-term debt securities as of such day, provided,
that if the ratings of S&P and Moody's on such day fall within different levels,
the level shall be the level which is one level above the level with the lower
rating unless there is a difference of more than two levels, in which case the
level shall be the level which is one level below the level with the higher
rating:
<PAGE> 51
8
<TABLE>
<CAPTION>
Rating Level
------ -----
<S> <C>
A- or better by S&P or A3 or better by Moody's I
BBB+ by S&P or Baa1 by Moody's II
BBB by S&P or Baa2 by Moody's III
BBB- by S&P or Baa3 by Moody's IV
Below BBB- by S&P and below Baa3 by Moody's V
</TABLE>
For purposes of this definition, "I" shall be the highest level and "V" shall be
the lowest level. If any rating established or deemed to have been established
by Moody's or S&P shall be changed, such change shall be effective as of the
date on which it is first announced by the applicable rating agency. Each change
in the Rating Level shall apply during the period commencing on the effective
date of such change and ending on the date immediately preceding the effective
date of the next such change. If the rating system of Moody's or S&P shall
change so as to make the above ratings inapplicable, or if either such rating
agency shall cease to be in the business of rating corporate debt obligations or
shall no longer have in effect a rating for any reason, the Company and the
Banks shall negotiate in good faith to amend the references to specific ratings
in this definition to reflect such changed rating system or the non-availability
of ratings from such rating agency or to select a substitute rating agency and
pending or in the absence of any agreement the Rating Level will be determined
by reference to the single available rating, if any, or, in the absence of any
rating, then such rating agencies will be deemed to have established a rating in
Level V.
"Reference Banks" shall mean The Chase Manhattan Bank and Bank of
America National Trust and Savings Association (or their Applicable Lending
Offices, as the case may be).
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"Regulatory Change" shall mean, with respect to any Bank, any change
after the date of this Agreement in United States Federal, state or foreign law
or regulations (including, without limitation, Regulation D) or the adoption or
making after such date of any interpretation, directive or request applying to a
class of banks including such Bank of or under any United States Federal, state
or foreign law or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof.
<PAGE> 52
9
"Restricted Subsidiaries" shall mean SNG, Sonat Exploration and any
other Subsidiary of the Company which shall acquire or succeed to all or any
substantial part of the assets or the stock of any such Restricted Subsidiary
(in which case any references to any such Restricted Subsidiary in this
Agreement shall, mutatis mutandis, be deemed to refer to such other Subsidiary).
"Set Rate Auction" shall mean a solicitation of Money Market Quotes
setting forth Money Market Rates pursuant to ss.1.02 hereof.
"Set Rate Loans" shall mean Money Market Loans the interest rates on
which are determined on the basis of Money Market Rates pursuant to a Set Rate
Auction.
"SNG" shall mean Southern Natural Gas Company, a wholly-owned
Subsidiary of the Company (except for directors' qualifying shares).
"Sonat Exploration" shall mean Sonat Exploration Company, a
wholly-owned Subsidiary of the Company (except for directors' qualifying
shares).
"S&P" shall mean Standard & Poor's Ratings Services, a division of The
Mc-Graw Hill Companies.
"SPC" shall have the meaning provided in ss.8.09(b).
"Subsidiary" shall mean, as to any Person, any corporation, partnership
or other entity at least a majority of whose securities or other ownership
interests having ordinary voting power for the election of directors or other
persons performing similar functions of such corporation, partnership or entity
(other than securities or other ownership interests having such power only by
reason of the happening of a contingency) are at the same time owned by such
Person and/or one or more of its other Subsidiaries.
"SunTrust" shall mean SunTrust Bank, Atlanta, in its capacity as the
Documentation Agent.
"Swingline Account" shall mean the account of the Company maintained
with the Swingline Bank at its Lending Office which the Company and the
Swingline Lender shall designate as the Swingline Account for purposes of this
Agreement.
"Swingline Bank" shall mean SunTrust Bank, Atlanta, in its capacity as
the lender of Swingline Loans.
"Swingline Business Day" shall mean any day on which commercial banks
are not authorized or required to close in Atlanta, Georgia.
"Swingline Commitment" shall mean the obligation of the Swingline Bank
to make Swingline Loans pursuant to ss.1.03 hereof in an aggregate principal
amount at any one time outstanding up to but not exceeding $60,000,000.
<PAGE> 53
10
"Swingline Loans" shall have the meaning assigned to such term in
ss.1.03 hereof.
"Swingline Note" shall have the meaning assigned to such term in
ss.1.10(c) hereof.
"Syndicated Loans" shall mean the loans provided for by ss.1.01 hereof.
"Syndicated Note" shall have the meaning assigned to such term in
ss.1.10(a) hereof.
"Termination Event" shall mean any event or condition which would
constitute grounds under ss.4042 of ERISA for the termination of, or for the
appointment of a trustee to administer, any Plan.
"Total Indebtedness" shall mean, for any Person, the aggregate unpaid
principal amount of the Indebtedness of such Person and its Consolidated
Subsidiaries (excluding Indebtedness of any Consolidated Subsidiary to such
Person or another such Consolidated Subsidiary and, except for the Company,
Indebtedness of such Person to any of its Consolidated Subsidiaries).
"Year 2000 Problem" shall mean for any Person the risk that computer
applications used by such Person may be unable to perform properly
date-sensitive functions involving certain dates after December 31, 1999.
<PAGE> 54
SCHEDULE 2
LENDING OFFICES
AND/OR
ADDRESSES FOR NOTICES
1. SONAT INC.
Address for Notices:
AmSouth-Sonat Tower
1900 Fifth Avenue North
Birmingham, Alabama 35202-2563
Attention: Treasurer
Fax: 205-325-7490
Telex: 4955644
Answerback: SNGC UI
2. The Chase Manhattan Bank (as a Bank and as
Administrative Agent)
Lending Office for All Types of Loans:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, New York 10081
Address for Notices:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, New York 10081
Attention: Loan and Agency Services
Lisa Pucciarelli
Telephone: 212-552-7886
Fax: 212-552-5777
With copies to:
The Chase Manhattan Bank
270 Park Avenue, 21st Floor
New York, New York 10017
Attention: Oil & Gas Group
Steven Wood
Carlos Morales
Chase Securities Inc.
270 Park Avenue
New York, New York 10017-2070
<PAGE> 55
2
Attention: Financial Products Money Market Management
6th Floor
Chase Securities Inc.
707 Travis, 8th Floor
Houston, Texas 77002
3. Bank of America National Trust and Savings
Association (as a Bank and as Syndication Agent)
Lending Office for All Types of Loans:
Bank of America National Trust and Savings Association
1850 Gateway Boulevard
Concord, CA 94520
Address for Notices:
Bank of America National Trust and Savings Association
1850 Gateway Boulevard
Concord, CA 94520
Attention: Camille Gibby
Telephone: 925-675-7759
Fax: 925-975-7531
with copies to:
Bank of America National Trust and Savings Association Three Allen
Center, 333 Clay St.
Houston, TX 77002
Attention:
Michael J. Dillon
Telephone: 713-651-4903
Fax: 713-651-4808
Robert R. Ingersoll
Telephone: 713-651-4922
Fax: 713-651-4904
<PAGE> 56
3
4. SunTrust Bank, Atlanta (as a Bank,
as the Swingline Bank and as Documentation Agent)
Lending Office for All Types of Loans:
SunTrust Bank, Atlanta
25 Park Place
Atlanta, Georgia 30303
Attention: John Frazer
Telephone: 404-575-2841
Fax: 404-588-8833
Address for Notices:
SunTrust Bank, Atlanta
P.O. Box 4418, Mail Code 120
Atlanta, Georgia 30303
Attention: Gina Muncus
Telephone: 404-658-4624
Fax: 404-827-6270
Telex: 54220
Answerback: TruscoIntAtl
5. The Bank of Nova Scotia
Lending Office for All Types of Loans:
The Bank of Nova Scotia
600 Peachtree Street, N.E.
Suite 2700
Atlanta, Georgia 30308
Address for Notices:
The Bank of Nova Scotia
600 Peachtree Street, N.E.
Suite 2700
Atlanta, Georgia 30308
Attention: Donna Gardner
Telephone: 404-877-1559
Fax: 404-888-8998
Address for Loan Documentation Matters:
The Bank of Nova Scotia
1100 Louisiana, Suite 3000
Houston, Texas 77002
Attention: Jean Paul Purdy
Telephone: 713-759-3433
Fax: 713-752-2425
<PAGE> 57
4
6. Credit Lyonnais, New York Branch
Lending Office for All Types of Loans
Credit Lyonnais, New York Branch
c/o Credit Lyonnais Houston Representative Office
1000 Louisiana, Suite #5360
Houston, Texas 77002
Address for Notices:
Credit Lyonnais, New York Branch
c/o Credit Lyonnais Houston Representative Office
1000 Louisiana, Suite #5360
Houston, Texas 77002
Attention: Robert LaRocque
Telephone: (713) 751-8721
Fax: (713) 751-0307
Telex: 6868674
Answerback: CL HOU UN
7. Mellon Bank, N.A.
Lending Office for All Types of Loans:
Mellon Bank, N.A.
Three Mellon Bank Center
Loan Administration
Room 1203
Pittsburgh, PA 15259
Attention: Supervisor
Telephone: 412-234-4087
Fax: 412-236-2027
Address for notices:
Mellon Bank, N.A.
One Mellon Bank Center
Room 4425
Pittsburgh, PA 15258
Attention: Roger Howard
Telephone: 412-234-5606
Fax: 412-236-1840
<PAGE> 58
5
Address for Notices Regarding Money Market Loans
Mellon Bank, N.A.
One Mellon Bank Center
Capital Markets, Room 151-0400
Pittsburgh, PA 15258-0001
Attention: Marilyn Wagner
Telephone: (412) 234-1693
Fax: (412) 234-7834
8. AmSouth Bank
Lending Office for All Types of Loans:
AmSouth Bank
1900 Fifth Avenue North
Birmingham, Alabama 35203
Address for Notices:
AmSouth Bank
1900 Fifth Avenue North
Birmingham, Alabama 35203
Attention: David A. Simmons
Senior Vice President
Telephone: 205-326-5924
Fax: 205-801-0157
9. Regions Bank
Lending Office for All Types of Loans
Regions Bank (Birmingham)
417 20th Street North
Birmingham, AL 35202
Address for Notices:
Regions Bank (Birmingham)
417 North 20th Street
Birmingham, AL 35202
Attention: Chuck Allen
Telephone: (205) 326-7003
Fax: (205) 326-7739
<PAGE> 59
6
10. The Bank of New York
Lending Office for All Types of Loans
The Bank of New York
One Wall Street, 19th Floor
New York, NY 10286
Address for Notices:
The Bank of New York
One Wall Street
New York, NY 10286
Attention: Steven Kalachman
Telephone: (212) 635-7881
Fax: (212) 635-7923
11. Northern Trust
Lending Office for All Types of Loans
Northern Trust
50 South LaSalle Street
Chicago, IL 60675
Attention:
Telephone:
Fax:
Address for Notices:
Northern Trust
50 South LaSalle Street
Chicago, IL 60675
Attention: Christina Jakuc
Telephone: (312) 444-3455
Fax: (312) 6630-6062
12. SouthTrust Bank N.A.
Lending Office for All Types of Loans
SouthTrust Bank N.A.
420 N. 20th Street, 6th Floor
Birmingham, AL 35203
Attention:
Telephone:
Fax:
<PAGE> 60
7
Address for Notices:
SouthTrust Bank N.A.
420 N. 20th Street, 6th Floor
Birmingham, AL 35203
Attention: John A. Lotz, Jr.
Telephone: (205) 254-5795
Fax: (205) 254-5911
<PAGE> 61
SCHEDULE 3
<TABLE>
<CAPTION>
BANKS COMMITMENT
<S> <C>
THE CHASE MANHATTAN BANK $ 45,000,000.00
BANK OF America National Trust and Savings Association 45,000,000.00
SUNTRUST BANK, ATLANTA 60,000,000.00
CREDIT LYONNAIS, NEW YORK BRANCH 45,000,000.00
THE BANK OF NOVA SCOTIA 30,000,000.00
MELLON BANK, N.A. 35,000,000.00
AMSOUTH BANK 30,000,000.00
THE BANK OF NEW YORK 30,000,000.00
REGIONS BANK 30,000,000.00
NORTHERN TRUST 25,000,000.00
SOUTHTRUST BANK N.A. 25,000,000.00
---------------
$400,000,000.00
</TABLE>
<PAGE> 62
EXHIBIT A-1
[Form of Note for Syndicated Loans]
PROMISSORY NOTE
$ , 19
-------------------- ----------- ---
New York, New York
FORVALUE RECEIVED, SONAT INC., a Delaware corporation (the "Company"),
hereby promises to pay to ___________ (the "Bank"), for account of its
respective Applicable Lending Offices provided for by the Credit Agreement
referred to below, at the principal office of The Chase Manhattan Bank at 1
Chase Manhattan Plaza, New York, New York 10081, the principal sum of _______
Dollars (or such lesser amount as shall equal the aggregate unpaid principal
amount of the Syndicated Loans made by the Bank to the Company under the Credit
Agreement), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Syndicated Loan, at such office, in like money and funds, for the period
commencing on the date of such Syndicated Loan until such Syndicated Loan shall
be paid in full, at the rates per annum and on the dates provided in the Credit
Agreement.
The date, amount, type, interest rate and maturity date of each
Syndicated Loan made by the Bank to the Company, and each payment made on
account of the principal thereof, shall be recorded by the Bank on its books
and, prior to any transfer of this Note, endorsed by the Bank on the schedule
attached hereto or any continuation thereof. The failure of the Bank to make any
notation or entry or any error in such a notation or entry shall not, however,
limit or otherwise affect any obligation of the Company under the Credit
Agreement or this Note.
This Note is one of the Notes referred to in the Credit Agreement (as
modified and supplemented and in effect from time to time, the "Credit
Agreement") dated as of January 20, 1999, among the Company, the banks named
therein and The Chase Manhattan Bank, as Administrative Agent, Bank of America
National Trust and Savings Association, as Syndication Agent, and SunTrust Bank,
Atlanta, as Documentation Agent, and evidences Syndicated Loans made by the Bank
thereunder. Capitalized terms used in this Note have the respective meanings
assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE> 63
2
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
SONAT INC.
By
-------------------------------
Title:
<PAGE> 64
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Credit
Agreement to the Company, on the dates, in the principal amounts, of the types,
bearing interest at the rates and maturing on the dates set forth below, subject
to the payments and prepayments of principal set forth below:
<TABLE>
<CAPTION>
Principal
Date Amount Type Maturity Amount Unpaid
of of of Interest Date of Paid or Principal Notation
Loan Loan Loan Rate Loan Prepaid Amount Made by
---- -------- ---- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 65
EXHIBIT A-2
[Form of Note for Money Market Loans]
PROMISSORY NOTE
, 19
----------------- ---
New York, New York
FOR VALUE RECEIVED, SONAT INC., a Delaware corporation (the "Company"),
hereby promises to pay to (the "Bank"), for account of its respective Applicable
Lending Offices provided for by the Credit Agreement referred to below, at the
principal office of The Chase Manhattan Bank at 1 Chase Manhattan Plaza, New
York, New York 10081, the aggregate unpaid principal amount of the Money Market
Loans made by the Bank to the Company under the Credit Agreement, in lawful
money of the United States of America and in immediately available funds, on the
dates and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount of each such Money Market Loan, at such
office, in like money and funds, for the period commencing on the date of such
Money Market Loan until such Money Market Loan shall be paid in full, at the
rates per annum and on the dates provided in the Credit Agreement.
The date, amount, interest rate and maturity date of each Money Market
Loan made by the Bank to the Company, and each payment made on account of the
principal thereof, shall be recorded by the Bank on its books and, prior to any
transfer of this Note, endorsed by the Bank on the schedule attached hereto or
any continuation thereof. The failure of the Bank to make any notation or entry
or any error in such a notation or entry shall not, however, limit or otherwise
affect any obligation of the Company under the Credit Agreement or this Note.
This Note is one of the Notes referred to in the Credit Agreement (as
modified and supplemented and in effect from time to time, the "Credit
Agreement") dated as of January 20, 1999, among the Company, the banks named
therein and The Chase Manhattan Bank, as Administrative Agent, Bank of America
National Trust and Savings Association, as Syndication Agent, and SunTrust Bank,
Atlanta, as Documentation Agent, and evidences Money Market Loans made by the
Bank thereunder. Capitalized terms used in this Note have the respective
meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE> 66
2
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
SONAT INC.
By
----------------------------------
Title:
<PAGE> 67
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Credit
Agreement to the Company, on the dates, in the principal amounts, bearing
interest at the rates and maturing on the dates set forth below, subject to the
payments and prepayments of principal set forth below:
<TABLE>
<CAPTION>
Principal
Date Amount Maturity Amount Unpaid
of of Interest Date of Paid or Principal Notation
Loan Loan Rate Loan Prepaid Amount Made by
---- --------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 68
EXHIBIT A-3
[Form of Note for Swingline Loans]
PROMISSORY NOTE
$ , 19
-------------------------- ----------- ---
New York, New York
FOR VALUE RECEIVED, SONAT INC., a Delaware corporation (the "Company"),
hereby promises to pay to SUNTRUST BANK, ATLANTA (the "Bank"), for account of
its respective Applicable Lending Offices provided for by the Credit Agreement
referred to below, at the principal office of The Chase Manhattan Bank at 1
Chase Manhattan Plaza, New York, New York 10081, the principal sum of Dollars
(or such lesser amount as shall equal the aggregate unpaid principal amount of
the Swingline Loans made by the Bank to the Company under the Credit Agreement),
in lawful money of the United States of America and in immediately available
funds, on the dates and in the principal amounts provided in the Credit
Agreement, and to pay interest on the unpaid principal amount of each such
Swingline Loan, at such office, in like money and funds, for the period
commencing on the date of such Swingline Loan until such Swingline Loan shall be
paid in full, at the rates per annum and on the dates provided in the Credit
Agreement.
The date, amount, type, interest rate and maturity date of each
Swingline Loan made by the Bank to the Company, and each payment made on account
of the principal thereof, shall be recorded by the Bank on its books and, prior
to any transfer of this Note, endorsed by the Bank on the schedule attached
hereto or any continuation thereof. The failure of the Bank to make any notation
or entry or any error in such a notation or entry shall not, however, limit or
otherwise affect any obligation of the Company under the Credit Agreement or
this Note.
This Note is one of the Notes referred to in the Credit Agreement (as
modified and supplemented and in effect from time to time, the "Credit
Agreement") dated as of January 20, 1999, among the Company, the banks named
therein and The Chase Manhattan Bank, as Administrative Agent, Bank of America
National Trust and Savings Association, as Syndication Agent, and SunTrust Bank,
Atlanta, as Documentation Agent, and evidences Swingline Loans made by the Bank
thereunder. Capitalized terms used in this Note have the respective meanings
assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE> 69
2
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
SONAT INC.
By
----------------------------------
Title:
<PAGE> 70
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Credit
Agreement to the Company, on the dates, in the principal amounts, of the types,
bearing interest at the rates and maturing on the dates set forth below, subject
to the payments and prepayments of principal set forth below:
<TABLE>
<CAPTION>
Principal
Date Amount Type Maturity Amount Unpaid
of of of Interest Date of Paid or Principal Notation
Loan Loan Loan Rate Loan Prepaid Amount Made by
---- --------- ---- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 71
EXHIBIT B
[Form of Opinion of Special Counsel to the Company]
January , 1999
---
To the Banks party to the Agreement
referred to below and The Chase
Manhattan Bank, as Administrative
Agent, Bank of America National Trust and Savings Association,
as Syndication Agent and SunTrust Bank,
Atlanta, as Documentation
Agent
Dear Sirs:
We have acted as special counsel for Sonat Inc., a Delaware corporation
(the "Company"), in connection with the execution and delivery of the Credit
Agreement (the "Agreement") dated as of January 20, 1999, among the Company, the
Banks named therein and The Chase Manhattan Bank, as Administrative Agent, Bank
of America National Trust and Savings Association, as Syndication Agent and
SunTrust Bank, Atlanta, as Documentation Agent.
This opinion is delivered to you pursuant to ss.4.01(v) of the
Agreement. All capitalized terms not otherwise defined herein shall have the
meanings attributed to them in the Agreement.
In this connection, and as a basis for the opinions expressed below, we
have examined or relied upon originals or copies, certified or otherwise
identified to our satisfaction, of such records, instruments, certificates and
other documents, have made such inquiries as to questions of fact of officers
and representatives of the Company and have made such examinations of law as we
have deemed necessary or appropriate for purposes of giving the opinions
hereinafter expressed. As to certain matters in respect of the opinions
expressed in paragraphs 1 and 2 below, we have relied, with your permission,
solely on the opinion, a copy of which is attached hereto, of William A. Smith,
Executive Vice President and General Counsel.
In rendering the opinions expressed below, we have assumed that the
Agreement has been duly authorized, executed and delivered by each party thereto
other than the Company, that each party thereto other than the Company has the
requisite power and authority to execute, deliver and perform the Agreement, and
that such execution, delivery and performance by such other parties does not and
will not breach, conflict with or constitute a violation of the laws or
governmental rules or regulations of any jurisdiction.
Each of the opinions expressed below is restricted to matters
controlled or affected by Federal laws, the General Corporation Law of the State
of Delaware and the laws of the State of New York.
<PAGE> 72
2
On the basis of the foregoing, it is our opinion that:
1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware
and is duly licensed or qualified to do business and is in good
standing in the States of Alabama, Texas and New York, constituting
those states which we have been advised are the states in which the
Company believes the conduct of its business or the ownership of its
assets requires such qualification, and the Company has the corporate
power to make the Agreement and the Notes and to borrow under the
Agreement.
2. The making and performance by the Company of the Agreement
and the Notes and borrowings under the Agreement have been duly
authorized by all necessary corporate action and do not and will not
contravene any provision of law applicable to the Company or of the
certificate of incorporation or by-laws of the Company or result in the
material breach of, or constitute a material default or require any
consent under, or result in the creation of any material lien, charge
or other security interest or encumbrance (except as may be required by
the Agreement) upon any property or assets of the Company pursuant to,
any indenture or other agreement or instrument to which the Company is
a party or by which the Company or any of its property may be bound or
affected.
3. No approval, license or consent of any governmental
regulatory body is requisite to the making and performance by the
Company of the Agreement or the execution, delivery and payment of the
Notes.
4. The Agreement and the Notes have been duly executed and
delivered by the Company and each constitutes a valid and binding
agreement of the Company enforceable in accordance with its terms
(subject to applicable bankruptcy, fraudulent conveyance, fraudulent
transfer, preferential transfer, insolvency, moratorium and other like
laws of general application affecting creditors' rights and to the
application of general principles of equity, including without
limitation concepts of materiality, reasonableness, good faith and fair
dealing and whether considered in a proceeding in equity or at law),
except that we express no opinion as to ss.2.06(c) of the Agreement.
In connection with the above, we wish to point out that provisions of
the Agreement which permit any Agent or any Bank to take action or make
determinations or allocations, or to benefit from indemnities and similar
undertakings of the Company, may be subject to a requirement that such action be
taken or such determinations or allocations be made, and that any action or
inaction by an Agent or a Bank which may give rise to a request for payment
under such an indemnity or similar undertaking be taken or not taken, on a
reasonable basis and in good faith.
<PAGE> 73
3
We express no opinion with respect to:
(A) the effect of any provision of the Agreement which is intended to
permit modification thereof only by means of an agreement in writing by the
parties thereto;
(B) the effect of any provision of the Agreement imposing penalties or
forfeitures;
(C) the enforceability of any provision of the Agreement to the extent
that such provision constitutes a waiver of illegality as a defense to
performance of contract obligations; and
(D) the effect of any provision of the Agreement relating to
indemnification or exculpation in connection with violations of any securities
laws or relating to indemnification, contribution or exculpation in connection
with willful, reckless or criminal acts or gross negligence of the indemnified
or exculpated Person or the Person receiving contribution.
Very truly yours,
<PAGE> 74
(ATTACHMENT TO
EXHIBIT B)
[Form of Opinion of General Counsel]
January , 1999
---
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
Dear Sirs:
As Executive Vice President and General Counsel of Sonat Inc., a
Delaware corporation (the "Company"), I am familiar with the Credit Agreement
(the "Agreement") dated as of January 20, 1999, among the Company, the Banks
named therein and The Chase Manhattan Bank, as Administrative Agent, Bank of
America National Trust and Savings Association, as Syndication Agent and
SunTrust Bank, Atlanta, as Documentation Agent.
This opinion is delivered to you in connection with the opinion which
you are rendering pursuant to ss.4.01(v) of the Agreement. You may rely on this
opinion in rendering your opinion, you may attach a copy hereof to your opinion
and the Banks may rely on this opinion as if it were addressed to them. All
capitalized terms not otherwise defined herein shall have the meaning attributed
to them in the Agreement.
In this connection, and as a basis for the opinions expressed below, I
have examined or relied upon originals or copies certified or otherwise
identified to my satisfaction, of such records, instruments, certificates and
other documents, have made inquiries as to questions of fact of officers and
representatives of the Company and have made such examinations of law as I have
deemed necessary or appropriate for purposes of giving the opinions hereinafter
expressed.
On the basis of the foregoing, it is my opinion that:
1. The Company is duly licensed or qualified to do business
and is in good standing in the States of Alabama, Texas and New York,
constituting those states in which the Company believes the conduct of
its business or the ownership of its assets requires such
qualification.
2. The making and performance by the Company of the Agreement
and the Notes and borrowings under the Agreement do not and will not
contravene any provision of law of the State of Alabama or the United
States applicable to the Company by virtue of the nature of its or any
of its Subsidiaries' businesses or of the properties owned or leased by
any of them or result in the material breach of, or constitute a
material default or require any consent under, or result in the
creation of any material lien, charge or other security interest or
encumbrance upon any property or assets of the Company pursuant to, any
indenture or other agreement or instrument to which the Company is a
party or by which the Company or any of its property may be bound or
affected.
<PAGE> 75
2
3. The Company is not an "investment company" or a company
"controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
4. Neither the Company nor any of its Subsidiaries is subject
to regulation under the Public Utility Holding Company Act of 1935, as
amended.
Very truly yours,
<PAGE> 76
EXHIBIT C
[Form of Opinion of Special Counsel
to the Banks and the Agents]
January , 1999
---
To the Banks currently party to the
Credit Agreement referred to below and
listed on Schedule 1 attached hereto;
The Chase Manhattan Bank, as Administrative
Agent, Bank of America National Trust and Savings Association,
as Syndication Agent and SunTrust Bank,
Atlanta, as Documentation
Agent
Gentlemen:
We have acted as your special counsel in connection with the Credit
Agreement (the "Credit Agreement") dated as of January 20, 1999, among Sonat
Inc. (the "Company"), the Banks named therein and The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and Savings Association, as
Syndication Agent and SunTrust Bank, Atlanta, as Documentation Agent. Terms
defined in the Credit Agreement are used herein as defined therein.
We have assumed for purposes of our opinion hereinafter set forth that
(1) the Credit Agreement is a valid and legally binding obligation of each of
the Banks and that the Credit Agreement has been duly authorized, executed and
delivered by the Company, each Bank and each Agent, (2) the Company is duly
incorporated and validly existing under the laws of the State of Delaware and
has full power, authority and legal right to make and perform the Credit
Agreement and the Notes and that such execution, delivery and performance by the
Company does not contravene its certificate of incorporation or by-laws or
violate, or require any consent not obtained under, any applicable law or
regulation or any order, writ, injunction or decree of any court or other
governmental authority and does not violate, or require any consent not obtained
under, any contractual obligation applicable to or binding upon the Company and
(3) the Company is not an "investment company" within the meaning of and subject
to regulation under the Investment Company Act of 1940.
We have examined (i) a copy of the Credit Agreement signed by the
Company, each Bank and each Agent, (ii) a copy of the Notes delivered on the
date hereof and (iii) a copy of the opinion letter of Hughes Hubbard & Reed LLP,
counsel for the Company, addressed to you and dated the date hereof in respect
of the Credit Agreement together with the opinion of the Executive Vice
President and General Counsel of the Company, attached thereto. We have assumed
the genuineness of all signatures, the authenticity of documents submitted to us
as originals, the conformity with the originals of all documents submitted to us
as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
<PAGE> 77
2
Based upon the foregoing and subject to the comments and qualifications
set forth below, we are of the opinion that the Credit Agreement constitutes,
and the Notes when executed and delivered for value (assuming due execution and
delivery by the Company) will constitute, valid and binding obligations of the
Company enforceable in accordance with their respective terms, except as the
foregoing may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith and fair
dealing, and except that we express no opinion as to ss.2.06(c) of the Credit
Agreement.
We express no opinion in respect to:
(A) the effect of any provision of the Credit Agreement which is
intended to permit modification thereof only by means of an agreement in writing
by the parties thereto;
(B) the effect of any provisions of the Credit Agreement imposing
penalties or forfeitures;
(C) the enforceability of any provision of the Credit Agreement to the
extent that such provision constitutes a waiver of illegality as a defense to
performance of contract obligations; and
(D) the effect of any provision of the Credit Agreement relating to
indemnification or exculpation in connection with violations of any securities
laws or relating to indemnification, contribution or exculpation in connection
with willful, reckless or criminal acts or gross negligence of the indemnified
or exculpated Person or the Person receiving contribution.
We are members of the Bar of the State of New York and do not herein
intend to express any opinion as to any matters governed by any laws other than
the law of the State of New York and the Federal law of the United States of
America.
This opinion is rendered to you in connection with the above described
transactions. This opinion may not be relied upon by you for any other purpose,
or relied upon by, or furnished to, any other person, firm or corporation
without our prior written consent.
Very truly yours,
<PAGE> 78
EXHIBIT D
[Form of Money Market Quote Request]
[Date]
To: [Bank]
From: Sonat Inc.
Re: Money Market Quote Request
Pursuant to ss.1.02 of the Credit Agreement (the "Credit Agreement")
dated as of January 20, 1999, among Sonat Inc., the banks named therein and The
Chase Manhattan Bank, as Administrative Agent, Bank of America National Trust
and Savings Association, as Syndication Agent and SunTrust Bank, Atlanta, as
Documentation Agent, we hereby give notice that we request Money Market Quotes
for the following proposed Money Market Borrowing(s):
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Date Date [1] Amount [2] Period [3]
---- -------- ---------- ----------
<S> <C> <C> <C>
</TABLE>
Money Market Quotes responding to this Money Market Quote Request must
be submitted to us not later than [time and date] [4].
Terms used herein have the meanings assigned to them in the Credit
Agreement.
SONAT INC.
By
------------------------
Title:
- --------------------
[1] For use if a Money Market Rate in a Set Rate Auction is requested to be
submitted before the Borrowing Date.
[2] Each amount must be $25,000,000 or a larger multiple of $5,000,000.
[3] A period of up to 180 days after the making of such Set Rate Loan and
ending on a Business Day.
[4] Insert time and date determined pursuant to ss.1.02(c)(i).
<PAGE> 79
THIS PAGE IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT DATED AS OF JANUARY 20,
1999 AMONG SONAT INC., THE BANKS NAMED HEREIN, THE CHASE MANHATTAN BANK, AS
ADMINISTRATIVE AGENT, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS
SYNDICATION AGENT AND SUNTRUST BANK, ATLANTA, AS DOCUMENTATION AGENT.
[Form of Money Market Quote]
To: Sonat Inc.
Attention:
Re: Money Market Quote to Sonat Inc. (the
"Borrower")
This Money Market Quote is given in accordance with ss.1.02(c) of the
Credit Agreement (the "Credit Agreement") dated as of January 20, 1999, among
the Borrower, the banks named therein and The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and Savings Association, as
Syndication Agent and SunTrust Bank, Atlanta, as Documentation Agent. Terms
defined in the Credit Agreement are used herein as defined therein.
In response to the Borrower's invitation dated ____________, 19__, we
hereby make the following Money Market Quote(s) on the following terms:
1. Quoting Bank:
2. Person to contact at Quoting Bank:
3. We hereby offer to make Money Market Loan(s)
in the following principal amount[s], for the following
Interest Period(s) and at the following rate(s):
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Date Date [1] Amount [2] Period [3] Rate [4]
---- -------- ---------- ---------- --------
<S> <C> <C> <C> <C>
</TABLE>
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the Credit Agreement,
irrevocably obligate[s] us to make the Money Market Loan(s) for which any
offer(s) (is/are) accepted, in whole or in part (subject to the third sentence
of ss.1.02(d) of the Credit Agreement).
Very truly yours,
[Name of Bank]
By
------------------------------
Authorized Officer
2
<PAGE> 80
3
THIS PAGE IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT DATED AS OF JANUARY 20,
1999 AMONG SONAT INC., THE BANKS NAMED HEREIN, THE CHASE MANHATTAN BANK, AS
ADMINISTRATIVE AGENT, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS
SYNDICATION AGENT AND SUNTRUST BANK, ATLANTA, AS DOCUMENTATION AGENT.
Dated: ,
---------------
- --------------------------
[1] As specified in the related Money Market Quote Request.
[2] The principal amount bid for each Interest Period may not exceed the
principal amount requested. Bids must be made for at least $5,000,000
or a larger multiple of $1,000,000.
[3] A period of up to 180 days after the making of such Set Rate Loan and
ending on a Business Day, as specified in the related Money Market
Quote Request.
[4] Specify rate of interest per annum (rounded to the nearest 1/10,000 of
1%).
3
<PAGE> 1
EXHIBIT 10.1
SONAT INC.
SUPPLEMENTAL BENEFIT PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997)
ARTICLE I - PURPOSE AND HISTORY
1.1 PURPOSE
This Supplemental Benefit Plan, as amended and restated herein (the
"Plan"), is adopted by Sonat Inc. (the "Company") on its own behalf and on
behalf of its subsidiaries and affiliates (the "Employers") which are
participating companies in the Sonat Inc. Retirement Plan (the "Retirement
Plan") and/or the Sonat Savings Plan (formerly the Sonat Inc. Stock Purchase
Plan) (the "Savings Plan"). The purposes of this Plan are:
(i) To provide benefits ("Excess Retirement Plan Benefits") in
excess of the limitations imposed by Sections 401(a)(9),
401(a)(17), 415, and/or the incidental benefit requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), on
the Retirement Plan.
(ii) To provide benefits ("Vesting Benefits") to certain employees
whose rights to Vested Benefits have not vested under Article
5 of the Retirement Plan in the event that their employment is
terminated after a Change of Control (as defined in Section
4.3 below).
(iii) To provide benefits ("Excess Savings Plan Benefits") to
employees whose ability to make employee contributions or to
receive employer contributions to the Savings Plan is limited
by Sections 401(a)(17), 401(m), and/or 415 of the Code.
<PAGE> 2
1.2 HISTORY OF THE PLAN
The Plan was adopted on July 28, 1983, as an amendment and restatement
of the Company's Supplemental Pension Plan, which was adopted effective January
1, 1976. The Plan was amended and restated as of January 1, 1985 in order to (1)
provide certain "Excess Disability Benefits", (2) conform the references in the
Plan to the provisions of the Retirement Plan and the Sonat Inc. Stock Purchase
Plan as in effect on the date thereof, and (3) clarify the meaning and intent of
the Plan.
The Plan was amended and restated as of January 1, 1987 in order to (1)
provide that Excess Retirement Plan Benefits and Excess Savings Plan Benefits
include benefits in excess of the limitations imposed by Section 401(a)(17) of
the Code (as well as Section 415 of the Code) on the Retirement Plan and Savings
Plan, (2) provide as Excess Savings Plan Benefits matching contributions on
amounts an employee is unable to contribute to the Savings Plan by reason of the
limitations imposed by Sections 401(a)(17), 401(m), and/or 415 of the Code, (3)
modify the time of commencement and form in which Excess Retirement Plan
Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid, (4)
provide for the accelerated distribution of Excess Savings Plan Benefits in the
event of a Participant's Termination of Employment following a Change of Control
(as defined herein) and (5) transfer the provisions and obligations relating to
Excess Disability Benefits from this Plan to the Sonat Inc. Supplemental
Disability Plan (the "Supplemental Disability Plan").
The Plan was amended effective as of September 6, 1989 to reflect an
amendment to the Retirement Plan permitting participants to elect that benefits
payable to a child be instead payable to a trust for the benefit of such child.
The Plan was amended and restated as of December 1, 1991 in order to further
modify the time of commencement and form in which Excess Retirement Plan
Benefits, Excess Savings Plan Benefits and Vesting Benefits are paid.
-2-
<PAGE> 3
The Plan was amended and restated effective as of February 25, 1993 in
order to provide flexibility to participants as to the time of commencement and
form in which Excess Retirement Plan Benefits and Excess Savings Plan Benefits
are paid.
The Plan was amended effective as of July 1, 1993 to clarify the
provisions applicable to employees of Sonat Offshore Drilling Inc. ("SODI") and
its subsidiaries whose benefits under the Retirement Plan and the Savings Plan
were transferred to plans established by SODI following the initial public
offering of SODI common stock ("SODI Employees"). The Plan was amended effective
as of April 28, 1994 to change the interest rate used for purposes of the
definition of Actuarial Equivalent.
The Plan was amended effective January 1, 1995 in order to (1) provide
that amounts credited as Excess Savings Plan Benefits will be deemed invested in
phantom shares of common stock of the Company and/or phantom shares of certain
mutual funds, and (2) permit the payment of Excess Retirement Plan Benefits to a
trust for the benefit of one or more children of the participant. The Plan was
amended effective as of December 1, 1995 to change the definition of a "Change
of Control."
The Plan is amended and restated as of the date hereof to (1) provide
that Excess Savings Plan Benefits will be credited as phantom units of the Sonat
Stock Fund established under the Company's Savings Plan, as well as phantom
shares of certain mutual fund investments chosen by the Company, (2) permit
daily transfers among the phantom funds in which a Participant's Diversifiable
Account (as defined in Article III) is deemed invested, and (3) permit transfers
out of the Phantom Stock Subaccount (as defined in Article III) of a
Participant's Diversifiable Account.
-3-
<PAGE> 4
ARTICLE II - EXCESS RETIREMENT PLAN BENEFITS
2.1 ELIGIBILITY
Each employee whose Retirement Benefit or Vested Benefit from the
Retirement Plan is limited by Code Sections 401(a)(17) and/or 415 and the
incorporation of those limitations in the Retirement Plan or whose Survivors
Benefits under the Retirement Plan are limited by Code Section 401(a)(9) or the
incidental benefit requirements of the Code and the incorporation of such
limitations in the Retirement Plan (a "Participant") shall be entitled to Excess
Retirement Plan Benefits under this Plan, regardless of whether such Participant
has received notice that he or she is so entitled. All capitalized terms used in
this Article II and not defined in this Plan shall have the meanings ascribed
thereto in the Retirement Plan.
2.2 DETERMINATION OF APPLICABLE FORM OF BENEFIT
If a Participant's date of Termination of Continuous Employment
occurred prior to December 1, 1991, such Participant's Excess Retirement Plan
Benefits shall be paid in annuity form as provided in Section 2.4 below
("Annuity Form"). If a Participant's date of Termination of Continuous
Employment occurred on or after December 1, 1991, such Participant's Excess
Retirement Plan Benefits shall be paid in lump sum form as provided in Section
2.3 below ("Lump Sum Form") unless, at least twelve months before the date of
the Participant's Termination of Continuous Employment, the Participant filed
with the Company an irrevocable written election to have such benefits paid in
Annuity Form, in which case such benefits shall be paid in Annuity Form.
Notwithstanding any other provision of the Plan, a Participant's election with
respect to the portion of his or her Excess Retirement Plan Benefit attributable
to his or her retirement benefit shall determine the Form in which the portion
of such benefit attributable to any related survivor benefit is paid.
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2.3 LUMP SUM FORM
The following provisions of this Section 2.3 apply to Excess Retirement
Plan Benefits which are paid in Lump Sum Form.
(A) BENEFIT UPON TERMINATION OF CONTINUOUS EMPLOYMENT. Upon the
Termination of Continuous Employment (other than death) of a Participant who is
entitled to a Retirement Benefit or a Vested Benefit and whose Excess Retirement
Plan Benefits are payable in Lump Sum Form, such Participant shall be entitled
to an Excess Retirement Plan Benefit, payable in the form of a cash lump sum,
that is equal to the sum of:
(1) the "Actuarial Equivalent" (as defined in Section
2.3(d) below) of the excess, if any, of (i) the amount that
hypothetically would have been payable to the Participant as a
Retirement Benefit or a Vested Benefit, as the case may be, under the
Retirement Plan if Sections 401(a)(17) and 415 of the Code were
nonexistent and the provisions of the Retirement Plan incorporating the
limitations contained in Sections 401(a)(17) and 415 of the Code were
inoperative, over (ii) the amount which hypothetically would have been
payable to the Participant as a Retirement Benefit or Vested Benefit,
as the case may be, under the Retirement Plan upon application of the
actual terms of the Retirement Plan, assuming that for purposes of
clauses (i) and (ii) the Participant elected to receive such Benefit in
the form of a single life annuity commencing on the earliest date on
which the Participant may commence receipt of his Retirement Benefit or
Vested Benefit, as the case may be, under the terms of the Retirement
Plan; plus
(2) if the Participant is entitled to a Retirement
Benefit and has an Eligible Spouse (as defined in Section 2.3(e) below)
on the date of such Termination of Continuous Employment, the Actuarial
Equivalent of the excess, if any, of (i) the amount that hypothetically
would have been payable to the Eligible Spouse as a Survivors Benefit
under the Retirement Plan upon the death of the
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Participant if Sections 401(a)(17) and 415 of the Code were nonexistent
and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in Sections 401(a)(17) and 415
of the Code were inoperative, over (ii) the amount which hypothetically
would have been payable to the Eligible Spouse as a Survivors Benefit
under the Retirement Plan upon application of the actual terms of the
Retirement Plan, with such excess to be valued as a reversionary
annuity, payable immediately upon the death of the Participant, using
the interest rate and mortality table set forth in Section 2.3(d).
Such cash lump-sum payment shall be paid as soon as practicable (and within 30
days) after the Participant's Termination of Continuous Employment.
(B) CERTAIN SURVIVOR BENEFITS. Upon the death of a Participant
whose Excess Retirement Plan Benefits are payable in Lump Sum Form, either
(1) after the Participant's Termination of Continuous
Employment (if such Participant was entitled to a Retirement Benefit
and did not have an Eligible Spouse at the date of such Termination of
Continuous Employment), or
(2) prior to the Participant's Termination of Continuous
Employment,
his or her Eligible Spouse (or, if the Participant has no Eligible Spouse at the
date of death, each of the Participant's Eligible Children) shall be entitled to
an Excess Retirement Plan Benefit, payable in the form of a cash lump sum, that
is equal to the Actuarial Equivalent of the excess, if any, of (i) the amount
that hypothetically would have been payable to the Eligible Spouse or such
Eligible Child (as the case may be) as a Survivors Benefit under the Retirement
Plan upon the death of the Participant if Sections 401(a)(17) and 415 of the
Code were nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in Section 401(a)(17) and 415 of the
Code were inoperative, over (ii) the amount actually payable to the Eligible
Spouse or such Eligible Child (as the case may be) as a Survivors Benefit under
the Retirement Plan upon application of the actual terms of the
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Retirement Plan. Such lump-sum payment shall be paid as soon as practicable (and
within 30 days) after the Participant's death.
(C) ADDITIONAL SURVIVORS BENEFITS TO ELIGIBLE CHILDREN. If the
Participant's Eligible Spouse dies after the date of death of the Participant,
the Participant's Eligible Children shall each be entitled to an Excess
Retirement Plan Benefit, payable in the form of a cash lump sum, that is equal
to the Actuarial Equivalent of the excess, if any, of (i) the amount that
hypothetically would have been payable to such Eligible Child as a Survivors
Benefit under the Retirement Plan if Sections 401(a)(17) and 415 of the Code
were nonexistent and Section 7.10 and the provisions of the Retirement Plan
incorporating the limitations contained in Section 401(a)(17) and 415 of the
Code were inoperative, over (ii) the amount actually payable to such Eligible
Child as a Survivors Benefit under the Retirement Plan. Such cash lump-sum
payment shall be paid as soon as practicable (and within 30 days) after the
Eligible Spouse's death.
(D) DEFINITION OF ACTUARIAL EQUIVALENT. For purposes of Section
2.3 and Section 4.2, "Actuarial Equivalent" shall mean a benefit actuarially
equal in value to the value of a given benefit in a given form or schedule,
based upon (1) the 1983 Group Annuity Mortality Table (or, if different, the
mortality table or tables used to calculate Actuarial Equivalents under the
Retirement Plan as of the date on which an Actuarial Equivalent is being
determined under this Plan) and (2) an interest rate equal to the yield on new
7-12 year AA-rated general obligation tax-exempt bonds as determined by Merrill
Lynch & Co. (or its affiliates) and published in The Wall Street Journal (or
other financial publication) on the business day immediately preceding the date
of the Participant's Termination of Continuous Employment (for calculation of
Actuarial Equivalents under Sections 2.3(a) and 4.2 of this Plan), the date of
the Participant's death (for calculation of Actuarial Equivalents under Section
2.3(b) of this Plan), or the date of the Participant's Eligible Spouse's death
(for calculation of Actuarial Equivalents under Section 2.3(c) of this Plan)
(or, if such yield is not so determined and published on such business day, on
the most immediately preceding day on which such yield was so determined and
published); provided, however, that if such yield has not been so
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determined and published within 90 days prior to the date of the Participant's
Termination of Continuous Employment or death or the date of the Participant's
Eligible Spouse's death (as the case may be), the interest rate shall be the
yield on substantially similar securities on the business day preceding the
applicable date as determined by AmSouth Bank N.A. upon the request of either
the Company or the Participant, Eligible Spouse or Eligible Child (as the case
may be). Notwithstanding the preceding provisions of this Section 2.3(d), if the
only Survivors Benefit to which an Eligible Spouse is entitled under the
Retirement Plan is an ERISA Preretirement Survivor Annuity, determination of
Actuarial Equivalent under Section 2.3(b) shall be based upon the assumption
that payment of the amounts described in clauses (i) and (ii) of Section 2.3(b)
commence on the first day of the month immediately following the later of the
date on which the Participant would have attained age 55 or the Participant's
date of death.
(E) DEFINITION OF ELIGIBLE SPOUSE. For purposes of Section 2.3,
"Eligible Spouse" shall mean the person who was married to the Participant under
the laws of the State where the marriage was contracted throughout the one year
period ending on the earlier of the date on which the Participant has a
Termination of Continuous Employment or the date of the Participant's death. If
the Participant does not have an Eligible Spouse on the date of Termination of
Continuous Employment, the person who was married to the Participant under the
laws of the State where the marriage was contracted throughout the one year
period ending on the date of the Participant's death shall be the Participant's
Eligible Spouse. In no event may a Participant have more than one Eligible
Spouse under this Plan.
2.4 ANNUITY FORM
The following provisions of this Section 2.4 apply to Excess Retirement
Plan Benefits which are paid in Annuity Form.
(A) RETIREMENT ANNUITY. Each Participant who is entitled to a
Retirement Benefit or a Vested Benefit and whose Excess Retirement Plan Benefits
are payable in
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Annuity Form shall be entitled to Excess Retirement Plan Benefits equal to the
excess, if any, of (i) the amount that hypothetically would have been payable to
the Participant as a Retirement Benefit or a Vested Benefit, as the case may be,
under the Retirement Plan (after any increases in Retirement Benefits or Vested
Benefits payable generally under the Company's retirement program which take
effect after the Participant's Termination of Continuous Employment) if Sections
401(a)(17) and 415 of the Code were nonexistent and the provisions of the
Retirement Plan incorporating the limitations contained in Sections 401(a)(17)
and 415 of the Code were inoperative, over (ii) the amount which hypothetically
would have been payable to the Participant as a Retirement Benefit or Vested
Benefit, as the case may be, under the Retirement Plan upon application of the
actual terms of the Retirement Plan, assuming that for purposes of clauses (i)
and (ii) the Participant elected to receive such Benefit in the form of a single
life annuity commencing on the date on which the Participant actually commences
receipt of his Retirement Benefit or Vested Benefit, as the case may be, under
the Retirement Plan. Excess Retirement Plan Benefits shall be paid commencing at
the time and in the form provided below:
(i) If the Participant is entitled to a Retirement Benefit under
the Retirement Plan, the Participant's Excess Retirement Plan
Benefit shall be payable to the Participant in the form of a
single life annuity, in monthly installments commencing (A) on
the Participant's early or normal retirement date, as the case
may be, under the Retirement Plan; or (B) in the case of a
Participant entitled to a Projected Retirement Benefit, upon
his or her Termination of Continuous Employment.
(ii) If the Participant is entitled to a Vested Benefit under the
Retirement Plan, the amount of the Participant's Excess
Retirement Plan Benefit shall be calculated using the
Retirement Plan's early benefit commencement factors (which
are incorporated in the Retirement Plan's definition of
Actuarial Equivalent) and the Section 415 limits which apply
for the benefit
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commencement date elected by the Participant under the
Retirement Plan. However, payment of such Excess Retirement
Plan Benefit shall not commence until the first day of the
month following the Participant's attainment of normal
retirement age. Such Benefit shall be payable (1) to the
Participant in the form of a single life annuity if the
Participant does not have a Spouse at the time the Excess
Retirement Plan Benefit commences, and (2) to the Participant
and his or her Spouse in the form of a 50% joint and survivor
annuity if the Participant has a Spouse at the time the Excess
Retirement Plan Benefit commences.
(iii) If payment of the Participant's Vested Benefit under the
Retirement Plan commences prior to the first day of the month
following the Participant's attainment of normal retirement
age, the Company shall create and maintain on its books an
account for such Participant (the "Vested Benefits Account")
to which the Company shall credit the following amounts. At
the beginning of each month beginning with the first month for
which the Participant receives a Vested Benefit under the
Retirement Plan and ending with the month in which the
Participant attains normal retirement age, the Company shall
credit the Vested Benefits Account with an amount equal to the
amount of the Excess Retirement Plan Benefit calculated under
Section 2.4(a)(ii) above. At the end of each calendar quarter
beginning with the first calendar quarter in which an amount
is credited pursuant to the preceding sentence and ending with
the calendar quarter referred to in the following sentence,
the Company shall also credit to such Vested Benefits Account
a sum which is equal to the product of (i) the average balance
in such Account for the calendar quarter (without regard to
any debits made at the end of the calendar quarter) times (ii)
one-fourth of the annual prime rate for corporate borrowers
quoted by The Chase Manhattan Bank, N.A. at the beginning of
the calendar quarter. At the end of the calendar quarter in
which
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occurs the earlier of the Participant's attainment of normal
retirement age or the Participant's death, the Company shall
debit the Participant's Vested Benefits Account and pay to
such Participant (or in the event of the Participant's death,
to his or her Beneficiary) the entire balance in such Account.
(B) SURVIVOR ANNUITY. Each Eligible Family Member of a Participant
under the Retirement Plan shall be entitled to Excess Retirement Plan Benefits
equal to the excess, if any, of (i) the amount that hypothetically would have
been payable to the Eligible Family Member as a Survivors Benefit under the
Retirement Plan (after any increases in Survivors Benefits payable generally
under the Company's retirement program which take effect after the Participant's
death) if Sections 401(a)(17) and 415 of the Code were nonexistent and Section
7.10 and the provisions of the Retirement Plan incorporating the limitations
contained in Section 401(a)(17) and 415 of the Code were inoperative, over (ii)
the amount actually payable to the Eligible Family Member as a Survivors Benefit
under the Retirement Plan. Excess Retirement Plan Benefits shall be paid to the
Eligible Family Members, commencing on the first day of the month following the
death of the Participant, as follows:
(i) If the Participant's Eligible Family Members include an
Eligible Spouse (which term, for purposes of this Section 2.4,
shall have the meaning set forth in the Retirement Plan), the
Excess Retirement Plan Benefits for such Eligible Family
Members shall be payable to such Eligible Spouse until such
person dies or is no longer an Eligible Spouse.
(ii) If Excess Retirement Plan Benefits cease to be payable to an
Eligible Spouse, or in the event there is no Eligible Spouse
at the date of the Participant's death, the Excess Retirement
Plan Benefits otherwise payable to such Eligible Spouse shall
be payable to an Eligible Child, until the earlier of the
death of such Eligible Child or the date on which he or she
ceases to be an Eligible Child, with such Benefits to be
divided
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equally among the Eligible Children in the event that there is
more than one Eligible Child. In the event there is more than
one Eligible Child and Excess Retirement Plan Benefits cease
with respect to one Eligible Child, each subsequent payment of
Excess Retirement Plan Benefits will be divided equally among
the remaining Eligible Children.
Notwithstanding the preceding provisions of this Section 2.4(b), if the only
Survivor's Benefit to which the Eligible Family Member is entitled under the
Retirement Plan is an ERISA Preretirement Survivor Annuity, (i) payment of the
Excess Retirement Plan Benefits shall commence on the first day of the month
immediately following the later of the date on which the Participant would have
attained age 55 or the Participant's date of death, and (ii) the Excess
Retirement Plan Benefits shall cease to be payable upon the death of the
Eligible Spouse.
2.5 DEFINITION OF ELIGIBLE CHILD
For purposes of Section 2.3 and 2.4, the term "Eligible Child" shall
mean the deceased Participant's Eligible Child (as defined in the Retirement
Plan). However, if the Participant has so elected under the Retirement Plan,
payments which otherwise would be made to an Eligible Child shall be made to an
Eligible Trust (as defined in the Retirement Plan). Notwithstanding the
Participant's election to have payments made to a trust, if the Administrative
Committee of the Retirement Plan determines that the trust is not an Eligible
Trust at the time payment to such trust is to be made, such payment shall not be
made to the trust and shall instead be made directly to the Participant's
Eligible Child.
2.6 PROVISIONS REGARDING SODI EMPLOYEES
(a) For purposes of Article II, all references to the Retirement
Plan as it relates to SODI Employees (as defined in Section 1.2) shall be deemed
to refer to such plan as in effect on June 30, 1993. In no event shall SODI
Employees accrue benefits under Article II of this Plan after June 30, 1993
(unless rehired by the Company).
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(b) For purposes of determining the timing of benefit payments
under this Plan, SODI Employees shall not be deemed to have incurred a
Termination of Continuous Employment by virtue of the initial public offering of
SODI common stock, but shall instead be deemed to have incurred a Termination of
Continuous Employment upon the termination of their employment with SODI and its
subsidiaries (as defined for purposes of the SODI retirement plan).
(c) Retirement, Vested and Survivor Benefits of SODI Employees
under this Plan shall be determined based on the SODI Employee's accrued
retirement or vested benefit, as the case may be (under the Retirement Plan and
this Plan), as of June 30, 1993 and the maximum dollar limit under Code Section
415(b) and the defined benefit fraction under Code Section 415(e) applicable as
of June 30, 1993. In addition, where the SODI Employee's Termination of
Continuous Employment occurs before the SODI Employee has attained age 65, the
benefits payable under this Plan shall be determined as follows.
(1) In the case of a SODI Employee who is eligible for
early retirement under the Retirement Plan on the date of his or her
Termination of Continuous Employment, the Participant's benefit accrued
as of June 30, 1993 (under both the Retirement Plan and this Plan)
payable at age 65 shall first be reduced to the date of the
Participant's Termination of Continuous Employment using the early
retirement factors in the Retirement Plan as in effect on June 30,
1993, and from this amount there shall be subtracted the amount of the
Participant's June 30, 1993 accrued benefit payable under the
Retirement Plan, calculated using the Code Section 415 limits in effect
on June 30, 1993 as adjusted to reflect early commencement of the
benefit on the date of the Participant's Termination of Continuous
Employment.
(2) In the case of a SODI Employee who is not eligible
for early retirement under the Retirement Plan on the date of his or
her Termination of Continuous Employment, the Participant's benefit
accrued as of June 30, 1993
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(under both the Retirement Plan and this Plan) payable at age 65 shall
first be reduced to the earliest date when the Participant may commence
receipt of his benefit under the Retirement Plan, using the factors in
the Retirement Plan as in effect on June 30, 1993 for determining the
actuarial equivalent of the Participant's vested benefit (as set forth
in such plan's definition of Actuarial Equivalent), and from this
amount there shall be subtracted the amount of the Participant's June
30, 1993 accrued benefit payable under the Retirement Plan, calculated
using the Code Section 415 limits in effect on June 30, 1993 as
adjusted to reflect early commencement of the benefit on the earliest
date when the Participant may commence receipt of his benefit under the
Retirement Plan.
Notwithstanding any other provision of this Plan, Survivors Benefits of SODI
Employees who die after June 30, 1993 shall be determined by reference to the
Survivors Benefits payable under the Sonat Offshore Retirement Plan rather than
the Retirement Plan.
(d) For purposes of Section 2.2, a SODI Employee's election to
have Excess Retirement Plan Benefits paid in Annuity Form which is filed with
SODI at least twelve full calendar months before such Participant's Termination
of Continuous Employment shall be deemed an election filed with the Company to
have benefits under this Plan paid in Annuity Form.
ARTICLE III - EXCESS SAVINGS PLAN BENEFITS
3.1 ELIGIBILITY
Each employee on whose behalf Company Matching Contributions to the
Savings Plan are limited by Sections 401(a)(17), 401(m), and/or 415 of the Code
and the incorporation of those limitations in the Savings Plan (a "Participant")
shall be entitled to Excess Savings Plan Benefits under this Plan, regardless of
whether such Participant has received notice that he or she is so entitled. In
addition, each Participant whose ability to make aggregate Before-Tax and
After-Tax Contributions to
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the Savings Plan is limited by Sections 401(a)(17), 401(m), and/or 415 of the
Code and the incorporation of those limitations in the Savings Plan shall be
entitled to Excess Savings Plan Benefits under this Plan, regardless of whether
such Participant has received notice that he or she is so entitled. All
capitalized terms used in this Article III and not defined in this Plan shall
have the meanings ascribed thereto in the Savings Plan.
3.2 CREDITS TO ACCOUNT
(A) AMOUNT CREDITED. The Company shall create and maintain on its
books two accounts for each Participant (the "Diversifiable Account" and the
"Non-Diversifiable Account", respectively, which are collectively referred to as
the "Accounts") to which it shall credit (i) the amount of any Company Matching
Contributions which are not paid to the Savings Plan by virtue of the
limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and the
incorporation of those limitations in the Savings Plan, plus (ii) the amount of
any Company Matching Contributions that would have been made under the Plan (but
for the limitations of Sections 401(a)(17), 401(m), and/or 415 of the Code and
the incorporation of those limitations in the Savings Plan) had the Participant
contributed the Before-Tax and After-Tax Contributions which he or she elected
to contribute but was precluded from contributing by virtue of the limitations
of Sections 401(a)(17), 401(m), and/or 415 of the Code and the incorporation of
those limitations in the Savings Plan. Such amounts, if any, shall be credited
at such time after the end of each pay period as Company Matching Contributions
for such pay period are paid to the Savings Plan. The Accounts shall be debited
upon payment to the Participant as provided in Section 3.4. The amount of a
Participant's Excess Savings Plan Benefits shall be equal to the fair market
value of his or her Accounts, as determined pursuant to Section 3.2 (c).
(B) CREDITING OF CONTRIBUTIONS. 50% of each amount credited on
behalf of a Participant pursuant to Section 3.2 (a) shall be credited to the
Non-Diversifiable Account. All amounts in the Non-Diversifiable Account shall be
credited to a
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subaccount (the "Phantom Stock Subaccount") that is deemed invested in units
("Units") of the Sonat Stock Fund established under the Company's Savings Plan
(the "Sonat Stock Fund"). The remaining 50% of each amount credited on behalf of
the Participant pursuant to Section 3.2 (a) shall be credited to the
Diversifiable Account. All amounts in the Diversifiable Account shall be
credited, at the direction of the Participant (pursuant to Section 3.3), to one
or more of (i) the Phantom Stock Subaccount, or (ii) a subaccount which is
deemed invested in shares of one of the mutual fund investments designated by
the Company (each of such subaccounts referred to as a "Phantom Mutual Fund
Subaccount"). In each case, the Participant's Phantom Stock Subaccount and each
Phantom Mutual Fund Subaccount (collectively, the "Subaccounts") shall be
credited with the number of phantom Units or phantom shares (including
fractional Units or shares) equal to the number of Units or shares which could
have been purchased with the dollar amount to be credited, valued at the closing
price of such Unit or share on the business day such amounts are credited. At
the time that any dividends are paid on the Sonat Stock Fund or the applicable
mutual fund, as the case may be, the Participant's Phantom Stock Subaccount or
Phantom Mutual Fund Subaccount, as the case may be, shall be adjusted to reflect
such dividend payment in a manner consistent with the treatment of accounts that
are actually invested in the Sonat Stock Fund or the applicable mutual fund, as
the case may be.
(C) DETERMINATION OF FAIR MARKET VALUE. Except as provided in
Section 3.4, the fair market value of a Phantom Stock Subaccount or a Phantom
Mutual Fund Subaccount, as the case may be, on any given date shall be
determined by multiplying (i) the number of phantom Units or shares credited to
such Subaccount on such date, by (ii) the closing price of a Unit or share (of
the Sonat Stock Fund or of such mutual fund, as the case may be) as of such date
(or, if such date is not a business day, on the preceding business day).
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3.3 INVESTMENT ELECTIONS AND TRANSFERS
(A) NEW CONTRIBUTIONS TO DIVERSIFIABLE ACCOUNT. A Participant may
on any business day elect (in the manner and subject to any limitations
specified by the Company) to designate the Subaccounts to which new
contributions to the Participant's Diversifiable Account shall be credited. All
amounts credited to the Participant's Diversifiable Account on or after the date
of such an election shall be credited in accordance with such election. The
Participant may make a new election on any business day (in the manner and
subject to any limitations specified by the Company), which shall take effect on
the close of business on the day the Company receives such election. If a
Participant fails to make an election, all amounts credited to the Participant's
Account prior to the effective date of a properly-made election shall be
credited as phantom shares of the Benchmark Government Portfolio (or such other
short-term money market investment as the Company may designate).
(B) TRANSFERS WITHIN DIVERSIFIABLE ACCOUNT. A Participant may on
any business day elect (in the manner and subject to any limitations specified
by the Company) to transfer a portion of his or her Diversifiable Account from
one Subaccount to another. Transfers shall be made as of the close of business
on the day the Company receives the election, based on the respective closing
prices of the respective phantom Units or shares on such business day.
Notwithstanding the foregoing provisions, a Participant may not transfer among
his or her Subaccounts on or after a Lump Sum Valuation Date, or during the
period beginning on an Installment Valuation Date and ending upon the close of
business on the next Installment Payment Date (as such terms are defined in
Section 3.4).
(C) NON-DIVERSIFIABLE ACCOUNT. All amounts credited to a
Participant's Non-Diversifiable Account shall be credited to the Phantom Stock
Subaccount. Transfers out of such Subaccount shall not be permitted.
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3.4 PAYMENT OF ACCOUNTS
Upon a Participant's Termination of Employment, on each Lump Sum
Payment Date or Installment Payment Date (as such terms are defined below) the
Company shall debit his or her Accounts and pay to such Participant (or in the
event of the Participant's death, to his or her Beneficiary) amounts at the
times determined pursuant to this Section 3.4.
(A) CASH LUMP SUM. Except as provided in Section 3.4(b) or 3.4(c)
below, upon a Participant's Termination of Employment, there shall be paid to
the Participant in a cash lump sum on the fifteenth day of the calendar quarter
following his or her Termination of Employment (or, if such day is not a
business day, on the next business day thereafter) (the "Lump Sum Payment Date")
(or as soon as practicable thereafter) an amount equal to the sum of: (i) the
value of the Participant's Accounts, as determined below, plus (ii) the amount
of any Company Matching Contributions that would have been credited to the
Accounts under Section 3.2 for pay periods beginning before the Participant's
Termination of Employment if such Company Matching Contributions have not yet
been credited on the last business day of the calendar quarter in which the
Participant's Termination of Employment occurs ("Lump Sum Valuation Date"). For
purposes of determining the value of a Participant's Accounts pursuant to this
Section 3.4 (a), (i) each of the Participant's Phantom Mutual Fund Subaccounts
shall have a value equal to the product of (1) the closing price of a share of
such mutual fund on the Lump Sum Valuation Date and (2) the number of phantom
shares credited to such Subaccount on the Lump Sum Valuation Date, and (ii) the
Participant's Phantom Stock Subaccounts shall have a value equal to the product
of (1) the average of the closing prices of a Unit on the ten business days
ending on the Lump Sum Valuation Date and (2) the number of phantom Units
credited to such Subaccounts on the Lump Sum Valuation Date.
(B) INSTALLMENTS. A Participant may elect to have all or (subject
to any limitations imposed by the Company) any designated portion of his or her
Accounts
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paid in a number of annual installments (up to a maximum of 15 installment
payments) designated by the Participant. To be effective, such election must be
written, irrevocable, and filed with the Company at least twelve months before
the Participant's Termination of Employment. Payment shall be made in the
designated number of installments as set forth below (the date of each payment
being an "Installment Payment Date"). The first installment shall be paid on the
fifteenth day of the calendar quarter following the Participant's Termination of
Employment (or if such day is not a business day, on the next business day
thereafter) or as soon as practicable thereafter. Each subsequent installment
shall be paid on an Installment Payment Date that is the anniversary of the
fifteenth day of such calendar quarter (or, if such day is not a business day,
on the next business day thereafter). Each installment shall be in an amount
equal to (i) the value of the Participant's Accounts at the time of payment of
such installment, as determined below, divided by (ii) the number of
installments remaining to be paid (including the installment about to be paid),
and shall be made on a pro rata basis from the Participant's Accounts and
Subaccounts. For purposes of determining the value of an installment of a
Participant's Accounts pursuant to this Section 3.4 (b), (i) each of the
Participant's Phantom Mutual Fund Subaccounts shall have a value equal to the
product of (1) the closing price of a share of such mutual fund on the last
business day of the calendar quarter immediately preceding the Installment
Payment Date (the "Installment Valuation Date") and (2) the number of phantom
shares credited to such Subaccount on the Installment Valuation Date, and (ii)
the Participant's Phantom Stock Subaccounts shall have a value equal to the
product of (1) the average of the closing prices of a Unit on the ten business
days ending on the Installment Valuation Date and (2) the number of phantom
Units credited to such Subaccounts on the Installment Valuation Date.
(C) PRIOR ELECTIONS. Notwithstanding the provisions of Sections
3.4 (a) and (b), any election made by a Participant prior to February 25, 1993
to have payment of all or a portion of his or her Accounts made in installments
shall be irrevocable. In the event that no election is in effect for a given
year after 1983 and prior to 1988, the
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<PAGE> 20
Participant shall be deemed to have elected installment payments for such year
for purposes of the preceding sentence. The provisions of Sections 3.4 (a) and
(b) shall apply with respect to any portion of the Participant's Accounts which
was distributable in the form of a lump sum pursuant to a Participant's election
or Plan provision which became effective prior to February 25, 1993.
3.5 CHANGE OF CONTROL PROVISIONS
(A) BEFORE TERMINATION OF EMPLOYMENT. Notwithstanding a
Participant's election or the provisions of Section 3.4, in the event of a
Participant's Termination of Employment within three years following a Change of
Control (as defined in Section 4.3), then there shall be paid to the Participant
in a cash lump sum, as soon as practicable (and within 30 days) after his or her
Termination of Employment an amount equal to the sum of (i) the value of the
Participant's Accounts, as determined below, plus (ii) the amount of any Company
Matching Contributions that would have been credited to the Accounts under
Section 3.2 for pay periods beginning before the Participant's Termination of
Employment if such Company Matching Contributions have not yet been credited at
the time of valuation of the Participant's Accounts. For purposes of determining
the value of a Participant's Accounts pursuant to this Section 3.5(a), (i) the
Participant's Phantom Mutual Fund Subaccounts shall have a value equal to the
product of (1) the closing price of a share of such mutual fund on the date of
the Participant's Termination of Employment (or, if the Participant's
Termination of Employment does not occur on a business day, on the next
succeeding business day) and (2) the number of phantom shares credited to such
Subaccount on the date of the Participant's Termination of Employment (or the
following business day, if applicable), and (ii) the Participant's Phantom Stock
Subaccounts shall have a value equal to the product of (1) the average of the
closing prices of a Unit on the ten business days ending on the date of the
Participant's Termination of Employment (or, if the Participant's Termination of
Employment does not occur on a business day, on the next succeeding business
day), and (2) the number of phantom Units credited to such
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Subaccounts on the date of the Participant's Termination of Employment (or the
following business day, if applicable).
(B) AFTER TERMINATION OF EMPLOYMENT. Notwithstanding any other
election made by a Participant or the provisions of Section 3.4, in the event a
"Change of Control" (as defined in Section 4.3) occurs after a Participant's
Termination of Employment, payment of the Participant's Accounts shall be made
in a cash lump sum as soon as practicable (and within 30 days) after such Change
of Control. The amount of such lump-sum payment shall equal the value of the
Participant's Accounts, as determined below. For purposes of determining the
value of a Participant's Accounts pursuant to this Section 3.5(b), (i) the
Participant's Phantom Mutual Fund Subaccounts shall have a value equal to the
product of (1) the closing price of a share of such mutual fund on the date of
the Change of Control (or, if the Change of Control does not occur on a business
day, on the next succeeding business day) and (2) the number of phantom shares
credited to such Subaccount on the date of the Change of Control (or the
following business day, if applicable), and (ii) the Participant's Phantom Stock
Subaccounts shall have a value equal to the product of (1) the average of the
closing prices of a Unit on the ten business days ending on the date of the
Change of Control (or, if the Change of Control does not occur on a business
day, on the next succeeding business day), and (2) the number of phantom Units
credited to such Subaccounts on the date of the Change of Control (or the
following business day, if applicable).
3.6 BENEFICIARY
For purposes of this Article III, "Beneficiary" shall mean (i) the
person, persons or entity designated by a Participant to receive Excess Savings
Plan Benefits in the event of the Participant's death, or (ii) if the
Participant has made no such designation, his or her Beneficiary under the
Savings Plan.
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<PAGE> 22
3.7 ANTIDILUTION ADJUSTMENTS
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, rights offer, liquidation, dissolution, merger,
consolidation, spin-off, sale of assets, or other change in or affecting the
corporate structure or capitalization of the Company, the Board of Directors of
the Company shall make appropriate adjustment to the Phantom Stock Subaccounts
of Participants so that the phantom Units in such Subaccounts shall be treated
as if they were actual Units. In the event the Common Stock is converted into
cash or other securities or property, the value of the Units on the date of such
conversion shall be determined by AmSouth Bank NA, and the phantom Units shall
be converted into cash based on such value and credited as phantom shares of the
Benchmark Government Portfolio (or such other Phantom Mutual Fund Subaccount as
may be designated by the Board of Directors).
3.8 PROVISIONS REGARDING SODI EMPLOYEES
SODI Employees (as defined in Section 1.2) shall not be deemed to have
incurred a Termination of Employment by virtue of the initial public offering of
SODI common stock, but shall instead be deemed to have incurred a Termination of
Employment upon the termination of their employment with SODI and its
subsidiaries (as defined for purposes of the SODI savings plan). In no event
shall SODI Employees accrue benefits under Article III of this Plan after June
30, 1993 (unless rehired by the Company), but Accounts established pursuant to
Article III hereof shall continue to be credited with interest as provided in
Section 3.2(b).
ARTICLE IV - VESTING BENEFITS
4.1 ELIGIBILITY
Each employee who has had a Termination of Continuous Employment and
who is a member of the Vesting Group (as defined in Section 4.4 below) (a
"Participant")
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<PAGE> 23
shall be entitled to Vesting Benefits hereunder, regardless of whether such
Participant has received notice that he or she is so entitled, but only if a
Change of Control (as defined in Section 4.3 below) has occurred while he or she
is employed by one of the Employers and is a member of the Vesting Group. All
capitalized terms used in this Article IV and not defined in this Plan shall
have the meanings ascribed thereto in the Retirement Plan.
4.2 AMOUNT AND FORM OF VESTING BENEFIT
Each Participant shall be entitled to a Vesting Benefit, payable in the
form of a cash lump sum, that is equal in amount to the Actuarial Equivalent (as
defined in Section 2.3(d) above) of the excess, if any, of (i) the amount
hypothetically payable to the Participant as a Vested Benefit under the
Retirement Plan if (x) Section 5.01 of the Retirement Plan were hypothetically
amended to provide a Vesting Date based on a period of Vesting Service
equivalent to the actual Vesting Service of the Participant, and (y) Sections
401(a)(17) and 415 of the Code were nonexistent and the provisions of the
Retirement Plan incorporating the limitations contained in Sections 401(a)(17)
and 415 of the Code were inoperative, over (ii) the amount payable as a Vested
Benefit under the Retirement Plan, assuming for purposes of clauses (i) and (ii)
that the Participant commenced receiving benefits under such clause in the form
of a single life annuity on the earliest date on which the Participant could
have commenced receipt of a Vested Benefit under the Retirement Plan (had he or
she been entitled to such Benefit). The grant of Vesting Benefits shall not
increase the Participant's Credited Service under the Retirement Plan. Such cash
lump-sum payment shall be paid as soon as practicable (and within 30 days) after
the Participant's Termination of Continuous Employment.
4.3 DEFINITION OF CHANGE OF CONTROL
A "Change of Control" shall mean:
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<PAGE> 24
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either
(1) the then outstanding shares of common stock of the Company
(the "Outstanding Common Stock") or (2) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Voting Securities"); provided, however, that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (D) any acquisition
by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii); or
(ii) Individuals who, as of December 1, 1995, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors;
provided, however, that any individual becoming a Director
subsequent to such date whose election, or nomination for
election by the Company's shareholders, was approved by a vote
of at least a majority of the Directors then comprising the
Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election
contest with respect to the election or removal of Directors
or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board of
Directors; or
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<PAGE> 25
(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.
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<PAGE> 26
4.4 DEFINITION OF VESTING GROUP
An employee shall be deemed to be a member of the Vesting Group if,
immediately prior to the occurrence of a Change of Control, he or she (1) is a
participant in the Retirement Plan, (2) is employed as an officer by an
Employing Company (as defined in the Retirement Plan) and (3) is not fully
vested under the Retirement Plan.
ARTICLE V - FUNDING
5.1. UNFUNDED PLAN
The Plan shall be unfunded, and the entire cost of the benefits and
administration of the Plan shall be borne by the Company.
ARTICLE VI - MISCELLANEOUS
6.1 EFFECT OF IRS DETERMINATION
If any amounts whose distribution is deferred pursuant to the Plan are
found in a "determination" (within the meaning of Section 1313(a) of the Code)
to have been includible in gross income by a Participant prior to payment of
such amounts under the Plan, such amounts shall be immediately paid to such
Participant notwithstanding the Participant's election or any other provision of
the Plan.
6.2 AMENDMENT
The Company intends to maintain the Plan in force indefinitely, but
necessarily reserves the right by action of its Board of Directors to amend or
discontinue the Plan at any time, provided that (i) no amendment or
discontinuance of the Plan shall diminish in any way payments under this Plan
due thereafter under rights created or grants made before such amendment or
discontinuance and (ii) rights created or grants made before
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<PAGE> 27
such amendment or discontinuation shall continue in force and effect and shall
continue to accrue as though no amendment or discontinuation of this Plan had
occurred.
6.3 EXCESS DISABILITY BENEFITS
The Excess Disability Benefits formerly provided under this Plan are
instead payable under the Supplemental Disability Plan to the full extent that
they formerly would have been payable under this Plan. To the extent that a
benefit is payable pursuant to the Supplemental Disability Plan it shall not be
payable under this Plan, and to the extent that a benefit is payable pursuant to
this Plan it shall not be payable under the Supplemental Disability Plan.
6.4 NON-ALIENATION; TAX WITHHOLDING
No benefit payable under this Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, garnishment,
encumbrance, or charge; provided, however, that taxes may be withheld from
benefit payments to the extent required by any federal, state or local law or
regulation.
6.5 NO RIGHT TO CONTINUED EMPLOYMENT
Participation in the Plan shall not give any employee the right to be
retained in the employ of the Employers.
6.6 DEFINITION OF PARTICIPANT
Any employee who is a "Participant" under any Section of this Plan
shall not be deemed to be a "Participant" under any other Section unless he or
she also satisfies the definition of "Participant" under such other Section. Any
Plan provision to the contrary notwithstanding, an employee shall not be a
"Participant" under any Section of this Plan unless either (i) the employee is a
member of a select group of management or highly compensated employees (as
provided in Section 201(b) of the Employee Retirement Income Security Act of
1974, as amended), or (ii) the benefits under this
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<PAGE> 28
Plan are provided solely by virtue of the limitations of Section 415 of the Code
and the incorporation of those limitations in the Retirement Plan or the Savings
Plan, as the case may be.
6.7 PLAN ADMINISTRATION AND INTERPRETATION
The administration of the Plan and the exclusive power to interpret it
is vested in the Employee Benefits Committee of the Board of Directors of the
Company. The Employee Benefits Committee may delegate any or all of its duties
and responsibilities hereunder to the Administrative Committee of the Retirement
Plan.
6.8 SUBSIDIARIES AND AFFILIATES
Each subsidiary or affiliate of the Company which the Company has
designated as a participating company in the Retirement Plan and/or the Savings
Plan with respect to its employees shall automatically be deemed to have adopted
this Plan; provided however, that if the terms of the Retirement Plan or the
Savings Plan with respect to such subsidiary or affiliate are different from
those applicable to the Company, such difference or differences shall be given
effect in applying this Plan. References herein to the Retirement Plan or the
Savings Plan shall be in regard to such plan as amended from time to time.
6.9 MINORS AND INCOMPETENTS
If a person entitled to benefits under this Plan is a minor or is
physically unable or mentally incompetent to receive such benefits and to
execute a valid release therefor, the Plan may pay such benefits to the guardian
or representative of such person or the individual or institution maintaining
custody of such person (provided that such payment shall be made for and applied
to the benefit of the person entitled thereto), and the release of such
guardian, representative, individual or institution shall be a valid and
complete discharge for payment of such benefit.
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6.10 CHOICE OF LAW
THIS PLAN SHALL BE INTERPRETED PURSUANT TO THE LAWS OF THE STATE OF
ALABAMA, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES.
I IN WITNESS WHEREOF, Sonat Inc. has caused this Plan as amended and
restated hereby to be executed as of January 1, 1997.
SONAT INC.
By:
----------------------------
Ronald L. Kuehn, Jr.
Chairman of the Board,
President and Chief
Executive Officer
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<PAGE> 1
EXHIBIT 10.15
SONAT INC.
DEFERRED COMPENSATION PLAN
PLAN SUMMARY - NOVEMBER 1, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
HOW THE PLAN WORKS
<S> <C> <C>
1. What is Sonat Inc. Deferred Compensation Plan?
An Overview...........................................................1
2. What are the advantages of the Deferred Compensation
Plan?.................................................................2
3. What are the trade-offs if I participate?.............................3
4. How does the Deferred Compensation Plan compare
with the Sonat Savings Plan?..........................................4
5. Does my participation affect my other Sonat benefits?.................4
ELIGIBILITY
6. Who is eligible to participate in the Deferred
Compensation Plan?....................................................5
DEFERRAL ELECTIONS
7. What deferral elections can I make?...................................5
8. When do I make my election to defer?..................................5
9. How much can I defer?.................................................6
10. What are my investment options?.......................................6
11. Can I change how future allocations will be invested, and
move funds among the investment options?..............................7
12. When will I receive my deferral account balance?......................7
13. How will my account be paid out of the Plan?..........................9
14. How do I name my beneficiary?........................................11
</TABLE>
(i)
<PAGE> 2
<TABLE>
<S> <C> <C>
ACCESS TO YOUR MONEY BEFORE THE PAYMENT EVENT
15. Can I get money from my account before the date
I elect for deferral payments to begin?..............................16
TAX CONSIDERATIONS
16. What are some of the more common tax-related questions
that should concern me?..............................................17
ENROLLMENT
17. How do I sign up for the Deferred Compensation Plan?.................18
18. Who can I talk to if I have questions about the Deferred
Compensation Plan or the enrollment package?.........................18
OTHER INFORMATION
19. What information will I receive about my Plan balance?...............19
20. What are the Section 16 consequences of participating
in the Plan?.........................................................19
21. Can the Plan be amended or discontinued?.............................22
EXHIBIT A
Comparison of Non-qualified Deferred Compensation Plan
and Before-Tax (401K) Contributions to Qualified Sonat
Savings Plan.........................................................23
</TABLE>
(ii)
<PAGE> 3
SONAT INC. DEFERRED COMPENSATION PLAN
PLAN SUMMARY
The Sonat Inc. Deferred Compensation Plan ("the Plan") provides you
with a tax-advantaged opportunity to save for retirement and other future income
needs. You are encouraged to review the Plan with your family and your tax and
financial advisors to determine how the Plan can help you meet your personal
financial goals.
The following is a summary of the Plan, in a Question-and-Answer
format. The official provisions of the Plan are in the Plan document, which you
may obtain from the Human Resources Department in Birmingham. If there is any
conflict or inconsistency between this summary or any other written or oral
communication and the Plan document, the official Plan document will always
govern. The Plan is subject to continued compliance with Internal Revenue
Service regulations.
HOW THE PLAN WORKS
1. WHAT IS THE SONAT INC. DEFERRED COMPENSATION PLAN?
- AN OVERVIEW
The Plan is a non-qualified deferred compensation program that allows
you to make pre-tax deferrals of base pay and bonuses, allocate the deferrals to
various investment options, and have your account balance paid to you in the
future.
You will be able to elect, for each year, the amount of base pay and
bonus that you wish to defer. You may defer up to 25% of your base pay and up to
90% of your annual bonus. Your deferrals will accrue earnings as if held in
"phantom" investments in the investment options available under the Sonat
Savings Plan.
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<PAGE> 4
Generally speaking, distribution will be made upon termination of your
employment. You may instead select a specified date on which to receive
payments, which may be before or after your anticipated retirement or
termination date. Payment will be made as a lump sum or in annual installments,
at your election.
2. WHAT ARE THE ADVANTAGES OF THE DEFERRED COMPENSATION PLAN?
A. REDUCED CURRENT INCOME TAXES.
Your current federal taxable income is reduced by the amount you elect
to defer. However, you will be taxed at the ordinary income rates in effect at
the time of distribution of your account. All state income tax laws (except in
Pennsylvania and New Jersey) follow the federal law and exclude the amount you
defer from current taxable income. Please consult with your personal tax advisor
regarding the laws for your particular state.
B. MORE DOLLARS AVAILABLE FOR INVESTMENT.
The initial deferral (investment) into this Plan can be a more
efficient investment than most other outside investments, because you are
investing pre-tax income rather than after-tax income. For example:
<TABLE>
<CAPTION>
==========================
OUTSIDE
INVESTMENT THIS PLAN
==========================================================
<S> <C> <C>
Compensation $1.00 $1.00
----------------------------------------------------------
Current Income Tax @ 36% -.36 -.00
----------------------------------------------------------
Net Funds Invested $ .64 $1.00
==========================================================
</TABLE>
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<PAGE> 5
C. TAX-DEFERRED ACCUMULATION.
Earnings in your Plan account are not subject to federal income tax
until paid to you. As a result, investments in the Plan can generate higher
results than similar investments whose earnings are taxed each year.
D. POSSIBLE FUTURE TAX SAVINGS.
You may achieve additional income tax savings when you receive your
deferral account, if you are in a lower tax bracket at that time.
3. WHAT ARE THE TRADE-OFFS IF I PARTICIPATE?
A. REDUCED CURRENT CASH FLOW.
By deferring your compensation, you reduce your current cash flow.
Therefore, if you require a greater amount of current income, deferral may not
be appropriate for you. However, the cash flow reduction may be significantly
less than the amount deferred, since your deferral is in pre-tax dollars. For
example, if your tax rate is 36%, $10,000 of compensation produces approximately
$6,400 of after-tax income. Therefore, deferring $10,000 reduces your disposable
after-tax income by $6,400, and you also have the equivalent of $10,000 working
for you in your deferral account.
B. THE PROGRAM IS UNFUNDED.
Under current IRS regulations, your deferral account must be an
unsecured general obligation of Sonat Inc. and may not be funded in any way.
Therefore, your right to receive payments under the Plan will be subject to
Sonat Inc.'s ability to pay, and in the event of Sonat's bankruptcy or
insolvency will be the same as any other unsecured general creditor. The Plan
does not create a trust relationship between you, or any other person, and the
Company.
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<PAGE> 6
C. RESTRICTED ACCESS TO YOUR MONEY.
You do not have access to your deferrals and earnings until the date
you specify on your election form, except in the limited circumstances discussed
at Question 15.
D. EMPLOYMENT AND LOCAL TAXES.
Amounts you defer under the Plan are subject to Social Security taxes
(up to the statutory limit), Medicare taxes and local (county and city) taxes
(if applicable). Withholding of these taxes on base pay deferral amounts will be
made from your remaining undeferred base pay. If you defer any of your bonus,
the taxes on your deferral will be withheld from the portion of the bonus that
is not deferred. (This is the reason the Plan does not allow complete deferral
of a bonus payout.) However, under current law, the payments from your accounts
will not be subject to Social Security, Medicare or local taxes at the time of
distribution.
E. POSSIBLE HIGHER TAX RATE.
The benefits of your deferral may be smaller than you would otherwise
expect if, at the time of distribution, you are in a higher tax bracket than
when you deferred.
4. HOW DOES THE DEFERRED COMPENSATION PLAN COMPARE WITH THE SONAT
SAVINGS PLAN?
Please refer to Exhibit A of this Summary.
5. DOES MY PARTICIPATION AFFECT MY OTHER SONAT BENEFITS?
Your participation in the Plan will have no effect on your other Sonat
benefits.
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<PAGE> 7
ELIGIBILITY
6. WHO IS ELIGIBLE TO PARTICIPATE IN THE DEFERRED COMPENSATION PLAN?
To be eligible to participate in the Plan, you must be an officer of
the Company or one of its principal subsidiaries, and must be selected for
participation by the Company's Chief Executive Officer.
DEFERRAL ELECTIONS
7. WHAT DEFERRAL ELECTIONS CAN I MAKE?
Each year you will be able to elect to defer both base pay and bonus.
Each item of compensation (base pay and bonus) for each year will be treated as
a discrete election. With each deferral election, you will select how much you
wish to defer, how you wish it to be paid (lump sum or installments), and when
you wish to receive it in the future. You will also select how the deferred
amounts will be allocated among the investment choices under the Plan. All of
these elections are discussed in more detail below.
8. WHEN DO I MAKE MY ELECTION TO DEFER?
An election to defer base pay must be made before the calendar year in
which the base pay is earned. The election to defer a bonus earned for a given
calendar year must be made by March 31 of that year.
Special rules will apply for an officer who first becomes eligible to
participate in the Plan after January 1, 1997. Such an officer must make
deferral elections for the remainder of the year's base pay, and the bonus
earned for that year, during that year and within 31 days after becoming
eligible.
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<PAGE> 8
9. HOW MUCH CAN I DEFER?
You may defer up to 25% of your annual base pay. Your deferral can be
for 1, 2, 3, 4 or 5% of base pay, or in 5% increments up to 25%. You may also
defer up to 90% of your annual bonus in 10% increments. An election to defer a
bonus will apply only to your annual bonus opportunity, and not to any special
bonus that you may receive.
In certain circumstances, if you elect to defer 90% of an annual bonus,
the remaining 10% may not be enough to satisfy the applicable federal and state
income, Social Security, Medicare and local tax withholding obligations. If this
situation applies to you, the Company will automatically reduce the amount of
bonus deferred (generally to about 85%), and use the remainder to satisfy the
tax withholding obligations.
Your election to defer is irrevocable, so you should carefully assess
the impact of your deferral elections on your personal financial situation.
10. WHAT ARE MY INVESTMENT OPTIONS?
Your deferral accounts will accrue earnings, according to your
election, as if held in the investment options available under the Sonat Savings
Plan. These investment options are listed in the Summary of Investment Options
for the Plan. Your allocations to these investment choices must be in 1%
increments. For more information, see the most recent Summary of Investment
Options.
Please note that your deferrals will not actually be invested in these
funds, but will be valued as if they were. (This bookkeeping treatment is often
called a "phantom" investment.) Your account's value will change as the values
of the relevant funds change, including reinvestments of dividends and earnings.
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<PAGE> 9
11. CAN I CHANGE HOW FUTURE ALLOCATIONS WILL BE INVESTED, AND MOVE FUNDS
AMONG THE INVESTMENT OPTIONS?
You may change the way future allocations are invested by selecting a
new allocation (in 1% increments, with a total of 100% among the investment
choices). You may also transfer your current balance among the investment
options by selecting (in 1% increments, with a total allocation of 100%) the
options in which you want your funds to be invested. Each procedure can be done
by phone on any business day, and will be effective on the day you make the
phone call.
To process these transactions, you should call the individuals in the
Company's Human Resources Department who are listed in the most recent Summary
of Investment Options.
12. WHEN WILL I RECEIVE MY DEFERRAL ACCOUNT BALANCE?
Each time you make a deferral election, you will elect a payment event
upon which to receive the amount deferred (and earnings on that amount) -
termination of employment, or a specified future date. Each year and each
element of compensation (base pay or bonus) will be treated as a separate
election. Special Plan provisions apply in the event of your death, or in the
event of a change of control of the Company.
A. TERMINATION OF EMPLOYMENT
You may select termination of employment as the payment event. This
selection would cover termination due to early or normal retirement, disability,
discharge, or resignation. AN ELECTION TO RECEIVE A DEFERRED AMOUNT (AND
EARNINGS) UPON TERMINATION OF EMPLOYMENT WILL BE IRREVOCABLE.
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<PAGE> 10
B. SPECIFIED DATE
You may instead select a specified date on which to receive the amount
deferred (and earnings). Such a date must be a July 1, must be at least two
years after the deferral election is made, and must be no later than your 70th
birthday.
If you select a payment event of a specified date you may, by making a
subsequent election at least 12 months before the specified date, elect to
postpone the date of payment. The new date must be a July 1, must be at least
two years after the date you first selected, and must be no later than your 70th
birthday. (You may not select termination of employment as your new payment
event.) YOU MAY POSTPONE THE SPECIFIED PAYMENT DATE OF A GIVEN DEFERRAL (AND
EARNINGS) ONLY ONCE. For example, if you elect to have a portion of your 1999
base pay (and earnings) paid on July 1, 2002, you could elect a later payment
date (on or after July 1, 2004) by filing an election before July 1, 2001.
C. DEATH
Upon your death, your entire balance in the Plan will be paid to your
beneficiary in a cash lump sum on the fifteenth day of the calendar quarter
following your death (or the first business day thereafter). For information
about beneficiary designations, see Question 14.
D. CHANGE OF CONTROL
If your employment terminates within three years after a Change of
Control of the Company (as defined in the Plan), your entire balance in the Plan
will be paid to you in a cash lump sum as soon as practicable (and within 30
days) after your termination of employment. Also, if a Change of Control occurs
after termination of your employment, your entire balance in the Plan will be
paid to you in a cash lump sum as soon as practicable (and within 30 days) after
the Change of Control.
-8-
<PAGE> 11
E. COMMITTEE DISCRETION TO DEFER PAYMENT
Under current tax law, if you are an executive whose pay is disclosed
in the Company's proxy statement, and if the "non-performance based" pay you
receive in a year exceeds $1,000,000, the Company will not receive a tax
deduction for the excess non-performance based pay. In general, under the
Company's current compensation programs, the following elements of pay are
"non-performance based" when received: base pay; a portion of annual bonus; base
pay deferred from previous years (and earnings thereon); and a portion of annual
bonuses deferred from previous years (and earnings thereon).
IF THE EXECUTIVE COMPENSATION COMMITTEE DETERMINES THAT YOUR RECEIPT OF
A PAYMENT FROM THE PLAN COULD CAUSE THE COMPANY TO LOSE A TAX DEDUCTION UNDER
THIS LAW, THE COMMITTEE CAN DEFER ALL OR PART OF THE PAYMENT TO ELIMINATE OR
REDUCE LOSS OF THE TAX DEDUCTION. UNDER CURRENT LAW, THIS ISSUE CAN GENERALLY
ARISE ONLY IF YOU RECEIVE A PAYMENT BEFORE TERMINATION OF EMPLOYMENT.
13. HOW WILL MY ACCOUNT BE PAID OUT OF THE PLAN?
When you make a deferral election, you will elect how you wish to
receive the amount deferred (and earnings on that amount). As with the payment
event, each year and each element of compensation (base pay and bonus) will be
treated as a separate election. You may choose, in each case, a lump sum payment
or annual installments.
-9-
<PAGE> 12
A. ANNUAL INSTALLMENTS
You may elect to have payment made to you in 2-15 annual installments.
IF YOU MAKE AN INSTALLMENT ELECTION, THAT ELECTION IS IRREVOCABLE. If you elect
installment payments to begin on a specified future date, the first payment will
be made on the July 1 that you selected (or, if that day is not a business day,
on the next business day). If you elect installment payments to begin upon
termination of employment, the first payment will be made on the fifteenth day
of the following calendar quarter (or if that day is not a business day, on the
next business day). Each subsequent payment will be made on the anniversary of
the preceding payment. Each installment will equal (1) the balance of the amount
deferred (and earnings) being paid out under the installment election at the
time of payment, divided by (2) the number of payments remaining to be paid
(including the current installment). For example, if you elect for a deferral
(and earnings) to be paid in three annual installments beginning July 1, 2005,
the first payment will equal 1/3 of the balance on July 1, 2005; the second
installment will equal 1/2 of the balance on July 1, 2006; and the last
installment will equal the remaining balance on July 1, 2007.
B. LUMP SUM
If you make a lump sum election, payments will be made to you in that
form. If you elect a lump sum, you may later decide, by making an irrevocable
election at least 12 months before the payment event (that is, termination of
employment or a specified date, according to your election), to instead receive
the payment in 2-15 annual installments, as discussed above. Therefore, if you
are not sure whether you want installment payments at the time you make a
deferral election, you may wish to elect a lump sum, and consider making an
installment election later.
-10-
<PAGE> 13
If a lump sum payment is to be made on a specified future date, payment
will be made on the July 1 that you selected (or, if that day is not a business
day, on the next business day). If a lump sum payment is to be made after your
termination of employment, payment will be made on the fifteenth day of the
following calendar quarter (or, if that day is not a business day, on the next
business day).
C. ACCOUNT VALUATION
All investment options (except the Sonat Stock Fund investment) will be
valued at the close of the June 15 (or, if that day is not a business day, the
next business day) before the payment date (if payment is being made on a
specified future date), or on the last business day of the calendar quarter
before the payment date (if payment is being made upon termination of
employment). The Sonat Stock Fund investment will be valued based on the average
of the closing price of the Fund on the 10 business days ending on June 15 (or
next business day) or the last business day of the calendar quarter (as the case
may be). All installment payments will be made on a pro rata basis from your
investments at the time of payment.
14. HOW DO I NAME MY BENEFICIARY?
Upon your death, your beneficiary(ies) will be paid your entire Plan
balance. You may make or change a beneficiary designation at any time, by
filling out a Beneficiary Designation Form and filing it with the Company's
Human Resources Department. You may name one or more primary beneficiaries, as
well as one or more contingent beneficiaries (to receive your Plan balance if
all primary beneficiaries predecease you). If you make no beneficiary
designation, or if all designated beneficiaries predecease you, your Plan
balance will be paid to your estate.
-11-
<PAGE> 14
ACCESS TO YOUR MONEY BEFORE THE PAYMENT EVENT
15. CAN I GET MONEY FROM MY ACCOUNT BEFORE THE DATE I ELECT FOR DEFERRAL
PAYMENTS TO BEGIN?
Access to your Plan balance before the payment event that you select is
very limited. You may withdraw funds from your deferral account only in the
event of an extreme and unforeseen financial hardship.
A. FINANCIAL HARDSHIP DISTRIBUTIONS
In the event of unusual, extraordinary expenses or unforeseen financial
hardship, you may request a distribution of the amount reasonably necessary to
meet your financial need. This definition of hardship is more stringent than the
hardship provision in the Sonat Savings Plan, and does not, for instance,
include college expenses, or costs in connection with a home purchase. It
generally encompasses hardship generated by unforeseen circumstances, such as
unreimbursed medical expenses, family loss of income by layoff and the like. The
Executive Compensation Committee of the Board of Directors may approve or deny
the request in its sole discretion, and distribution is limited to the amount
necessary to relieve the hardship plus your income tax liability on the
distribution. If approved, this distribution is not subject to any penalty
taxes, and is ordinary income for federal and state income tax purposes.
B. LOANS
Loans are not available from your account balance, since the Plan would
lose its favorable tax treatment if loans were permitted.
-16-
<PAGE> 15
TAX CONSIDERATIONS
16. WHAT ARE SOME OF THE MORE COMMON TAX-RELATED QUESTIONS THAT SHOULD
CONCERN ME?
AM I TAXED ON MY DEFERRALS OR EARNINGS CREDITED TO THEM?
Under current tax law, neither your deferrals nor the earnings thereon
are subject to federal income tax before withdrawal from the Plan. All state
income laws (except in Pennsylvania and New Jersey) follow the federal law and
exclude the amount you defer from current taxable income. Under current law,
there will be no income tax liability until you actually receive a payment.
Check with your legal or tax counsel concerning your specific state or local
(city, county) tax laws.
WHAT ABOUT SOCIAL SECURITY, MEDICARE AND LOCAL TAXES?
Deferred amounts are subject to these taxes AT THE TIME OF DEFERRAL.
The eventual payment of your deferral accounts, including earnings, will not be
subject to these taxes under current law. Distributions from the Plan will not
reduce your Social Security benefits after retirement, as they do not represent
wages for services performed in the calendar year of receipt.
HOW WILL PAYMENTS BE REPORTED?
Payments made to you will be reported on Form W-2, whether you are
employed or retired at time of distribution. Payments to beneficiaries made in
the event of your death will be reported on Form 1099.
CAN I ROLL OVER MY DISTRIBUTION TO AN IRA?
No, because this is not a tax-qualified program under the Internal
Revenue Code. When electing a Plan distribution, you should seek professional
tax advice to determine the best course of action in light of your financial
circumstances.
-17-
<PAGE> 16
WILL THE PLAN BENEFITS PAID TO MY BENEFICIARIES BE INCLUDED IN MY GROSS ESTATE
FOR FEDERAL ESTATE TAX PURPOSES?
Yes, the cumulative amounts in your account at the time of death will
be included in your estate. If, however, your spouse is your beneficiary and the
benefit qualifies for the estate tax marital deduction, the amount in your
account may not increase your taxable estate.
You should consult with your legal and financial advisors about
beneficiary designations and the payment of benefits in the event of your death.
HOW WILL MY DISTRIBUTIONS BE TAXED?
Under current law, distributions from your account are taxed as
ordinary income when received, and no special tax advantages or penalties apply.
Federal and state income taxes will be withheld from your payments when they are
made.
ENROLLMENT
17. HOW DO I SIGN UP FOR THE DEFERRED COMPENSATION PLAN?
You will be given enrollment materials a few weeks before a deferral
election is required under the Plan. You should review these materials carefully
with your family and financial advisors, and return all the necessary forms by
the dates described in the materials.
18. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE DEFERRED COMPENSATION
PLAN OR THE ENROLLMENT PACKAGE?
See the most recent Summary of Investment Options for the names and
phone numbers to call if you have questions about the Plan.
-18-
<PAGE> 17
OTHER INFORMATION
19. WHAT INFORMATION WILL I RECEIVE ABOUT MY PLAN BALANCE?
You will receive a quarterly statement that will provide you with the
balance in your account, deferrals and investment earnings for the quarter, and
other information.
20. WHAT ARE THE SECTION 16 CONSEQUENCES OF PARTICIPATING IN THE PLAN?
You need to review this Question and Answer only if you are an
executive officer of Sonat Inc. who is subject to the provisions of Section 16
of the Securities Exchange Act. Section 16(b) requires executive officers to pay
over to the Company any profit realized from the purchase and sale, or sale and
purchase, of Company equity securities within any period of less than six
months. Section 16(a) requires reports of changes in beneficial ownership of
Sonat equity securities to the Securities and Exchange Commission. YOU WILL BE
NOTIFIED IF YOU ARE SUBJECT TO SECTION 16.
The following will describe how transactions in the Plan are treated
for purposes of Sections 16(b) (short swing profit liability) and 16(a)
(reporting). When a transaction is said to be "exempt", it means the transaction
is not a "purchase" or a "sale" under Section 16(b). (As noted below, however,
many exempt transactions still trigger reporting requirements under Section
16(a).)
-19-
<PAGE> 18
A. CONTRIBUTIONS; INVESTMENT OF EARNINGS
Acquisitions of units of the phantom Sonat Stock Fund through deferrals
and reinvestment of earnings under the Plan are exempt under Section 16(b).
B. TRANSFERS AMONG INVESTMENT OPTIONS; IN-SERVICE CASH WITHDRAWALS AND
PAYMENTS; SAVINGS PLAN LOANS
Transfers among investment options under the Plan are called
"discretionary" transactions under the Section 16 rules. The Section 16
consequence of a discretionary transaction in the Plan is affected by the
discretionary transactions in ANY Sonat plan that involves stock or phantom
stock funds - the Sonat Savings Plan, the Savings Plan feature of the
Supplemental Benefit Plan (the "Supplemental Savings Plan"), and the Deferred
Compensation Plan. A discretionary disposition of units of the Sonat Stock Fund
or phantom Sonat Stock Fund in ANY of these plans (such as a transfer into a
mutual fund investment, or the liquidation of stock to acquire loan proceeds or
to fund a cash in-service withdrawal from the Savings Plan) will be exempt
UNLESS you elected to make a discretionary acquisition (such as transfer from a
mutual fund (or phantom mutual fund) into units of the Sonat Stock Fund (or
phantom Sonat Stock Fund)) within the previous 6 months under ANY plan.
Similarly, a discretionary acquisition of units of the Sonat Stock Fund (or
phantom Sonat Stock Fund) under ANY plan (as described above) is exempt, UNLESS
you elected to make a discretionary disposition of units of the Sonat Stock Fund
(or phantom Sonat Stock Fund) under ANY plan within the previous 6 months.
For example, assume the following sequence of transactions, with no
prior discretionary transactions under any plan:
December 1, 1998 -- you transfer 1,000 units out of the Sonat Stock
Fund in the Savings Plan into a mutual fund.
-20-
<PAGE> 19
January 1, 1999 -- you transfer 1,000 units out of the phantom Sonat
Stock Fund in the Supplemental Savings Plan into a phantom mutual fund.
March 1, 1999 -- you acquire 1,000 units of the phantom Sonat Stock
Fund in the Deferred Compensation Plan by transfer from a phantom
mutual fund.
July 1, 1999 -- you take an in-service cash withdrawal from the Savings
Plan which results in the liquidation of 500 units of the Sonat Stock
Fund.
The first two transactions are exempt under Section 16(b), because they
are both dispositions of Sonat stock or phantom stock and there was no
discretionary acquisition under any plan within the preceding six months. The
March 1 transaction is a non-exempt "purchase" under Section 16(b), because it
is a discretionary acquisition that occurs only two months after a discretionary
disposition (the January 1 transfer). The fact that the January and March
transactions occurred in different plans does not change the result. The March 1
purchase can be matched against any sale that occurs inside or outside the plans
within six months before or after March 1 (including a sale resulting from a
cashless option exercise). The July transaction is a discretionary disposition
that occurred within three months of the March 1 discretionary acquisition, so
it is a non-exempt "sale" under Section 16(b). The March purchase and the July
sale will be matched against each other for Section 16(b) short-swing profit
liability purposes.
-21-
<PAGE> 20
C. DISTRIBUTIONS FROM THE PLAN
In general, the liquidation of phantom Sonat Stock Funds units in
connection with a distribution from the Plan is a Section 16(b) "sale", unless
the Executive Compensation Committee of the Company's Board of Directors
specifically approves the related deferral election. (However, such a
liquidation is exempt under Section 16(b) if the distribution results from
termination of employment, if you did not initially elect a lump-sum payment and
subsequently change to annual installments.)
D. REPORTING REQUIREMENTS
Transactions in the Plan that result in a Section 16 "purchase" or
"sale" must be reported on Form 4. All other (exempt) transactions must be
reported on Form 5 (or, if you so elect, on an earlier Form 4). Each Form 4 or
Form 5 report that shows a transaction in phantom Sonat Stock Fund units must
show the total number of shares of phantom Sonat stock represented by the units
credited to your account in the Plan.
21. CAN THE PLAN BE AMENDED OR DISCONTINUED?
The Company's Board of Directors retains the right to amend or
terminate the Plan at any time. However, your accrued benefits at the time of
any amendment, suspension or termination of the Plan cannot be reduced.
-22-
<PAGE> 21
SONAT INC. DEFERRED COMPENSATION PLAN
PLAN SUMMARY
EXHIBIT A
COMPARISON OF NON-QUALIFIED DEFERRED COMPENSATION PLAN AND BEFORE-TAX
(401K) CONTRIBUTIONS TO QUALIFIED SONAT SAVINGS PLAN
<TABLE>
<CAPTION>
================================================================================================================
NON-QUALIFIED
DEFERRED QUALIFIED
COMPENSATION PRINCIPAL CHARACTERISTICS SONAT SAVINGS
PLAN PLAN
================================================================================================================
<S> <C> <C>
Yes Deferral on Pre-Tax Basis Yes(1)
----------------------------------------------------------------------------------------------------------------
Yes FICA/Medicare Withheld on Deferrals Yes
----------------------------------------------------------------------------------------------------------------
Yes Earnings Accumulate Tax Deferred Yes
----------------------------------------------------------------------------------------------------------------
No Actual Funds or Assets Held in Participant Accounts Yes
----------------------------------------------------------------------------------------------------------------
Yes Distributions Subject to Income Taxes Yes
----------------------------------------------------------------------------------------------------------------
Federal Income Tax Statutory Withholding Rate on
28% Lump-Sum Payments 20%(2)
----------------------------------------------------------------------------------------------------------------
No Rollover into an IRA Allowed Yes
----------------------------------------------------------------------------------------------------------------
No 5 or 10 Year Income Tax Averaging Available Yes(3)
----------------------------------------------------------------------------------------------------------------
Yes(4) Hardship Withdrawals Available Yes
----------------------------------------------------------------------------------------------------------------
No Loans Against Accounts Available Yes
----------------------------------------------------------------------------------------------------------------
No 10% Penalty Tax for pre-age 59 1/2 distributions Yes(2)
================================================================================================================
</TABLE>
- --------------
(1) Amount limited by IRS rules.
(2) If not rolled over.
(3) 5 year averaging not available on distributions after 1999;
10 year averaging grandfathered for those born on or before
January 1, 1936.
(4) "Hardship" definition is much more stringent than in the
Savings Plan.
-23-
<PAGE> 1
EXHIBIT 12
SONAT INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS
FROM CONTINUING OPERATIONS TO FIXED CHARGES
TOTAL ENTERPRISE (a)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income before income taxes $(838,232) $ 322,472 $ 379,004 $ 399,280 $ 176,901
Fixed charges (see computation below) 195,215 168,981 162,291 174,634 133,902
Less allowance for interest capitalized (5,123) (7,448) (7,642) (8,072) (7,736)
--------- --------- --------- --------- ---------
Total Earnings Available for Fixed Charges $(648,140) $ 484,005 $ 533,653 $ 565,842 $ 303,067
========= ========= ========= ========= =========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 187,102 $ 160,829 $ 154,769 $ 167,068 $ 126,193
Rentals(b) 8,113 8,152 7,522 7,566 7,709
--------- --------- --------- --------- ---------
$ 195,215 $ 168,981 $ 162,291 $ 174,634 $ 133,902
========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges (3.3)(c) 2.9 3.3 3.2 2.3
========= ========= ========= ========= =========
</TABLE>
- -----------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
unconsolidated affiliates.
(c) Earnings from continuing operations for the year ended December 31, 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 $195.2
million for the year ended December 31, 1998. The coverage deficiency was
$843.4 million for the year.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF SONAT INC.
AS OF MARCH 1, 1999
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ---------
<S> <C> <C>
SONAT INC.: (a)
SNT REALTY INC. (b) Alabama 100%
SONAT ENERGY SERVICES COMPANY Delaware 100%
Sonat West Georgia L.L.C.(c) Delaware 100%
Sonat Intrastate-Alabama Inc. Alabama 100%
Sonat Generating L.L.C.(c) Delaware 100%
Sonat Marketing Company(d) Delaware 100%
Sonat Marketing Company L. P.(e)(f)(g) Delaware 65%
JV Trading Inc. (h) Delaware 100%
Keystone Trading Company Delaware 100%
Vail Trading Company Delaware 100%
Sonat Power Inc. (i) Delaware 100%
Sonat Mid-Georgia L.L.C.(j) Delaware 100%
Pacific Gas Power Inc. Delaware 100%
Sonat Power Marketing Inc.(k) Delaware 100%
Sonat Power Marketing L. P. Delaware 65%
Utilities Service Group L.P. (l) Delaware 100%
</TABLE>
- ----------------------------
Indentations indicate subsidiaries of subsidiaries
<PAGE> 2
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ---------
<S> <C> <C>
SONAT EXPLORATION COMPANY (m) Delaware 100%
Field Gas Gathering Inc. Delaware 100%
Sonat Minerals Inc. Delaware 100%
Sonat Minerals Leasing Inc. Delaware 100%
Sonat Texas Gathering Company Delaware 100%
Sonat Oil Transmission Inc. Delaware 100%
Stateline Gas Gathering Company Delaware 100%
SONAT EXPLORATION GOM INC. Delaware 100%
Sonat Energy Development I Company Delaware 100%
SONAT POWER SYSTEMS INC. Delaware 100%
SONAT SERVICES INC. Alabama l00%
Sonat Services (D. C.) Inc. Delaware 100%
SOUTHERN NATURAL GAS COMPANY(n)(o) Delaware 100%
Sea Robin Pipeline Company(p) Louisiana 100%
Sonat Gathering Company Delaware 100%
Sonat Ventures Inc. (q)(r) Delaware 100%
Sonat NGV Technology Inc. (s) Delaware 100%
South Georgia Natural Gas Company Delaware l00%
Southern Deepwater Pipeline Company
L.L.C. Delaware l00%
Southern LNG Inc. Delaware l00%
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Percent of
Country of Voting
Organization Securities
or, if United Owned by
States, State Immediate
Name of Company of Organization Parent
- --------------- --------------- ---------
<S> <C> <C>
Southern Gas Storage Company (t) Delaware l00%
Southern Offshore Pipeline Company
L.L.C. Delaware 100%
</TABLE>
<TABLE>
<CAPTION>
Notes
- -----
<S> <C>
(a) Sonat Inc. owns 50 percent of Citrus Corp., which owns 100 percent of
the stock of Florida Gas Transmission Company, Florida Intrastate
Pipeline Company, Citrus Trading Corp., Citrus Industrial Sales
Company, Citrus Energy Services, Inc. and Citrus Interstate Pipeline
Company. Houston Natural Gas Company, a wholly owned subsidiary of
Enron Corp., owns the remaining 50 percent of Citrus Corp.
(b) SNT Realty Inc. has a 50-percent interest in Fifth Avenue Realty
Company, an unincorporated joint venture, the remaining 50 percent of
which is owned by AmSouth Bank N.A.
(c) Sonat West Georgia L.L.C. and Sonat Generating L.L.C. each hold general
partnership interest in West Georgia Generating Company L.P., a
Delaware limited partnership.
(d) Sonat Marketing Company is a 65-percent participant and General Partner
in Sonat Marketing Company L. P., a limited partnership; AGL Energy
Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds
a 35-percent limited partnership interest.
(e) Sonat Marketing Company L.P. has a 50-percent interest in Sonat Public
Service Company L.L.C., a limited liability company, the remaining 50
percent of which is owned by PSNC Production Corporation, a wholly
owned subsidiary of Public Service Company of North Carolina, Inc.
(f) Sonat Marketing Company L.P. has a 50-percent interest in Stone &
Webster Sonat Energy Resources L.L.C., a Delaware limited liability
company; the remaining 50-percent interest is held by Stone & Webster
Engineers & Construction, Inc, a wholly owned subsidiary of Stone &
Webster, Inc.
(g) Sonat Marketing Company L.P has a 50-percent interest in Unicom Gas
Services LLC, a limited liability company, the remaining 50 percent of
which is held by Unicom Energy Services, Inc., a wholly owned
subsidiary of Unicom Corporation.
(h) JV Trading Inc. has a 50-percent partnership interest in Seminole Gas
Marketing; the remaining 50-percent partnership interest of which is
held by Suwannee Gas Marketing, Inc., a subsidiary of Lykes Energy,
Inc.
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C>
(i) Sonat Power Inc. is a 50-percent participant in AES/Sonat Power L.L.C.,
a limited liability company, the remaining 50-percent interest of which
is held by AES Gas Power, Inc., a wholly owned subsidiary of The AES
Corporation.
(j) Sonat Mid-Georgia L.L.C. is a 50-percent participant in Mid-Georgia
Cogen L.P., the remaining 50 percent is held jointly by NCP Inc. and
NCP Houston Power Inc., wholly owned subsidiaries of GPU, Inc.
(k) Sonat Power Marketing Inc. is a 65-percent participant and General
Partner in Sonat Power Marketing L.P., a limited partnership; AGL Power
Services, Inc., a wholly owned subsidiary of AGL Resources, Inc., holds
a 35-percent limited partnership interest.
(l) Sonat Energy Services Company has a 64-percent limited partnership
interest and a 1-percent general partnership interest and Sonat Power
Marketing Inc. has a 35-percent limited partnership interest in
Utilities Service Group L.P., a Delaware limited partnership.
(m) Sonat Exploration Company has a 50-percent interest in Black Warrior
Methane Corp. and Black Warrior Transmission Corp., the remaining 50
percent of each is held by Jim Walter Resources, Inc.
(n) Southern Natural Gas Company has a 33.33-percent interest in Destin
Pipeline Company, L.L.C., a limited liability company, the remaining
66.66-percent interest is held equally by BP Amoco Destin Pipeline
Company, a wholly owned subsidiary of BP Amoco Corporation, and Tejas
Destin, LLC, a wholly owned subsidiary of Shell Oil Company.
(o) Southern Natural Gas Company is a 50-percent participant in Etowah LNG
Company, L.L.C., a limited liability company, the remaining 50 percent
is held by AGL Peaking Services, Inc., a wholly owned subsidiary of AGL
Resources, Inc.
(p) Sea Robin Pipeline Company, an unincorporated joint venture organized
under the laws of the State of Louisiana, is a wholly owned subsidiary
of Southern Natural Gas Company through two wholly owned limited
liability companies, Southern Offshore Pipeline Company, L.L.C. and
Southern Deepwater Pipeline Company, L.L.C.
(q) Sonat Ventures Inc. is a 50-percent participant in Monarch CNG, an
Alabama general partnership, the remaining 50-percent interest of which
is held by Midtown NGV, Inc., a wholly owned subsidiary of Energen
Corporation.
(r) Sonat Ventures Inc. is a 50-percent participant in Florida Natural
Fuels, Ltd., a Florida limited partnership, the remaining 50-percent
interest of which is held by Suwannee Gas Marketing, Inc., a wholly
owned subsidiary of Lykes Energy, Inc.
(s) Sonat NGV Technology Inc. is a one-half participant in NGV Southeast
Technology Center, L.L.C., a Georgia limited liability company, the
remaining 50 percent of which is held by Georgia Energy Company, a
subsidiary of AGL Resources, Inc.
(t) Southern Gas Storage Company has a 50-percent interest in Bear Creek
Storage Company, an unincorporated joint venture, the remaining 50
percent of which is owned by Tennessee Storage Company, a wholly owned
subsidiary of Tennessee Gas Pipeline Company, a subsidiary of El Paso
Energy Corporation. Bear Creek Storage Company has a l00-percent
interest in Bear Creek Capital Corporation.
</TABLE>
-4-
<PAGE> 1
EXHIBIT 22
SONAT INC.
P.O. BOX 2563, BIRMINGHAM, ALABAMA 35202 TELEPHONE: (205) 325-3800
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1999
To Our Stockholders:
The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation,
will be held at the Luxury Collection Hotel, 1919 Briar Oaks Lane, Houston,
Texas, at 9:00 a.m., local time, on Thursday, April 22, 1999, for the following
purposes:
1. To elect four Directors as members of the Board of Directors of the
Company, to serve until the 2002 Annual Meeting of Stockholders and
until their respective successors have been duly elected and qualified.
2. To elect an Auditor of the Company for the ensuing year. The Board of
Directors of the Company has recommended Ernst & Young LLP, the present
Auditor, for election as Auditor (Proposal No. l).
3. To transact such other business as may properly be brought before the
meeting.
Only holders of Common Stock of record at the close of business on March 5,
1999, will be entitled to vote at the meeting.
The meeting may be adjourned from time to time without other notice than by
announcement at the meeting or at any adjournment thereof. Any and all business
for which the meeting is hereby noticed may be transacted at any such
adjournment.
By order of the Board of Directors,
/s/ Beverley T. Krannich
BEVERLEY T. KRANNICH
Secretary
Birmingham, Alabama
March 22, 1999
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
PLEASE COMPLETE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED RETURN ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE> 2
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS APRIL 22, 1999
This Proxy Statement is furnished in connection with the solicitation of
proxies by Sonat Inc. (the "Company") on behalf of the Board of Directors of the
Company, to be voted at the Annual Meeting of Stockholders, called to be held on
Thursday, April 22, 1999 at 9:00 a.m. at the Luxury Collection Hotel, 1919 Briar
Oaks Lane, Houston, Texas. Mailing of the Proxy Statement and the accompanying
proxy card to the stockholders is expected to commence on or about March 23,
1999.
VOTING SECURITIES
As of March 11, 1999, the Company had outstanding 110,047,818 shares of
Common Stock, par value $1.00 per share, which are its only voting securities.
Holders of Common Stock are entitled to one vote for each share held. The Board
of Directors has fixed March 5, 1999, as the record date for the determination
of stockholders entitled to notice of, and to vote at, the Annual Meeting.
THE PROXY
If a proxy is executed properly by a stockholder and is not revoked, it
will be voted at the Annual Meeting in the manner specified on the proxy. If no
manner is specified, it will be voted "FOR" the election of the four nominees
for Director and "FOR" Proposal No. 1. The submission of an executed proxy will
not affect a stockholder's right to attend, and to vote in person at, the Annual
Meeting. A stockholder who executes a proxy may revoke it at any time before it
is voted by filing a written revocation with the Secretary of the Company,
executing a proxy bearing a later date or attending and voting in person at the
Annual Meeting.
THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE
AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE.
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation provides for the
classification of the Board of Directors into three classes (Class I, Class II
and Class III). Four Class I Directors are to be elected at the Annual Meeting
of Stockholders to serve for a three-year term and until the election and
qualification of their respective successors in office.
On January 30, 1998, pursuant to the terms of an Agreement and Plan of
Merger dated as of November 22, 1997 (the "Zilkha Merger Agreement") between the
Company and Zilkha Energy Company, an oil and gas exploration, development and
production company ("Zilkha Energy"), a wholly-owned subsidiary of the Company
merged with Zilkha Energy. Pursuant to the terms of the Zilkha Merger Agreement,
on December 5, 1997, the Board of Directors appointed Selim K. Zilkha as a Class
III Director and Michael S. Zilkha as a Class I Director. Such appointments were
effective immediately following the effective time of the merger on January 30,
1998. The Zilkha Merger Agreement provides that as long as Michael S. Zilkha,
Selim K. Zilkha and their respective affiliates own at least 8% of the Company's
Common Stock, the Board of Directors will nominate and support the reelection of
the Zilkhas to the Board following the expiration of their respective terms. If
such stock ownership drops below 8% of the Company's Common Stock, the Zilkha
Merger Agreement provides that the Zilkhas will promptly tender their
resignations as Directors.
On March 13, 1999, the Company and El Paso Energy Corporation ("El Paso")
entered into an agreement and plan of merger (the "El Paso Merger Agreement")
pursuant to which, among other things, the Company and El Paso will be merged
(the "El Paso Merger"). Pursuant to the terms of the El Paso Merger Agreement
(and assuming that the Company stockholders and the El Paso stockholders approve
the El Paso Merger Agreement and the El Paso Merger and that certain other
conditions are met), the Company shall be merged with and into El Paso, with El
Paso continuing as the surviving corporation. If the El Paso Merger is
consummated, the Board of Directors of the combined company shall consist of
fifteen members, nine of whom shall be designated by El Paso and six of whom
shall be designated by the Company.
<PAGE> 3
The four nominees for election as Class I Directors are Ronald L. Kuehn,
Jr., Robert J. Lanigan, Charles Marshall and Michael S. Zilkha. Each of the
nominees has been previously elected as a Director by the stockholders, except
for Mr. Zilkha (who was appointed to the Board of Directors in connection with
the Zilkha Energy merger, as discussed above). In the event that any of the
nominees becomes unavailable for any reason, which is not anticipated, the Board
of Directors in its discretion may, unless it has taken appropriate action to
provide for a lesser number of Directors, designate a substitute nominee, in
which event, pursuant to the accompanying proxy, votes will be cast for such
substitute nominee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RONALD L. KUEHN, JR., ROBERT
J. LANIGAN, CHARLES MARSHALL AND MICHAEL S. ZILKHA AS CLASS I DIRECTORS.
NOMINEES FOR DIRECTOR -- CLASS I -- TERMS TO EXPIRE 2002
<TABLE>
<S> <C>
[Ronald L. Kuehn Jr. RONALD L. KUEHN, JR., age 63, is Chairman of the Board,
Picture] President and Chief Executive Officer of the Company. He has
served as a Director of the Company since 1981. Mr. Kuehn is
also a Director of AmSouth Bancorporation, Praxair, Inc.,
Protective Life Corporation, The Dun & Bradstreet
Corporation, Transocean Offshore Inc. and Union Carbide
Corporation, and a member of the Board of Trustees of
Tuskegee University and Southern Research Institute. During
the past five years, Mr. Kuehn has served as an executive
officer of the Company.
- --------------------------------------------------------------------------------------------
ROBERT J. LANIGAN, age 70, is Chairman Emeritus of the Board
[Robert J. Lanigan Picture] of Directors of Owens-Illinois, Inc., the principal business
of which is the manufacture and sale of packaging products.
He has served as a Director of the Company since 1983. Mr.
Lanigan is also a Director of Cognizant Corporation,
Daimler-Chrysler Corporation, The Dun & Bradstreet
Corporation and Transocean Offshore Inc. During the past
five years prior to his appointment to his current position,
Mr. Lanigan served as an executive officer of
Owens-Illinois, Inc.
- --------------------------------------------------------------------------------------------
CHARLES MARSHALL, age 69, is the former Vice Chairman of the
[Charles Marshall Picture] Board of American Telephone and Telegraph Company. He has
served as a Director of the Company since 1982. Mr. Marshall
is also a Director of Ceridian Corporation, GATX
Corporation, Hartmarx Corporation and Sundstrand
Corporation. Prior to his retirement, Mr. Marshall served as
an executive officer of American Telephone and Telegraph
Company.
- --------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
MICHAEL S. ZILKHA, age 44, is the former Executive Vice
[Michael S. Zilkha Picture] President of Zilkha Energy. He served as an executive
officer of Zilkha Energy from July 1986 to January 1998. Mr.
Zilkha was an editor at Atlantic Monthly Press from 1985 to
1986, and from 1978 to 1985, he was President of ZE Records,
an independent record production company in New York.
- --------------------------------------------------------------------------------------------
</TABLE>
CONTINUING DIRECTORS -- CLASS II -- TERMS TO EXPIRE 2000
<TABLE>
<S> <C>
JEROME J. RICHARDSON, age 62, is Owner/Founder of the NFL
[Jerome J. Richardson Carolina Panthers. He has served as a Director of the
Picture] Company since 1991. Mr. Richardson is also Chairman of the
NFL Stadium Committee, a Director of The NCAA Foundation and
a Trustee of Wofford College. During the past five years
prior to his retirement in May 1995, Mr. Richardson served
as an executive officer of Flagstar Companies, Inc. and
Flagstar Corporation.
- --------------------------------------------------------------------------------------------
ADRIAN M. TOCKLIN, age 47, is President and Chief Executive
[Adrian M. Tocklin Picture] Officer of Tocklin & Associates, Inc., an insurance
management and consulting firm. She has served as a Director
of the Company since 1994. Ms. Tocklin is also a Director of
CNA Surety Corp. and First Insurance Company of Hawaii, and
a Trustee of George Washington University. During the past
five years prior to her retirement in April 1998, Ms.
Tocklin served as an executive officer of CNA Insurance
Companies and The Continental Corporation.
- --------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
JAMES B. WILLIAMS, age 66, is Chairman of the Executive
[James B. Williams Picture] Committee of the Board of Directors of SunTrust Banks, Inc.
He has served as a Director of the Company since 1987. Mr.
Williams is also a Director of The Coca-Cola Company,
Genuine Parts Company, Georgia-Pacific Corporation, Rollins,
Inc. and RPC, Inc. During the past five years prior to his
retirement in March 1998, Mr. Williams served as Chairman of
the Board and Chief Executive Officer of SunTrust Banks,
Inc.
- --------------------------------------------------------------------------------------------
JOE B. WYATT, age 63, is Chancellor, Chief Executive Officer
[Joe B. Wyatt Picture] and Trustee of Vanderbilt University, a position he has held
during the past five years. He has served as a Director of
the Company since 1984. Chancellor Wyatt is also a Director
of Advanced Network & Services, Inc., Ingram Micro, Inc.,
Reynolds Metals Company, The Aerostructures Corporation and
University Research Association.
- --------------------------------------------------------------------------------------------
</TABLE>
CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 2001
<TABLE>
<S> <C>
MAX L. LUKENS, age 50, is Chairman, President and Chief
[Max L. Lukens Picture] Executive Officer of Baker Hughes Incorporated, the
principal business of which is the provision of products and
services to the petroleum and continuous process industries.
He has served as a Director of the Company since 1995. Mr.
Lukens is also a Director of Baker Hughes Incorporated and
Transocean Offshore Inc. During the past five years, Mr.
Lukens has served as an executive officer of Baker Hughes
Incorporated.
- --------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
BENJAMIN F. PAYTON, age 66, is President of Tuskegee
[Benjamin F. Payton Picture] University, a position he has held during the past five
years. He has served as a Director of the Company since
1992. Dr. Payton is also a Director of AmSouth
Bancorporation, Liberty Corporation, Morrison's Health Care,
Inc., Praxair, Inc. and Ruby Tuesday, Inc.
- --------------------------------------------------------------------------------------------
JOHN J. PHELAN, JR., age 67, is the former Chairman of the
[John J. Phelan, Jr. Board and Chief Executive Officer of the New York Stock
Picture] Exchange. From 1991 to 1993, he was President of the
International Federation of Stock Exchanges. Mr. Phelan has
served as a Director of the Company since 1990. He is also a
Director of Eastman Kodak Company, Merrill Lynch & Co., Inc.
and Metropolitan Life Insurance Company and a Senior Advisor
to The Boston Consulting Group.
- --------------------------------------------------------------------------------------------
SELIM K. ZILKHA, age 71, is the former Chief Executive
[Slim K. Zilkha Picture] Officer of Zilkha Energy. He served as the sole Director and
Chief Executive Officer of Zilkha Energy from March 1984
until January 1998. Prior to such time, Mr. Zilkha was a
banker with Zilkha & Sons in the United States and Europe
from 1947 to 1955 and in London from 1955 to 1960. In 1960,
he founded Mothercare, PLC, a retail chain catering to
mothers-to-be, babies and small children in Great Britain,
Europe and the United States. Mr. Zilkha sold his interest
in Mothercare, PLC in January 1982.
</TABLE>
Selim K. Zilkha is the father of Michael S. Zilkha. There are no other
family relationships between Directors and executive officers of the Company.
William O. Bourke, who is currently a Class I Director, will retire from
the Board of Directors on April 22, 1999, in accordance with the Board's
retirement policy.
BOARD MEETINGS AND COMMITTEES
During 1998 the Board of Directors held eight regular and special meetings.
The Board has established Committees that assist the Board in the discharge of
its responsibilities. Each Director attended at least 75% of the meetings of the
Board and the Committees on which the Director served.
Audit Committee. The Audit Committee reviews and reports to the Board the
scope and results of audits by the Auditor and the Company's internal auditing
staff, and reviews with the Auditor the
5
<PAGE> 7
adequacy of the Company's system of internal controls. It reviews transactions
between the Company and its Directors and officers and Company policies with
respect thereto, and compliance with the Company's business ethics and conflict
of interest policies. The Committee also recommends a firm of certified public
accountants to serve as Auditor of the Company (subject to nomination by the
Board and election by the stockholders), authorizes all audit and other
professional services rendered by the Auditor and periodically reviews the
independence of the Auditor.
Membership on the Audit Committee is restricted to those Directors who are
not active or retired officers or employees of the Company. The Company's policy
on Audit Committee membership complies with the Audit Committee Policy Statement
adopted by the New York Stock Exchange. The current members of the Committee are
John J. Phelan, Jr., Chairman, Charles Marshall, Jerome J. Richardson, Adrian M.
Tocklin and Joe B. Wyatt. The Committee met three times during 1998.
Committee on Directors. The Committee on Directors makes recommendations
to the Board with respect to the size and composition of the Board, Board
retirement and tenure policies, and Director compensation. It also reviews the
qualifications of potential candidates for the Board of Directors, evaluates the
performance of incumbent Directors and recommends to the Board nominees to be
elected at the Annual Meeting of Stockholders. The current members of the
Committee are Charles Marshall, Chairman, William O. Bourke, Benjamin F. Payton,
John J. Phelan, Jr., Jerome J. Richardson, James B. Williams and Selim K.
Zilkha. The Committee met once during 1998.
The Committee on Directors will consider nominees for Director recommended
by stockholders. Recommendations should be submitted in writing, accompanied by
a resume of the nominee's qualifications and business experience and a signed
statement of the proposed candidate consenting to be named as a candidate and,
if nominated and elected, to serve as a Director, and addressed to the offices
of the Company to the attention of Beverley T. Krannich, Secretary.
Employee Benefits Committee. The Employee Benefits Committee periodically
reviews the status of the Company's employee benefit programs and the
performance of the managers of the funded programs. To assist in its review, the
Committee meets periodically with the chairman of the administrative committee
of the funded plans. The current members of the Committee are Joe B. Wyatt,
Chairman, Robert J. Lanigan, Benjamin F. Payton, Adrian M. Tocklin, James B.
Williams and Michael S. Zilkha. The Committee met twice during 1998.
Executive Compensation Committee. The Executive Compensation Committee
reviews and makes recommendations to the Board with respect to the Company's
overall executive compensation policy. The Committee also reviews and approves
the compensation of the officers of the Company and makes awards under the
Executive Award Plan, Performance Award Plan and Cash Bonus Plan. Membership on
the Executive Compensation Committee is restricted to Directors who are not
active or retired officers or employees of the Company. The current members of
the Committee are Robert J. Lanigan, Chairman, William O. Bourke, Max L. Lukens,
James B. Williams and Joe B. Wyatt. The Committee met seven times during 1998.
Finance Committee. The Finance Committee approves long-term financial
policies and annual financial plans, significant capital expenditures, insurance
programs and investment policies of the Company. It also makes recommendations
to the Board concerning dividend policy, the issuance and terms of debt and
equity securities and the establishment of bank lines of credit. The current
members of the Committee are James B. Williams, Chairman, Robert J. Lanigan, Max
L. Lukens, John J. Phelan, Jr., Jerome J. Richardson and Selim K. Zilkha. The
Committee met three times during 1998.
Public Affairs Committee. The Public Affairs Committee reviews the
Company's policies and practices which address issues of social and public
concern, such as government affairs, the environment, energy conservation and
charitable contributions. It also reviews stockholder relations and considers
stockholder proposals and matters of corporate governance. The current members
6
<PAGE> 8
of the Committee are William O. Bourke, Chairman, Charles Marshall, Benjamin F.
Payton, John J. Phelan, Jr., Adrian M. Tocklin and Michael S. Zilkha. The
Committee met twice during 1998.
Strategic Planning Committee. The Strategic Planning Committee assists in
the formulation of the business strategies of the Company and its subsidiaries
and reviews the Company's management succession plan. The current members of the
Committee are Max L. Lukens, Chairman, William O. Bourke, Robert J. Lanigan,
Charles Marshall, Benjamin F. Payton, John J. Phelan, Jr., Jerome J. Richardson,
Adrian M. Tocklin, James B. Williams, Joe B. Wyatt, Michael S. Zilkha and Selim
K. Zilkha. The Committee met six times during 1998.
COMPENSATION OF OUTSIDE DIRECTORS
FEES AND RETAINERS. Each non-employee Director of the Company receives a
quarterly retainer of $9,000 ($10,250 for Committee Chairmen) and a fee of
$1,250 for each Board meeting and each Board Committee meeting attended, plus
incurred expenses where appropriate.
Pursuant to the Director's Fees Deferral Plan, a Director may elect to
defer receipt of some or all of the Director's fees and retainer. All amounts
deferred are credited to the Director's account under the Plan. The Director may
invest the Plan balance in "phantom" investments in the Company's common stock
and twelve mutual funds. The Director may choose to have the account balance
distributed in a lump sum or in annual installments, commencing upon termination
of service as a Director.
RETIREMENT PLAN FOR DIRECTORS. Directors of the Company who during some
portion of their service as Directors were not officers of the Company or its
subsidiaries are participants in the Retirement Plan for Directors. An eligible
Director who ceases being a Director after reaching age 70, completing five
years of service as a non-employee Director or as a result of death or permanent
disability, will receive a retirement benefit from the Plan. The Director may
choose to have such benefit paid as either (1) a cash lump sum in an amount
equal to the value of a series of quarterly payments equal to the retainer (as
of the date of the Director's retirement) for the period the Director served as
a non-employee Director of the Company or (2) in a series of quarterly payments
with a value equal to such lump-sum payment.
RESTRICTED STOCK PLAN FOR DIRECTORS. Each non-employee Director of the
Company is a participant in the Restricted Stock Plan for Directors. Each such
Director who was a member of the Board of Directors on April 1, 1998 (the
effective date of the Plan, as amended and restated on February 26, 1998) was
granted 2,000 shares of restricted stock on such date. The Plan provides that
400 shares granted to each Director will vest on April 1 of each of the years
1999 through 2003.
Each person who first becomes a non-employee Director after April 1, 1998
and before April 1, 2003 will be granted 33.33 shares of restricted stock for
each calendar month or fraction thereof from the Director's election as a
non-employee Director to the following March 31 (rounded to the nearest whole
share), plus 400 shares for each subsequent Plan Year (April 1 -- March 31)
until April 1, 2003. The product of 33.33 shares times the number of full and
partial calendar months from the Director's election as a non-employee Director
to the following March 31 (rounded to the nearest whole share) will vest on the
April 1 following such election, and 400 shares will vest on each April 1
thereafter through April 1, 2003.
All shares of restricted stock will vest immediately upon the Director's
death or disability. At the time the restricted stock vests, the Director will
receive a cash tax-offset "supplemental payment" in an amount equal to the
amount necessary to pay the federal income tax payable with respect to both the
vesting of restricted stock and receipt of the supplemental payment, assuming
the Director is taxed at the maximum effective federal income tax rate. If a
Director leaves the Board of Directors before all of the Director's shares of
restricted stock have vested, the unvested shares will be forfeited.
7
<PAGE> 9
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount and nature of beneficial ownership of
shares of the Common Stock of the Company beneficially owned by the Directors
and certain executive officers of the Company, and by all present Directors and
executive officers of the Company as a group, as of January 31, 1999. For
information regarding certain entities known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock as of December 31, 1998, see
"Institutional Ownership of Common Stock" at page 22.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) CLASS
------------------------ --------------------------- ----------
<S> <C> <C>
William O. Bourke......................... 7,000 *
John B. Holmes, Jr........................ 10,450(2) *
Ronald L. Kuehn, Jr....................... 846,922(2 and 3) *
Robert J. Lanigan......................... 8,040(4) *
Max L. Lukens............................. 4,107 *
Charles Marshall.......................... 16,958 *
James E. Moylan, Jr....................... 131,236(2 and 5) *
Benjamin F. Payton........................ 4,805 *
John J. Phelan, Jr........................ 4,660 *
Jerome J. Richardson...................... 7,464 *
James A. Rubright......................... 113,289(2) *
William A. Smith.......................... 235,659(2) *
Adrian M. Tocklin......................... 5,390(6) *
James B. Williams......................... 25,361 *
Joe B. Wyatt.............................. 5,200 *
Michael S. Zilkha......................... 8,994,664(7) 8.2%
909 Fannin
Two Houston Center, Suite 2910
Houston, TX 77010
Selim K. Zilkha........................... 14,118,916(8) 12.8%
750 Lausanne Road
Los Angeles, CA 90077
All present Directors and Executive
Officers as a Group (21 persons)........ 24,831,831(9) 22.6%
</TABLE>
- ---------------
* Less than 1%.
NOTE 1: Each Director and executive officer has sole voting power and sole
investment power with respect to all shares beneficially owned by such
individual, unless otherwise indicated.
In connection with the execution of the El Paso Merger Agreement, on March
13, 1999, El Paso entered into separate voting agreements with (1) Michael S.
Zilkha, Selim K. Zilkha and an affiliated entity, and (2) Ronald L. Kuehn, Jr.,
pursuant to which, among other things, such stockholders of the Company agreed
to vote their shares of the Company's Common Stock in favor of the El Paso
Merger Agreement and the transactions contemplated thereby.
The number of shares shown includes 2,000 shares of restricted stock for
each of William O. Bourke, Robert J. Lanigan, Max L. Lukens, Charles Marshall,
Benjamin F. Payton, John J. Phelan, Jr., Jerome J. Richardson, Adrian M.
Tocklin, James B. Williams, Joe B. Wyatt, Michael S. Zilkha and Selim K. Zilkha,
granted under the Company's Restricted Stock Plan for Directors, which shares
had not vested as of January 31, 1999. Such persons have the power to vote and
receive dividends on such shares, but do not have the power to dispose of, or to
direct the disposition of, such shares until such shares are vested pursuant to
the terms of such plan.
The number of shares shown includes "phantom" shares of the Company's
Common Stock held by the following individuals: (a) Charles Marshall, 7,358
phantom shares; Adrian M. Tocklin, 757 phantom shares; and James B. Williams,
8,161 phantom shares (all held under the Company's Director's Fees Deferral
Plan); and (b) John B. Holmes, Jr., 186 phantom shares; Ronald L.
8
<PAGE> 10
Kuehn, Jr., 43,021 phantom shares; James E. Moylan, Jr., 462 phantom shares;
James A. Rubright, 842 phantom shares; and William A. Smith, 965 phantom shares
(all held under the Company's Supplemental Benefit Plan and Deferred
Compensation Plan).
NOTE 2: The number of shares shown for Messrs. Kuehn, Moylan, Rubright and
Smith includes 118,400 shares, 7,900 shares, 7,900 shares and 7,700 shares,
respectively, of restricted stock granted under the Company's Executive Award
Plan, which shares had not vested as of January 31, 1999. Such persons have the
right to vote and receive dividends on such shares, but do not have the power to
dispose of, or to direct the disposition of, such shares until such shares are
vested pursuant to the terms of such plan. The number of shares shown for
Messrs. Holmes, Kuehn, Moylan, Rubright and Smith also includes (a) 264 shares,
52,127 shares, 11,858 shares, 556 shares and 17,664 shares, respectively, held
by the Trustee under the Company's Savings Plan as of January 31, 1999; and (b)
10,000 shares, 616,200 shares, 105,000 shares, 98,500 shares and 192,400 shares,
respectively, covered by options under the Company's Executive Award Plan which
were exercisable within sixty days after January 31, 1999.
NOTE 3: The number of shares shown for Mr. Kuehn includes 10,500 shares
owned by his wife, 20 shares owned by his children, and 2,000 shares held in
trust for his children, of which shares he disclaims any beneficial ownership.
NOTE 4: The number of shares shown for Mr. Lanigan includes 4,240 shares
held in a family limited partnership. Mr. Lanigan is the sole shareholder of the
corporate general partner of the partnership, and he and his wife own all of the
limited partnership interests of the partnership.
NOTE 5: The number of shares shown for Mr. Moylan includes 1,237 shares
owned by his wife, of which shares he disclaims any beneficial ownership.
NOTE 6: The number of shares shown for Ms. Tocklin includes 100 shares
owned by her husband, of which shares she disclaims any beneficial ownership.
NOTE 7: The number of shares shown for Michael S. Zilkha includes 180,000
shares held in a family limited partnership. Mr. Zilkha and his wife each own a
50% interest in the limited liability company that is the general partner of the
partnership, and Mr. Zilkha owns all of the limited partnership interest of the
partnership.
NOTE 8: The number of shares shown for Selim K. Zilkha includes 14,116,816
shares held in the Selim K. Zilkha Trust (of which Mr. Zilkha is settlor,
trustee and beneficiary).
NOTE 9: The number of shares shown includes 168,100 shares of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1999; 118,687 shares held by the Trustee under the
Company's Savings Plan as of January 31, 1999; 1,226,460 shares covered by
options under the Company's Executive Award Plan which were exercisable within
sixty days after January 31, 1999; 24,000 shares of restricted stock granted
under the Company's Restricted Stock Plan for Directors, which shares had not
vested as of January 31, 1999; and 64,185 phantom shares of the Company's Common
Stock held under the Company's Director's Fees Deferral Plan, Supplemental
Benefit Plan and Deferred Compensation Plan as of January 31, 1999.
COMPENSATION OF EXECUTIVE OFFICERS
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Executive Compensation Committee of the Board of Directors of the
Company, which is composed solely of non-employee Directors, administers the
Company's executive compensation program. The Committee's primary responsibility
is to ensure that the executive compensation program furthers the interests of
the Company and its stockholders.
The Company's executive compensation program has three principal
objectives: (1) to attract and retain a highly qualified and motivated
management team; (2) to appropriately reward individual
9
<PAGE> 11
executives for their contributions to the attainment of the Company's key
strategic goals; and (3) to link the interests of executives and stockholders
through stock-based plans and performance measures.
The Committee meets with outside consultants at least annually to evaluate
the Company's performance against the performance of a peer group of companies
and to review and compare the level of compensation paid or awarded to key
executives to the compensation practices of the peer group. The peer group used
for determining 1998 compensation for corporate executives consisted of 12
publicly held companies in the energy business (the "Corporate Peer Group"). In
comparing the level of the Company's compensation to that of the companies in
the Corporate Peer Group, the Committee reviews an analysis which "size-adjusts"
the compensation paid by a company to take into account the relative size of the
company as measured by its revenues. The recommended size-adjustment is computed
by an independent compensation consulting firm. The Committee also reviews and
may give greater weight to compensation survey data specific to a particular
business segment when considering the compensation of executive officers whose
job is related primarily to a single business segment.
The key components of the Company's executive compensation program are base
salary, annual cash bonus incentives, and long-term stock incentives. The
Committee's policies with respect to each component of the program, including
the bases for the compensation of Mr. Kuehn, Chairman of the Board, President
and Chief Executive Officer of the Company, are described below. The Committee
consults with Mr. Kuehn in reviewing the individual performance and compensation
of key executives of the Company (other than Mr. Kuehn). The Committee reviews
Mr. Kuehn's performance and compensation in executive session at least annually.
BASE SALARIES. Base salaries are initially established by an evaluation of
the executive's position, responsibilities and experience and a review of salary
surveys. Each year the Committee reviews the base salaries of key executive
officers of the Company and its subsidiaries and determines whether salaries
should be adjusted, based primarily on the executive's individual performance
and experience and salary survey information. In general, the Committee's
objective is to maintain overall executive salaries at the median of the
salaries for comparable executives in the Corporate Peer Group or other relevant
peer group. Executive salaries for 1998 were slightly below the median level
overall, although some executives were below and some above the median. Mr.
Kuehn has been in his current position for approximately 14 1/2 years, and has
significantly longer tenure than the average tenure of the chief executive
officers in the Corporate Peer Group. His current salary (which was increased
9.0% effective October 1) is 2.0% above the median of the Corporate Peer Group.
ANNUAL CASH BONUS INCENTIVES. Annual cash bonus incentive opportunities
are awarded each year. The amount of an executive's bonus opportunity (which is
expressed as a percentage of base salary) is dependent primarily upon such
individual's position and responsibilities and the bonus opportunities provided
to comparable positions within the Corporate Peer Group or other relevant peer
group. At the beginning of each year, the Committee reviews and approves annual
performance goals. Shortly after the end of the year, the Committee determines
the appropriate bonus payout levels based on the degree to which these goals
have been achieved.
The design of the annual incentive program takes into account the fact that
the Company's financial results can be significantly affected by factors that
are beyond the control of the Company and its management, such as oil and
natural gas prices. Therefore, when compared to the programs of many other
employers, the Company's annual incentive program generally provides a lower
level of payout when the Company significantly exceeds the established financial
goals, and a higher level of payout when the Company's financial goals are only
partially achieved.
The payout of an executive's 1998 bonus opportunity was based on the level
of achievement of certain corporate and subsidiary financial goals, corporate
and subsidiary business goals, and individual goals, as described below. The
goals for each executive's bonus opportunity were weighted as follows: financial
goals -- 50%; business goals -- 35%; and individual goals -- 15%. The
10
<PAGE> 12
Committee also has the discretion to make additional cash bonus awards to
recognize exceptional individual performance.
The corporate financial goals included in the 1998 bonus opportunities were
the Company's 1998 earnings per share ("EPS") as compared to EPS targets
established by the Committee, the Company's annual cash flow return on assets as
compared to the mean of the cash flow return of a group of energy companies
whose aggregate asset mix approximates that of the Company (the "Financial Peer
Group"), and the Company's annual total stockholder return ("TSR") as compared
to the mean of the TSR of the Financial Peer Group. For subsidiary officers,
subsidiary financial goals included subsidiary earnings before corporate charges
("EBC") as compared to EBC targets established by the Committee, and subsidiary
annual cash flow return on assets as compared to the mean of the cash flow
return of a subsidiary peer group. Each goal had a minimum level of achievement
that was required for any payout to be made.
The corporate and subsidiary business goals included in the 1998 bonus
opportunities included operating, marketing and strategic goals relating to each
major business segment, and goals relating to safety and the environment, human
resources, and corporate citizenship. When appropriate, an executive's goals
focused on the company for which he was primarily employed. Achievement of many
of the goals was determined by quantitative or objective measures, while other
goals were subjective in nature.
Each executive's 1998 bonus opportunity included individual performance.
Mr. Kuehn's individual performance was based primarily on the Committee's
assessment of his leadership for the year.
In January 1999, the Committee reviewed in detail the extent to which the
1998 performance goals had been achieved. The Company's EPS and TSR were below
the minimum payout levels, while cash flow return on assets was above the mean
for the Financial Peer Group and resulted in a payout percentage of 123% of the
bonus opportunity for that goal. The level of achievement of subsidiary
financial goals varied among the business segments. The Sonat Pipeline Group had
payout percentages of 45% of the bonus opportunity for its EBC goal and 100% of
the bonus opportunity for its cash flow return on assets goal. Sonat Exploration
Company had earnings below the minimum payout level for its EBC goal, and a
payout percentage of 135% of the bonus opportunity for its cash flow return on
assets goal.
The level of achievement of corporate and subsidiary business goals varied
considerably among the Company's business segments. The payout percentage for
these goals ranged from 47% to 69%.
Including individual performance, the total bonus payout percentages under
the 1998 annual incentive program for Company and subsidiary officers ranged
from 48% to 87%. Mr. Kuehn's total bonus payout percentage for 1998 was 48% of
his bonus opportunity, compared to 70% of his bonus opportunity for 1997 and
108% of his bonus opportunity for 1996.
LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of
the Company's executive compensation program is designed to align executive and
stockholder interests by rewarding executives for the attainment of stock price
appreciation and total stockholder returns.
As a general rule, the Committee administers the long-term stock incentive
program through annual grants of stock options and restricted stock to certain
executive officers of the Company and its major operating subsidiaries. For
purposes of determining the value of long-term incentive compensation, an
independent compensation consulting firm values stock options using a modified
Black-Scholes option pricing model. Similarly, the consulting firm values
restricted share grants based on the present value of the shares on the date of
grant (taking into account the vesting schedules of the grants and projected
executive turnover). The Committee may adjust the grants to take into account
individual performance and the number of options and restricted shares
previously granted to the executive. In addition, the Committee may make special
awards to individual executives during the year on a discretionary basis.
11
<PAGE> 13
The number of stock options and restricted shares granted to each executive
officer as part of the annual grant program is generally determined primarily by
individual position and responsibilities, compensation survey data of the
Company's Corporate Peer Group, and the Company's three-year total stockholder
return (considering stock price appreciation and dividends paid, and weighted
for most recent performance) as compared to the total stockholder return of the
Financial Peer Group. The amount of an executive's annual long-term incentive
grant (expressed as a percentage of base salary)is tied to the Company's total
stockholder return as compared to that of the Financial Peer Group. A minimum
level of total stockholder return must be attained in order for grants to be
made under the program. In 1998, the Company's weighted annualized three-year
total stockholder return was below the minimum level established by the
Committee.
In December 1998, the Committee reviewed compensation survey data which
indicated that over the past few years the value of the long-term incentive
grants made to senior executives was substantially below the level required to
appropriately compensate the Company's key officers. The Committee also
considered executive retention and the Committee's continued desire to align the
interests of executives and stockholders and to motivate the Company's senior
management to increase total stockholder return. Based on these considerations,
the Committee granted long-term incentive awards in December 1998 at a level
designed to be at or below the 25th percentile of the Corporate Peer Group. All
grants were made in the form of stock options; no restricted shares were
awarded.
Mr. Kuehn was awarded stock options in December 1998. As discussed above,
the amount of this award was intended to result in long-term compensation at or
below the 25th percentile of the Corporate Peer Group. Mr. Kuehn's total
long-term incentive grants in 1998 had a value of 97% of his salary, as compared
to 185% of his salary in 1997 and 235% of his salary in 1996.
The Committee will continue to consider individual position and
responsibilities, compensation survey data, total stockholder return, and
stockholder interests in its administration of the long-term stock incentive
program.
STOCK OWNERSHIP GUIDELINES. The Committee has established guidelines
designed to encourage key executives of the Company and its subsidiaries to
attain specified levels of stock ownership over a five-year period. Stock
ownership goals are based on the value of the Company's stock, and are expressed
as a multiple of the executive's base salary. The Committee periodically reviews
the guidelines and the executives' progress toward attaining the stock ownership
goals.
POLICY WITH RESPECT TO SECTION 162(m). Section 162(m) of the Internal
Revenue Code limits the tax deduction that the Company or its subsidiaries can
take with respect to the compensation of certain executive officers, unless the
compensation is "performance-based." The Committee expects that all income
recognized by executive officers with respect to restricted stock and stock
options granted under the Executive Award Plan will qualify as performance-based
compensation.
The Committee feels that it should not use only arithmetic formulas in
carrying out its responsibilities for compensating the Company's management.
Therefore, the Committee currently intends to continue to make cash bonus
payments that are based on the achievement of subjective, non-quantifiable
goals, and that may therefore not qualify as performance-based compensation. The
Committee believes that these Company, subsidiary and individual goals, while
not properly measurable by the kind of quantifiable targets that are required to
qualify compensation as performance-based, are important to the long-term
financial success of the Company and to its stockholders.
CONCLUSION. The Committee believes that the executive compensation
philosophy that it has adopted effectively serves the interests of the
stockholders and the Company. It is the Committee's intention that the pay
delivered to executives be commensurate with Company performance.
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C>
Robert J. Lanigan William O. Bourke Max L. Lukens
James B. Williams Joe B. Wyatt
</TABLE>
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ending December 31, 1996,
1997 and 1998 the cash compensation paid by the Company, and a summary of
certain other compensation paid or accrued for such years, to certain of the
Company's executive officers (as determined pursuant to the rules of the
Securities and Exchange Commission) (the "named executive officers") for service
in all capacities with the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ----------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND OTHER ANNUAL STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) SARS (2)
- ------------------ ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr., 1998 $797,500 $440,000 $1,283,945(3) $ 0 112,600 $ 47,850
Director, Chairman of 1997 $770,500 $550,000 $ 0 $385,528(4) 92,000 $105,522
the Board, President and 1996 $736,500 $800,000 $2,154,978(3) $748,800(5) 82,500 $111,058
Chief Executive Officer
John B. Holmes, Jr., 1998 $341,667 $182,940 $ 0 $ 0 185,000 $ 20,067
Senior Vice President(6)
James E. Moylan, Jr., 1998 $294,250 $116,625 $ 0 $ 0 35,000 $ 33,016
Senior Vice President 1997 $259,000 $132,100 $ 0 $ 70,096(4) 25,000 $ 30,098
and Chief Financial 1996 $245,000 $190,000 $ 0 $208,000(5) 20,000 $ 29,131
Officer
James A. Rubright, 1998 $372,667 $187,990 $ 0 $ 0 85,000 $ 43,522
Executive Vice 1997 $314,250 $163,600 $ 0 $ 70,096(4) 25,000 $ 41,810
President 1996 $300,250 $193,700 $ 0 $208,000(5) 20,000 $ 41,246
William A. Smith, 1998 $365,000 $160,000 $ 0 $ 0 35,000 $ 40,380
Executive Vice 1997 $365,000 $131,300 $ 669,098(3) $ 70,096(4) 23,000 $ 43,547
President and General 1996 $365,000 $218,300 $ 919,299(3) $197,600(5) 17,000 $ 44,260
Counsel
</TABLE>
NOTE 1: The amount shown represents the dollar value of restricted stock
awards made during the year, calculated by multiplying the closing price of
unrestricted shares of the Company's Common Stock on the date of grant by the
number of shares awarded. Dividends are paid on all shares of restricted stock.
All shares of restricted stock granted to Messrs. Moylan, Rubright and
Smith generally vest at the earlier of age 65 or 10 years from the date of
grant, unless the average closing price of the Company's Common Stock achieves
certain specified levels, in which case vesting of such shares is accelerated.
All shares of restricted stock granted to Mr. Kuehn generally vest on April 1,
2001.
All shares of restricted stock that have not previously vested are
generally forfeited upon termination of employment, unless such termination
occurs either by reason of death or disability or for the convenience of the
Company (as determined by the Executive Compensation Committee). All shares of
restricted stock that have not previously vested will immediately vest upon a
"Change of Control" of the Company, as described under "Compensation Upon Change
of Control" below. The El Paso Merger, if consummated, will constitute a Change
of Control for this purpose.
The number of shares of restricted stock held by the named executive
officers as of December 31, 1998, and the value of such shares (calculated by
multiplying the closing price of unrestricted shares of the Company's Common
Stock on December 31, 1998 ($27.0625) by the number of shares held on such date)
is as follows: Mr. Kuehn, 118,400 shares, $3,204,200;
13
<PAGE> 15
Mr. Holmes, 0 shares, $0; Mr. Moylan, 7,900 shares, $213,794; Mr. Rubright,
7,900 shares, $213,794; and Mr. Smith, 7,700 shares, $208,381.
NOTE 2: With respect to 1998, represents the following amounts for each of
Messrs. Kuehn, Holmes, Moylan, Rubright and Smith, respectively: (1) Company
matching contributions to the trust established under the Company's Savings
Plan -- $9,600, $9,167, $9,600, $9,600 and $9,600; (2) Company contributions to
the Savings Plan accounts under the Company's Supplemental Benefit
Plan -- $38,250, $10,900, $8,055, $12,760 and $12,300; and (3) with respect to
premiums paid by the Company under the Company's "split-dollar" Executive Life
Insurance Program, the sum of (a) the value of the premium payment used to
purchase term life insurance plus (b) the value of the benefit to the executive
officer of the remainder of the premium payment -- $0, $0, $15,361, $21,162 and
$18,480.
NOTE 3: Represents the amount of tax-offset "supplemental payments" paid
upon the exercise of stock options (or tandem stock appreciation rights) granted
under the Company's Executive Award Plan.
NOTE 4: Represents the value of 8,800 shares, 1,600 shares, 1,600 shares
and 1,600 shares of restricted stock granted on December 5, 1997 to Messrs.
Kuehn, Moylan, Rubright and Smith, respectively.
NOTE 5: Represents the value of 14,400 shares, 4,000 shares, 4,000 shares
and 3,800 shares of restricted stock granted on December 5, 1996 to Messrs.
Kuehn, Moylan, Rubright and Smith, respectively.
NOTE 6: Mr. Holmes was employed by the Company on January 30, 1998 and was
named Senior Vice President of the Company effective as of May 1, 1998.
OPTION GRANT TABLE
The following table contains certain information with respect to stock
options (and tandem stock appreciation rights that become exercisable only upon
certain change of control events ("Limited SARs")) granted in 1998 under the
Company's Executive Award Plan to the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (10 YEARS)
------------------------------------------------------- --------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION
NAME GRANTED (1) IN 1998 ($/SHARE)(2) DATE(3) 5%(4) 10%(4)
---- ------------ ------------ ------------ ---------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
All Stockholders......... 110,059,886 -- -- -- $ 1,898,808,183 $4,813,193,964
Ronald L. Kuehn,
Jr.(5)................. 112,600 8.5% $27.4375 12/3/08 $ 1,942,632 $ 4,924,280
John B. Holmes, Jr.(6)... 50,000 3.8% $ 44.69 1/20/08 $ 1,405,500 $ 3,561,000
John B. Holmes, Jr.(7)... 75,000 5.7% $ 43.875 4/22/08 $ 2,069,625 $ 5,244,375
John B. Holmes, Jr.(5)... 60,000 4.5% $27.4375 12/3/08 $ 1,035,150 $ 2,623,950
James E. Moylan,
Jr.(5)................. 35,000 2.6% $27.4375 12/3/08 $ 603,838 $ 1,530,638
James A. Rubright(7)..... 25,000 1.9% $ 43.875 4/22/08 $ 689,875 $ 1,748,125
James A. Rubright(5)..... 60,000 4.5% $27.4375 12/3/08 $ 1,035,150 $ 2,623,950
William A. Smith(5)...... 35,000 2.6% $27.4375 12/3/08 $ 603,838 $ 1,530,638
Named Executive Officers' Potential Realizable Value as a % of All Stockholders'
Potential Realizable Value -- December 4, 1998 Grant 0.27% 0.27%
</TABLE>
14
<PAGE> 16
NOTE 1: Each stock option shown in the table was granted with a tandem
Limited SAR that may be exercised only within 60 days after a Change of Control
(as defined under "Compensation Upon Change of Control" below). For more
information on Limited SARs, see "Compensation Upon Change of Control" below.
Any stock options (and tandem Limited SARs) that have not previously become
exercisable are generally forfeited upon termination of employment, unless such
termination occurs by reason of normal retirement, death, disability or for the
convenience of the Company (as determined by the Executive Compensation
Committee). Any options (and tandem Limited SARs) held by then-current employees
will become immediately exercisable in the event of a "Change of Control" of the
Company, as described under "Compensation Upon Change of Control" below.
The El Paso Merger, if consummated, will constitute a Change of Control for
the foregoing purposes.
NOTE 2: The exercise price equals the closing price of the Company's
Common Stock on the date of grant.
NOTE 3: The stock options (and tandem Limited SARs) are subject to
termination prior to their expiration date in the event of termination of
employment.
NOTE 4: For each named executive officer, the potential realizable values
shown represent the difference between the Resulting Company Stock Price for the
option (as described below) and the exercise price of the option, multiplied by
the number of options granted to such executive officer. For all stockholders,
the potential realizable values shown represent the difference between the
Resulting Company Stock Price for the options granted on December 4, 1998 and
the exercise price of such options, multiplied by the number of outstanding
shares of the Company's Common Stock as of December 31, 1998.
The Resulting Company Stock Price for an option equals the price the
Company's Common Stock would attain at the end of the option's 10-year term if
the price of the Company's Common Stock appreciated from the date of stock
option grant at a rate of 5% or 10% per year (as the case may be). The Resulting
Company Stock Prices are as follows: (1) for the options granted on January 21,
1998, $72.80 (5% annual stock price appreciation) and $115.91 (10% annual stock
price appreciation), (2) for the options granted on April 23, 1998, $71.47 (5%
annual stock price appreciation) and $113.80 (10% annual stock price
appreciation) and (3) for the options granted on December 4, 1998, $44.69 (5%
annual stock price appreciation) and $71.17 (10% annual stock price
appreciation).
NOTE 5: Represents stock options (and tandem Limited SARs) granted on
December 4, 1998. The stock options (and tandem Limited SARs) become exercisable
in equal installments on each of the first five anniversaries of the date of
grant, provided that the entire grant will become immediately exercisable if,
during any 10 business day period ending prior to December 4, 2003, the average
of the closing prices of the Company's Common Stock during such period is at
least $41.1563.
NOTE 6: Represents stock options (and tandem Limited SARs) granted to Mr.
Holmes on January 21, 1998 (contingent upon his commencement of employment with
the Company on January 30, 1998). The stock options (and tandem Limited SARs)
become exercisable in five equal installments on each of the first five
anniversaries of the date of grant, provided that the entire grant will become
immediately exercisable if, during any 10 business day period ending prior to
January 21, 2003, the average of the closing prices of the Company's Common
Stock during such period is at least $67.04.
NOTE 7: Represents stock options (and tandem Limited SARs) granted on
April 23, 1998. The stock options (and tandem Limited SARs) become exercisable
in five equal installments on each of the first five anniversaries of the date
of grant, provided that the entire grant will become
15
<PAGE> 17
immediately exercisable if, during any 10 business day period ending prior to
April 23, 2003, the average of the closing prices of the Company's Common Stock
during such period is at least $65.8125.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table shows certain information with respect to the named
executive officers concerning the exercise of stock options (or stock
appreciation rights ("SARs") granted in tandem therewith) during 1998 and
unexercised stock options (and tandem SARs) held as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
------------------------------------------------------------------------------------
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED,
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FISCAL YEAR END(1) AT FISCAL YEAR END(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr...... 70,000 $1,863,750 616,200 235,700 $1,826,625 $0
John B. Holmes, Jr....... 0 $ 0 10,000 175,000 $ 0 $0
James E. Moylan, Jr...... 0 $ 0 105,000 67,000 $ 195,563 $0
James A. Rubright........ 0 $ 0 98,500 117,000 $ 0 $0
William A. Smith......... 0 $ 0 192,400 63,600 $ 630,750 $0
</TABLE>
NOTE 1: Certain stock options granted before December 6, 1991, were
granted with tandem SARs. Each stock option granted before December 6, 1991 was
granted with a tax-offset "supplemental payment" payable upon the exercise of
the stock option (or tandem SAR). The amount of the supplemental payment is the
amount necessary to pay the federal income tax payable with respect to both (1)
exercise of the stock option (or tandem SAR) and (2) receipt of the supplemental
payment, based on the assumption that the participant is taxed at the maximum
effective federal income tax rate.
NOTE 2: The value of each unexercised in-the-money stock option (or tandem
SAR) is equal to the difference between $27.0625 (the closing price of the
Company's Common Stock on December 31, 1998) and the exercise price of the stock
option. Such value does not include the value of any tax-offset supplemental
payments.
DEFINED BENEFIT PLANS
Employees and officers of the Company and participating subsidiaries are
participants in the Company's Retirement Plan. The Retirement Plan provides two
types of benefits -- pension benefits and cash balance benefits.
The pension benefits portion of the Retirement Plan (the "Pension Program")
provides annual retirement benefits that are based on average covered
compensation for the highest five consecutive years of the final ten years of
employment. Covered compensation under the Pension Program currently includes
salaries and amounts paid under the Performance Award Plan and the Cash Bonus
Plan (reported in the Summary Compensation Table); covered compensation does not
include amounts relating to the grant or vesting of restricted stock, the
exercise of stock options and SARs, and receipt of supplemental payments under
the Executive Award Plan, or to employer contributions under the Savings Plan or
the Supplemental Benefit Plan.
The maximum annual retirement benefit under the Pension Program is 65% of
the participant's average covered compensation minus 50% of his primary social
security benefit. Participants accrue benefits under the following formula: (a)
2.4% of average covered compensation minus 2.0% of primary social security
benefits for each year of service before January 1, 1992; plus (b) 2.0% of
average covered compensation minus 1.667% of primary social security benefits
for each year of
16
<PAGE> 18
service after January 1, 1992; plus (c) when the total of (a) plus (b) above
equals 60% of average covered compensation minus 50% of primary social security
benefits, 1% of average covered compensation for each year of service after
January 1, 1992, not included in the calculation in (b) above, up to five such
additional years of service. The eligible survivors of a deceased Pension
Program participant are entitled to a survivors benefit, which equals 75% or 50%
of the participant's retirement benefit (depending upon the participant's date
of hire, age and years of service). Pension Program benefits are generally paid
as life annuities.
Under the cash balance benefits portion of the Retirement Plan (the "Cash
Balance Program"), Company contributions and interest are credited to a
hypothetical account for the participant under the Retirement Plan. Company
contributions equal 1 1/2% or 2 1/2% of the participant's salary (as shown in
the Summary Compensation Table), depending on the participant's date of hire,
age and years of service. Interest credits are based on the 30-year Treasury
Constant Maturities rate. Cash Balance Program benefits are based on the value
of the participant's hypothetical account at termination of employment, and are
paid as a lump sum, life annuity or 50% joint and survivor annuity.
The Supplemental Benefit Plan provides its eligible participants and their
eligible survivors with Pension Program and Cash Balance Program benefits that
would have been payable under the Retirement Plan but for the fact that benefits
payable under funded pension plans are limited by federal tax laws. As a general
rule, during 1998 the federal tax laws limited annual benefits under the
Retirement Plan to $130,000 (subject to reduction in certain circumstances), and
required the Retirement Plan to disregard any portion of the participant's 1998
compensation in excess of $160,000. A participant may choose to have benefits
under the Supplemental Benefit Plan paid either as a life annuity or in a cash
lump sum upon termination of employment.
The following table sets forth information with respect to the named
executive officers concerning the benefits payable under the Retirement Plan and
Supplemental Benefit Plan.
DEFINED BENEFIT PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF
YEARS OF CASH 1998 1998 ESTIMATED
PENSION BALANCE PENSION PROGRAM CASH BALANCE ANNUAL
PROGRAM PROGRAM COVERED PROGRAM COVERED RETIREMENT
NAME SERVICE(1) SERVICE(2) COMPENSATION(3) COMPENSATION(4) BENEFIT(5)
---- ---------- ---------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr. ..... 28.4 1.0 $1,237,500 $797,500 $811,483
John B. Holmes, Jr. ...... 0.9 0.9 $ 524,607 $341,667 $168,754
James E. Moylan, Jr. ..... 22.5 1.0 $ 410,875 $294,250 $290,642
James A. Rubright......... 4.8 1.0 $ 560,657 $372,667 $226,552
William A. Smith.......... 28.7 1.0 $ 525,000 $365,000 $356,295
</TABLE>
NOTE 1: The number of years of credited service under the Pension Program
as of December 31, 1998.
NOTE 2: The number of years of service under the Cash Balance Program as
of December 31, 1998.
NOTE 3: The aggregate of the named executive officer's salary and bonus
for 1998 (as shown in the Summary Compensation Table).
NOTE 4: The named executive officer's salary for 1998 (as shown in the
Summary Compensation Table).
NOTE 5: The aggregate estimated annual benefit payable as a single life
annuity to the named executive officer under the Retirement Plan and
Supplemental Benefit Plan, based on the assumptions that (1) such officer's
average covered compensation under the Pension Program at his retirement date
equals his 1998 Pension Program covered compensation; (2) such officer's salary
under the Cash Balance Program between December 31, 1998 and his retirement date
equals his 1998 Cash Balance Program covered compensation; and (3) such
officer's hypothetical account
17
<PAGE> 19
under the Cash Balance Program is credited with interest after December 31, 1998
at the annual interest rate in effect for the Program as of such date (6.33%),
and determined without regard to the offset for primary social security benefits
under the Pension Program. The assumed retirement dates are April 30, 2001 for
Mr. Kuehn, and age 65 for the other named executive officers.
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's Common Stock for the five-year period ending December 31, 1998, with
the cumulative total return of three indices during such period.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
SONAT INC.; STANDARD & POOR'S 500 STOCK INDEX;
STANDARD & POOR'S NATURAL GAS DISTRIBUTION/PIPELINE GROUP (1);
STANDARD & POOR'S OIL & GAS
(EXPLORATION & PRODUCTION) GROUP (2)
[CUMULATIVE PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
SONAT INC. S&P 500 S&P NATURAL GAS S&P OIL AND GAS
---------- ------- --------------- ---------------
<S> <C> <C> <C> <C>
12/31/93 100.00 100.00 100.00 100.00
12/31/94 100.58 101.31 92.21 79.59
12/31/95 132.36 139.37 126.31 93.36
12/31/96 196.15 171.36 164.49 128.73
12/31/97 178.01 228.52 193.54 113.71
12/31/98 110.45 293.81 211.77 78.44
</TABLE>
The total returns set forth above assume that $100 was invested in the
Company's Common Stock and each of the indices set forth above on December 31,
1993, and that all dividends were reinvested.
NOTE 1: The Standard & Poor's Natural Gas Distribution/Pipeline Group
consists of the following companies: The Coastal Corporation, Columbia Energy
Group, Consolidated Natural Gas Company, Eastern Enterprises, Enron Corp., NICOR
Inc., ONEOK Inc., Peoples Energy Corporation, Sempra Energy, Sonat Inc. and The
Williams Companies, Inc.
NOTE 2: The Standard & Poor's Oil & Gas (Exploration & Production) Group
consists of the following companies: Anadarko Petroleum Corporation, Apache
Corporation, Burlington Resources, Inc., Kerr-McGee Corporation, Oryx Energy
Company and Union Pacific Resources Group, Inc.
18
<PAGE> 20
COMPENSATION UPON CHANGE OF CONTROL
Certain of the Company's benefit plans provide for the acceleration of
certain benefits in the event of a "Change of Control" of the Company. Under
such plans, a Change of Control will be deemed to have occurred if (1) any
person or group becomes the owner of (or obtains the right to acquire) 20% or
more of the Company's common stock or outstanding voting securities (with
certain exceptions, as set forth in the plans); (2) the individuals who, as of
December 1, 1995, constituted the Board of Directors (the "Incumbent Board"),
cease to be at least a majority of the Board of Directors (but including as
Incumbent Board members, except as otherwise provided, any director whose
election or nomination was approved by the Incumbent Board); or (3) there is
consummation of a reorganization, consolidation or merger involving the Company,
or sale of all or substantially all of the Company's assets, unless the
stockholders and Board of Directors of the Company before the transaction
control the resulting company after the transaction.
Any outside Director who is eligible for a retirement benefit under the
Retirement Plan for Directors will receive such benefit (regardless of whether
the Director has met the other eligibility requirements of the Plan) in the
event the Director ceases to be a Director following a Change of Control. The
balance in a Director's account in the Director's Fees Deferral Plan will be
distributed in a lump sum if the Director's service as a Director is terminated
within three years following a Change of Control, regardless of any other
elections the Director may have made with respect to the timing and manner of
payment of amounts in the account. Also, all shares of restricted stock granted
under the Restricted Stock Plan for Directors will vest immediately upon a
Change of Control.
Upon the occurrence of a Change of Control, all outstanding shares of
restricted stock under the Executive Award Plan will immediately vest, and all
outstanding options (and tandem SARs) under the Executive Award Plan held by
then-current employees will become immediately exercisable. Also, upon the
occurrence of a Change of Control, the participant will receive 100% of his
bonus opportunities under the Performance Award Plan and the Cash Bonus Plan.
Any officer of the Company or certain of its subsidiaries who at the time of a
Change of Control is not vested under the Retirement Plan will be provided with
a vested benefit under the Supplemental Benefit Plan equal to the benefit that
would have been payable under the Retirement Plan if the officer's actual years
of service had been sufficient for vesting. Following a Change of Control, a
participant's Savings Plan account under the Supplemental Benefit Plan will be
distributed within 30 days of termination of employment.
The named executive officers have Limited SARs in tandem with all
outstanding options under the Executive Award Plan. Upon exercise of a Limited
SAR or an SAR in connection with a Change of Control, the executive officer
would receive the difference between (1) the "change of control price" and (2)
the exercise price of the Limited SAR or SAR.
The El Paso Merger, if consummated, will constitute a Change of Control for
the foregoing purposes and for purposes of the Executive Severance Agreements
described below.
EXECUTIVE SEVERANCE AGREEMENTS
The Company has Executive Severance Agreements with Messrs. Kuehn, Holmes,
Moylan, Rubright and Smith. These agreements provide that if the executive
officer's employment is terminated either (1) within three years after a Change
of Control (as defined above), either (a) by the Company for reasons other than
dishonesty, conviction of a felony or willful unauthorized disclosure of
confidential information or other than as a consequence of death, disability or
retirement at normal retirement age (April 30, 2001 for Mr. Kuehn and age 65 for
the other officers) or (b) by the executive officer for reasons relating to a
diminution of responsibilities or compensation or relocation requiring a change
in residence or a significant increase in travel, or (2) by the executive
officer for any reason during the 30-day period immediately following the first
anniversary of the Change of Control, he will receive: (1) a lump sum severance
payment equal to three times his "earnings" (defined to include the sum of (a)
the executive's annual base pay, (b) the largest
19
<PAGE> 21
cash bonus payable to the executive either upon the Change of Control or in the
previous two years, and (c) the average value of the executive's stock option
and restricted stock grants over the last three years) (such lump sum payment to
be reduced pro rata to the extent there are less than 36 months until the
officer reaches normal retirement age); (2) life, medical, and accident and
disability insurance as provided in the Company's insurance programs or, in
certain circumstances, substantially equivalent insurance to be provided by the
Company for a period of 36 months after termination of employment (or until
normal retirement age, whichever is sooner); and (3) for an executive officer
who is not otherwise entitled to an early retirement benefit under the
Retirement Plan, a lump-sum payment in an amount equal in value to the annual
benefit such officer would have received had he been entitled to an early
retirement benefit (reduced by any benefits payable to him under the Retirement
Plan and the Supplemental Benefit Plan), and the survivors benefit with respect
to such early retirement benefit. The Executive Severance Agreements also
provide that if the executive officer receives payments that would be subject to
the tax imposed by Section 4999 of the Internal Revenue Code, the executive
shall be entitled to receive an additional payment in an amount necessary to put
the executive officer in the same after-tax position as if such tax had not been
imposed. Assuming that the executive officers terminated employment on April 1,
1999, in a manner entitling them to benefits under the Executive Severance
Agreements, the respective executive officers would receive the following lump
sum cash payments pursuant to items (1) and (3) above: Mr. Kuehn, $6,854,989 in
severance pay and $0 in retirement benefits; Mr. Holmes, $4,229,280 in severance
pay and $39,141 in retirement benefits; Mr. Moylan, $2,968,032 in severance pay
and $554,553 in retirement benefits; Mr. Rubright, $4,229,280 in severance pay
and $159,945 in retirement benefits; and Mr. Smith, $3,022,254 in severance pay
and $1,245,418 in retirement benefits.
The Executive Severance Agreements provide that the executive officer may
not voluntarily leave the employ of the Company if a third party attempts to
effect a Change of Control until such third party abandons such attempt or a
Change of Control has occurred. The Agreements renew automatically for one-year
terms unless terminated at the end of any term by the Board of Directors. The
Agreements shall also terminate if the Executive Compensation Committee
determines that the executive officer is no longer a key employee. In no event
shall the Agreements terminate within three years after a Change of Control, or
during any period in which a Change of Control is threatened.
ELECTION OF AUDITOR (PROPOSAL NO. 1)
Ernst & Young LLP has been nominated for election as Auditor of the
Company. The Restated Certificate of Incorporation provides that no other person
shall be eligible for election as Auditor unless notice of intention to nominate
such person has been given to the Company not less than ten days before the
Annual Meeting.
A representative of Ernst & Young LLP will be present at the Annual Meeting
with the opportunity to make a statement if such representative desires to do so
and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ERNST &
YOUNG LLP AS AUDITOR (PROPOSAL NO. 1).
20
<PAGE> 22
OTHER MATTERS
PROPOSALS OF STOCKHOLDERS
STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT. In order for
proposals by stockholders to be considered for inclusion in the proxy statement
and form of proxy relating to the 2000 Annual Meeting of Stockholders, such
proposals must be received at the principal executive offices of the Company,
AmSouth-Sonat Tower, Birmingham, Alabama 35203, by no later than November 24,
1999.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS. A stockholder who
desires to propose any business at an annual meeting of stockholders must give
the Secretary of the Company written notice which is received not later than the
close of business on the 60th day nor earlier than the close of business on the
90th day before the first anniversary of the preceding year's annual meeting
(the "Notice Deadline"). (Special notice provisions apply if the date of the
annual meeting is more than 30 days before or more than 60 days after such
anniversary date.) Adjournment of an annual meeting shall not commence a new
Notice Deadline. The stockholder's notice must set forth (a) a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and the beneficial owner, if any, on
whose behalf the proposal is made; (b) a representation that the stockholder is
a holder of record of stock of the Company entitled to vote at such meeting (or
if the record date for such meeting is subsequent to the date required for such
stockholder notice, a representation that the stockholder is a holder of record
at the time of such notice and intends to be a holder of record on the record
date for such meeting) and intends to appear in person or by proxy at such
meeting to propose such business; (c) any material interest of the stockholder
in such business; and (d) for both the stockholder giving notice and the
beneficial owner, if any, on whose behalf the proposal is made (1) the name and
address of such stockholder and beneficial owner and (2) the class and number of
shares owned beneficially and of record by such stockholder and beneficial
owner.
STOCKHOLDER NOMINATIONS FOR DIRECTORS. A stockholder who desires to
nominate Directors at a meeting of stockholders must give the Secretary of the
Company written notice within the Notice Deadline (for an annual meeting) or,
for a special meeting at which directors are to be elected pursuant to the
Company's notice of meeting, not earlier than the close of business on the 90th
day before such special meeting and not later than the close of business on the
later of the 60th day before such special meeting or the 10th day after the date
public announcement is made of the date of the special meeting and the nominees
proposed by the Board of Directors to be elected at such meeting. The
stockholder's notice must set forth (a) the name and address of the stockholder
giving the notice and of the beneficial owner, if any, on whose behalf the
nominations are made; (b) the class and number of shares owned beneficially and
of record by such stockholder and such beneficial owner; (c) a representation
that the stockholder is a holder of record of stock of the Company entitled to
vote at such meeting (or if the record date for such meeting is subsequent to
the date required for such stockholder notice, a representation that the
stockholder is a holder of record at the time of such notice and intends to be a
holder of record on the record date for such meeting) and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice; (d) a description of all arrangements or understandings between the
stockholder or beneficial owner and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made; (e) such other information regarding each nominee proposed by
such stockholder as would have been required to be disclosed in solicitations of
proxies for election of directors pursuant to the rules of the Securities and
Exchange Commission; and (f) the consent of each nominee to be named in the
proxy statement as a nominee and to serve as a Director of the Company if so
elected.
The Chairman of the meeting may refuse to transact any business or to
acknowledge the nomination of any person if a stockholder has failed to comply
with the foregoing procedures.
21
<PAGE> 23
A copy of the Company's By-Laws may be obtained from the Company upon
written request to the Company at its Birmingham, Alabama office.
INSTITUTIONAL OWNERSHIP OF COMMON STOCK
The table below sets forth, as of December 31, 1998, certain information
with respect to each entity known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock. For information regarding certain
individuals known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock as of January 31, 1999, see "Ownership of Common
Stock by Directors and Executive Officers" at page 8.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER TITLE OF CLASS BENEFICIALLY OWNED OF CLASS
- ------------------- -------------- ------------------ --------
<S> <C> <C> <C>
Putnam Investments, Inc....................... Common Stock 9,702,120 8.8
and certain of its subsidiaries.
One Post Office Square
Boston, MA 02109
</TABLE>
In a report on Schedule 13G filed with the Securities and Exchange
Commission with respect to the ownership of the Company's Common Stock as of
December 31, 1998, Putnam Investments, Inc. and its subsidiaries each stated
that such stock was acquired in the ordinary course of business and was not
acquired for the purpose of changing or influencing the control of the Company
and was not acquired in connection with or as a participant in any transaction
having such a purpose or effect.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
John M. Musgrave, Vice President -- Planning and Treasurer of the Company,
filed one late report under Section 16(a) of the Securities Exchange Act of 1934
("Section 16(a)") with respect to his initial ownership of the Company's Common
Stock. Selim K. Zilkha, a Director of the Company, filed one late report under
Section 16(a) with respect to a charitable gift of the Company's Common Stock.
VOTING AT THE ANNUAL MEETING
The presence, in person or by proxy, of the holders of a majority of the
Company's Common Stock is necessary to constitute a quorum at the Annual Meeting
or any adjournment thereof.
The vote required for the election of Directors and the approval of the
other matters scheduled for a vote at the Annual Meeting is controlled by the
provisions of the Company's Charter and By-Laws and the Delaware General
Corporation Law. Directors are elected by a plurality vote. Approval of Proposal
No. 1 would require a plurality vote. Abstentions and broker "non-votes" (shares
not voted on a matter because a nominee holding shares for a beneficial owner
neither receives voting instructions from such beneficial owner nor has
discretionary voting power with respect thereto) shall not have an effect on the
vote for the election of Directors and on Proposal No. 1. The vote will be
tabulated by an independent tabulator and the results of such vote will be
certified by independent inspectors of election.
SOLICITATION OF PROXIES
The Company will bear the costs of solicitation of proxies. Officers and
regular employees of the Company may solicit proxies by mail, telephone,
telegraph and personal interview. In addition, the Company has retained D. F.
King & Co., Inc. to assist in the solicitation of proxies, and anticipates that
the fees that it will incur for this service, excluding out-of-pocket expenses,
will not exceed $11,000. Arrangements will be made with brokerage houses and
with other custodians, nominees and fiduciaries to forward proxy soliciting
material to beneficial owners. The Company will
22
<PAGE> 24
reimburse persons holding stock for others in their names or in those of their
nominees for their reasonable out-of-pocket expenses in sending proxy material
to their principals and obtaining their proxies.
------------------------
The information provided under the headings "Report of the Executive
Compensation Committee" and "Performance Graph" above shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission or subject to Regulations 14A or 14C, other than as provided in Item
402 of Regulation S-K, or to the liabilities of Section 18 of the Securities
Exchange Act of 1934 and, unless specific reference is made therein to such
headings, shall not be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
The Company is not aware that any matters other than those mentioned above
will be presented for action at the 1999 Annual Meeting, but if any other
matters do properly come before the meeting, the persons named as proxies will
vote upon such matters in accordance with their best judgment.
Please complete, sign, date and return the enclosed proxy card promptly.
SONAT INC.
/s/ Beverley T. Krannich
Beverley T. Krannich
SECRETARY
Birmingham, Alabama
March 22, 1999
23
<PAGE> 25
PROXY
SONAT SAVINGS PLAN
SONAT INC.
ANNUAL MEETING -- APRIL 22, 1999
I hereby direct The Northern Trust Company, as Trustee of the Sonat Savings
Plan, to sign and forward a proxy in the form being solicited by the Board of
Directors and to vote as directed on the reverse side all shares of Sonat Inc.
Common Stock held with respect to my account under the Plan at the Annual
Meeting of Stockholders of Sonat Inc. to be held on April 22, 1999 and at any
adjournment thereof.
TO BE COMPLETED, SIGNED AND DATED ON THE REVERSE SIDE.
<PAGE> 26
SONAT SAVINGS PLAN
SONAT INC.
ANNUAL MEETING -- APRIL 22, 1999
THE BOARD RECOMMENDS A VOTE "FOR ALL NOMINEES" AND "FOR" PROPOSAL NO. 1.
<TABLE>
<S> <C> <C>
1. ELECTION OF DIRECTORS FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY [ ]
Ronald L. Kuehn, Jr., Robert J. Lanigan, (except those whose names are inserted on the line below) to vote for all nominees
Charles Marshall and Michael S. Zilkha
</TABLE>
<TABLE>
<S> <C> <C> <C>
2. ELECTION of Ernst & Young LLP as Auditor (Proposal No. 1). FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE UNDERSIGNED'S VOTE IS TO BE CAST AS SPECIFIED ABOVE. IF NO VOTE IS SPECIFIED, IT WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1
AND "FOR" PROPOSAL NO. 1.
</TABLE>
Dated ___________, 1999 Signature _________________________________
Sign here as name appears hereon.
<PAGE> 27
PROXY
SONAT INC.
AMSOUTH -- SONAT TOWER
BIRMINGHAM, ALABAMA 35203
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Ronald L. Kuehn, Jr., James A. Rubright and
William A. Smith, and each of them, proxies, with full powers of substitution,
and hereby authorizes each of them to represent the undersigned at the Annual
Meeting of Stockholders of Sonat Inc. to be held on April 22, 1999 and at any
adjournment thereof, and to vote all shares of stock which the undersigned would
be entitled to vote if personally present as directed on the reverse side hereof
with respect to the items set forth in the Proxy Statement and upon any other
matter which may properly come before the meeting or any adjournment thereof.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
- FOLD AND DETACH HERE -
<PAGE> 28
Please mark
your votes [X]
like this.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
WITHHELD
FOR FOR ALL
Item 1 -- ELECTION of Directors
Nominees for the Board of Directors: [ ] [ ]
Ronald L. Kuehn, Jr., Robert J. Lanigan,
Charles Marshall and Michael S. Zilkha
WITHHELD FOR: (Write that nominee's
name in the space provided below).
FOR AGAINST ABSTAIN
Item 2 -- ELECTION of Ernst & Young LLP
as Auditor (Proposal No. 1). [ ] [ ] [ ]
Signature(s)_____________________________________________Date___________________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- FOLD AND DETACH HERE -
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration Statement
(Form S-8, No. 33-64367) pertaining to the Sonat Inc. Executive Award Plan and
the related Prospectus, (ii) the Registration Statement (Form S-8, No. 33-50142)
pertaining to the Sonat Savings Plan and the related Prospectus and (iii) the
Registration Statement (Form S-3, No. 333-62383) of Sonat Inc. and the related
Prospectus and Prospectus Supplement of our report dated January 19, 1999, with
respect to the consolidated financial statements of Sonat Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
Our report refers to a change in accounting for oil and gas properties from the
successful efforts method to the full cost method.
Our audits also included the financial statement schedules of Sonat Inc. listed
in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Birmingham, Alabama Ernst & Young LLP
March 19, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the references to us and to the use of the information
derived from our reserve report on the interests of Sonat Exploration GOM Inc.
(formerly Zilkha Energy Company) ("Sonat GOM"), dated January 14, 1999, relating
to the estimated quantities of certain of Sonat GOM's proved reserves, in the
Sonat Inc. Annual Report on Form 10-K for 1998 under the caption "Sonat
Exploration Company" and to the incorporation by reference of such references
and information in the Sonat Inc. Registration Statements on Form S-8 (No.
33-64367 and No. 33-50142) and Registration Statement on Form S-3 (No.
333-62383). We also consent to our being named as experts for purposes of such
Registration Statements.
WILLIAM M. COBB & ASSOCIATES, INC.
By: F. J. Marek, P.E.
Vice President
Dallas, Texas
March 4, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the references to us relating to the estimated quantities
of certain of Sonat Exploration Company's proved reserves in the Sonat Inc.
Annual Report on Form 10-K for 1998 under the caption "Sonat Exploration
Company." and to the incorporation by reference of such references and
information in the Sonat Inc. Registration Statement on Form S-8 (No. 33-64367
and No. 33-50142) and Registration Statement on Form S-3 (No. 333-62383). We
also consent to our being named as experts for purposes of such Registration
Statements.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 8, 1999
<PAGE> 1
EXHIBIT 23.4
The Board of Directors
Sonat Exploration GOM Inc.
(formerly Zilkha Energy Company)
We consent to the incorporation by reference in (i) the registration statements
(No 33-34367 and No. 33-50142) on Form S-8, and (ii) the registration statement
(No. 333-62383) on Form S-3 and related prospectus of Sonat Inc. of our report
dated December 8, 1997, with respect to the Statements of Operations and Cash
Flows of Zilkha Energy Company as of December 31, 1996 which report is
incorporated by reference in the Form 10-K of Sonat Inc. for the year ended
December 31, 1998.
Our report, dated December 8, 1997, refers to a change in accounting for oil and
gas properties from the full cost method to the successful efforts method.
KPMG LLP
Houston, Texas
March 19, 1999
<PAGE> 1
EXHIBIT 23.5
The Board of Directors
Sonat Exploration GOM Inc.
(formerly Zilkha Energy Company)
We consent to the incorporation by reference in the Form 10-K of Sonat Inc. for
the year ended December 31, 1998, of our report dated December 8, 1997, with
respect to the Statements of Operations and Cash Flows of Zilkha Energy Company
for the year ended December 31, 1996, which report is incorporated by reference
in the Form 8-K of Sonat Inc. dated April 23, 1998.
Our report, dated December 8, 1997, refers to a change in accounting for oil
and gas properties from the full cost method to the successful efforts method.
KPMG LLP
Houston, Texas
March 19, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ William O. Bourke
--------------------------------
William O. Bourke
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and
director of Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.;
Thomas W. Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C.
Griffin, and each of them, his true and lawful attorneys to execute in his name
(whether on behalf of Sonat Inc. or as an Officer or director of Sonat Inc.) the
Sonat Inc. Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and any and all amendments thereto to be filed with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 and to file the same, with all exhibits thereto, and any other
documents in connection therewith, with the Securities and Exchange Commission.
The undersigned does hereby ratify and confirm all that said attorneys and
agents, and each of them, shall do or cause to be done by virtue hereof. Each of
such attorneys shall have and may exercise all powers to act hereunder with or
without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1998.
/s/ Ronald L. Kuehn, Jr.
----------------------------------
Ronald L. Kuehn, Jr.
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 1st day of March, 1999.
/s/ Robert J. Lanigan
----------------------------------
Robert J. Lanigan
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Max L. Lukens
----------------------------
Max L. Lukens
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 1st day of March, 1999.
/s/ Charles Marshall
------------------------------
Charles Marshall
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Benjamin F. Payton
-----------------------------------
Benjamin F. Payton
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ John J. Phelan, Jr.
-----------------------------------
John J. Phelan, Jr.
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Jerome J. Richardson
----------------------------------
Jerome J. Richardson
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed her name hereto as of
the 25th day of February, 1999.
/s/ Adrian M. Tocklin
----------------------------------
Adrian M. Tocklin
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ James B. Williams
------------------------------
James B. Williams
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Joe B. Wyatt
----------------------
Joe B. Wyatt
<PAGE> 12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Selim K. Zilkha
------------------------------
Selim K. Zilkha
<PAGE> 13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
Sonat Inc., does hereby constitute and appoint Ronald L. Kuehn, Jr.; Thomas W.
Barker, Jr.; James E. Moylan, Jr.; William A. Smith; and John C. Griffin, and
each of them, his true and lawful attorneys to execute in his name (whether on
behalf of Sonat Inc. or as a director of Sonat Inc.) the Sonat Inc. Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and any and all
amendments thereto to be filed with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and to
file the same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission. The undersigned does
hereby ratify and confirm all that said attorneys and agents, and each of them,
shall do or cause to be done by virtue hereof. Each of such attorneys shall have
and may exercise all powers to act hereunder with or without the others.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
the 25th day of February, 1999.
/s/ Michael S. Zilkha
---------------------------------
Michael S. Zilkha
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SONAT INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,104
<SECURITIES> 0
<RECEIVABLES> 438,434
<ALLOWANCES> 0
<INVENTORY> 69,093
<CURRENT-ASSETS> 800,509
<PP&E> 8,399,934
<DEPRECIATION> 5,703,767
<TOTAL-ASSETS> 4,361,094
<CURRENT-LIABILITIES> 1,576,599
<BONDS> 1,099,484
0
0
<COMMON> 111,388
<OTHER-SE> 1,217,863
<TOTAL-LIABILITY-AND-EQUITY> 4,361,094
<SALES> 3,207,707
<TOTAL-REVENUES> 3,709,818
<CGS> 2,744,969
<TOTAL-COSTS> 2,908,355
<OTHER-EXPENSES> 1,384,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,714
<INCOME-PRETAX> (828,265)
<INCOME-TAX> (297,748)
<INCOME-CONTINUING> (530,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (530,517)
<EPS-PRIMARY> (4.82)
<EPS-DILUTED> (4.82)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[RYDER SCOTT COMPANY PETROLEUM ENGINEER LETTERHEAD]
March 10, 1999
Sonat Exploration Company
Post Office Box 1513
Houston, Texas 77251-1513
Gentlemen:
At your request, we have reviewed the estimates of the remaining proved
reserves attributable to certain properties of Sonat Exploration Company
(Sonat), as of January 1, 1999, as prepared by its engineering and geological
staff and based on Securities and Exchange Commission (SEC) guidelines. The
properties that we reviewed are comprised of 1410 reserve determinations and are
located in the states of Alabama, Arkansas, Louisiana, Oklahoma, and Texas.
The net reserves attributable to the properties that we reviewed
account for 64.3 percent of Sonat's total net remaining gas reserves and 41.8
percent of Sonat's total net remaining liquid hydrocarbon reserves. The
properties represent 56.8 percent of the total proved discounted future net
income based on the unescalated pricing policy of the SEC as taken from reserve
and income projections prepared by Sonat Exploration Company as of January 1,
1999.
The estimated reserves presented in this report are related to
hydrocarbon prices. Sonat has informed us that in the preparation of their
reserve and income projections, as of January 1, 1999, they used December 1998
hydrocarbon prices as required by SEC guidelines; however, actual future prices
may vary significantly from December 1998. Therefore, volumes of reserves
actually recovered and the amounts of income actually received may differ
significantly from the estimated quantities presented in this report. The
estimated net reserves attributable to Sonat's interest in properties that we
reviewed, as calculated by Sonat, are summarized as follows:
SEC CASE
Estimated Net Remaining Proved Reserves
Attributable to Certain Properties of
Sonat Exploration Company
As of January 1, 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
Natural Gas
Gas Oil/Condensate Plant Liquids Equivalents
(MMCF) (Barrels) (Barrels) (MMCFE)
---------- -------------- ------------- -----------
Net Reserves of Properties
Reviewed by Ryder Scott
- ---------------------------
<S> <C> <C> <C> <C>
Proved Producing 609,458 3,637,338 3,943,780 655,291
Proved Behind Pipe 96,582 1,884,051 978,000 113,351
Proved Undeveloped 206,968 1,434,228 646,000 219,828
------- --------- --------- -------
Total Proved 913,008 6,955,617 5,567,780 988,470
</TABLE>
<PAGE> 2
March 10, 1999
Page 2
REVIEW PROCEDURE AND OPINION
In performing our review, we have relied upon data furnished by Sonat with
respect to property interests owned, production and well tests from examined
wells, geological structural and isopach maps, well logs, core analyses, and
pressure measurements. These data were accepted as authentic and sufficient for
determining the reserves unless, during the course of our examination, a matter
of question came to our attention in which case the data were not accepted
until all questions were satisfactorily resolved. Our review included such
tests and procedures as we considered necessary under the circumstances to
render the conclusions set forth herein.
In our opinion, Sonat's estimates of future reserves for the reviewed
properties were prepared in accordance with generally accepted procedures for
the estimation of future reserves, and we found on bias in the utilization and
analysis of data in estimates for these properties. In general, we were in
reasonable agreement with Sonat's estimates of remaining proved reserves for
the properties which we reviewed. It is our opinion that the data presented
herein for the properties that we reviewed fairly reflect the estimated net
reserves owned by Sonat.
Certain technical personnel of Sonat are responsible for the preparation
of reserve estimates on new properties and for the preparation of revised
estimates, when necessary, on old properties. These personnel assembled the
necessary data and maintained the data and workpapers in an orderly manner. We
consulted with these technical personnel and had access to their workpapers and
supporting data in the course of our review.
RESERVE ESTIMATES
The reserves for the properties that we reviewed were estimated by
performance methods or the volumetric method. The reserve estimates by the
performance method utilized extrapolations of various historical data in those
cases where such data were definitive. Reserves were estimated by the
volumetric method in those cases where there were inadequate historical data to
establish a definitive trend or where the use of production performance data as
a basis for the reserve estimates was considered to be inappropriate and the
volumetric data were adequate for a reasonable estimate.
The reserves presented herein, as estimated by Sonat and reviewed by us,
are estimates only and should not be construed as being exact quantities.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
APPLICABLE DEFINITIONS
Liquid hydrocarbons are expressed in standard 42 gallon barrels and are
converted into gas equivalents at the ratio of 1 barrel of hydrocarbon liquids
to 6 MCF of gas. All gas volumes are expressed in millions of cubic feet (MMCF)
at the official temperature and pressure bases of the areas in which the gas
reserves are located.
The proved developed non-producing reserves attributable to the total
properties are comprised of behind pipe reserves.
<PAGE> 3
March 10, 1999
Page 3
The proved reserves, which are attributable to the properties that we
reviewed, conform to the definition as set forth in the Securities and Exchange
Commission's Regulation S-X Part 210.4-10 (a) as clarified by subsequent
Commission Staff Accounting Bulletins. The proved reserves are defined as
follows:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing operating conditions, i.e., prices and costs
as of the date the estimate is made. Prices include consideration of changes
in existing prices provided only by contractual arrangements, but not on
escalation based on future conditions. Reservoirs are considered proved if
economic producibility is supported by either actual production or conclusive
formation test. In certain instances, proved reserves are assigned on the
basis of a combination of core analysis and electrical and other type logs
which indicate the reservoirs are analogous to reservoirs in the same field
which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes (1) that
portion delineated by drilling and defined by fluid contacts, if any, and (2)
the adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or
the operation of an installed program in the reservoir provides support for
the engineering analysis on which the project or program was based, and (2)
it is reasonably certain the project will proceed. Improved recovery includes
all methods for supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its original
sense. Improved recovery also includes the enhanced recovery methods of
thermal, chemical flooding, and the use of miscible and immiscible
displacement fluids. Proved natural gas reserves are comprised of
non-associated, associated and dissolved gas. An appropriate reduction in gas
reserves has been made for the expected removal of natural gas liquids, for
lease and plant fuel, and for the exclusion of non-hydrocarbon gases if they
occur in significant quantities and are removed prior to sale. Estimates of
proved reserves do not include crude oil, natural gas, or natural gas liquids
being held in underground or surface storage. Proved reserves are estimates
of hydrocarbons to be recovered from a given date forward. They may be
revised as hydrocarbons are produced and additional data become available.
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through
production response that increased recovery will be achieved.
Proved developed reserves may be subcategorized as producing or non-producing
using the SPE/WPC Definitions:
Producing
Reserves sub-categorized as producing are expected to be recovered from
completion intervals which are open and producing at the time of the
estimate. Improved recovery reserves are considered producing only after the
improved recovery project is in operation.
<PAGE> 4
March 10, 1999
Page 4
NON-PRODUCING
Reserves sub-categorized as non-producing include behind pipe reserves. Behind
pipe reserves are expected to be recovered from zones in existing wells, which
will require additional completion work or future recompletion prior to the
start of production.
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with reasonable certainty that there is continuity of production
from the existing productive formation. Estimates for proved undeveloped
reserves are attributable to any acreage for which an application of fluid
injection or other improved technique is contemplated, only when such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
GENERAL
In general, the reserve estimates for the properties that we reviewed are
based on data available through December 1998. Gas imbalances, if any, were not
taken into account in the gas reserve estimates reviewed.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to do this work nor the compensation is
contingent on our estimates of reserves for the properties which were reviewed.
This report was prepared for the exclusive use of Sonat. The data and work
papers used in the preparation of this report are available for examination by
authorized parties in our offices. Please contact us if we can be of further
service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ John R. Warner
------------------------------
John R. Warner, P.E.
Senior Vice President
<PAGE> 1
EXHIBIT 99.2
[WILLIAM M. COBB & ASSOCIATES, INC. LETTERHEAD]
January 14, 1999
Mr. Larry Brewer
Sonat Exploration Company
Four Greenway Plaza, 4th Floor
Houston, TX 77046-0402
Dear Mr. Brewer:
In accordance with your request, we have estimated the proved reserves and
future income, as of January 1, 1999, attributable to the interest of Sonat
Exploration GOM Inc. (Sonat GOM) in certain oil and gas properties located in
State and Federal Offshore Waters in the Gulf of Mexico.
Table 1 summarizes our estimates of the proved oil and gas reserves and their
pre-Federal Income Tax value undiscounted and discounted at ten percent. Values
shown are determined utilizing constant oil and gas prices as specified by
Sonat GOM. The discounted present worth of future income values, shown in
Table 1 or in other portions of this report, are not intended to necessarily
represent an estimate of fair market value.
TABLE 1
-------
SONAT GOM NET RESERVES AND VALUE
AS OF JANUARY 1, 1999
FLAT PRICING
<TABLE>
<CAPTION>
FUTURE NET PRE-TAX
NET RESERVES INCOME - M$
------------------- ------------------------------
OIL GAS PRESENT WORTH
RESERVE CATEGORY (MBBL) (MMCF) TOTAL DISCOUNTED AT 10%
- ---------------- ------ ------- ------- -----------------
<S> <C> <C> <C> <C>
PROVED
Producing.......... 4,900 113,769 209,268 181,675
Non-Producing...... 3,110 40,818 88,802 70,435
Undeveloped........ 570 37,008 62,496 46,147
----- ------- ------- -------
TOTAL PROVED........ 8,580 191,595 360,566 298,257
</TABLE>
Oil (Condensate) volumes are expressed in thousands of stock tank barrels
(MBBL). A stock tank barrel is equivalent to 42 United States gallons. Gas
volumes are expressed in millions
<PAGE> 2
Page 2
of standard cubic feet (MMCF) as determined at 60 degrees Fahrenheit and the
legal pressure base prevailing in the state in which the reserves are located.
Table 2 summarizes the economic parameters specific to each property. These
include abandonment costs, fixed operating expenses, transportation and
processing fees ($/Mcf and $/Bbl), Btu factors, ownership reversion payout
balances (estimated as of January 1, 1999) and evaluated ownership (both before
payout and after payout, if applicable).
Figures 1 through 3 are included to highlight various conclusions regarding the
Sonat GOM reserves. Figure 1 is a pie chart which shows the distribution of
value (present worth discounted at ten percent) by reserve category for the
total proved reserves. Figure 2 is a pie chart showing the future net revenue
for the proved reserves attributable to both oil and gas. Finally, Figure 3
presents a projection of future net cash flow versus time for each proved
reserve category and for the total proved reserves.
A value ranking of the Sonat GOM properties may be found under the tab
"Property Ranking." The properties are listed by field in order of decreasing
present worth, discounted at ten percent, of the total proved reserves.
DISCUSSION
Two new properties have been added to the Sonat GOM property base through
successful exploration efforts since July 1, 1998. Following is a brief
description of each of the new properties.
SOUTH TIMBALIER 46 -- Sonat GOM owns a 100 percent working interest in the
Sonat #1 well which was drilled offshore Louisiana in November, 1998. Drilled
to a total depth of 15,400 feet, the well encountered 102 feet of gas pay in
the Big -A- sand at a depth of 14,370 feet. Proved reserves of 9,150 MMCF were
assigned to lowest known gas. Production is scheduled to commence in March 1999
with an estimated initial rate of 20 MMCF per day. There is no behind-pipe
potential attributed to this wellbore.
SOUTH TIMABLIER 86 -- Sonat GOM owns a 100 percent working interest in the
Sonat #1 well which was drilled offshore Louisiana in October, 1998. Drilled to
a total depth of 13,626 feet, the well encountered hydrocarbon-bearing sands at
depths ranging from 13,100 to 13,500 feet. The well is scheduled to be
completed initially in the "BP" sand at a depth of 13,500 feet with proved
reserves to lowest known gas of 1,402 MMCF. With net pay of 26 feet, the well
is projected to commence production in February 1999 at a rate of five MMCF per
day. Behind-pipe reserves of 1,115 MMCF are attributable to the "P-95" sand at
13,100 feet.
OIL AND GAS PRICING
The flat pricing case for future oil and gas prices utilizes constant prices of
$10.10/BBL and $1.98/MMBtu, respectively, for all wells. Gas prices are
adjusted by property for Btu factor.
<PAGE> 3
Page 3
For 1999, average oil and gas prices for the total Sonat GOM proved reserves
are projected to be $10.10/BBL of oil and $2.13/MCF of gas, respectively.
OPERATING COSTS
Operating costs for the Sonat GOM properties are based on historical values
furnished by Sonat GOM. Future operating costs and capital expenditures are
projected at current values with no future escalation.
RESERVE METHODOLOGY
Reserve calculations for the Sonat GOM properties are based on actual
production and pressure performance when sufficient historical data is
available and applicable. For properties with limited production performance
data and those producing under a natural water-drive mechanism, reserves are
determined utilizing the volumetric technique. To perform the volumetric
calculations, we have analyzed well logs provided by Sonat GOM to determine
reservoir properties such as porosity, water saturation, and net pay thickness.
Areal extent and reservoir bulk volume are determined from structure and net
pay isopach maps provided by Sonat GOM. We have studied the Sonat GOM maps, and
in certain instances, we modified the maps based on our interpretation of
available well logs. It is noted that reserve volumes calculated using the
volumetric technique are generally less reliable than those supported by actual
performance trends and, as such, should be considered to contain a higher
element of risk.
ECONOMIC PROJECTIONS
Summary economic projections for the Sonat GOM properties may be found under
the tab "Summary Tables." These summaries show future net operating revenue
before deducting state severance tax and ad valorem tax for the proved
reserves. Cash flow is after deducting these taxes, operating costs, and
capital costs. Abandonment costs for the offshore properties were provided by
Sonat GOM. All economic evaluations are made without consideration of Federal
Income Taxes. Detailed projections for each reserve category are presented
along with a one line summary by field.
Detailed economic projections are also presented for each individual property.
These detailed projections are found behind a tab identifying each property.
Our definition of reserves may be found under the tab "Reserve Definitions." It
is similar to and consistent with reserve definitions used throughout the
industry.
We have not made any field examination of the Sonat GOM properties. Therefore,
operating ability and condition of the production equipment have not been
considered. No consideration was given in this report to potential
environmental liabilities which may exist, nor were any costs included for
potential liability to restore and clean up damages, if any,
<PAGE> 4
Page 4
caused by past operating practices. Sonat GOM advised us that they have
furnished all of the geological, engineering, economic, and other data required
for this analysis.
In evaluating the information at our disposal concerning this appraisal, we have
excluded from our consideration all matters as to which legal or accounting
interpretation, rather than engineering, may be controlling. As in all aspects
of oil and gas evaluation, there are uncertainties inherent in the
interpretation of engineering and geological data. Therefore, conclusions
necessarily represent only informed professional judgments.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. The revenues from such reserves and the
actual costs related thereto could be more or less then the estimated amounts.
Because of governmental policies and uncertainties of supply and demand, the
prices actually received for the reserves included in this report, and the costs
incurred in recovering such reserves, may vary from the price and cost
assumptions in this report. In any case, estimates of reserves may increase or
decrease as a result of future operations.
Titles to the appraised properties have not been examined by William M. Cobb &
Associates, Inc., nor has the actual degree of interest owned been independently
confirmed. The data used in our evaluation were obtained from Sonat Exploration
GOM Inc. and the nonconfidential files of William M. Cobb & Associates, Inc. and
were considered accurate. Basic field performance data, together with our
engineering work sheets, are maintained on file in our office.
Very truly yours,
WILLIAM M. COBB & ASSOCIATES, INC.
/s/ LARRY E. TARRANT, P.E.
--------------------------------
Larry E. Tarrant, P.E.
Sr. Reservoir Engineer
/s/ FRANK J. MAREK, P.E.
--------------------------------
Frank J. Marek, P.E.
Vice President
/s/ WILLIAM M. COBB, P.E.
--------------------------------
William M. Cobb, P.E.
President
